Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Amendment No. 1 to an Advance Notice To Adopt a Recovery & Wind-Down Plan and Related Rules, 38329-38343 [2018-16711]

Download as PDF Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices the Exchange Act,27 which requires, among other things, that FINRA rules provide for the equitable allocation of reasonable dues, fees and other charges among members and issuers and other persons using any facility or system that FINRA operates or controls. sradovich on DSK3GMQ082PROD with NOTICES Public Interest The Commission agrees with FINRA and the commenter that the proposed rule change would protect investors and the public interest by improving FINRA’s ability to recruit and retain qualified arbitrators willing to devote the time and effort necessary to consider prehearing issues, which FINRA asserts is an essential element for it to operate an effective arbitration forum.28 Currently, parties can cancel prehearing conferences up to, and including, the same day of the conference without penalty. Late cancellations of prehearing conferences do, however, penalize the arbitrators who would not receive compensation for the time and effort devoted to preparing for the conference, as well as the potential for lost personal or professional opportunities caused by reserving the scheduled meeting time. These burdens could negatively impact an arbitrator’s decision to remain on the FINRA arbitrator roster or an individual’s decision to join the roster. The proposed rule change would eliminate these disincentives by compensating arbitrators in the event of a late cancellation. For these reasons, the Commission believes the proposed rule change is consistent with the Section 15A(b)(6) requirement that FINRA rules be designed to protect the public interest. Equitable Allocation of Fees The Commission also agrees that the proposed rule change represents an equitable allocation of the fees associated with using the FINRA arbitration forum.29 In particular, the Commission notes the proposed late cancellation fee would be allocated among those parties responsible for canceling the meeting within three days of the prehearing conferences. Even if a party or parties did not request the cancellation, the proposed rule change would permit arbitrators to allocate all, or a portion of the fee, to those parties if the arbitrators determine that they caused or contributed to the late cancellation.30 The Commission recognizes that the proposed rule change could increase the U.S.C. 78o–3(b)(5). 28 See Notice, 83 FR at 23308. 29 Id. See also Caruso Letter. 30 See Notice, 83 FR at 23308. 17:36 Aug 03, 2018 V. Conclusion It is therefore ordered pursuant to Section 19(b)(2) of the Exchange Act 34 that the proposal (SR–FINRA–2018– 019), be and hereby is approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.35 Robert W. Errett, Deputy Secretary. [FR Doc. 2018–16721 Filed 8–3–18; 8:45 am] BILLING CODE 8011–01–P 31 Id. 32 Id. 27 15 VerDate Sep<11>2014 cost to parties of using the arbitration forum.31 However, the Commission also recognizes that the late cancellation fee would compensate arbitrators directly inconvenienced by the late cancellation of a prehearing conference and address a practice that negatively impacts the roster of arbitrators. In particular, the Commission notes that FINRA would compensate arbitrators for their preparation time and opportunity cost associated with reserving a meeting date when a prehearing conference is cancelled on short notice.32 The Commission believes that it is reasonable to compensate the inconvenienced arbitrators for the time and opportunity cost. Furthermore, the Commission notes that parties to an arbitration could avoid the proposed late termination fee by, among other ways, providing notice of cancellation more than three business days prior to a scheduled prehearing conference.33 Furthermore, the Commission notes that the arbitrator(s) could assess the fee to one party or to a non-requesting party or parties if the arbitrator(s) determine that these parties caused or contributed to the need for the cancellation. Finally, if an extraordinary circumstance prevents a party from making a timely cancellation request, the arbitrator(s) would have the discretion to waive the late cancellation fee, provided they receive a written explanation of the circumstance For these reasons, the Commission believes the proposed rule change is also consistent with the Section 15A(b)(5) requirement that FINRA rules provide for the equitable allocation of reasonable fees among persons using any facility or system that FINRA operates or controls. 33 See Notice, 83 FR at 23308. U.S.C. 78s(b)(2). 35 17 CFR 200.30–3(a)(12). 34 15 Jkt 244001 PO 00000 Frm 00057 Fmt 4703 Sfmt 4703 38329 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–83745; File No. SR–NSCC– 2017–805] Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Amendment No. 1 to an Advance Notice To Adopt a Recovery & WindDown Plan and Related Rules July 31, 2018. On December 18, 2017, National Securities Clearing Corporation (‘‘NSCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–NSCC–2017–805 (‘‘Advance Notice’’) pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (‘‘Clearing Supervision Act’’) and Rule 19b–4(n)(1)(i) under the Securities Exchange Act of 1934 (‘‘Act’’).1 The notice of filing and extension of the review period of the Advance Notice was published for comment in the Federal Register on January 30, 2018.2 1 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b– 4(n)(1)(i), respectively. On December 18, 2017, NSCC filed the Advance Notice as a proposed rule change (SR–NSCC–2017–017) with the Commission pursuant to Section 19(b)(1) of the Act and Rule 19b–4 thereunder (‘‘Proposed Rule Change’’). (17 CFR 240.19b–4 and 17 CFR 240.19b–4, respectively.) The Proposed Rule Change was published in the Federal Register on January 8, 2018. See Securities Exchange Act Release No. 82430 (January 2, 2018), 83 FR 841 (January 8, 2018) (SR–NSCC–2017–017). On February 8, 2018, the Commission designated a longer period within which to approve, disapprove, or institute proceedings to determine whether to approve or disapprove the Proposed Rule Change. See Securities Exchange Act Release No. 82669 (February 8, 2018), 83 FR 6653 (February 14, 2018) (SR–DTC–2017–021; SR–FICC–2017–021; SR– NSCC–2017–017). On March 20, 2018, the Commission instituted proceedings to determine whether to approve or disapprove the Proposed Rule Change. See Securities Exchange Act Release No. 82908 (March 20, 2018), 83 FR 12986 (March 26, 2018) (SR–NSCC–2017–017). On June 25, 2018, the Commission designated a longer period for Commission action on the proceedings to determine whether to approve or disapprove the Proposed Rule Change. Therefore, September 5, 2018 is the date by which the Commission should either approve or disapprove the Proposed Rule Change. See Securities Exchange Act Release No. 83509 (June 25, 2018), 83 FR 30785 (June 29, 2018) (SR– DTC–2017–021; SR–FICC–2017–021; SR–NSCC– 2017–017). On June 28, 2018, NSCC filed Amendment No. 1 to the Proposed Rule Change. See Securities Exchange Act Release No. 83632 (July 13, 2018), 83 FR 34166 (July 19, 2018) (SR– NSCC–2017–017). As of the date of this release, the Commission has not received any comments on the Proposed Rule Change. 2 Securities Exchange Act Release No. 82581 (January 24, 2018), 83 FR 4327 (January 30, 2018) (SR–NSCC–2017–805). Pursuant to Section Continued E:\FR\FM\06AUN1.SGM 06AUN1 38330 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices On April 10, 2018, the Commission required additional information from NSCC pursuant to Section 806(e)(1)(D) of the Clearing Supervision Act, which tolled the Commission’s period of review of the Advance Notice.3 On June 28, 2018, NSCC filed Amendment No. 1 to the Advance Notice to amend and replace in its entirety the Advance Notice as originally submitted on December 18, 2017.4 On July 6, 2018, the Commission received a response to its request for additional information in consideration of the Advance Notice, which added a further 60-days to the review period pursuant to Section 806(e)(1)(E) and (G) of the Clearing Supervision Act.5 The Advance Notice, as amended by Amendment No. 1, is described in Items I and II below, which Items have been prepared by NSCC. The Commission is publishing this notice to solicit comments on the Advance Notice, as amended by Amendment No. 1, from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Advance Notice sradovich on DSK3GMQ082PROD with NOTICES The Advance Notice of NSCC proposes to (1) adopt the Recovery & Wind-down Plan of NSCC (‘‘R&W Plan’’ or ‘‘Plan’’); and (2) amend NSCC’s Rules & Procedures (‘‘Rules’’) 6 in order to adopt Rule 41 (Corporation Default), Rule 42 (Wind-down of the Corporation), and Rule 60 (Market 806(e)(1)(H) of the Clearing Supervision Act, the Commission may extend the review period of an advance notice for an additional 60 days, if the changes proposed in the advance notice raise novel or complex issues, subject to the Commission providing the clearing agency with prompt written notice of the extension. 12 U.S.C. 5465(e)(1)(H). The Commission found that the Advance Notice raised novel and complex issues and, accordingly, extended the review period of the Advance Notice for an additional 60 days until April 17, 2018, pursuant to Section 806(e)(1)(H). Id. 3 12 U.S.C. 5465(e)(1)(D); see Memorandum from the Office of Clearance and Settlement Supervision, Division of Trading and Markets, titled ‘‘Commission’s Request for Additional Information,’’ available at https://www.sec.gov/ rules/sro/nscc-an.htm. 4 To promote the public availability and transparency of its post-notice amendment, NSCC submitted a copy of Amendment No. 1 through the Commission’s electronic public comment letter mechanism. Accordingly, Amendment No. 1 has been posted on the Commission’s website at https:// www.sec.gov/rules/sro/nscc-an.htm and thus been publicly available since June 29, 2018. 5 12 U.S.C. 5465(e)(1)(E) and (G); see Memorandum from the Office of Clearance and Settlement Supervision, Division of Trading and Markets, titled ‘‘Response to the Commission’s Request for Additional Information,’’ available at https://www.sec.gov/rules/sro/nscc-an.htm. 6 Capitalized terms used herein and not otherwise defined herein are defined in the Rules, available at www.dtcc.com/∼/media/Files/Downloads/legal/ rules/nscc_rules.pdf. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 Disruption and Force Majeure) (each a ‘‘Proposed Rule’’ and, collectively, the ‘‘Proposed Rules’’). The Advance Notice would also propose to re-number the current Rule 42 (Wind-down of a Member, Fund Member or Insurance Carrier/Retirement Services Member) to Rule 40, which is currently reserved for future use. The R&W Plan would be maintained by NSCC in compliance with Rule 17Ad–22(e)(3)(ii) under the Act by providing plans for the recovery and orderly wind-down of NSCC necessitated by credit losses, liquidity shortfalls, losses from general business risk, or any other losses, as described below.7 The Proposed Rules are designed to (1) facilitate the implementation of the R&W Plan when necessary and, in particular, allow NSCC to effectuate its strategy for winding down and transferring its business; (2) provide Members and Limited Members with transparency around critical provisions of the R&W Plan that relate to their rights, responsibilities and obligations; and (3) provide NSCC with the legal basis to implement those provisions of the R&W Plan when necessary, as described below. II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Advance Notice In its filing with the Commission, the clearing agency included statements concerning the purpose of and basis for the Advance Notice and discussed any comments it received on the Advance Notice. The text of these statements may be examined at the places specified in Item IV below. The clearing agency has prepared summaries, set forth in sections A and B below, of the most significant aspects of such statements. (A) Clearing Agency’s Statement on Comments on the Advance Notice Received From Members, Participants, or Others While NSCC has not solicited or received any written comments relating to this proposal, NSCC has conducted outreach to Members in order to provide them with notice of the proposal. NSCC will notify the Commission of any written comments received by NSCC. (B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing Supervision Act Description of Amendment No. 1 This filing constitutes Amendment No. 1 (‘‘Amendment’’) to the Advance Notice (also referred to below as the 7 17 PO 00000 CFR 240.17Ad–22(e)(3)(ii). Frm 00058 Fmt 4703 Sfmt 4703 ‘‘Original Filing’’) previously filed by NSCC.8 NSCC is amending the proposed R&W Plan and the Original Filing in order to clarify certain matters and make minor technical and conforming changes to the R&W Plan, as described below and as marked on Exhibit 4 hereto. To the extent such changes to the Plan require changes to the Original Filing, the information provided under ‘‘Description of Proposed Changes’’ in the Original Filing has been amended and is restated in its entirety below. Other sections of the Original Filing are unchanged and are restated in their entity for convenience. First, this Amendment would clarify the meaning of the terms ‘‘cease to act,’’ ‘‘Member default,’’ ‘‘Defaulting Member,’’ and ‘‘Member Default Losses’’ as such terms are used in the Plan. This Amendment would also make conforming changes as necessary to reflect the use of these terms. Second, this Amendment would clarify that actions and tools described in the Plan that are available in one phase of the Crisis Continuum may be used in subsequent phases of the Crisis Continuum when appropriate to address the applicable situation. This Amendment would also clarify that the allocation of losses resulting from a Member default would be applied when provided for, and in accordance with, Rule 4 of the Rules. Third, this Amendment would clarify that the Recovery Corridor (as defined therein) is not a ‘‘sub-phase’’ of the recovery phase. Rather, the Recovery Corridor is a period of time that would occur toward the end of the Member default phase, when indicators are that NSCC may transition into the recovery phase. Thus, the Recovery Corridor precedes the recovery phase within the Crisis Continuum. Fourth, this Amendment would make revisions to address the allocation of losses resulting from a Member default in order to more closely conform such statements to the changes proposed by the Loss Allocation Filing, as defined below. Fifth, this Amendment would clarify the notifications that NSCC would be required to make under the Proposed Rule 60 (Market Disruption and Force Majeure). Finally, this Amendment would make minor, technical and conforming revisions to correct typographical errors and to simplify descriptions. For example, such revisions would use lower case for terms that are not defined 8 See Securities Exchange Act Release No. 82581 (January 24, 2018), 83 FR 4327 (January 30, 2018) (SR–NSCC–2017–805). E:\FR\FM\06AUN1.SGM 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES therein, and would use upper case for terms that are defined. The Amendment would also simplify certain descriptions by removing extraneous words and statements that are repetitive. These minor, technical revisions would not alter the substance of the proposal. Description of Proposed Changes NSCC is proposing to adopt the R&W Plan to be used by the Board and management of NSCC in the event NSCC encounters scenarios that could potentially prevent it from being able to provide its critical services as a going concern. The R&W Plan would identify (i) the recovery tools available to NSCC to address the risks of (a) uncovered losses or liquidity shortfalls resulting from the default of one or more Members, and (b) losses arising from non-default events, such as damage to its physical assets, a cyber-attack, or custody and investment losses, and (ii) the strategy for implementation of such tools. The R&W Plan would also establish the strategy and framework for the orderly wind-down of NSCC and the transfer of its business in the remote event the implementation of the available recovery tools does not successfully return NSCC to financial viability. As discussed in greater detail below, the R&W Plan would provide, among other matters, (i) an overview of the business of NSCC and its parent, The Depository Trust & Clearing Corporation (‘‘DTCC’’); (ii) an analysis of NSCC’s intercompany arrangements and critical links to other financial market infrastructures (‘‘FMIs’’); (iii) a description of NSCC’s services, and the criteria used to determine which services are considered critical; (iv) a description of the NSCC and DTCC governance structure; (v) a description of the governance around the overall recovery and wind-down program; (vi) a discussion of tools available to NSCC to mitigate credit/market and liquidity risks, including recovery indicators and triggers, and the governance around management of a stress event along a ‘‘Crisis Continuum’’ timeline; (vii) a discussion of potential non-default losses and the resources available to NSCC to address such losses, including recovery triggers and tools to mitigate such losses; (viii) an analysis of the recovery tools’ characteristics, including how they are comprehensive, effective, and transparent, how the tools provide appropriate incentives to Members to, among other things, control and monitor the risks they may present to NSCC, and how NSCC seeks to minimize the negative consequences of executing its recovery tools; and (ix) the framework VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 and approach for the orderly winddown and transfer of NSCC’s business, including an estimate of the time and costs to effect a recovery or orderly wind-down of NSCC. The R&W Plan would be structured as a roadmap, and would identify and describe the tools that NSCC may use to effect a recovery from the events and scenarios described therein. Certain recovery tools that would be identified in the R&W Plan are based in the Rules (including the Proposed Rules) and, as such, descriptions of those tools would include descriptions of, and reference to, the applicable Rules and any related internal policies and procedures. Other recovery tools that would be identified in the R&W Plan are based in contractual arrangements to which NSCC is a party, including, for example, existing committed or pre-arranged liquidity arrangements. Further, the R&W Plan would state that NSCC may develop further supporting internal guidelines and materials that may provide operationally for matters described in the Plan, and that such documents would be supplemental and subordinate to the Plan. Key factors considered in developing the R&W Plan and the types of tools available to NSCC were its governance structure and the nature of the markets within which NSCC operates. As a result of these considerations, many of the tools available to NSCC that would be described in the R&W Plan are NSCC’s existing, business-as-usual risk management and Member default management tools, which would continue to be applied in scenarios of increasing stress. In addition to these existing, business-as-usual tools, the R&W Plan would describe NSCC’s other principal recovery tools, which include, for example, (i) identifying, monitoring and managing general business risk and holding sufficient liquid net assets funded by equity (‘‘LNA’’) to cover potential general business losses pursuant to the Clearing Agency Policy on Capital Requirements (‘‘Capital Policy’’),9 (ii) maintaining the Clearing Agency Capital Replenishment Plan (‘‘Replenishment Plan’’) as a viable plan for the replenishment of capital should NSCC’s equity fall close to or below the amount being held pursuant to the Capital Policy,10 and (iii) the process for the allocation of losses among Members, as provided in Rule 4.11 The R&W Plan 9 See Securities Exchange Act Release No. 81105 (July 7, 2017), 82 FR 32399 (July 13, 2017) (SR– DTC–2017–003, SR–FICC–2017–007, SR–NSCC– 2017–004). 10 See id. 11 See Rule 4 (Clearing Fund), supra note 6. NSCC is proposing changes to Rule 4 and other related PO 00000 Frm 00059 Fmt 4703 Sfmt 4703 38331 would provide governance around the selection and implementation of the recovery tool or tools most relevant to mitigate a stress scenario and any applicable loss or liquidity shortfall. The development of the R&W Plan is facilitated by the Office of Recovery & Resolution Planning (‘‘R&R Team’’) of DTCC.12 The R&R Team reports to the DTCC Management Committee (‘‘Management Committee’’) and is responsible for maintaining the R&W Plan and for the development and ongoing maintenance of the overall recovery and wind-down planning process. The Board, or such committees as may be delegated authority by the Board from time to time pursuant to its charter, would review and approve the R&W Plan biennially, and would also review and approve any changes that are proposed to the R&W Plan outside of the biennial review. As discussed in greater detail below, the Proposed Rules would define the procedures that may be employed in the event of NSCC’s default and its winddown, and would provide for NSCC’s authority to take certain actions on the occurrence of a ‘‘Market Disruption Event,’’ as defined therein. Significantly, the Proposed Rules would provide Members and Limited Members with transparency and certainty with respect to these matters. The Proposed Rules would facilitate the implementation of the R&W Plan, particularly NSCC’s strategy for winding down and transferring its business, and would provide NSCC with the legal basis to implement those aspects of the R&W Plan. NSCC R&W Plan The R&W Plan is intended to be used by the Board and NSCC’s management in the event NSCC encounters scenarios that could potentially prevent it from being able to provide its critical services rules regarding allocation of losses in a separate filing submitted simultaneously with the Original Filing. See Securities Exchange Act Release Nos. 82430 (January 2, 2018), 83 FR 841 (January 8, 2018) (SR–NSCC–2017–017) and 82581 (January 24, 2018), 83 FR 4327 (January 30, 2018) (SR–NSCC– 2017–805) (collectively referred to herein as the ‘‘Loss Allocation Filing’’). NSCC has submitted an amendment to the Loss Allocation Filing. A copy of the amendment to the Loss Allocation Filing is available at https://www.dtcc.com/legal/sec-rulefilings.aspx. NSCC expects the Commission to review both proposals, as amended, together, and, as such, the proposal described in this filing anticipates the approval and implementation of those proposed changes to the Rules. 12 DTCC operates on a shared services model with respect to NSCC and its other subsidiaries. Most corporate functions are established and managed on an enterprise-wide basis pursuant to intercompany agreements under which it is generally DTCC that provides a relevant service to a subsidiary, including NSCC. E:\FR\FM\06AUN1.SGM 06AUN1 38332 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES as a going concern. The R&W Plan would be structured to provide a roadmap, define the strategy, and identify the tools available to NSCC to either (i) recover in the event it experiences losses that exceed its prefunded resources (such strategies and tools referred to herein as the ‘‘Recovery Plan’’) or (ii) wind-down its business in a manner designed to permit the continuation of its critical services in the event that such recovery efforts are not successful (such strategies and tools referred to herein as the ‘‘Winddown Plan’’). The description of the R&W Plan below is intended to highlight the purpose and expected effects of the material aspects of the R&W Plan, and to provide Members and Limited Members with appropriate transparency into these features. Business Overview, Critical Services, and Governance The introduction to the R&W Plan would identify the document’s purpose and its regulatory background, and would outline a summary of the Plan. The stated purpose of the R&W Plan is that it is to be used by the Board and NSCC management in the event NSCC encounters scenarios that could potentially prevent it from being able to provide its critical services as a going concern. The R&W Plan would be maintained by NSCC in compliance with Rule 17Ad–22(e)(3)(ii) under the Act 13 by providing plans for the recovery and orderly wind-down of NSCC. The R&W Plan would describe DTCC’s business profile, provide a summary of NSCC’s services, and identify the intercompany arrangements and links between NSCC and other entities, including other FMIs. This overview section would provide a context for the R&W Plan by describing NSCC’s business, organizational structure and critical links to other entities. By providing this context, this section would facilitate the analysis of the potential impact of utilizing the recovery tools set forth in later sections of the Recovery Plan, and the analysis of the factors that would be addressed in implementing the Wind-down Plan. DTCC is a user-owned and usergoverned holding company and is the parent company of NSCC and its affiliates, The Depository Trust Company (‘‘DTC’’) and Fixed Income Clearing Corporation (‘‘FICC’’, and, together with NSCC and DTC, the ‘‘Clearing Agencies’’). The Plan would describe how corporate support services are provided to NSCC from DTCC and 13 17 CFR 240.17Ad–22(e)(3)(ii). VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 DTCC’s other subsidiaries through intercompany agreements under a shared services model. The Plan would provide a description of established links between NSCC and other FMIs, including The Options Clearing Corporation (‘‘OCC’’), CDS Clearing and Depository Services Inc. (‘‘CDS’’), and DTC. For example, the arrangement between NSCC and OCC governs the process by which OCC submits transactions to NSCC for settlement, and sets the time when the settlement obligations and the central counterparty trade guaranty shifts from OCC to NSCC with respect to these transactions.14 The arrangement with CDS enables participants of CDS to clear and settle OTC trades with U.S. brokerdealers through subaccounts maintained by CDS through its own membership with NSCC.15 The interface between DTC and NSCC permits transactions to flow between DTC’s system and NSCC’s Continuous Net Settlement (‘‘CNS’’) system in a collateralized environment.16 NSCC’s CNS relies on this interface with DTC for the bookentry movement of securities to settle transactions. This section of the Plan, identifying and briefly describing NSCC’s established links, would provide a mapping of critical connections and dependencies that may need to be relied on or otherwise addressed in connection with the implementation of either the Recovery Plan or the Wind-down Plan. The Plan would define the criteria for classifying certain of NSCC’s services as ‘‘critical,’’ and would identify those critical services and the rationale for their classification. This section would provide an analysis of the potential systemic impact from a service disruption, and is important for evaluating how the recovery tools and the wind-down strategy would facilitate and provide for the continuation of NSCC’s critical services to the markets it serves. The criteria that would be used to identify an NSCC service or function as critical would include consideration as to (1) whether there is a lack of alternative providers or products; (2) whether failure of the service could impact NSCC’s ability to perform its central counterparty services; (3) whether failure of the 14 See Securities Exchange Act Release Nos. 81266 (July 31, 2017), 82 FR 36484 (August 4, 2017) (SR–NSCC–2017–007, SR–OCC–2017–013); 81260 (July 31, 2017), 82 FR 36476 (August 4, 2017) (SR– NSCC–2017–803, SR–OCC–2017–804); Procedure III (Trade Recording Service (Interface with Qualified Clearing Agencies)), supra note 6. 15 See Rule 61 (International Links), supra note 6. 16 See Rule 11 (CNS System) and Procedure VII (CNS Accounting Operation), supra note 6. PO 00000 Frm 00060 Fmt 4703 Sfmt 4703 service could impact NSCC’s ability to perform its netting services, and, as such, the availability of market liquidity; and (4) the service is interconnected with other participants and processes within the U.S. financial system, for example, with other FMIs, settlement banks, broker-dealers, and exchanges. The Plan would then list each of those services, functions or activities that NSCC has identified as ‘‘critical’’ based on the applicability of these four criteria. Such critical services would include, for example, trade capture and recording through the Universal Trade Capture system,17 services supporting Correspondent Clearing relationships,18 the CNS system,19 the Balance Order Netting system,20 Mutual Funds Services,21 and the settlement of money payments with respect to transactions processed by NSCC.22 The R&W Plan would also include a non-exhaustive list of NSCC services that are not deemed critical. The evaluation of which services provided by NSCC are deemed critical is important for purposes of determining how the R&W Plan would facilitate the continuity of those services. As discussed further below, while NSCC’s Wind-down Plan would provide for the transfer of all critical services to a transferee in the event NSCC’s winddown is implemented, it would anticipate that any non-critical services that are ancillary and beneficial to a critical service, or that otherwise have substantial user demand from the continuing membership, would also be transferred. The Plan would describe the governance structure of both DTCC and NSCC. This section of the Plan would identify the ownership and governance model of these entities at both the Board of Directors and management levels. The Plan would state that the stages of escalation required to manage recovery under the Recovery Plan or to invoke NSCC’s wind-down under the Winddown Plan would range from relevant business line managers up to the Board through NSCC’s governance structure. The Plan would then identify the parties responsible for certain activities under 17 See Rule 7 (Comparison and Trade Recording Operation) and Procedure II (Trade Comparison and Recording Service), supra note 6. 18 See Procedure IV (Special Representative Service), supra note 6. 19 See Rule 11 (CNS System) and Procedure VII (CNS Accounting Operation), supra note 6. 20 See Rule 8 (Balance Order and Foreign Security Systems) and Procedure V (Balance Order Accounting Operation), supra note 6. 21 See Rule 52 (Mutual Funds Services), supra note 6. 22 See Rule 12 (Settlement) and Procedure VIII (Money Settlement Service), supra note 6. E:\FR\FM\06AUN1.SGM 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES both the Recovery Plan and the Winddown Plan, and would describe their respective roles. The Plan would identify the Risk Committee of the Board (‘‘Board Risk Committee’’) as being responsible for oversight of risk management activities at NSCC, which include focusing on both oversight of risk management systems and processes designed to identify and manage various risks faced by NSCC, and, due to NSCC’s critical role in the markets in which it operates, oversight of NSCC’s efforts to mitigate systemic risks that could impact those markets and the broader financial system.23 The Plan would identify the DTCC Management Risk Committee (‘‘Management Risk Committee’’) as primarily responsible for general, day-to-day risk management through delegated authority from the Board Risk Committee. The Plan would state that the Management Risk Committee has delegated specific dayto-day risk management, including management of risks addressed through margining systems and related activities, to the DTCC Group Chief Risk Office (‘‘GCRO’’), which works with staff within the DTCC Financial Risk Management group. Finally, the Plan would describe the role of the Management Committee, which provides overall direction for all aspects of NSCC’s business, technology, and operations and the functional areas that support these activities. The Plan would describe the governance of recovery efforts in response to both default losses and nondefault losses under the Recovery Plan, identifying the groups responsible for those recovery efforts. Specifically, the Plan would state that the Management Risk Committee provides oversight of actions relating to the default of a Member, which would be reported and escalated to it through the GCRO, and the Management Committee provides oversight of actions relating to nondefault events that could result in a loss, which would be reported and escalated to it from the DTCC Chief Financial Officer (‘‘CFO’’) and the DTCC Treasury group that reports to the CFO, and from other relevant subject matter experts based on the nature and circumstances of the non-default event.24 More 23 The charter of the Board Risk Committee is available at https://www.dtcc.com/∼/media/Files/ Downloads/legal/policy-and-compliance/DTCCBOD-Risk-Committee-Charter.pdf. 24 The Plan would state that these groups would be involved to address how to mitigate the financial impact of non-default losses, and in recommending mitigating actions, the Management Committee would consider information and recommendations from relevant subject matter experts based on the nature and circumstances of the non-default event. Any necessary operational response to these events, VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 generally, the Plan would state that the type of loss and the nature and circumstances of the events that lead to the loss would dictate the components of governance to address that loss, including the escalation path to authorize those actions. As described further below, both the Recovery Plan and the Wind-down Plan would describe the governance of escalations, decisions, and actions under each of those plans. Finally, the Plan would describe the role of the R&R Team in managing the overall recovery and wind-down program and plans for each of the Clearing Agencies. NSCC Recovery Plan The Recovery Plan is intended to be a roadmap of those actions that NSCC may employ to monitor and, as needed, stabilize its financial condition. As each event that could lead to a financial loss could be unique in its circumstances, the Recovery Plan would not be prescriptive and would permit NSCC to maintain flexibility in its use of identified tools and in the sequence in which such tools are used, subject to any conditions in the Rules or the contractual arrangement on which such tool is based. NSCC’s Recovery Plan would consist of (1) a description of the risk management surveillance, tools, and governance that NSCC would employ across evolving stress scenarios that it may face as it transitions through a ‘‘Crisis Continuum,’’ described below; (2) a description of NSCC’s risk of losses that may result from non-default events, and the financial resources and recovery tools available to NSCC to manage those risks and any resulting losses; and (3) an evaluation of the characteristics of the recovery tools that may be used in response to either default losses or nondefault losses, as described in greater detail below. In all cases, NSCC would act in accordance with the Rules, within the governance structure described in the R&W Plan, and in accordance with applicable regulatory oversight to address each situation in order to best protect NSCC, Members, and the markets in which it operates. Managing Member Default Losses and Liquidity Needs Through the Crisis Continuum. The Recovery Plan would describe the risk management surveillance, tools, and governance that NSCC may employ across an increasing stress environment, which is referred to as the ‘‘Crisis Continuum.’’ This however, would be managed in accordance with applicable incident response/business continuity process; for example, processes established by the DTCC Technology Risk Management group would be followed in response to a cyber event. PO 00000 Frm 00061 Fmt 4703 Sfmt 4703 38333 description would identify those tools that can be employed to mitigate losses, and mitigate or minimize liquidity needs, as the market environment becomes increasingly stressed. The phases of the Crisis Continuum would include (1) a stable market phase, (2) a stress market phase, (3) a phase commencing with NSCC’s decision to cease to act for a Member or Affiliated Family of Members (referred to in the Plan as the ’’ Member default phase’’),25 and (4) a recovery phase. This section of the Recovery Plan would address conditions and circumstances relating to NSCC’s decision to cease to act for a Member pursuant to the Rules.26 In the Plan, ‘‘cease to act’’ and the events that may lead to such decision, are used within the context of Rule 46 of the Rules.27 Further, for ease of reference, the R&W Plan would, for purposes of the Plan, use the term ‘‘Member default’’ to refer to the event or events that precipitate NSCC ceasing to act for a Member or an Affiliated Family, would use the term ‘‘Defaulting Member’’ to refer to a Member for which NSCC has ceased to act, and would use the term ‘‘Member Default Losses’’ to refer to losses that arise out of or relate to the Member default (including any losses that arise from liquidation of that Member’s portfolio), and to distinguish such losses from those that arise out of the business or other events not related to a Member default, which are separately addressed in the Plan. The Recovery Plan would provide context to its roadmap through this Crisis Continuum by describing NSCC’s ongoing management of credit, market and liquidity risk, and its existing process for measuring and reporting its risks as they align with established thresholds for its tolerance of those risks. The Recovery Plan would discuss the management of credit/market risk and liquidity exposures together, because the tools that address these risks can be deployed either separately or in a coordinated approach in order to address both exposures. NSCC manages these risk exposures collectively to limit their overall impact on NSCC and its membership. As part of its market risk management strategy, NSCC manages its credit exposure to Members by determining the appropriate Required Deposits to the Clearing Fund and monitoring its sufficiency, as provided 25 The Plan would define an ‘‘Affiliated Family’’ of Members as a number of affiliated entities that are all Members of NSCC. 26 See Rule 46 (Restrictions on Access to Services), supra note 6. 27 Id. E:\FR\FM\06AUN1.SGM 06AUN1 38334 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES for in the Rules.28 NSCC manages its liquidity risks with an objective of maintaining sufficient resources to be able to fulfill obligations that have been guaranteed by NSCC in the event of a Member default that presents the largest aggregate liquidity exposure to NSCC over the settlement cycle.29 The Recovery Plan would outline the metrics and indicators that NSCC has developed to evaluate a stress situation against established risk tolerance thresholds. Each risk mitigation tool identified in the Recovery Plan would include a description of the escalation thresholds that allow for effective and timely reporting to the appropriate internal management staff and committees, or to the Board. The Recovery Plan would make clear that these tools and escalation protocols would be calibrated across each phase of the Crisis Continuum. The Recovery Plan would also establish that NSCC would retain the flexibility to deploy such tools either separately or in a coordinated approach, and to use other alternatives to these actions and tools as necessitated by the circumstances of a particular Member default, in accordance with the Rules. Therefore, the Recovery Plan would both provide NSCC with a roadmap to follow within each phase of the Crisis Continuum, and would permit it to adjust its risk management measures to address the unique circumstances of each event. The Recovery Plan would describe the conditions that mark each phase of the Crisis Continuum, and would identify actions that NSCC could take as it transitions through each phase in order to both prevent losses from materializing through active risk management, and to restore the financial health of NSCC during a period of stress. 28 See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund Formula and Other Matters), supra note 6. Because NSCC does not maintain a guaranty fund separate and apart from the Clearing Fund it collects from Members, NSCC monitors its credit exposure to its Members by managing the market risks of each Member’s unsettled portfolio through the collection of the Clearing Fund. The aggregate of all Members’ Required Fund Deposits comprises the Clearing Fund that represents NSCC’s prefunded resources to address uncovered loss exposures, as provided for in proposed Rule 4. Therefore, NSCC’s market risk management strategy is designed to comply with Rule 17Ad–22(e)(4) under the Act, where these risks are referred to as ‘‘credit risks.’’ See also 17 CFR 240.17Ad–22(e)(4). 29 NSCC’s liquidity risk management strategy, including the manner in which NSCC utilizes its liquidity tools, is described in the Clearing Agency Liquidity Risk Management Framework. See Securities Exchange Act Release Nos. 80489 (April 19, 2017), 82 FR 19120 (April 25, 2017) (SR–DTC– 2017–004, SR–NSCC–2017–005, SR–FICC–2017– 008); 81194 (July 24, 2017), 82 FR 35241 (July 28, 2017) (SR–DTC–2017–004, SR–NSCC–2017–005, SR–FICC–2017–008). VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 The stable market phase of the Crisis Continuum would describe active risk management activities in the normal course of business. These activities would include (1) routine monitoring of margin adequacy through daily review of back testing and stress testing results that review the adequacy of NSCC’s margin calculations, and escalation of those results to internal and Board committees; 30 and (2) routine monitoring of liquidity adequacy through review of daily liquidity studies that measure sufficiency of available liquidity resources to meet cash settlement obligations of the Member that would generate the largest aggregate payment obligation.31 The Recovery Plan would describe some of the indicators of the stress market phase of the Crisis Continuum, which would include, for example, volatility in market prices of certain assets where there is increased uncertainty among market participants about the fundamental value of those assets. This phase would involve general market stresses, when no Member default would be imminent. Within the description of this phase, the Recovery Plan would provide that NSCC may take targeted, routine risk management measures as necessary and as permitted by the Rules. Within the Member default phase of the Crisis Continuum, the Recovery Plan would provide a roadmap for the existing procedures that NSCC would follow in the event of a Member default and any decision by NSCC to cease to act for that Member.32 The Recovery Plan would provide that the objectives of NSCC’s actions upon a Member or Affiliated Family default are to (1) minimize losses and market exposure of the affected Members and NSCC’s nonDefaulting Members; and (2), to the extent practicable, minimize disturbances to the affected markets. The Recovery Plan would describe tools, actions, and related governance for both market risk monitoring and liquidity risk monitoring through this phase. For example, in connection with managing its market risk during this phase, NSCC would, pursuant to the Rules, (1) monitor and assess the adequacy of Clearing Fund resources; 30 NSCC’s stress testing practices are described in the Clearing Agency Stress Testing Framework (Market Risk). See Securities Exchange Act Release Nos. 80485 (April 19, 2017), 82 FR 19131 (April 25, 2017) (SR–DTC–2017–005, SR–FICC–2017–009, SR–NSCC–2017–006); 81192 (July 24, 2017), 82 FR 35245 (July 28, 2017) (SR–DTC–2017–005, SR– FICC–2017–009, SR–NSCC–2017–006). 31 See supra note 29. 32 See Rule 18 (Procedures for When the Corporation Declines or Ceases to Act) and Rule 46 (Restrictions on Access to Services), supra note 6. PO 00000 Frm 00062 Fmt 4703 Sfmt 4703 (2), when necessary and appropriate pursuant to the Rules, assess and collect additional margin requirements; and (3) follow its operational procedures to liquidate the Defaulting Member’s portfolio. Management of liquidity risk through this phase would involve ongoing monitoring of the adequacy of NSCC’s liquidity resources, and the Recovery Plan would identify certain actions NSCC may deploy as it deems necessary to mitigate a potential liquidity shortfall, which would include, for example, adjusting its strategy for closing out the Defaulting Member’s portfolio or seeking additional liquidity resources. The Recovery Plan would state that, throughout this phase, relevant information would be escalated and reported to both internal management committees and the Board Risk Committee. The Recovery Plan would also identify financial resources available to NSCC, pursuant to the Rules, to address losses arising out of a Member default. Specifically, Rule 4, as proposed to be amended by the Loss Allocation Filing, would provide that losses remaining after application of the Defaulting Member’s resources be satisfied first by applying a ‘‘Corporate Contribution,’’ and then, if necessary, by allocating remaining losses among the membership in accordance with such Rule 4.33 In order to provide for an effective and timely recovery, the Recovery Plan would describe the period of time that would occur near the end of the Member default phase, during which NSCC may experience stress events or observe early warning indicators that allow it to evaluate its options and prepare for the recovery phase (referred to in the Plan as the ‘‘Recovery Corridor’’). The Recovery Plan would then describe the recovery phase of the Crisis Continuum, which would begin on the date that NSCC issues the first Loss Allocation Notice of the second loss allocation round with respect to a given ‘‘Event Period.’’ 34 The recovery 33 See supra note 11. The Loss Allocation Filing proposes to amend Rule 4 to define the amount NSCC would contribute to address a loss resulting from either a Member default or a non-default event as the ‘‘Corporate Contribution.’’ This amount would be 50 percent (50%) of the ‘‘General Business Risk Capital Requirement,’’ which is calculated pursuant to the Capital Policy and is an amount sufficient to cover potential general business losses so that NSCC can continue operations and services as a going concern if those losses materialize, in compliance with Rule 17Ad– 22(e)(15) under the Act. See also supra note 9; 17 CFR 240.17Ad–22(e)(15). 34 The Loss Allocation Filing proposes to amend Rule 4 to introduce the concept of an ‘‘Event Period’’ as the ten (10) Business Days beginning on E:\FR\FM\06AUN1.SGM 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES phase would describe actions that NSCC may take to avoid entering into a wind down of its business. NSCC expects that significant deterioration of liquidity resources would cause it to enter the Recovery Corridor. As such, the Plan would describe the actions NSCC may take aimed at replenishing those resources. Recovery Corridor indicators may include, for example, a rapid and material change in market prices or substantial intraday activity volume by the Member that subsequently defaults, neither of which are mitigated by intraday margin calls, or subsequent defaults by other Members or Affiliated Families during a compressed time period. Throughout the Recovery Corridor, NSCC would monitor the adequacy of its resources and the expected timing of replenishment of those resources, and would do so through the monitoring of certain corridor indicator metrics. The majority of the corridor indicators, as identified in the Recovery Plan, relate directly to conditions that may require NSCC to adjust its strategy for hedging and liquidating a Defaulting Member’s portfolio, and any such changes would include an assessment of the status of the corridor indicators. Corridor indicators would include, for example, effectiveness and speed of NSCC’s efforts to close out the portfolio of the Defaulting Member, and an impediment to the availability of its financial resources. For each corridor indicator, the Recovery Plan would identify (1) measures of the indicator, (2) evaluations of the status of the indicator, (3) metrics for determining the status of the deterioration or improvement of the indicator, and (4) ‘‘Corridor Actions,’’ which are steps that may be taken to improve the status of the indicator,35 as well as management (i) with respect to a Member default, the day on which NSCC notifies Members that it has ceased to act for a Member under the Rules, or (ii) with respect to a non-default loss, the day that NSCC notifies Members of the determination by the Board that there is a non-default loss event, as described in greater detail in that filing. The proposed Rule 4 would define a ‘‘round’’ as a series of loss allocations relating to an Event Period, and would provide that the first Loss Allocation Notice in a first, second, or subsequent round shall expressly state that such notice reflects the beginning of a first, second, or subsequent round. The maximum allocable loss amount of a round is equal to the sum of the ‘‘Loss Allocation Caps’’ (as defined in the proposed Rule 4) of those Members included in the round. See supra note 11. 35 The Corridor Actions that would be identified in the Plan are indicative, but not prescriptive; therefore, if NSCC needs to consider alternative actions due to the applicable facts and circumstances, the escalation of those alternative actions would follow the same escalation protocol identified in the Plan for the Corridor Indicator to which the action relates. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 escalations required to authorize those steps. Because NSCC has never experienced the default of multiple Members, it has not, historically, measured the deterioration or improvements metrics of the corridor indicators. As such, these metrics were chosen based on the business judgment of NSCC management. The Recovery Plan would also describe the reporting and escalation of the status of the corridor indicators throughout the Recovery Corridor. Significant deterioration of a corridor indicator, as measured by the metrics set out in the Recovery Plan, would be escalated to the Board. NSCC management would review the corridor indicators and the related metrics at least annually, and would modify these metrics as necessary in light of observations from simulations of Member defaults and other analyses. Any proposed modifications would be reviewed by the Management Risk Committee and the Board Risk Committee. The Recovery Plan would estimate that NSCC may remain in the Recovery Corridor between one day and two weeks. This estimate is based on historical data observed in past Member defaults, the results of simulations of Member defaults, and periodic liquidity analyses conducted by NSCC. The actual length of a Recovery Corridor would vary based on actual market conditions observed at the time, and NSCC would expect the Recovery Corridor to be shorter in market conditions of increased stress. The Recovery Plan would outline steps by which NSCC may allocate its losses, which would occur when and in the order provided in Rule 4, as amended.36 The Recovery Plan would also identify tools that may be used to address foreseeable shortfalls of NSCC’s liquidity resources following a Member default, and would provide that these tools may be used as appropriate during the Crisis Continuum to address liquidity shortfalls if they arise. The goal in managing NSCC’s qualified liquidity resources is to maximize resource availability in an evolving stress situation, to maintain flexibility in the order and use of sources of liquidity, and to repay any third party lenders of liquidity in a timely manner. These liquidity tools include, for example, NSCC’s committed 364-day 36 As these matters are described in greater detail in the Loss Allocation Filing and in the proposed amendments to Rule 4, described therein, reference is made to that filing and the details are not repeated here. See supra note 11. PO 00000 Frm 00063 Fmt 4703 Sfmt 4703 38335 credit facility,37 and the issuance and private placement of additional shortterm promissory notes (‘‘commercial paper’’) and extendible notes, the cash proceeds of which provide NSCC with prefunded liquidity.38 Additional voluntary or uncommitted tools to address potential liquidity shortfalls, for example uncommitted bank loans, which may supplement NSCC’s other liquid resources described herein, would also be identified in the Recovery Plan. The Recovery Plan would state that, due to the extreme nature of a stress event that would cause NSCC to consider the use of these liquidity tools, the availability and capacity of these liquidity tools, and the willingness of counterparties to lend, cannot be accurately predicted and are dependent on the circumstances of the applicable stress period, including market price volatility, actual or perceived disruptions in financial markets, the costs to NSCC of utilizing these tools, and any potential impact on NSCC’s credit rating. As stated above, the Recovery Plan would state that NSCC will have entered the recovery phase on the date that it issues the first Loss Allocation Notice of the second loss allocation round with respect to a given Event Period. The Recovery Plan would provide that, during the recovery phase, NSCC would continue and, as needed, enhance, the monitoring and remedial actions already described in connection with previous phases of the Crisis Continuum, and would remain in the recovery phase until its financial resources are expected to be or are fully replenished, or until the Wind-down Plan is triggered, as described below. The Recovery Plan would describe governance for the actions and tools that may be employed within each phase of the Crisis Continuum, which would be dictated by the facts and circumstances applicable to the situation being addressed. Such facts and circumstances would be measured by the various indicators and metrics applicable to that phase of the Crisis Continuum, and would follow the relevant escalation protocols that would be described in the Recovery Plan. The Recovery Plan would also describe the governance procedures around a decision to cease to act for a Member, pursuant to the Rules, and around the management and oversight of the subsequent liquidation of the Defaulting 37 See Securities Exchange Act Release No. 80605 (May 5, 2017), 82 FR 21850 (May 10, 2017) (SR– DTC–2017–802, SR–NSCC–2017–802). 38 See Securities Exchange Act Release No. 75730 (August 19, 2015), 80 FR 51638 (August 25, 2015) (SR–NSCC–2015–802). E:\FR\FM\06AUN1.SGM 06AUN1 38336 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES Member’s portfolio. The Recovery Plan would state that, overall, NSCC would retain flexibility in accordance with the Rules, its governance structure, and its regulatory oversight, to address a particular situation in order to best protect NSCC and the Members, and to meet the primary objectives, throughout the Crisis Continuum, of minimizing losses and, where consistent and practicable, minimizing disturbance to affected markets. Non-Default Losses. The Recovery Plan would outline how NSCC may address losses that result from events other than a Member default. While these matters are addressed in greater detail in other documents, this section of the Plan would provide a roadmap to those documents and an outline for NSCC’s approach to monitoring and managing losses that could result from a non-default event. The Plan would first identify some of the risks NSCC faces that could lead to these losses, which include, for example, the business and profit/loss risks of unexpected declines in revenue or growth of expenses; the operational risks of disruptions to systems or processes that could lead to large losses, including those resulting from, for example, a cyber-attack; and custody or investment risks that could lead to financial losses. The Recovery Plan would describe NSCC’s overall strategy for the management of these risks, which includes a ‘‘three lines of defense’’ approach to risk management that allows for comprehensive management of risk across the organization.39 The Recovery Plan would also describe NSCC’s approach to financial risk and capital management. The Plan would identify key aspects of this approach, including, for example, an annual budget process, business line 39 This ‘‘three lines of defense’’ approach to risk management includes (1) a first line of defense comprised of the various business lines and functional units that support the products and services offered by NSCC; (2) a second line of defense comprised of control functions that support NSCC, including the risk management, legal and compliance areas; and (3) a third line of defense, which is performed by an internal audit group. The Clearing Agency Risk Management Framework includes a description of this ‘‘three lines of defense’’ approach to risk management, and addresses how NSCC comprehensively manages various risks, including operational, general business, investment, custody, and other risks that arise in or are borne by it. See Securities Exchange Act Release No. 81635 (September 15, 2017), 82 FR 44224 (September 21, 2017) (SR–DTC–2017–013, SR–FICC–2017–016, SR–NSCC–2017–012). The Clearing Agency Operational Risk Management Framework describes the manner in which NSCC manages operational risks, as defined therein. See Securities Exchange Act Release No. 81745 (September 28, 2017), 82 FR 46332 (October 4, 2017) (SR–DTC–2017–014, SR–FICC–2017–017, SR–NSCC–2017–013). VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 performance reviews with management, and regular review of capital requirements against LNA. These risk management strategies are collectively intended to allow NSCC to effectively identify, monitor, and manage risks of non-default losses. The Plan would identify the two categories of financial resources NSCC maintains to cover losses and expenses arising from non-default risks or events as (1) LNA, maintained, monitored, and managed pursuant to the Capital Policy, which include (a) amounts held in satisfaction of the General Business Risk Capital Requirement,40 (b) the Corporate Contribution,41 and (c) other amounts held in excess of NSCC’s capital requirements pursuant to the Capital Policy; and (2) resources available pursuant to the loss allocation provisions of Rule 4.42 The Plan would address the process by which the CFO and the DTCC Treasury group would determine which available LNA resources are most appropriate to cover a loss that is caused by a non-default event. This determination involves an evaluation of a number of factors, including the current and expected size of the loss, the expected time horizon over when the loss or additional expenses would materialize, the current and projected available LNA, and the likelihood LNA could be successfully replenished pursuant to the Replenishment Plan, if triggered.43 Finally the Plan would discuss how NSCC would apply its resources to address losses resulting from a non-default event, including the order of resources it would apply if the loss or liability exceeds NSCC’s excess LNA amounts, or is large relative thereto, and the Board has declared the event a ‘‘Declared Non-Default Loss Event’’ pursuant to Rule 4.44 The Plan would also describe proposed Rule 60 (Market Disruption and Force Majeure), which NSCC is proposing to adopt in the Rules. This Proposed Rule would provide transparency around how NSCC would address extraordinary events that may occur outside its control. Specifically, the Proposed Rule would define a ‘‘Market Disruption Event’’ and the governance around a determination that such an event has occurred. The Proposed Rule would also describe NSCC’s authority to take actions during the pendency of a Market Disruption Event that it deems appropriate to 40 See supra note 33. supra note 33. 42 See supra note 11. 43 See supra note 9. 44 See supra note 11. 41 See PO 00000 Frm 00064 Fmt 4703 address such an event and facilitate the continuation of its services, if practicable, as described in greater detail below. The Plan would describe the interaction between the Proposed Rule and NSCC’s existing processes and procedures addressing business continuity management and disaster recovery (generally, the ‘‘BCM/DR procedures’’), making clear that the Proposed Rule is designed to support those BCM/DR procedures and to address circumstances that may be exogenous to NSCC and not necessarily addressed by the BCM/DR procedures. Finally, the Plan would describe that, because the operation of the Proposed Rule is specific to each applicable Market Disruption Event, the Proposed Rule does not define a time limit on its application. However, the Plan would note that actions authorized by the Proposed Rule would be limited to the pendency of the applicable Market Disruption Event, as made clear in the Proposed Rule. Overall, the Proposed Rule is designed to mitigate risks caused by Market Disruption Events and, thereby, minimize the risk of financial loss that may result from such events. Recovery Tool Characteristics. The Recovery Plan would describe NSCC’s evaluation of the tools identified within the Recovery Plan, and its rationale for concluding that such tools are comprehensive, effective, and transparent, and that such tools provide appropriate incentives to Members and minimize negative impact on Members and the financial system, in compliance with guidance published by the Commission in connection with the adoption of Rule 17Ad–22(e)(3)(ii) under the Act.45 NSCC’s analysis and the conclusions set forth in this section of the Recovery Plan are described in greater detail in Item 3(b) of this filing, below. NSCC Wind-Down Plan The Wind-down Plan would provide the framework and strategy for the orderly Wind-down of NSCC if the use of the recovery tools described in the Recovery Plan do not successfully return NSCC to financial viability. While NSCC believes that, given the comprehensive nature of the recovery tools, such event is extremely unlikely, as described in greater detail below, NSCC is proposing a Wind-down strategy that provides for (1) the transfer of NSCC’s business, assets and 45 Standards for Covered Clearing Agencies, Securities Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786 (October 13, 2016) (S7–03–14). Sfmt 4703 E:\FR\FM\06AUN1.SGM 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES membership to another legal entity, (2) such transfer being effected in connection with proceedings under Chapter 11 of the U.S. Federal Bankruptcy Code,46 and (3) after effectuating this transfer, NSCC liquidating any remaining assets in an orderly manner in bankruptcy proceedings. NSCC believes that the proposed transfer approach to a winddown would meet its objectives of (1) assuring that NSCC’s critical services will be available to the market as long as there are Members in good standing, and (2) minimizing disruption to the operations of Members and financial markets generally that might be caused by NSCC’s failure. In describing the transfer approach to NSCC’s Wind-down Plan, the Plan would identify the factors that NSCC considered in developing this approach, including the fact that NSCC does not own material assets that are unrelated to its clearance and settlement activities. As such, a business reorganization or ‘‘bail-in’’ of debt approach would be unlikely to mitigate significant losses. Additionally, NSCC’s approach was developed in consideration of its critical and unique position in the U.S. markets, which precludes any approach that would cause NSCC’s critical services to no longer be available. First, the Wind-down Plan would describe the potential scenarios that could lead to the wind-down of NSCC, and the likelihood of such scenarios. The Wind-down Plan would identify the time period leading up to a decision to wind-down NSCC as the ‘‘Runway Period.’’ This period would follow the implementation of any recovery tools, as it may take a period of time, depending on the severity of the market stress at that time, for these tools to be effective or for NSCC to realize a loss sufficient to cause it to be unable to effectuate settlements and repay its obligations.47 The Wind-down Plan would identify some of the indicators that it has entered this Runway Period, which would include, for example, successive Member defaults, significant Member retirements thereafter, and NSCC’s inability to replenish its financial resources following the liquidation of the portfolio of the Defaulting Member(s). 46 11 U.S.C. 1101 et seq. Wind-down Plan would state that, given NSCC’s position as a user-governed financial market utility, it is possible that Members might voluntarily elect to provide additional support during the recovery phase leading up to a potential trigger of the Wind-down Plan, but would also make clear that NSCC cannot predict the willingness of Members to do so. 47 The VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 The trigger for implementing the Wind-down Plan would be a determination by the Board that recovery efforts have not been, or are unlikely to be, successful in returning NSCC to viability as a going concern. As described in the Plan, NSCC believes this is an appropriate trigger because it is both broad and flexible enough to cover a variety of scenarios, and would align incentives of NSCC and the Members to avoid actions that might undermine NSCC’s recovery efforts. Additionally, this approach takes into account the characteristics of NSCC’s recovery tools and enables the Board to consider (1) the presence of indicators of a successful or unsuccessful recovery, and (2) potential for knock-on effects of continued iterative application of NSCC’s recovery tools. The Wind-down Plan would describe the general objectives of the transfer strategy, and would address assumptions regarding the transfer of NSCC’s critical services, business, assets and membership, and the assignment of NSCC’s links with other FMIs, to another legal entity that is legally, financially, and operationally able to provide NSCC’s critical services to entities that wish to continue their membership following the transfer (‘‘Transferee’’). The Wind-down Plan would provide that the Transferee would be either (1) a third party legal entity, which may be an existing or newly established legal entity or a bridge entity formed to operate the business on an interim basis to enable the business to be transferred subsequently (‘‘Third Party Transferee’’); or (2) an existing, debt-free failover legal entity established ex-ante by DTCC (‘‘Failover Transferee’’) to be used as an alternative Transferee in the event that no viable or preferable Third Party Transferee timely commits to acquire NSCC’s business. NSCC would seek to identify the proposed Transferee, and negotiate and enter into transfer arrangements during the Runway Period and prior to making any filings under Chapter 11 of the U.S. Federal Bankruptcy Code.48 As stated above, the Wind-down Plan would anticipate that the transfer to the Transferee be effected in connection with proceedings under Chapter 11 of the U.S. Federal Bankruptcy Code, and pursuant to a bankruptcy court order under Section 363 of the Bankruptcy Code, such that the transfer would be free and clear of claims against, and interests in, NSCC, except to the extent 48 See PO 00000 11 U.S.C. 1101 et seq. Frm 00065 Fmt 4703 Sfmt 4703 38337 expressly provided in the court’s order.49 In order to effect a timely transfer of its services and minimize the market and operational disruption of such transfer, NSCC would expect to transfer all of its critical services and any noncritical services that are ancillary and beneficial to a critical service, or that otherwise have substantial user demand from the continuing membership. Following the transfer, the Wind-down Plan would anticipate that the Transferee and its continuing membership would determine whether to continue to provide any transferred non-critical service on an ongoing basis, or terminate the non-critical service following some transition period. NSCC’s Wind-down Plan would anticipate that the Transferee would enter into a transition services agreement with DTCC so that DTCC would continue to provide the shared services it currently provides to NSCC, including staffing, infrastructure and operational support. The Wind-down Plan would also anticipate the assignment of NSCC’s link arrangements, including those with DTC, CDS and OCC, described above, to the Transferee.50 The Wind-down Plan would provide that Members’ open positions existing prior to the effective time of the transfer would be addressed by the provisions of the proposed Winddown Rule and Corporation Default Rule, as defined and described below, and that the Transferee would not acquire any pending or open transactions with the transfer of the business. The Wind-down Plan would anticipate that the Transferee would accept transactions for processing with a trade date from and after the effective time of the transfer. The Wind-down Plan would provide that, following the effectiveness of the transfer to the Transferee, the winddown of NSCC would involve addressing any residual claims against NSCC through the bankruptcy process and liquidating the legal entity. As such, and as stated above, the Wind-down Plan does not contemplate NSCC continuing to provide services in any 49 See id. at 363. proposed transfer arrangements outlined in the Wind-down Plan do not contemplate the transfer of any credit or funding agreements, which are generally not assignable by NSCC. However, to the extent the Transferee adopts rules substantially identical to those NSCC has in effect prior to the transfer, it would have the benefit of any rulesbased liquidity funding. The Wind-down Plan contemplates that no Clearing Fund would be transferred to the Transferee, as it is not held in a bankruptcy remote manner and it is the primary prefunded liquidity resource to be accessed in the recovery phase. 50 The E:\FR\FM\06AUN1.SGM 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES 38338 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices capacity following the transfer time, and any services not transferred would be terminated. The Wind-down Plan would also identify the key dependencies for the effectiveness of the transfer, which include regulatory approvals that would permit the Transferee to be legally qualified to provide the transferred services from and after the transfer, and approval by the applicable bankruptcy court of, among other things, the proposed sale, assignments, and transfers to the Transferee. The Wind-down Plan would address governance matters related to the execution of the transfer of NSCC’s business and its wind-down. The Winddown Plan would address the duties of the Board to execute the wind-down of NSCC in conformity with (1) the Rules, (2) the Board’s fiduciary duties, which mandate that it exercise reasonable business judgment in performing these duties, and (3) NSCC’s regulatory obligations under the Act as a registered clearing agency. The Wind-down Plan would also identify certain factors the Board may consider in making these decisions, which would include, for example, whether NSCC could safely stabilize the business and protect its value without seeking bankruptcy protection, and NSCC’s ability to continue to meet its regulatory requirements. The Wind-down Plan would describe (1) actions NSCC or DTCC may take to prepare for wind-down in the period before NSCC experiences any financial distress, (2) actions NSCC would take both during the recovery phase and the Runway Period to prepare for the execution of the Wind-down Plan, and (3) actions NSCC would take upon commencement of bankruptcy proceedings to effectuate the Winddown Plan. Finally, the Wind-down Plan would include an analysis of the estimated time and costs to effectuate the plan, and would provide that this estimate be reviewed and approved by the Board annually. In order to estimate the length of time it might take to achieve a recovery or orderly wind-down of NSCC’s critical operations, as contemplated by the R&W Plan, the Wind-down Plan would include an analysis of the possible sequencing and length of time it might take to complete an orderly wind-down and transfer of critical operations, as described in earlier sections of the R&W Plan. The Wind-down Plan would also include in this analysis consideration of other factors, including the time it might take to complete any further attempts at recovery under the Recovery Plan. The VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 Wind-down Plan would then multiply this estimated length of time by NSCC’s average monthly operating expenses, including adjustments to account for changes to NSCC’s profit and expense profile during these circumstances, over the previous twelve months to determine the amount of LNA that it should hold to achieve a recovery or orderly wind-down of NSCC’s critical operations. The estimated wind-down costs would constitute the ‘‘Recovery/ Wind-down Capital Requirement’’ under the Capital Policy.51 Under that policy, the General Business Risk Capital Requirement is calculated as the greatest of three estimated amounts, one of which is this Recovery/Wind-down Capital Requirement.52 The R&W Plan is designed as a roadmap, and the types of actions that may be taken both leading up to and in connection with implementation of the Wind-down Plan would be primarily addressed in other supporting documentation referred to therein. The Wind-down Plan would address proposed Rule 41 (Corporation Default) and proposed Rule 42 (Wind-down of the Corporation), which would be adopted to facilitate the implementation of the Wind-down Plan, and are discussed below. Proposed Rules In connection with the adoption of the R&W Plan, NSCC is proposing to adopt the Proposed Rules, each described below. The Proposed Rules would facilitate the execution of the R&W Plan and would provide Members and Limited Members with transparency as to critical aspects of the Plan, particularly as they relate to the rights and responsibilities of both NSCC and Members. The Proposed Rules also provide a legal basis to these aspects of the Plan. Rule 41 (Corporation Default) The proposed Rule 41 (‘‘Corporation Default Rule’’) would provide a mechanism for the termination, valuation and netting of unsettled, guaranteed CNS transactions in the event NSCC is unable to perform its obligations or otherwise suffers a defined event of default, such as entering insolvency proceedings. The proposed Corporation Default Rule would provide Members with transparency and certainty regarding what would happen if NSCC were to fail (defined in the proposed Rule as a ‘‘Corporation Default’’). 51 See 52 See PO 00000 supra note 9. supra note 9. Frm 00066 Fmt 4703 The proposed rule would define the events that would constitute a Corporation Default, which would generally include (1) the failure of NSCC to make any undisputed payment or delivery to a Member if such failure is not remedied within seven days after notice of such failure is given to NSCC; (2) NSCC is dissolved; (3) NSCC institutes a proceeding seeking a judgment of insolvency or bankruptcy, or a proceeding is instituted against it seeking a judgment of bankruptcy or insolvency and such judgment is entered; or (4) NSCC seeks or becomes subject to the appointment of a receiver, trustee or similar official pursuant to the federal securities laws or Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act 53 for it or for all or substantially all of its assets. Upon a Corporation Default, the proposed Corporation Default Rule would provide that all unsettled, guaranteed CNS transactions would be terminated and, no later than forty-five days from the date on which the event that constitutes a Corporation Default occurred (or ‘‘Default Date’’), the Board would determine a single net amount owed by or to each Member with respect to such transactions pursuant to the valuation procedures set forth in the Proposed Rule. Essentially, for each affected position in a CNS Security, the ‘‘CNS Market Value’’ would be determined by using the Current Market Price for that security as determined in the CNS System as of the close of business on the next Business Day following the Default Date. NSCC would determine a ‘‘Net Contract Value’’ for each Member’s net unsettled long or short position in a CNS Security by netting the Member’s (i) contract price for such net position that, as of the Default Date, has not yet passed the Settlement Date, and (ii) the Current Market Price in the CNS System on the Default Date for its fail positions. To determine each Member’s ‘‘CNS Closeout Value,’’ (i) the Net Contract Value for each CUSIP would be subtracted from the CNS Market Value for such CUSIP, and (ii) the resulting difference for all CUSIPS in which the Member had a net long or short position would be summed, and would be netted and offset against any other amounts that may be due to or owing from the Member under the Rules. The proposed Corporation Default Rule would provide for notification to each Member of its CNS Close-out Value, and would also address interpretation of the Rules in relation to certain terms that are defined in the Federal Deposit Insurance 53 12 Sfmt 4703 E:\FR\FM\06AUN1.SGM U.S.C. 5381–5394. 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES Corporation Improvement Act of 1991 (‘‘FDICIA’’).54 NSCC believes this valuation approach, which is comparable to the approach adopted by other central counterparties, is appropriate for NSCC given the market in which NSCC operates and the volumes of transactions it processes in CNS, because it would provide for a common, clear and transparent valuation methodology and price per CUSIP applicable to all affected Members. Rule 42 (Wind-Down of the Corporation) The proposed Rule 42 (‘‘Wind-down Rule’’) would be adopted to facilitate the execution of the Wind-down Plan. The Wind-down Rule would include a proposed set of defined terms that would be applicable only to the provisions of this Proposed Rule. The Wind-down Rule would make clear that a wind-down of NSCC’s business would occur (1) after a decision is made by the Board, and (2) in connection with the transfer of NSCC’s services to a Transferee, as described therein. Generally, the proposed Wind-down Rule is designed to create clear mechanisms for the transfer of Eligible Members, Eligible Limited Members, and Settling Banks (as these terms would be defined in the Wind-down Rule), and NSCC’s business, in order to provide for continued access to critical services and to minimize disruption to the markets in the event the Wind-down Plan is initiated. Wind-down Trigger. First, the Proposed Rule would make clear that the Board is responsible for initiating the Wind-down Plan, and would identify the criteria the Board would consider when making this determination. As provided for in the Wind-down Plan and in the proposed Wind-down Rule, the Board would initiate the Plan if, in the exercise of its business judgment and subject to its fiduciary duties, it has determined that the execution of the Recovery Plan has not or is not likely to restore NSCC to viability as a going concern, and the implementation of the Wind-down Plan, including the transfer of NSCC’s business, is in the best interests of NSCC, Members and Limited Members, its shareholders and creditors, and the U.S. financial markets. Identification of Critical Services; Designation of Dates and Times for Specific Actions. The Proposed Rule would provide that, upon making a determination to initiate the Winddown Plan, the Board would identify 54 12 U.S.C. 1811 et seq. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 the critical and non-critical services that would be transferred to the Transferee at the Transfer Time (as defined below and in the Proposed Rule), as well as any non-critical services that would not be transferred to the Transferee. The proposed Wind-down Rule would establish that any services transferred to the Transferee will only be provided by the Transferee as of the Transfer Time, and that any non-critical services that are not transferred to the Transferee would be terminated at the Transfer Time. The Proposed Rule would also provide that the Board would establish (1) an effective time for the transfer of NSCC’s business to a Transferee (‘‘Transfer Time’’), (2) the last day that transactions may be submitted to NSCC for processing (‘‘Last Transaction Acceptance Date’’), and (3) the last day that transactions submitted to NSCC will be settled (‘‘Last Settlement Date’’). Treatment of Pending Transactions. The Wind-down Rule would also authorize the Board to provide for the settlement of pending transactions prior to the Transfer Time, so long as the Corporation Default Rule has not been triggered. For example, the Proposed Rule would provide the Board with the ability to, if it deems practicable, based on NSCC’s resources at that time, allow pending transactions to complete prior to the transfer of NSCC’s business to a Transferee. The Board would also have the ability to allow Members to only submit trades that would effectively offset pending positions or provide that transactions will be processed in accordance with special or exception processing procedures. The Proposed Rule is designed to enable these actions in order to facilitate settlement of pending transactions and reduce claims against NSCC that would have to be satisfied after the transfer has been effected. If none of these actions are deemed practicable (or if the Corporation Default Rule has been triggered), then the provisions of the proposed Corporation Default Rule would apply to the treatment of open, pending transactions. The Proposed Rule would make clear, however, that NSCC would not accept any transactions for processing after the Last Transaction Acceptance Date or which are designated to settle after the Last Settlement Date. Any transactions to be processed and/or settled after the Transfer Time would be required to be submitted to the Transferee, and would not be NSCC’s responsibility. Notice Provisions. The proposed Wind-down Rule would provide that, upon a decision to implement the Winddown Plan, NSCC would provide Members and Limited Members and its PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 38339 regulators with a notice that includes material information relating to the Wind-down Plan and the anticipated transfer of NSCC’s membership and business, including, for example, (1) a brief statement of the reasons for the decision to implement the Wind-down Plan; (2) identification of the Transferee and information regarding the transaction by which the transfer of NSCC’s business would be effected; (3) the Transfer Time, Last Transaction Acceptance Date, and Last Settlement Date; and (4) identification of Eligible Members and Eligible Limited Members, and the critical and non-critical services that would be transferred to the Transferee at the Transfer Time, as well as those Non-Eligible Members and Non-Eligible Limited Members (as defined in the Proposed Rule), and any non-critical services that would not be included in the transfer. NSCC would also make available the rules and procedures and membership agreements of the Transferee. Transfer of Membership. The proposed Wind-down Rule would address the expected transfer of NSCC’s membership to the Transferee, which NSCC would seek to effectuate by entering into an arrangement with a Failover Transferee, or by using commercially reasonable efforts to enter into such an arrangement with a Third Party Transferee. Therefore, the Winddown Rule would provide Members, Limited Members and Settling Banks with notice that, in connection with the implementation of the Wind-down Plan and with no further action required by any party, (1) their membership with NSCC would transfer to the Transferee, (2) they would become party to a membership agreement with such Transferee, and (3) they would have all of the rights and be subject to all of the obligations applicable to their membership status under the rules of the Transferee. These provisions would not apply to any Member or Limited Member that is either in default of an obligation to NSCC or has provided notice of its election to withdraw from membership. Further, the proposed Wind-down Rule would make clear that it would not prohibit (1) Members and Limited Members that are not transferred by operation of the Winddown Rule from applying for membership with the Transferee, or (2) Members, Limited Members, and Settling Banks that would be transferred to the Transferee from withdrawing from membership with the Transferee.55 55 The Members and Limited Members whose membership is transferred to the Transferee E:\FR\FM\06AUN1.SGM Continued 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES 38340 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices Comparability Period. The proposed automatic mechanism for the transfer of NSCC’s membership is intended to provide NSCC’s membership with continuous access to critical services in the event of NSCC’s wind-down, and to facilitate the continued prompt and accurate clearance and settlement of securities transactions. Further to this goal, the proposed Wind-down Rule would provide that NSCC would enter into arrangements with a Failover Transferee, or would use commercially reasonable efforts to enter into arrangements with a Third Party Transferee, providing that, in either case, with respect to the critical services and any non-critical services that are transferred from NSCC to the Transferee, for at least a period of time to be agreed upon (‘‘Comparability Period’’), the business transferred from NSCC to the Transferee would be operated in a manner that is comparable to the manner in which the business was previously operated by NSCC. Specifically, the proposed Wind-down Rule would provide that: (1) the rules of the Transferee and terms of membership agreements would be comparable in substance and effect to the analogous Rules and membership agreements of NSCC; (2) the rights and obligations of any Members, Limited Members and Settling Banks that are transferred to the Transferee would be comparable in substance and effect to their rights and obligations as to NSCC; and (3) the Transferee would operate the transferred business and provide any services that are transferred in a comparable manner to which such services were provided by NSCC. The purpose of these provisions and the intended effect of the proposed Winddown Rule is to facilitate a smooth transition of NSCC’s business to a Transferee and to provide that, for at least the Comparability Period, the Transferee (1) would operate the transferred business in a manner that is comparable in substance and effect to the manner in which the business was operated by NSCC, and (2) would not require sudden and disruptive changes in the systems, operations and business practices of the new members of the Transferee. Subordination of Claims Provisions and Miscellaneous Matters. The proposed Wind-down Rule would also include a provision addressing the subordination of unsecured claims pursuant to the proposed Wind-down Rule would submit transactions to be processed and settled subject to the rules and procedures of the Transferee, including any applicable margin charges or other financial obligations. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 against NSCC of Members and Limited Members who fail to participate in NSCC’s recovery efforts (i.e., such firms are delinquent in their obligations to NSCC or elect to retire from NSCC in order to minimize their obligations with respect to the allocation of losses, pursuant to the Rules). This provision is designed to incentivize Members to participate in NSCC’s recovery efforts.56 The proposed Wind-down Rule would address other ex-ante matters including provisions providing that Members, Limited Members and Settling Banks (1) will assist and cooperate with NSCC to effectuate the transfer of NSCC’s business to a Transferee, (2) consent to the provisions of the rule, and (3) grant NSCC power of attorney to execute and deliver on their behalf documents and instruments that may be requested by the Transferee. Finally, the Proposed Rule would include a limitation of liability for any actions taken or omitted to be taken by NSCC pursuant to the Proposed Rule. The purpose of the limitation of liability is to facilitate and protect NSCC’s ability to act expeditiously in response to extraordinary events. As noted, such limitation of liability would be available only following triggering of the Winddown Plan. In addition, and as a separate matter, the limitation of liability provides Members with transparency for the unlikely situation when those extraordinary events could occur, as well supporting the legal framework within which NSCC would take such actions. These provisions, collectively, are designed to enable NSCC to take such acts as the Board determines necessary to effectuate an orderly transfer and wind-down of its business should recovery efforts prove unsuccessful. Rule 60 (Market Disruption and Force Majeure) The proposed Rule 60 (‘‘Force Majeure Rule’’) would address NSCC’s authority to take certain actions upon the occurrence, and during the pendency, of a ‘‘Market Disruption Event,’’ as defined therein. The Proposed Rule is designed to clarify NSCC’s ability to take actions to address extraordinary events outside of the control of NSCC and of its membership, 56 Nothing in the proposed Wind-down Rule would seek to prevent a Member, Limited Member or Settling Bank that retired its membership at NSCC from applying for membership with the Transferee. Once its NSCC membership is terminated, however, such firm would not be able to benefit from the membership assignment that would be effected by this proposed Wind-down Rule, and it would have to apply for membership directly with the Transferee, subject to its membership application and review process. PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 and to mitigate the effect of such events by facilitating the continuity of services (or, if deemed necessary, the temporary suspension of services). To that end, under the proposed Force Majeure Rule, NSCC would be entitled, during the pendency of a Market Disruption Event, to (1) suspend the provision of any or all services, and (2) take, or refrain from taking, or require Members and Limited Members to take, or refrain from taking, any actions it considers appropriate to address, alleviate, or mitigate the event and facilitate the continuation of NSCC’s services as may be practicable. The proposed Force Majeure Rule would identify the events or circumstances that would be considered a ‘‘Market Disruption Event,’’ including, for example, events that lead to the suspension or limitation of trading or banking in the markets in which NSCC operates, or the unavailability or failure of any material payment, bank transfer, wire or securities settlement systems. The proposed Force Majeure Rule would define the governance procedures for how NSCC would determine whether, and how, to implement the provisions of the rule. A determination that a Market Disruption Event has occurred would generally be made by the Board, but the Proposed Rule would provide for limited, interim delegation of authority to a specified officer or management committee if the Board would not be able to take timely action. In the event such delegated authority is exercised, the proposed Force Majeure Rule would require that the Board be convened as promptly as practicable, no later than five Business Days after such determination has been made, to ratify, modify, or rescind the action. The proposed Force Majeure Rule would also provide for prompt notification to the Commission, and advance consultation with Commission staff, when practicable, including notification when an event is no longer continuing and the relevant actions are terminated. The Proposed Rule would require Members and Limited Members to notify NSCC immediately upon becoming aware of a Market Disruption Event, and, likewise, would require NSCC to notify Members and Limited Members if it has triggered the Proposed Rule and of actions taken or intended to be taken thereunder. Finally, the Proposed Rule would address other related matters, including a limitation of liability for any failure or delay in performance, in whole or in part, arising out of the Market Disruption Event. The purpose of the limitation of liability would be similar to the purpose of the analogous provision in the proposed Wind-down E:\FR\FM\06AUN1.SGM 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices Consistency With the Clearing Supervision Act Rule, which is to facilitate and protect NSCC’s ability to act expeditiously in response to extraordinary events. sradovich on DSK3GMQ082PROD with NOTICES Proposed Change to the Rule Numbers In order to align the order of the Proposed Rules with the order of comparable rules in the rulebooks of the other Clearing Agencies, NSCC is also proposing to re-number the current Rule 42 (Wind-down of a Member, Fund Member or Insurance Carrier/Retirement Services Member) to Rule 40, which is currently reserved for future user, as shown on Exhibit 5b, hereto. Expected Effect on and Management of Risk NSCC believes the proposal to adopt the R&W Plan and the Proposed Rules would enable it to better manage its risks. As described above, the Recovery Plan would identify the recovery tools and the risk management activities that NSCC may use to address risks of uncovered losses or shortfalls resulting from a Member default and losses arising from non-default events. By creating a framework for its management of risks across an evolving stress scenario and providing a roadmap for actions it may employ to monitor and, as needed, stabilize its financial condition, the Recovery Plan would strengthen NSCC’s ability to manage risk. The Wind-down Plan would also enable NSCC to better manage its risks by establishing the strategy and framework for its orderly wind-down and the transfer of NSCC’s business when the Wind-down Plan is triggered. By creating clear mechanisms for the transfer of NSCC’s membership and business, the Wind-down Plan would facilitate continued access to NSCC’s critical services and minimize market impact of the transfer and enable NSCC to better manage risks related to its wind-down. NSCC believes the Proposed Rules would enable it to better manage its risks by facilitating, and providing a legal basis for, the implementation of critical aspects of the R&W Plan. The Proposed Rules would provide Members and Limited Members with transparency around those provisions of the R&W Plan that relate to their and NSCC’s rights, responsibilities and obligations. Therefore, NSCC believes the Proposed Rules would enable it to better manage its risks by providing this transparency and creating certainty, to the extent practicable, around the occurrence of a Market Disruption Event or a Corporation Default (as such terms are defined in the respective Proposed Rules), and around the implementation of the Wind-down Plan. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 The stated purpose of Title VIII of the Clearing Supervision Act is to mitigate systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for systemically important financial market utilities and strengthening the liquidity of systemically important financial market utilities.57 Section 805(a)(2) of the Clearing Supervision Act 58 also authorizes the Commission to prescribe risk management standards for the payment, clearing, and settlement activities of designated clearing entities, like NSCC, for which the Commission is the supervisory agency. Section 805(b) of the Clearing Supervision Act 59 states that the objectives and principles for risk management standards prescribed under Section 805(a) shall be to promote robust risk management, promote safety and soundness, reduce systemic risks, and support the stability of the broader financial system. NSCC believes that the proposal is consistent with Section 805(b) of the Clearing Supervision Act because it is designed to address each of these objectives. The Recovery Plan and the proposed Force Majeure Rule would promote robust risk management and would reduce systemic risks by providing NSCC with a roadmap for actions it may employ to monitor and manage its risks, and, as needed, to stabilize its financial condition in the event those risks materialize. Further, the Recovery Plan would identify the triggers of recovery tools, but would not provide that those triggers necessitate the use of those tools. Instead, the Recovery Plan would provide that the triggers of these tools lead to escalation to an appropriate management body, which would have the authority and flexibility to respond appropriately to the situation. Essentially, the Recovery Plan and the proposed Force Majeure Rule are designed to minimize losses to both NSCC and Members by giving NSCC the ability to determine the most appropriate way to address each stress situation. This approach would allow for proper evaluation of the situation and the possible impacts of the use of the available recovery tools in order to minimize the negative effects of the stress situation, and would reduce systemic risks related to the implementation of the Recovery Plan and the underlying recovery tools. The Wind-down Plan and the proposed Corporation Default Rule and Wind-down Rule, which would facilitate the implementation of the Wind-down Plan, would promote safety and soundness and would support the stability of the broader financial system, because they would establish a framework for the orderly wind-down of NSCC’s business and would set forth clear mechanics for the transfer of its critical services and membership, as well as clear provisions concerning the treatment of open, guaranteed CNS transactions in the event of NSCC’s default. By designing the Wind-down Plan and these Proposed Rules to enable the continuity of NSCC’s critical services and membership, NSCC believes they would promote safety and soundness and would support stability in the broader financial system in the event the Wind-down Plan is implemented. By assisting NSCC to promote robust risk management, promote safety and soundness, reduce systemic risks, and support the stability of the broader financial system, as described above, NSCC believes the proposal is consistent with Section 805(b) of the Clearing Supervision Act.60 NSCC also believes that the proposal is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a registered clearing agency. In particular, NSCC believes that the R&W Plan, each of the Proposed Rules, and the proposed change to Rule numbers are consistent with Section 17A(b)(3)(F) of the Act,61 the R&W Plan and each of the Proposed Rules are consistent with Rule 17Ad– 22(e)(3)(ii) under the Act,62 and the R&W Plan is consistent with Rule 17Ad22(e)(15)(ii) under the Act,63 for the reasons described below. Section 17A(b)(3)(F) of the Act requires, in part, that the rules of NSCC be designed to promote the prompt and accurate clearance and settlement of securities transactions, and to assure the safeguarding of securities and funds which are in the custody or control of NSCC or for which it is responsible.64 The Recovery Plan and the proposed Force Majeure Rule would promote the prompt and accurate clearance and settlement of securities transactions by providing NSCC with a roadmap for actions it may employ to mitigate losses, and monitor and, as needed, stabilize, its financial condition, which would 60 Id. 61 15 U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(e)(3)(ii). 63 Id. at 240.17Ad–22(e)(15)(ii). 64 15 U.S.C. 78q–1(b)(3)(F). 57 12 U.S.C. 5461(b). 58 Id. at 5464(a)(2). 59 Id. at 5464(b). PO 00000 Frm 00069 Fmt 4703 62 17 Sfmt 4703 38341 E:\FR\FM\06AUN1.SGM 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES 38342 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices allow it to continue its critical clearance and settlement services in stress situations. Further, as described above, the Recovery Plan is designed to identify the actions and tools NSCC may use to address and minimize losses to both NSCC and Members. The Recovery Plan and the proposed Force Majeure Rule would provide NSCC’s management and the Board with guidance in this regard by identifying the indicators and governance around the use and application of such tools to enable them to address stress situations in a manner most appropriate for the circumstances. Therefore, the Recovery Plan and the proposed Force Majeure Rule would also contribute to the safeguarding of securities and funds which are in the custody or control of NSCC or for which it is responsible by enabling actions that would address and minimize losses. The Wind-down Plan and the proposed Corporation Default Rule and Wind-down Rule, which would both facilitate the implementation of the Wind-down Plan, would also promote the prompt and accurate clearance and settlement of securities transactions and assure the safeguarding of securities and funds which are in the custody or control of NSCC or for which it is responsible. The Wind-down Plan and the proposed Corporation Default Rule and Wind-down Rule would collectively establish a framework for the transfer and orderly wind-down of NSCC’s business. These proposals would establish clear mechanisms for the transfer of NSCC’s critical services and membership, and for the treatment of open, guaranteed CNS transactions in the event of NSCC’s default. By doing so, the Wind-down Plan and these Proposed Rules are designed to facilitate the continuity of NSCC’s critical services and enable Members and Limited Members to maintain access to NSCC’s services through the transfer of its membership in the event NSCC defaults or the Wind-down Plan is triggered by the Board. Therefore, by facilitating the continuity of NSCC’s critical clearance and settlement services, NSCC believes the proposals would promote the prompt and accurate clearance and settlement of securities transactions. Further, by creating a framework for the transfer and orderly wind-down of NSCC’s business, NSCC believes the proposals would enhance the safeguarding of securities and funds which are in the custody or control of NSCC or for which it is responsible. Finally, the proposed change to the Rule numbers would align the order of the Proposed Rules with the order of comparable rules in the rulebooks of the VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 other Clearing Agencies. Therefore, NSCC believes the proposed change would create ease of reference, particularly for Members that are also participants of the other Clearing Agencies, and, as such, would assist in promoting the prompt and accurate clearance and settlement of securities transactions. Therefore, NSCC believes the R&W Plan, each of the Proposed Rules, and the proposed change to Rule numbers are consistent with the requirements of Section 17A(b)(3)(F) of the Act.65 Rule 17Ad–22(e)(3)(ii) under the Act requires NSCC to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain a sound risk management framework for comprehensively managing legal, credit, liquidity, operational, general business, investment, custody, and other risks that arise in or are borne by the covered clearing agency, which includes plans for the recovery and orderly wind-down of the covered clearing agency necessitated by credit losses, liquidity shortfalls, losses from general business risk, or any other losses.66 The R&W Plan and the Proposed Rules are designed to meet the requirements of Rule 17Ad–22(e)(3)(ii).67 The R&W Plan would be maintained by NSCC in compliance with Rule 17Ad–22(e)(3)(ii) in that it provides plans for the recovery and orderly winddown of NSCC necessitated by credit losses, liquidity shortfalls, losses from general business risk, or any other losses, as described above.68 Specifically, the Recovery Plan would define the risk management activities, stress conditions and indicators, and tools that NSCC may use to address stress scenarios that could eventually prevent it from being able to provide its critical services as a going concern. Through the framework of the Crisis Continuum, the Recovery Plan would address measures that NSCC may take to address risks of credit losses and liquidity shortfalls, and other losses that could arise from a Member default. The Recovery Plan would also address the management of general business risks and other non-default risks that could lead to losses. The Wind-down Plan would be triggered by a determination by the Board that recovery efforts have not been, or are unlikely to be, successful in returning NSCC to viability as a going concern. Once triggered, the Wind- down Plan would set forth clear mechanisms for the transfer of NSCC’s membership and business, and would be designed to facilitate continued access to NSCC’s critical services and to minimize market impact of the transfer. By establishing the framework and strategy for the execution of the transfer and wind-down of NSCC in order to facilitate continuous access to NSCC’s critical services, the Wind-down Plan establishes a plan for the orderly winddown of NSCC. Therefore, NSCC believes the R&W Plan would provide plans for the recovery and orderly winddown of the covered clearing agency necessitated by credit losses, liquidity shortfalls, losses from general business risk, or any other losses, and, as such, meets the requirements of Rule 17Ad– 22(e)(3)(ii).69 As described in greater detail above, the Proposed Rules are designed to facilitate the execution of the R&W Plan, provide Members and Limited Members with transparency regarding the material provisions of the Plan, and provide NSCC with a legal basis for implementation of those provisions. As such, NSCC also believes the Proposed Rules meet the requirements of Rule 17Ad–22(e)(3)(ii).70 NSCC has evaluated the recovery tools that would be identified in the Recovery Plan and has determined that these tools are comprehensive, effective, and transparent, and that such tools provide appropriate incentives to NSCC’s Members to manage the risks they present. The recovery tools, as outlined in the Recovery Plan and in the proposed Force Majeure Rule, provide NSCC with a comprehensive set of options to address its material risks and support the resiliency of its critical services under a range of stress scenarios. NSCC also believes the recovery tools are effective, as NSCC has both legal basis and operational capability to execute these tools in a timely and reliable manner. Many of the recovery tools are provided for in the Rules; Members are bound by the Rules through their membership agreements with NSCC, and the Rules are adopted pursuant to a framework established by Rule 19b–4 under the Act,71 providing a legal basis for the recovery tools found therein. Other recovery tools have legal basis in contractual arrangements to which NSCC is a party, as described above. Further, as many of the tools are embedded in NSCC’s ongoing risk management practices or are embedded into its predefined default-management 65 Id. 66 17 CFR 240.17Ad–22(e)(3)(ii). 69 Id. 67 Id. 70 Id. 68 Id. 71 Id. PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 E:\FR\FM\06AUN1.SGM at 240.19b–4. 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices procedures, NSCC is able to execute these tools, in most cases, when needed and without material operational or organizational delay. The majority of the recovery tools are also transparent, as they are, or are proposed to be, included in the Rules, which are publicly available. NSCC believes the recovery tools also provide appropriate incentives to the Members, as they are designed to control the amount of risk they present to NSCC’s clearance and settlement system. Members’ financial obligations to NSCC, particularly their Required Deposits to the Clearing Fund, are measured by the risk posed by the Members’ activity in NSCC’s systems, which incentivizes them to manage that risk which would correspond to lower financial obligations. Finally, NSCC’s Recovery Plan provides for a continuous evaluation of the systemic consequences of executing its recovery tools, with the goal of minimizing their negative impact. The Recovery Plan would outline various indicators over a timeline of increasing stress, the Crisis Continuum, with escalation triggers to NSCC management or the Board, as appropriate. This approach would allow for timely evaluation of the situation and the possible impacts of the use of a recovery tool in order to minimize the negative effects of the stress scenario. Therefore, NSCC believes that the recovery tools that would be identified and described in its Recovery Plan, including the authority provided to it in the proposed Force Majeure Rule, would meet the criteria identified within guidance published by the Commission in connection with the adoption of Rule 17Ad–22(e)(3)(ii).72 Therefore, NSCC believes the R&W Plan and each of the Proposed Rules are consistent with Rule 17Ad– 22(e)(3)(ii).73 Rule 17Ad–22(e)(15)(ii) under the Act requires NSCC to establish, implement, maintain and enforce written policies and procedures reasonably designed to identify, monitor, and manage its general business risk and hold sufficient LNA to cover potential general business losses so that NSCC can continue operations and services as a going concern if those losses materialize, including by holding LNA equal to the greater of either (x) six months of the covered clearing agency’s current operating expenses, or (y) the amount determined by the board of directors to be sufficient to ensure a recovery or orderly wind-down of critical operations and services of the covered clearing agency.74 While the Capital Policy addresses how NSCC holds LNA in compliance with these requirements, the Wind-down Plan would include an analysis that would estimate the amount of time and the costs to achieve a recovery or orderly wind-down of NSCC’s critical operations and services, and would provide that the Board review and approve this analysis and estimation annually. The Wind-down Plan would also provide that the estimate would be the ‘‘Recovery/Winddown Capital Requirement’’ under the Capital Policy. Under that policy, the General Business Risk Capital Requirement, which is the sufficient amount of LNA that NSCC should hold to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialize, is calculated as the greatest of three estimated amounts, one of which is this Recovery/Wind-down Capital Requirement. Therefore, NSCC believes the R&W Plan, as it interrelates with the Capital Policy, is consistent with Rule 17Ad–22(e)(15)(ii).75 38343 arguments concerning the foregoing. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NSCC–2017–805 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. III. Date of Effectiveness of the Advance Notice, and Timing for Commission Action The proposed change may be implemented if the Commission does not object to the proposed change within 60 days of the later of (i) the date that the proposed change was filed with the Commission or (ii) the date that any additional information requested by the Commission is received. The clearing agency shall not implement the proposed change if the Commission has any objection to the proposed change. A proposed change may be implemented in less than 60 days from the date the advance notice is filed, or the date further information requested by the Commission is received, if the Commission notifies the clearing agency in writing that it does not object to the proposed change and authorizes the clearing agency to implement the proposed change on an earlier date, subject to any conditions imposed by the Commission. The clearing agency shall post notice on its website of proposed changes that are implemented. The proposal shall not take effect until all regulatory actions required with respect to the proposal are completed. All submissions should refer to File Number SR–NSCC–2017–805. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the Advance Notice that are filed with the Commission, and all written communications relating to the Advance Notice between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of NSCC and on DTCC’s website (https://dtcc.com/legal/sec-rulefilings.aspx). All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NSCC– 2017–805 and should be submitted on or before August 21, 2018. IV. Solicitation of Comments Interested persons are invited to submit written data, views and By the Commission. Robert W. Errett, Deputy Secretary. [FR Doc. 2018–16711 Filed 8–3–18; 8:45 am] 72 Supra note 45. 73 17 CFR 240.17Ad–22(e)(3)(ii). VerDate Sep<11>2014 17:36 Aug 03, 2018 74 Id. at 240.17Ad–22(e)(15)(ii). BILLING CODE 8011–01–P 75 Id. Jkt 244001 PO 00000 Frm 00071 Fmt 4703 Sfmt 9990 E:\FR\FM\06AUN1.SGM 06AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 151 (Monday, August 6, 2018)]
[Notices]
[Pages 38329-38343]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16711]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83745; File No. SR-NSCC-2017-805]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Amendment No. 1 to an Advance Notice 
To Adopt a Recovery & Wind-Down Plan and Related Rules

July 31, 2018.
    On December 18, 2017, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') advance notice SR-NSCC-2017-805 (``Advance Notice'') 
pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act'') and Rule 19b-4(n)(1)(i) under the Securities 
Exchange Act of 1934 (``Act'').\1\ The notice of filing and extension 
of the review period of the Advance Notice was published for comment in 
the Federal Register on January 30, 2018.\2\
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    \1\ 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i), 
respectively. On December 18, 2017, NSCC filed the Advance Notice as 
a proposed rule change (SR-NSCC-2017-017) with the Commission 
pursuant to Section 19(b)(1) of the Act and Rule 19b-4 thereunder 
(``Proposed Rule Change''). (17 CFR 240.19b-4 and 17 CFR 240.19b-4, 
respectively.) The Proposed Rule Change was published in the Federal 
Register on January 8, 2018. See Securities Exchange Act Release No. 
82430 (January 2, 2018), 83 FR 841 (January 8, 2018) (SR-NSCC-2017-
017). On February 8, 2018, the Commission designated a longer period 
within which to approve, disapprove, or institute proceedings to 
determine whether to approve or disapprove the Proposed Rule Change. 
See Securities Exchange Act Release No. 82669 (February 8, 2018), 83 
FR 6653 (February 14, 2018) (SR-DTC-2017-021; SR-FICC-2017-021; SR-
NSCC-2017-017). On March 20, 2018, the Commission instituted 
proceedings to determine whether to approve or disapprove the 
Proposed Rule Change. See Securities Exchange Act Release No. 82908 
(March 20, 2018), 83 FR 12986 (March 26, 2018) (SR-NSCC-2017-017). 
On June 25, 2018, the Commission designated a longer period for 
Commission action on the proceedings to determine whether to approve 
or disapprove the Proposed Rule Change. Therefore, September 5, 2018 
is the date by which the Commission should either approve or 
disapprove the Proposed Rule Change. See Securities Exchange Act 
Release No. 83509 (June 25, 2018), 83 FR 30785 (June 29, 2018) (SR-
DTC-2017-021; SR-FICC-2017-021; SR-NSCC-2017-017). On June 28, 2018, 
NSCC filed Amendment No. 1 to the Proposed Rule Change. See 
Securities Exchange Act Release No. 83632 (July 13, 2018), 83 FR 
34166 (July 19, 2018) (SR-NSCC-2017-017). As of the date of this 
release, the Commission has not received any comments on the 
Proposed Rule Change.
    \2\ Securities Exchange Act Release No. 82581 (January 24, 
2018), 83 FR 4327 (January 30, 2018) (SR-NSCC-2017-805). Pursuant to 
Section 806(e)(1)(H) of the Clearing Supervision Act, the Commission 
may extend the review period of an advance notice for an additional 
60 days, if the changes proposed in the advance notice raise novel 
or complex issues, subject to the Commission providing the clearing 
agency with prompt written notice of the extension. 12 U.S.C. 
5465(e)(1)(H). The Commission found that the Advance Notice raised 
novel and complex issues and, accordingly, extended the review 
period of the Advance Notice for an additional 60 days until April 
17, 2018, pursuant to Section 806(e)(1)(H). Id.

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[[Page 38330]]

    On April 10, 2018, the Commission required additional information 
from NSCC pursuant to Section 806(e)(1)(D) of the Clearing Supervision 
Act, which tolled the Commission's period of review of the Advance 
Notice.\3\ On June 28, 2018, NSCC filed Amendment No. 1 to the Advance 
Notice to amend and replace in its entirety the Advance Notice as 
originally submitted on December 18, 2017.\4\ On July 6, 2018, the 
Commission received a response to its request for additional 
information in consideration of the Advance Notice, which added a 
further 60-days to the review period pursuant to Section 806(e)(1)(E) 
and (G) of the Clearing Supervision Act.\5\
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    \3\ 12 U.S.C. 5465(e)(1)(D); see Memorandum from the Office of 
Clearance and Settlement Supervision, Division of Trading and 
Markets, titled ``Commission's Request for Additional Information,'' 
available at https://www.sec.gov/rules/sro/nscc-an.htm.
    \4\ To promote the public availability and transparency of its 
post-notice amendment, NSCC submitted a copy of Amendment No. 1 
through the Commission's electronic public comment letter mechanism. 
Accordingly, Amendment No. 1 has been posted on the Commission's 
website at https://www.sec.gov/rules/sro/nscc-an.htm and thus been 
publicly available since June 29, 2018.
    \5\ 12 U.S.C. 5465(e)(1)(E) and (G); see Memorandum from the 
Office of Clearance and Settlement Supervision, Division of Trading 
and Markets, titled ``Response to the Commission's Request for 
Additional Information,'' available at https://www.sec.gov/rules/sro/nscc-an.htm.
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    The Advance Notice, as amended by Amendment No. 1, is described in 
Items I and II below, which Items have been prepared by NSCC. The 
Commission is publishing this notice to solicit comments on the Advance 
Notice, as amended by Amendment No. 1, from interested persons.

I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    The Advance Notice of NSCC proposes to (1) adopt the Recovery & 
Wind-down Plan of NSCC (``R&W Plan'' or ``Plan''); and (2) amend NSCC's 
Rules & Procedures (``Rules'') \6\ in order to adopt Rule 41 
(Corporation Default), Rule 42 (Wind-down of the Corporation), and Rule 
60 (Market Disruption and Force Majeure) (each a ``Proposed Rule'' and, 
collectively, the ``Proposed Rules''). The Advance Notice would also 
propose to re-number the current Rule 42 (Wind-down of a Member, Fund 
Member or Insurance Carrier/Retirement Services Member) to Rule 40, 
which is currently reserved for future use.
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    \6\ Capitalized terms used herein and not otherwise defined 
herein are defined in the Rules, available at www.dtcc.com/~/media/
Files/Downloads/legal/rules/nscc_rules.pdf.
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    The R&W Plan would be maintained by NSCC in compliance with Rule 
17Ad-22(e)(3)(ii) under the Act by providing plans for the recovery and 
orderly wind-down of NSCC necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses, as 
described below.\7\ The Proposed Rules are designed to (1) facilitate 
the implementation of the R&W Plan when necessary and, in particular, 
allow NSCC to effectuate its strategy for winding down and transferring 
its business; (2) provide Members and Limited Members with transparency 
around critical provisions of the R&W Plan that relate to their rights, 
responsibilities and obligations; and (3) provide NSCC with the legal 
basis to implement those provisions of the R&W Plan when necessary, as 
described below.
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    \7\ 17 CFR 240.17Ad-22(e)(3)(ii).
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the Advance Notice 
and discussed any comments it received on the Advance Notice. The text 
of these statements may be examined at the places specified in Item IV 
below. The clearing agency has prepared summaries, set forth in 
sections A and B below, of the most significant aspects of such 
statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants, or Others

    While NSCC has not solicited or received any written comments 
relating to this proposal, NSCC has conducted outreach to Members in 
order to provide them with notice of the proposal. NSCC will notify the 
Commission of any written comments received by NSCC.

(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing 
Supervision Act

Description of Amendment No. 1
    This filing constitutes Amendment No. 1 (``Amendment'') to the 
Advance Notice (also referred to below as the ``Original Filing'') 
previously filed by NSCC.\8\ NSCC is amending the proposed R&W Plan and 
the Original Filing in order to clarify certain matters and make minor 
technical and conforming changes to the R&W Plan, as described below 
and as marked on Exhibit 4 hereto. To the extent such changes to the 
Plan require changes to the Original Filing, the information provided 
under ``Description of Proposed Changes'' in the Original Filing has 
been amended and is restated in its entirety below. Other sections of 
the Original Filing are unchanged and are restated in their entity for 
convenience.
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    \8\ See Securities Exchange Act Release No. 82581 (January 24, 
2018), 83 FR 4327 (January 30, 2018) (SR-NSCC-2017-805).
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    First, this Amendment would clarify the meaning of the terms 
``cease to act,'' ``Member default,'' ``Defaulting Member,'' and 
``Member Default Losses'' as such terms are used in the Plan. This 
Amendment would also make conforming changes as necessary to reflect 
the use of these terms.
    Second, this Amendment would clarify that actions and tools 
described in the Plan that are available in one phase of the Crisis 
Continuum may be used in subsequent phases of the Crisis Continuum when 
appropriate to address the applicable situation. This Amendment would 
also clarify that the allocation of losses resulting from a Member 
default would be applied when provided for, and in accordance with, 
Rule 4 of the Rules.
    Third, this Amendment would clarify that the Recovery Corridor (as 
defined therein) is not a ``sub-phase'' of the recovery phase. Rather, 
the Recovery Corridor is a period of time that would occur toward the 
end of the Member default phase, when indicators are that NSCC may 
transition into the recovery phase. Thus, the Recovery Corridor 
precedes the recovery phase within the Crisis Continuum.
    Fourth, this Amendment would make revisions to address the 
allocation of losses resulting from a Member default in order to more 
closely conform such statements to the changes proposed by the Loss 
Allocation Filing, as defined below.
    Fifth, this Amendment would clarify the notifications that NSCC 
would be required to make under the Proposed Rule 60 (Market Disruption 
and Force Majeure).
    Finally, this Amendment would make minor, technical and conforming 
revisions to correct typographical errors and to simplify descriptions. 
For example, such revisions would use lower case for terms that are not 
defined

[[Page 38331]]

therein, and would use upper case for terms that are defined. The 
Amendment would also simplify certain descriptions by removing 
extraneous words and statements that are repetitive. These minor, 
technical revisions would not alter the substance of the proposal.
Description of Proposed Changes
    NSCC is proposing to adopt the R&W Plan to be used by the Board and 
management of NSCC in the event NSCC encounters scenarios that could 
potentially prevent it from being able to provide its critical services 
as a going concern. The R&W Plan would identify (i) the recovery tools 
available to NSCC to address the risks of (a) uncovered losses or 
liquidity shortfalls resulting from the default of one or more Members, 
and (b) losses arising from non-default events, such as damage to its 
physical assets, a cyber-attack, or custody and investment losses, and 
(ii) the strategy for implementation of such tools. The R&W Plan would 
also establish the strategy and framework for the orderly wind-down of 
NSCC and the transfer of its business in the remote event the 
implementation of the available recovery tools does not successfully 
return NSCC to financial viability.
    As discussed in greater detail below, the R&W Plan would provide, 
among other matters, (i) an overview of the business of NSCC and its 
parent, The Depository Trust & Clearing Corporation (``DTCC''); (ii) an 
analysis of NSCC's intercompany arrangements and critical links to 
other financial market infrastructures (``FMIs''); (iii) a description 
of NSCC's services, and the criteria used to determine which services 
are considered critical; (iv) a description of the NSCC and DTCC 
governance structure; (v) a description of the governance around the 
overall recovery and wind-down program; (vi) a discussion of tools 
available to NSCC to mitigate credit/market and liquidity risks, 
including recovery indicators and triggers, and the governance around 
management of a stress event along a ``Crisis Continuum'' timeline; 
(vii) a discussion of potential non-default losses and the resources 
available to NSCC to address such losses, including recovery triggers 
and tools to mitigate such losses; (viii) an analysis of the recovery 
tools' characteristics, including how they are comprehensive, 
effective, and transparent, how the tools provide appropriate 
incentives to Members to, among other things, control and monitor the 
risks they may present to NSCC, and how NSCC seeks to minimize the 
negative consequences of executing its recovery tools; and (ix) the 
framework and approach for the orderly wind-down and transfer of NSCC's 
business, including an estimate of the time and costs to effect a 
recovery or orderly wind-down of NSCC.
    The R&W Plan would be structured as a roadmap, and would identify 
and describe the tools that NSCC may use to effect a recovery from the 
events and scenarios described therein. Certain recovery tools that 
would be identified in the R&W Plan are based in the Rules (including 
the Proposed Rules) and, as such, descriptions of those tools would 
include descriptions of, and reference to, the applicable Rules and any 
related internal policies and procedures. Other recovery tools that 
would be identified in the R&W Plan are based in contractual 
arrangements to which NSCC is a party, including, for example, existing 
committed or pre-arranged liquidity arrangements. Further, the R&W Plan 
would state that NSCC may develop further supporting internal 
guidelines and materials that may provide operationally for matters 
described in the Plan, and that such documents would be supplemental 
and subordinate to the Plan.
    Key factors considered in developing the R&W Plan and the types of 
tools available to NSCC were its governance structure and the nature of 
the markets within which NSCC operates. As a result of these 
considerations, many of the tools available to NSCC that would be 
described in the R&W Plan are NSCC's existing, business-as-usual risk 
management and Member default management tools, which would continue to 
be applied in scenarios of increasing stress. In addition to these 
existing, business-as-usual tools, the R&W Plan would describe NSCC's 
other principal recovery tools, which include, for example, (i) 
identifying, monitoring and managing general business risk and holding 
sufficient liquid net assets funded by equity (``LNA'') to cover 
potential general business losses pursuant to the Clearing Agency 
Policy on Capital Requirements (``Capital Policy''),\9\ (ii) 
maintaining the Clearing Agency Capital Replenishment Plan 
(``Replenishment Plan'') as a viable plan for the replenishment of 
capital should NSCC's equity fall close to or below the amount being 
held pursuant to the Capital Policy,\10\ and (iii) the process for the 
allocation of losses among Members, as provided in Rule 4.\11\ The R&W 
Plan would provide governance around the selection and implementation 
of the recovery tool or tools most relevant to mitigate a stress 
scenario and any applicable loss or liquidity shortfall.
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    \9\ See Securities Exchange Act Release No. 81105 (July 7, 
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003, SR-FICC-2017-
007, SR-NSCC-2017-004).
    \10\ See id.
    \11\ See Rule 4 (Clearing Fund), supra note 6. NSCC is proposing 
changes to Rule 4 and other related rules regarding allocation of 
losses in a separate filing submitted simultaneously with the 
Original Filing. See Securities Exchange Act Release Nos. 82430 
(January 2, 2018), 83 FR 841 (January 8, 2018) (SR-NSCC-2017-017) 
and 82581 (January 24, 2018), 83 FR 4327 (January 30, 2018) (SR-
NSCC-2017-805) (collectively referred to herein as the ``Loss 
Allocation Filing''). NSCC has submitted an amendment to the Loss 
Allocation Filing. A copy of the amendment to the Loss Allocation 
Filing is available at https://www.dtcc.com/legal/sec-rule-filings.aspx. NSCC expects the Commission to review both proposals, 
as amended, together, and, as such, the proposal described in this 
filing anticipates the approval and implementation of those proposed 
changes to the Rules.
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    The development of the R&W Plan is facilitated by the Office of 
Recovery & Resolution Planning (``R&R Team'') of DTCC.\12\ The R&R Team 
reports to the DTCC Management Committee (``Management Committee'') and 
is responsible for maintaining the R&W Plan and for the development and 
ongoing maintenance of the overall recovery and wind-down planning 
process. The Board, or such committees as may be delegated authority by 
the Board from time to time pursuant to its charter, would review and 
approve the R&W Plan biennially, and would also review and approve any 
changes that are proposed to the R&W Plan outside of the biennial 
review.
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    \12\ DTCC operates on a shared services model with respect to 
NSCC and its other subsidiaries. Most corporate functions are 
established and managed on an enterprise-wide basis pursuant to 
intercompany agreements under which it is generally DTCC that 
provides a relevant service to a subsidiary, including NSCC.
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    As discussed in greater detail below, the Proposed Rules would 
define the procedures that may be employed in the event of NSCC's 
default and its wind-down, and would provide for NSCC's authority to 
take certain actions on the occurrence of a ``Market Disruption 
Event,'' as defined therein. Significantly, the Proposed Rules would 
provide Members and Limited Members with transparency and certainty 
with respect to these matters. The Proposed Rules would facilitate the 
implementation of the R&W Plan, particularly NSCC's strategy for 
winding down and transferring its business, and would provide NSCC with 
the legal basis to implement those aspects of the R&W Plan.
NSCC R&W Plan
    The R&W Plan is intended to be used by the Board and NSCC's 
management in the event NSCC encounters scenarios that could 
potentially prevent it from being able to provide its critical services

[[Page 38332]]

as a going concern. The R&W Plan would be structured to provide a 
roadmap, define the strategy, and identify the tools available to NSCC 
to either (i) recover in the event it experiences losses that exceed 
its prefunded resources (such strategies and tools referred to herein 
as the ``Recovery Plan'') or (ii) wind-down its business in a manner 
designed to permit the continuation of its critical services in the 
event that such recovery efforts are not successful (such strategies 
and tools referred to herein as the ``Wind-down Plan''). The 
description of the R&W Plan below is intended to highlight the purpose 
and expected effects of the material aspects of the R&W Plan, and to 
provide Members and Limited Members with appropriate transparency into 
these features.
Business Overview, Critical Services, and Governance
    The introduction to the R&W Plan would identify the document's 
purpose and its regulatory background, and would outline a summary of 
the Plan. The stated purpose of the R&W Plan is that it is to be used 
by the Board and NSCC management in the event NSCC encounters scenarios 
that could potentially prevent it from being able to provide its 
critical services as a going concern. The R&W Plan would be maintained 
by NSCC in compliance with Rule 17Ad-22(e)(3)(ii) under the Act \13\ by 
providing plans for the recovery and orderly wind-down of NSCC.
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    \13\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The R&W Plan would describe DTCC's business profile, provide a 
summary of NSCC's services, and identify the intercompany arrangements 
and links between NSCC and other entities, including other FMIs. This 
overview section would provide a context for the R&W Plan by describing 
NSCC's business, organizational structure and critical links to other 
entities. By providing this context, this section would facilitate the 
analysis of the potential impact of utilizing the recovery tools set 
forth in later sections of the Recovery Plan, and the analysis of the 
factors that would be addressed in implementing the Wind-down Plan.
    DTCC is a user-owned and user-governed holding company and is the 
parent company of NSCC and its affiliates, The Depository Trust Company 
(``DTC'') and Fixed Income Clearing Corporation (``FICC'', and, 
together with NSCC and DTC, the ``Clearing Agencies''). The Plan would 
describe how corporate support services are provided to NSCC from DTCC 
and DTCC's other subsidiaries through intercompany agreements under a 
shared services model.
    The Plan would provide a description of established links between 
NSCC and other FMIs, including The Options Clearing Corporation 
(``OCC''), CDS Clearing and Depository Services Inc. (``CDS''), and 
DTC. For example, the arrangement between NSCC and OCC governs the 
process by which OCC submits transactions to NSCC for settlement, and 
sets the time when the settlement obligations and the central 
counterparty trade guaranty shifts from OCC to NSCC with respect to 
these transactions.\14\ The arrangement with CDS enables participants 
of CDS to clear and settle OTC trades with U.S. broker-dealers through 
subaccounts maintained by CDS through its own membership with NSCC.\15\ 
The interface between DTC and NSCC permits transactions to flow between 
DTC's system and NSCC's Continuous Net Settlement (``CNS'') system in a 
collateralized environment.\16\ NSCC's CNS relies on this interface 
with DTC for the book-entry movement of securities to settle 
transactions. This section of the Plan, identifying and briefly 
describing NSCC's established links, would provide a mapping of 
critical connections and dependencies that may need to be relied on or 
otherwise addressed in connection with the implementation of either the 
Recovery Plan or the Wind-down Plan.
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    \14\ See Securities Exchange Act Release Nos. 81266 (July 31, 
2017), 82 FR 36484 (August 4, 2017) (SR-NSCC-2017-007, SR-OCC-2017-
013); 81260 (July 31, 2017), 82 FR 36476 (August 4, 2017) (SR-NSCC-
2017-803, SR-OCC-2017-804); Procedure III (Trade Recording Service 
(Interface with Qualified Clearing Agencies)), supra note 6.
    \15\ See Rule 61 (International Links), supra note 6.
    \16\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting 
Operation), supra note 6.
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    The Plan would define the criteria for classifying certain of 
NSCC's services as ``critical,'' and would identify those critical 
services and the rationale for their classification. This section would 
provide an analysis of the potential systemic impact from a service 
disruption, and is important for evaluating how the recovery tools and 
the wind-down strategy would facilitate and provide for the 
continuation of NSCC's critical services to the markets it serves. The 
criteria that would be used to identify an NSCC service or function as 
critical would include consideration as to (1) whether there is a lack 
of alternative providers or products; (2) whether failure of the 
service could impact NSCC's ability to perform its central counterparty 
services; (3) whether failure of the service could impact NSCC's 
ability to perform its netting services, and, as such, the availability 
of market liquidity; and (4) the service is interconnected with other 
participants and processes within the U.S. financial system, for 
example, with other FMIs, settlement banks, broker-dealers, and 
exchanges. The Plan would then list each of those services, functions 
or activities that NSCC has identified as ``critical'' based on the 
applicability of these four criteria. Such critical services would 
include, for example, trade capture and recording through the Universal 
Trade Capture system,\17\ services supporting Correspondent Clearing 
relationships,\18\ the CNS system,\19\ the Balance Order Netting 
system,\20\ Mutual Funds Services,\21\ and the settlement of money 
payments with respect to transactions processed by NSCC.\22\ The R&W 
Plan would also include a non-exhaustive list of NSCC services that are 
not deemed critical.
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    \17\ See Rule 7 (Comparison and Trade Recording Operation) and 
Procedure II (Trade Comparison and Recording Service), supra note 6.
    \18\ See Procedure IV (Special Representative Service), supra 
note 6.
    \19\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting 
Operation), supra note 6.
    \20\ See Rule 8 (Balance Order and Foreign Security Systems) and 
Procedure V (Balance Order Accounting Operation), supra note 6.
    \21\ See Rule 52 (Mutual Funds Services), supra note 6.
    \22\ See Rule 12 (Settlement) and Procedure VIII (Money 
Settlement Service), supra note 6.
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    The evaluation of which services provided by NSCC are deemed 
critical is important for purposes of determining how the R&W Plan 
would facilitate the continuity of those services. As discussed further 
below, while NSCC's Wind-down Plan would provide for the transfer of 
all critical services to a transferee in the event NSCC's wind-down is 
implemented, it would anticipate that any non-critical services that 
are ancillary and beneficial to a critical service, or that otherwise 
have substantial user demand from the continuing membership, would also 
be transferred.
    The Plan would describe the governance structure of both DTCC and 
NSCC. This section of the Plan would identify the ownership and 
governance model of these entities at both the Board of Directors and 
management levels. The Plan would state that the stages of escalation 
required to manage recovery under the Recovery Plan or to invoke NSCC's 
wind-down under the Wind-down Plan would range from relevant business 
line managers up to the Board through NSCC's governance structure. The 
Plan would then identify the parties responsible for certain activities 
under

[[Page 38333]]

both the Recovery Plan and the Wind-down Plan, and would describe their 
respective roles. The Plan would identify the Risk Committee of the 
Board (``Board Risk Committee'') as being responsible for oversight of 
risk management activities at NSCC, which include focusing on both 
oversight of risk management systems and processes designed to identify 
and manage various risks faced by NSCC, and, due to NSCC's critical 
role in the markets in which it operates, oversight of NSCC's efforts 
to mitigate systemic risks that could impact those markets and the 
broader financial system.\23\ The Plan would identify the DTCC 
Management Risk Committee (``Management Risk Committee'') as primarily 
responsible for general, day-to-day risk management through delegated 
authority from the Board Risk Committee. The Plan would state that the 
Management Risk Committee has delegated specific day-to-day risk 
management, including management of risks addressed through margining 
systems and related activities, to the DTCC Group Chief Risk Office 
(``GCRO''), which works with staff within the DTCC Financial Risk 
Management group. Finally, the Plan would describe the role of the 
Management Committee, which provides overall direction for all aspects 
of NSCC's business, technology, and operations and the functional areas 
that support these activities.
---------------------------------------------------------------------------

    \23\ The charter of the Board Risk Committee is available at 
https://www.dtcc.com/~/media/Files/Downloads/legal/policy-and-
compliance/DTCC-BOD-Risk-Committee-Charter.pdf.
---------------------------------------------------------------------------

    The Plan would describe the governance of recovery efforts in 
response to both default losses and non-default losses under the 
Recovery Plan, identifying the groups responsible for those recovery 
efforts. Specifically, the Plan would state that the Management Risk 
Committee provides oversight of actions relating to the default of a 
Member, which would be reported and escalated to it through the GCRO, 
and the Management Committee provides oversight of actions relating to 
non-default events that could result in a loss, which would be reported 
and escalated to it from the DTCC Chief Financial Officer (``CFO'') and 
the DTCC Treasury group that reports to the CFO, and from other 
relevant subject matter experts based on the nature and circumstances 
of the non-default event.\24\ More generally, the Plan would state that 
the type of loss and the nature and circumstances of the events that 
lead to the loss would dictate the components of governance to address 
that loss, including the escalation path to authorize those actions. As 
described further below, both the Recovery Plan and the Wind-down Plan 
would describe the governance of escalations, decisions, and actions 
under each of those plans.
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    \24\ The Plan would state that these groups would be involved to 
address how to mitigate the financial impact of non-default losses, 
and in recommending mitigating actions, the Management Committee 
would consider information and recommendations from relevant subject 
matter experts based on the nature and circumstances of the non-
default event. Any necessary operational response to these events, 
however, would be managed in accordance with applicable incident 
response/business continuity process; for example, processes 
established by the DTCC Technology Risk Management group would be 
followed in response to a cyber event.
---------------------------------------------------------------------------

    Finally, the Plan would describe the role of the R&R Team in 
managing the overall recovery and wind-down program and plans for each 
of the Clearing Agencies.
NSCC Recovery Plan
    The Recovery Plan is intended to be a roadmap of those actions that 
NSCC may employ to monitor and, as needed, stabilize its financial 
condition. As each event that could lead to a financial loss could be 
unique in its circumstances, the Recovery Plan would not be 
prescriptive and would permit NSCC to maintain flexibility in its use 
of identified tools and in the sequence in which such tools are used, 
subject to any conditions in the Rules or the contractual arrangement 
on which such tool is based. NSCC's Recovery Plan would consist of (1) 
a description of the risk management surveillance, tools, and 
governance that NSCC would employ across evolving stress scenarios that 
it may face as it transitions through a ``Crisis Continuum,'' described 
below; (2) a description of NSCC's risk of losses that may result from 
non-default events, and the financial resources and recovery tools 
available to NSCC to manage those risks and any resulting losses; and 
(3) an evaluation of the characteristics of the recovery tools that may 
be used in response to either default losses or non-default losses, as 
described in greater detail below. In all cases, NSCC would act in 
accordance with the Rules, within the governance structure described in 
the R&W Plan, and in accordance with applicable regulatory oversight to 
address each situation in order to best protect NSCC, Members, and the 
markets in which it operates.
    Managing Member Default Losses and Liquidity Needs Through the 
Crisis Continuum. The Recovery Plan would describe the risk management 
surveillance, tools, and governance that NSCC may employ across an 
increasing stress environment, which is referred to as the ``Crisis 
Continuum.'' This description would identify those tools that can be 
employed to mitigate losses, and mitigate or minimize liquidity needs, 
as the market environment becomes increasingly stressed. The phases of 
the Crisis Continuum would include (1) a stable market phase, (2) a 
stress market phase, (3) a phase commencing with NSCC's decision to 
cease to act for a Member or Affiliated Family of Members (referred to 
in the Plan as the '' Member default phase''),\25\ and (4) a recovery 
phase. This section of the Recovery Plan would address conditions and 
circumstances relating to NSCC's decision to cease to act for a Member 
pursuant to the Rules.\26\ In the Plan, ``cease to act'' and the events 
that may lead to such decision, are used within the context of Rule 46 
of the Rules.\27\ Further, for ease of reference, the R&W Plan would, 
for purposes of the Plan, use the term ``Member default'' to refer to 
the event or events that precipitate NSCC ceasing to act for a Member 
or an Affiliated Family, would use the term ``Defaulting Member'' to 
refer to a Member for which NSCC has ceased to act, and would use the 
term ``Member Default Losses'' to refer to losses that arise out of or 
relate to the Member default (including any losses that arise from 
liquidation of that Member's portfolio), and to distinguish such losses 
from those that arise out of the business or other events not related 
to a Member default, which are separately addressed in the Plan.
---------------------------------------------------------------------------

    \25\ The Plan would define an ``Affiliated Family'' of Members 
as a number of affiliated entities that are all Members of NSCC.
    \26\ See Rule 46 (Restrictions on Access to Services), supra 
note 6.
    \27\ Id.
---------------------------------------------------------------------------

    The Recovery Plan would provide context to its roadmap through this 
Crisis Continuum by describing NSCC's ongoing management of credit, 
market and liquidity risk, and its existing process for measuring and 
reporting its risks as they align with established thresholds for its 
tolerance of those risks. The Recovery Plan would discuss the 
management of credit/market risk and liquidity exposures together, 
because the tools that address these risks can be deployed either 
separately or in a coordinated approach in order to address both 
exposures. NSCC manages these risk exposures collectively to limit 
their overall impact on NSCC and its membership. As part of its market 
risk management strategy, NSCC manages its credit exposure to Members 
by determining the appropriate Required Deposits to the Clearing Fund 
and monitoring its sufficiency, as provided

[[Page 38334]]

for in the Rules.\28\ NSCC manages its liquidity risks with an 
objective of maintaining sufficient resources to be able to fulfill 
obligations that have been guaranteed by NSCC in the event of a Member 
default that presents the largest aggregate liquidity exposure to NSCC 
over the settlement cycle.\29\
---------------------------------------------------------------------------

    \28\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund 
Formula and Other Matters), supra note 6. Because NSCC does not 
maintain a guaranty fund separate and apart from the Clearing Fund 
it collects from Members, NSCC monitors its credit exposure to its 
Members by managing the market risks of each Member's unsettled 
portfolio through the collection of the Clearing Fund. The aggregate 
of all Members' Required Fund Deposits comprises the Clearing Fund 
that represents NSCC's prefunded resources to address uncovered loss 
exposures, as provided for in proposed Rule 4. Therefore, NSCC's 
market risk management strategy is designed to comply with Rule 
17Ad-22(e)(4) under the Act, where these risks are referred to as 
``credit risks.'' See also 17 CFR 240.17Ad-22(e)(4).
    \29\ NSCC's liquidity risk management strategy, including the 
manner in which NSCC utilizes its liquidity tools, is described in 
the Clearing Agency Liquidity Risk Management Framework. See 
Securities Exchange Act Release Nos. 80489 (April 19, 2017), 82 FR 
19120 (April 25, 2017) (SR-DTC-2017-004, SR-NSCC-2017-005, SR-FICC-
2017-008); 81194 (July 24, 2017), 82 FR 35241 (July 28, 2017) (SR-
DTC-2017-004, SR-NSCC-2017-005, SR-FICC-2017-008).
---------------------------------------------------------------------------

    The Recovery Plan would outline the metrics and indicators that 
NSCC has developed to evaluate a stress situation against established 
risk tolerance thresholds. Each risk mitigation tool identified in the 
Recovery Plan would include a description of the escalation thresholds 
that allow for effective and timely reporting to the appropriate 
internal management staff and committees, or to the Board. The Recovery 
Plan would make clear that these tools and escalation protocols would 
be calibrated across each phase of the Crisis Continuum. The Recovery 
Plan would also establish that NSCC would retain the flexibility to 
deploy such tools either separately or in a coordinated approach, and 
to use other alternatives to these actions and tools as necessitated by 
the circumstances of a particular Member default, in accordance with 
the Rules. Therefore, the Recovery Plan would both provide NSCC with a 
roadmap to follow within each phase of the Crisis Continuum, and would 
permit it to adjust its risk management measures to address the unique 
circumstances of each event.
    The Recovery Plan would describe the conditions that mark each 
phase of the Crisis Continuum, and would identify actions that NSCC 
could take as it transitions through each phase in order to both 
prevent losses from materializing through active risk management, and 
to restore the financial health of NSCC during a period of stress.
    The stable market phase of the Crisis Continuum would describe 
active risk management activities in the normal course of business. 
These activities would include (1) routine monitoring of margin 
adequacy through daily review of back testing and stress testing 
results that review the adequacy of NSCC's margin calculations, and 
escalation of those results to internal and Board committees; \30\ and 
(2) routine monitoring of liquidity adequacy through review of daily 
liquidity studies that measure sufficiency of available liquidity 
resources to meet cash settlement obligations of the Member that would 
generate the largest aggregate payment obligation.\31\
---------------------------------------------------------------------------

    \30\ NSCC's stress testing practices are described in the 
Clearing Agency Stress Testing Framework (Market Risk). See 
Securities Exchange Act Release Nos. 80485 (April 19, 2017), 82 FR 
19131 (April 25, 2017) (SR-DTC-2017-005, SR-FICC-2017-009, SR-NSCC-
2017-006); 81192 (July 24, 2017), 82 FR 35245 (July 28, 2017) (SR-
DTC-2017-005, SR-FICC-2017-009, SR-NSCC-2017-006).
    \31\ See supra note 29.
---------------------------------------------------------------------------

    The Recovery Plan would describe some of the indicators of the 
stress market phase of the Crisis Continuum, which would include, for 
example, volatility in market prices of certain assets where there is 
increased uncertainty among market participants about the fundamental 
value of those assets. This phase would involve general market 
stresses, when no Member default would be imminent. Within the 
description of this phase, the Recovery Plan would provide that NSCC 
may take targeted, routine risk management measures as necessary and as 
permitted by the Rules.
    Within the Member default phase of the Crisis Continuum, the 
Recovery Plan would provide a roadmap for the existing procedures that 
NSCC would follow in the event of a Member default and any decision by 
NSCC to cease to act for that Member.\32\ The Recovery Plan would 
provide that the objectives of NSCC's actions upon a Member or 
Affiliated Family default are to (1) minimize losses and market 
exposure of the affected Members and NSCC's non-Defaulting Members; and 
(2), to the extent practicable, minimize disturbances to the affected 
markets. The Recovery Plan would describe tools, actions, and related 
governance for both market risk monitoring and liquidity risk 
monitoring through this phase. For example, in connection with managing 
its market risk during this phase, NSCC would, pursuant to the Rules, 
(1) monitor and assess the adequacy of Clearing Fund resources; (2), 
when necessary and appropriate pursuant to the Rules, assess and 
collect additional margin requirements; and (3) follow its operational 
procedures to liquidate the Defaulting Member's portfolio. Management 
of liquidity risk through this phase would involve ongoing monitoring 
of the adequacy of NSCC's liquidity resources, and the Recovery Plan 
would identify certain actions NSCC may deploy as it deems necessary to 
mitigate a potential liquidity shortfall, which would include, for 
example, adjusting its strategy for closing out the Defaulting Member's 
portfolio or seeking additional liquidity resources. The Recovery Plan 
would state that, throughout this phase, relevant information would be 
escalated and reported to both internal management committees and the 
Board Risk Committee.
---------------------------------------------------------------------------

    \32\ See Rule 18 (Procedures for When the Corporation Declines 
or Ceases to Act) and Rule 46 (Restrictions on Access to Services), 
supra note 6.
---------------------------------------------------------------------------

    The Recovery Plan would also identify financial resources available 
to NSCC, pursuant to the Rules, to address losses arising out of a 
Member default. Specifically, Rule 4, as proposed to be amended by the 
Loss Allocation Filing, would provide that losses remaining after 
application of the Defaulting Member's resources be satisfied first by 
applying a ``Corporate Contribution,'' and then, if necessary, by 
allocating remaining losses among the membership in accordance with 
such Rule 4.\33\
---------------------------------------------------------------------------

    \33\ See supra note 11. The Loss Allocation Filing proposes to 
amend Rule 4 to define the amount NSCC would contribute to address a 
loss resulting from either a Member default or a non-default event 
as the ``Corporate Contribution.'' This amount would be 50 percent 
(50%) of the ``General Business Risk Capital Requirement,'' which is 
calculated pursuant to the Capital Policy and is an amount 
sufficient to cover potential general business losses so that NSCC 
can continue operations and services as a going concern if those 
losses materialize, in compliance with Rule 17Ad-22(e)(15) under the 
Act. See also supra note 9; 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------

    In order to provide for an effective and timely recovery, the 
Recovery Plan would describe the period of time that would occur near 
the end of the Member default phase, during which NSCC may experience 
stress events or observe early warning indicators that allow it to 
evaluate its options and prepare for the recovery phase (referred to in 
the Plan as the ``Recovery Corridor''). The Recovery Plan would then 
describe the recovery phase of the Crisis Continuum, which would begin 
on the date that NSCC issues the first Loss Allocation Notice of the 
second loss allocation round with respect to a given ``Event Period.'' 
\34\ The recovery

[[Page 38335]]

phase would describe actions that NSCC may take to avoid entering into 
a wind down of its business.
---------------------------------------------------------------------------

    \34\ The Loss Allocation Filing proposes to amend Rule 4 to 
introduce the concept of an ``Event Period'' as the ten (10) 
Business Days beginning on (i) with respect to a Member default, the 
day on which NSCC notifies Members that it has ceased to act for a 
Member under the Rules, or (ii) with respect to a non-default loss, 
the day that NSCC notifies Members of the determination by the Board 
that there is a non-default loss event, as described in greater 
detail in that filing. The proposed Rule 4 would define a ``round'' 
as a series of loss allocations relating to an Event Period, and 
would provide that the first Loss Allocation Notice in a first, 
second, or subsequent round shall expressly state that such notice 
reflects the beginning of a first, second, or subsequent round. The 
maximum allocable loss amount of a round is equal to the sum of the 
``Loss Allocation Caps'' (as defined in the proposed Rule 4) of 
those Members included in the round. See supra note 11.
---------------------------------------------------------------------------

    NSCC expects that significant deterioration of liquidity resources 
would cause it to enter the Recovery Corridor. As such, the Plan would 
describe the actions NSCC may take aimed at replenishing those 
resources. Recovery Corridor indicators may include, for example, a 
rapid and material change in market prices or substantial intraday 
activity volume by the Member that subsequently defaults, neither of 
which are mitigated by intraday margin calls, or subsequent defaults by 
other Members or Affiliated Families during a compressed time period. 
Throughout the Recovery Corridor, NSCC would monitor the adequacy of 
its resources and the expected timing of replenishment of those 
resources, and would do so through the monitoring of certain corridor 
indicator metrics.
    The majority of the corridor indicators, as identified in the 
Recovery Plan, relate directly to conditions that may require NSCC to 
adjust its strategy for hedging and liquidating a Defaulting Member's 
portfolio, and any such changes would include an assessment of the 
status of the corridor indicators. Corridor indicators would include, 
for example, effectiveness and speed of NSCC's efforts to close out the 
portfolio of the Defaulting Member, and an impediment to the 
availability of its financial resources. For each corridor indicator, 
the Recovery Plan would identify (1) measures of the indicator, (2) 
evaluations of the status of the indicator, (3) metrics for determining 
the status of the deterioration or improvement of the indicator, and 
(4) ``Corridor Actions,'' which are steps that may be taken to improve 
the status of the indicator,\35\ as well as management escalations 
required to authorize those steps. Because NSCC has never experienced 
the default of multiple Members, it has not, historically, measured the 
deterioration or improvements metrics of the corridor indicators. As 
such, these metrics were chosen based on the business judgment of NSCC 
management.
---------------------------------------------------------------------------

    \35\ The Corridor Actions that would be identified in the Plan 
are indicative, but not prescriptive; therefore, if NSCC needs to 
consider alternative actions due to the applicable facts and 
circumstances, the escalation of those alternative actions would 
follow the same escalation protocol identified in the Plan for the 
Corridor Indicator to which the action relates.
---------------------------------------------------------------------------

    The Recovery Plan would also describe the reporting and escalation 
of the status of the corridor indicators throughout the Recovery 
Corridor. Significant deterioration of a corridor indicator, as 
measured by the metrics set out in the Recovery Plan, would be 
escalated to the Board. NSCC management would review the corridor 
indicators and the related metrics at least annually, and would modify 
these metrics as necessary in light of observations from simulations of 
Member defaults and other analyses. Any proposed modifications would be 
reviewed by the Management Risk Committee and the Board Risk Committee. 
The Recovery Plan would estimate that NSCC may remain in the Recovery 
Corridor between one day and two weeks. This estimate is based on 
historical data observed in past Member defaults, the results of 
simulations of Member defaults, and periodic liquidity analyses 
conducted by NSCC. The actual length of a Recovery Corridor would vary 
based on actual market conditions observed at the time, and NSCC would 
expect the Recovery Corridor to be shorter in market conditions of 
increased stress.
    The Recovery Plan would outline steps by which NSCC may allocate 
its losses, which would occur when and in the order provided in Rule 4, 
as amended.\36\ The Recovery Plan would also identify tools that may be 
used to address foreseeable shortfalls of NSCC's liquidity resources 
following a Member default, and would provide that these tools may be 
used as appropriate during the Crisis Continuum to address liquidity 
shortfalls if they arise. The goal in managing NSCC's qualified 
liquidity resources is to maximize resource availability in an evolving 
stress situation, to maintain flexibility in the order and use of 
sources of liquidity, and to repay any third party lenders of liquidity 
in a timely manner. These liquidity tools include, for example, NSCC's 
committed 364-day credit facility,\37\ and the issuance and private 
placement of additional short-term promissory notes (``commercial 
paper'') and extendible notes, the cash proceeds of which provide NSCC 
with prefunded liquidity.\38\ Additional voluntary or uncommitted tools 
to address potential liquidity shortfalls, for example uncommitted bank 
loans, which may supplement NSCC's other liquid resources described 
herein, would also be identified in the Recovery Plan. The Recovery 
Plan would state that, due to the extreme nature of a stress event that 
would cause NSCC to consider the use of these liquidity tools, the 
availability and capacity of these liquidity tools, and the willingness 
of counterparties to lend, cannot be accurately predicted and are 
dependent on the circumstances of the applicable stress period, 
including market price volatility, actual or perceived disruptions in 
financial markets, the costs to NSCC of utilizing these tools, and any 
potential impact on NSCC's credit rating.
---------------------------------------------------------------------------

    \36\ As these matters are described in greater detail in the 
Loss Allocation Filing and in the proposed amendments to Rule 4, 
described therein, reference is made to that filing and the details 
are not repeated here. See supra note 11.
    \37\ See Securities Exchange Act Release No. 80605 (May 5, 
2017), 82 FR 21850 (May 10, 2017) (SR-DTC-2017-802, SR-NSCC-2017-
802).
    \38\ See Securities Exchange Act Release No. 75730 (August 19, 
2015), 80 FR 51638 (August 25, 2015) (SR-NSCC-2015-802).
---------------------------------------------------------------------------

    As stated above, the Recovery Plan would state that NSCC will have 
entered the recovery phase on the date that it issues the first Loss 
Allocation Notice of the second loss allocation round with respect to a 
given Event Period. The Recovery Plan would provide that, during the 
recovery phase, NSCC would continue and, as needed, enhance, the 
monitoring and remedial actions already described in connection with 
previous phases of the Crisis Continuum, and would remain in the 
recovery phase until its financial resources are expected to be or are 
fully replenished, or until the Wind-down Plan is triggered, as 
described below.
    The Recovery Plan would describe governance for the actions and 
tools that may be employed within each phase of the Crisis Continuum, 
which would be dictated by the facts and circumstances applicable to 
the situation being addressed. Such facts and circumstances would be 
measured by the various indicators and metrics applicable to that phase 
of the Crisis Continuum, and would follow the relevant escalation 
protocols that would be described in the Recovery Plan. The Recovery 
Plan would also describe the governance procedures around a decision to 
cease to act for a Member, pursuant to the Rules, and around the 
management and oversight of the subsequent liquidation of the 
Defaulting

[[Page 38336]]

Member's portfolio. The Recovery Plan would state that, overall, NSCC 
would retain flexibility in accordance with the Rules, its governance 
structure, and its regulatory oversight, to address a particular 
situation in order to best protect NSCC and the Members, and to meet 
the primary objectives, throughout the Crisis Continuum, of minimizing 
losses and, where consistent and practicable, minimizing disturbance to 
affected markets.
    Non-Default Losses. The Recovery Plan would outline how NSCC may 
address losses that result from events other than a Member default. 
While these matters are addressed in greater detail in other documents, 
this section of the Plan would provide a roadmap to those documents and 
an outline for NSCC's approach to monitoring and managing losses that 
could result from a non-default event. The Plan would first identify 
some of the risks NSCC faces that could lead to these losses, which 
include, for example, the business and profit/loss risks of unexpected 
declines in revenue or growth of expenses; the operational risks of 
disruptions to systems or processes that could lead to large losses, 
including those resulting from, for example, a cyber-attack; and 
custody or investment risks that could lead to financial losses. The 
Recovery Plan would describe NSCC's overall strategy for the management 
of these risks, which includes a ``three lines of defense'' approach to 
risk management that allows for comprehensive management of risk across 
the organization.\39\ The Recovery Plan would also describe NSCC's 
approach to financial risk and capital management. The Plan would 
identify key aspects of this approach, including, for example, an 
annual budget process, business line performance reviews with 
management, and regular review of capital requirements against LNA. 
These risk management strategies are collectively intended to allow 
NSCC to effectively identify, monitor, and manage risks of non-default 
losses.
---------------------------------------------------------------------------

    \39\ This ``three lines of defense'' approach to risk management 
includes (1) a first line of defense comprised of the various 
business lines and functional units that support the products and 
services offered by NSCC; (2) a second line of defense comprised of 
control functions that support NSCC, including the risk management, 
legal and compliance areas; and (3) a third line of defense, which 
is performed by an internal audit group. The Clearing Agency Risk 
Management Framework includes a description of this ``three lines of 
defense'' approach to risk management, and addresses how NSCC 
comprehensively manages various risks, including operational, 
general business, investment, custody, and other risks that arise in 
or are borne by it. See Securities Exchange Act Release No. 81635 
(September 15, 2017), 82 FR 44224 (September 21, 2017) (SR-DTC-2017-
013, SR-FICC-2017-016, SR-NSCC-2017-012). The Clearing Agency 
Operational Risk Management Framework describes the manner in which 
NSCC manages operational risks, as defined therein. See Securities 
Exchange Act Release No. 81745 (September 28, 2017), 82 FR 46332 
(October 4, 2017) (SR-DTC-2017-014, SR-FICC-2017-017, SR-NSCC-2017-
013).
---------------------------------------------------------------------------

    The Plan would identify the two categories of financial resources 
NSCC maintains to cover losses and expenses arising from non-default 
risks or events as (1) LNA, maintained, monitored, and managed pursuant 
to the Capital Policy, which include (a) amounts held in satisfaction 
of the General Business Risk Capital Requirement,\40\ (b) the Corporate 
Contribution,\41\ and (c) other amounts held in excess of NSCC's 
capital requirements pursuant to the Capital Policy; and (2) resources 
available pursuant to the loss allocation provisions of Rule 4.\42\
---------------------------------------------------------------------------

    \40\ See supra note 33.
    \41\ See supra note 33.
    \42\ See supra note 11.
---------------------------------------------------------------------------

    The Plan would address the process by which the CFO and the DTCC 
Treasury group would determine which available LNA resources are most 
appropriate to cover a loss that is caused by a non-default event. This 
determination involves an evaluation of a number of factors, including 
the current and expected size of the loss, the expected time horizon 
over when the loss or additional expenses would materialize, the 
current and projected available LNA, and the likelihood LNA could be 
successfully replenished pursuant to the Replenishment Plan, if 
triggered.\43\ Finally the Plan would discuss how NSCC would apply its 
resources to address losses resulting from a non-default event, 
including the order of resources it would apply if the loss or 
liability exceeds NSCC's excess LNA amounts, or is large relative 
thereto, and the Board has declared the event a ``Declared Non-Default 
Loss Event'' pursuant to Rule 4.\44\
---------------------------------------------------------------------------

    \43\ See supra note 9.
    \44\ See supra note 11.
---------------------------------------------------------------------------

    The Plan would also describe proposed Rule 60 (Market Disruption 
and Force Majeure), which NSCC is proposing to adopt in the Rules. This 
Proposed Rule would provide transparency around how NSCC would address 
extraordinary events that may occur outside its control. Specifically, 
the Proposed Rule would define a ``Market Disruption Event'' and the 
governance around a determination that such an event has occurred. The 
Proposed Rule would also describe NSCC's authority to take actions 
during the pendency of a Market Disruption Event that it deems 
appropriate to address such an event and facilitate the continuation of 
its services, if practicable, as described in greater detail below.
    The Plan would describe the interaction between the Proposed Rule 
and NSCC's existing processes and procedures addressing business 
continuity management and disaster recovery (generally, the ``BCM/DR 
procedures''), making clear that the Proposed Rule is designed to 
support those BCM/DR procedures and to address circumstances that may 
be exogenous to NSCC and not necessarily addressed by the BCM/DR 
procedures. Finally, the Plan would describe that, because the 
operation of the Proposed Rule is specific to each applicable Market 
Disruption Event, the Proposed Rule does not define a time limit on its 
application. However, the Plan would note that actions authorized by 
the Proposed Rule would be limited to the pendency of the applicable 
Market Disruption Event, as made clear in the Proposed Rule. Overall, 
the Proposed Rule is designed to mitigate risks caused by Market 
Disruption Events and, thereby, minimize the risk of financial loss 
that may result from such events.
    Recovery Tool Characteristics. The Recovery Plan would describe 
NSCC's evaluation of the tools identified within the Recovery Plan, and 
its rationale for concluding that such tools are comprehensive, 
effective, and transparent, and that such tools provide appropriate 
incentives to Members and minimize negative impact on Members and the 
financial system, in compliance with guidance published by the 
Commission in connection with the adoption of Rule 17Ad-22(e)(3)(ii) 
under the Act.\45\ NSCC's analysis and the conclusions set forth in 
this section of the Recovery Plan are described in greater detail in 
Item 3(b) of this filing, below.
---------------------------------------------------------------------------

    \45\ Standards for Covered Clearing Agencies, Securities 
Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786 
(October 13, 2016) (S7-03-14).
---------------------------------------------------------------------------

NSCC Wind-Down Plan
    The Wind-down Plan would provide the framework and strategy for the 
orderly Wind-down of NSCC if the use of the recovery tools described in 
the Recovery Plan do not successfully return NSCC to financial 
viability. While NSCC believes that, given the comprehensive nature of 
the recovery tools, such event is extremely unlikely, as described in 
greater detail below, NSCC is proposing a Wind-down strategy that 
provides for (1) the transfer of NSCC's business, assets and

[[Page 38337]]

membership to another legal entity, (2) such transfer being effected in 
connection with proceedings under Chapter 11 of the U.S. Federal 
Bankruptcy Code,\46\ and (3) after effectuating this transfer, NSCC 
liquidating any remaining assets in an orderly manner in bankruptcy 
proceedings. NSCC believes that the proposed transfer approach to a 
wind-down would meet its objectives of (1) assuring that NSCC's 
critical services will be available to the market as long as there are 
Members in good standing, and (2) minimizing disruption to the 
operations of Members and financial markets generally that might be 
caused by NSCC's failure.
---------------------------------------------------------------------------

    \46\ 11 U.S.C. 1101 et seq.
---------------------------------------------------------------------------

    In describing the transfer approach to NSCC's Wind-down Plan, the 
Plan would identify the factors that NSCC considered in developing this 
approach, including the fact that NSCC does not own material assets 
that are unrelated to its clearance and settlement activities. As such, 
a business reorganization or ``bail-in'' of debt approach would be 
unlikely to mitigate significant losses. Additionally, NSCC's approach 
was developed in consideration of its critical and unique position in 
the U.S. markets, which precludes any approach that would cause NSCC's 
critical services to no longer be available.
    First, the Wind-down Plan would describe the potential scenarios 
that could lead to the wind-down of NSCC, and the likelihood of such 
scenarios. The Wind-down Plan would identify the time period leading up 
to a decision to wind-down NSCC as the ``Runway Period.'' This period 
would follow the implementation of any recovery tools, as it may take a 
period of time, depending on the severity of the market stress at that 
time, for these tools to be effective or for NSCC to realize a loss 
sufficient to cause it to be unable to effectuate settlements and repay 
its obligations.\47\ The Wind-down Plan would identify some of the 
indicators that it has entered this Runway Period, which would include, 
for example, successive Member defaults, significant Member retirements 
thereafter, and NSCC's inability to replenish its financial resources 
following the liquidation of the portfolio of the Defaulting Member(s).
---------------------------------------------------------------------------

    \47\ The Wind-down Plan would state that, given NSCC's position 
as a user-governed financial market utility, it is possible that 
Members might voluntarily elect to provide additional support during 
the recovery phase leading up to a potential trigger of the Wind-
down Plan, but would also make clear that NSCC cannot predict the 
willingness of Members to do so.
---------------------------------------------------------------------------

    The trigger for implementing the Wind-down Plan would be a 
determination by the Board that recovery efforts have not been, or are 
unlikely to be, successful in returning NSCC to viability as a going 
concern. As described in the Plan, NSCC believes this is an appropriate 
trigger because it is both broad and flexible enough to cover a variety 
of scenarios, and would align incentives of NSCC and the Members to 
avoid actions that might undermine NSCC's recovery efforts. 
Additionally, this approach takes into account the characteristics of 
NSCC's recovery tools and enables the Board to consider (1) the 
presence of indicators of a successful or unsuccessful recovery, and 
(2) potential for knock-on effects of continued iterative application 
of NSCC's recovery tools.
    The Wind-down Plan would describe the general objectives of the 
transfer strategy, and would address assumptions regarding the transfer 
of NSCC's critical services, business, assets and membership, and the 
assignment of NSCC's links with other FMIs, to another legal entity 
that is legally, financially, and operationally able to provide NSCC's 
critical services to entities that wish to continue their membership 
following the transfer (``Transferee''). The Wind-down Plan would 
provide that the Transferee would be either (1) a third party legal 
entity, which may be an existing or newly established legal entity or a 
bridge entity formed to operate the business on an interim basis to 
enable the business to be transferred subsequently (``Third Party 
Transferee''); or (2) an existing, debt-free failover legal entity 
established ex-ante by DTCC (``Failover Transferee'') to be used as an 
alternative Transferee in the event that no viable or preferable Third 
Party Transferee timely commits to acquire NSCC's business. NSCC would 
seek to identify the proposed Transferee, and negotiate and enter into 
transfer arrangements during the Runway Period and prior to making any 
filings under Chapter 11 of the U.S. Federal Bankruptcy Code.\48\ As 
stated above, the Wind-down Plan would anticipate that the transfer to 
the Transferee be effected in connection with proceedings under Chapter 
11 of the U.S. Federal Bankruptcy Code, and pursuant to a bankruptcy 
court order under Section 363 of the Bankruptcy Code, such that the 
transfer would be free and clear of claims against, and interests in, 
NSCC, except to the extent expressly provided in the court's order.\49\
---------------------------------------------------------------------------

    \48\ See 11 U.S.C. 1101 et seq.
    \49\ See id. at 363.
---------------------------------------------------------------------------

    In order to effect a timely transfer of its services and minimize 
the market and operational disruption of such transfer, NSCC would 
expect to transfer all of its critical services and any non-critical 
services that are ancillary and beneficial to a critical service, or 
that otherwise have substantial user demand from the continuing 
membership. Following the transfer, the Wind-down Plan would anticipate 
that the Transferee and its continuing membership would determine 
whether to continue to provide any transferred non-critical service on 
an ongoing basis, or terminate the non-critical service following some 
transition period. NSCC's Wind-down Plan would anticipate that the 
Transferee would enter into a transition services agreement with DTCC 
so that DTCC would continue to provide the shared services it currently 
provides to NSCC, including staffing, infrastructure and operational 
support. The Wind-down Plan would also anticipate the assignment of 
NSCC's link arrangements, including those with DTC, CDS and OCC, 
described above, to the Transferee.\50\ The Wind-down Plan would 
provide that Members' open positions existing prior to the effective 
time of the transfer would be addressed by the provisions of the 
proposed Wind-down Rule and Corporation Default Rule, as defined and 
described below, and that the Transferee would not acquire any pending 
or open transactions with the transfer of the business. The Wind-down 
Plan would anticipate that the Transferee would accept transactions for 
processing with a trade date from and after the effective time of the 
transfer.
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    \50\ The proposed transfer arrangements outlined in the Wind-
down Plan do not contemplate the transfer of any credit or funding 
agreements, which are generally not assignable by NSCC. However, to 
the extent the Transferee adopts rules substantially identical to 
those NSCC has in effect prior to the transfer, it would have the 
benefit of any rules-based liquidity funding. The Wind-down Plan 
contemplates that no Clearing Fund would be transferred to the 
Transferee, as it is not held in a bankruptcy remote manner and it 
is the primary prefunded liquidity resource to be accessed in the 
recovery phase.
---------------------------------------------------------------------------

    The Wind-down Plan would provide that, following the effectiveness 
of the transfer to the Transferee, the wind-down of NSCC would involve 
addressing any residual claims against NSCC through the bankruptcy 
process and liquidating the legal entity. As such, and as stated above, 
the Wind-down Plan does not contemplate NSCC continuing to provide 
services in any

[[Page 38338]]

capacity following the transfer time, and any services not transferred 
would be terminated.
    The Wind-down Plan would also identify the key dependencies for the 
effectiveness of the transfer, which include regulatory approvals that 
would permit the Transferee to be legally qualified to provide the 
transferred services from and after the transfer, and approval by the 
applicable bankruptcy court of, among other things, the proposed sale, 
assignments, and transfers to the Transferee.
    The Wind-down Plan would address governance matters related to the 
execution of the transfer of NSCC's business and its wind-down. The 
Wind-down Plan would address the duties of the Board to execute the 
wind-down of NSCC in conformity with (1) the Rules, (2) the Board's 
fiduciary duties, which mandate that it exercise reasonable business 
judgment in performing these duties, and (3) NSCC's regulatory 
obligations under the Act as a registered clearing agency. The Wind-
down Plan would also identify certain factors the Board may consider in 
making these decisions, which would include, for example, whether NSCC 
could safely stabilize the business and protect its value without 
seeking bankruptcy protection, and NSCC's ability to continue to meet 
its regulatory requirements.
    The Wind-down Plan would describe (1) actions NSCC or DTCC may take 
to prepare for wind-down in the period before NSCC experiences any 
financial distress, (2) actions NSCC would take both during the 
recovery phase and the Runway Period to prepare for the execution of 
the Wind-down Plan, and (3) actions NSCC would take upon commencement 
of bankruptcy proceedings to effectuate the Wind-down Plan.
    Finally, the Wind-down Plan would include an analysis of the 
estimated time and costs to effectuate the plan, and would provide that 
this estimate be reviewed and approved by the Board annually. In order 
to estimate the length of time it might take to achieve a recovery or 
orderly wind-down of NSCC's critical operations, as contemplated by the 
R&W Plan, the Wind-down Plan would include an analysis of the possible 
sequencing and length of time it might take to complete an orderly 
wind-down and transfer of critical operations, as described in earlier 
sections of the R&W Plan. The Wind-down Plan would also include in this 
analysis consideration of other factors, including the time it might 
take to complete any further attempts at recovery under the Recovery 
Plan. The Wind-down Plan would then multiply this estimated length of 
time by NSCC's average monthly operating expenses, including 
adjustments to account for changes to NSCC's profit and expense profile 
during these circumstances, over the previous twelve months to 
determine the amount of LNA that it should hold to achieve a recovery 
or orderly wind-down of NSCC's critical operations. The estimated wind-
down costs would constitute the ``Recovery/Wind-down Capital 
Requirement'' under the Capital Policy.\51\ Under that policy, the 
General Business Risk Capital Requirement is calculated as the greatest 
of three estimated amounts, one of which is this Recovery/Wind-down 
Capital Requirement.\52\
---------------------------------------------------------------------------

    \51\ See supra note 9.
    \52\ See supra note 9.
---------------------------------------------------------------------------

    The R&W Plan is designed as a roadmap, and the types of actions 
that may be taken both leading up to and in connection with 
implementation of the Wind-down Plan would be primarily addressed in 
other supporting documentation referred to therein.
    The Wind-down Plan would address proposed Rule 41 (Corporation 
Default) and proposed Rule 42 (Wind-down of the Corporation), which 
would be adopted to facilitate the implementation of the Wind-down 
Plan, and are discussed below.
Proposed Rules
    In connection with the adoption of the R&W Plan, NSCC is proposing 
to adopt the Proposed Rules, each described below. The Proposed Rules 
would facilitate the execution of the R&W Plan and would provide 
Members and Limited Members with transparency as to critical aspects of 
the Plan, particularly as they relate to the rights and 
responsibilities of both NSCC and Members. The Proposed Rules also 
provide a legal basis to these aspects of the Plan.
Rule 41 (Corporation Default)
    The proposed Rule 41 (``Corporation Default Rule'') would provide a 
mechanism for the termination, valuation and netting of unsettled, 
guaranteed CNS transactions in the event NSCC is unable to perform its 
obligations or otherwise suffers a defined event of default, such as 
entering insolvency proceedings. The proposed Corporation Default Rule 
would provide Members with transparency and certainty regarding what 
would happen if NSCC were to fail (defined in the proposed Rule as a 
``Corporation Default'').
    The proposed rule would define the events that would constitute a 
Corporation Default, which would generally include (1) the failure of 
NSCC to make any undisputed payment or delivery to a Member if such 
failure is not remedied within seven days after notice of such failure 
is given to NSCC; (2) NSCC is dissolved; (3) NSCC institutes a 
proceeding seeking a judgment of insolvency or bankruptcy, or a 
proceeding is instituted against it seeking a judgment of bankruptcy or 
insolvency and such judgment is entered; or (4) NSCC seeks or becomes 
subject to the appointment of a receiver, trustee or similar official 
pursuant to the federal securities laws or Title II of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act \53\ for it or for all 
or substantially all of its assets.
---------------------------------------------------------------------------

    \53\ 12 U.S.C. 5381-5394.
---------------------------------------------------------------------------

    Upon a Corporation Default, the proposed Corporation Default Rule 
would provide that all unsettled, guaranteed CNS transactions would be 
terminated and, no later than forty-five days from the date on which 
the event that constitutes a Corporation Default occurred (or ``Default 
Date''), the Board would determine a single net amount owed by or to 
each Member with respect to such transactions pursuant to the valuation 
procedures set forth in the Proposed Rule. Essentially, for each 
affected position in a CNS Security, the ``CNS Market Value'' would be 
determined by using the Current Market Price for that security as 
determined in the CNS System as of the close of business on the next 
Business Day following the Default Date. NSCC would determine a ``Net 
Contract Value'' for each Member's net unsettled long or short position 
in a CNS Security by netting the Member's (i) contract price for such 
net position that, as of the Default Date, has not yet passed the 
Settlement Date, and (ii) the Current Market Price in the CNS System on 
the Default Date for its fail positions. To determine each Member's 
``CNS Close-out Value,'' (i) the Net Contract Value for each CUSIP 
would be subtracted from the CNS Market Value for such CUSIP, and (ii) 
the resulting difference for all CUSIPS in which the Member had a net 
long or short position would be summed, and would be netted and offset 
against any other amounts that may be due to or owing from the Member 
under the Rules. The proposed Corporation Default Rule would provide 
for notification to each Member of its CNS Close-out Value, and would 
also address interpretation of the Rules in relation to certain terms 
that are defined in the Federal Deposit Insurance

[[Page 38339]]

Corporation Improvement Act of 1991 (``FDICIA'').\54\
---------------------------------------------------------------------------

    \54\ 12 U.S.C. 1811 et seq.
---------------------------------------------------------------------------

    NSCC believes this valuation approach, which is comparable to the 
approach adopted by other central counterparties, is appropriate for 
NSCC given the market in which NSCC operates and the volumes of 
transactions it processes in CNS, because it would provide for a 
common, clear and transparent valuation methodology and price per CUSIP 
applicable to all affected Members.
Rule 42 (Wind-Down of the Corporation)
    The proposed Rule 42 (``Wind-down Rule'') would be adopted to 
facilitate the execution of the Wind-down Plan. The Wind-down Rule 
would include a proposed set of defined terms that would be applicable 
only to the provisions of this Proposed Rule. The Wind-down Rule would 
make clear that a wind-down of NSCC's business would occur (1) after a 
decision is made by the Board, and (2) in connection with the transfer 
of NSCC's services to a Transferee, as described therein. Generally, 
the proposed Wind-down Rule is designed to create clear mechanisms for 
the transfer of Eligible Members, Eligible Limited Members, and 
Settling Banks (as these terms would be defined in the Wind-down Rule), 
and NSCC's business, in order to provide for continued access to 
critical services and to minimize disruption to the markets in the 
event the Wind-down Plan is initiated.
    Wind-down Trigger. First, the Proposed Rule would make clear that 
the Board is responsible for initiating the Wind-down Plan, and would 
identify the criteria the Board would consider when making this 
determination. As provided for in the Wind-down Plan and in the 
proposed Wind-down Rule, the Board would initiate the Plan if, in the 
exercise of its business judgment and subject to its fiduciary duties, 
it has determined that the execution of the Recovery Plan has not or is 
not likely to restore NSCC to viability as a going concern, and the 
implementation of the Wind-down Plan, including the transfer of NSCC's 
business, is in the best interests of NSCC, Members and Limited 
Members, its shareholders and creditors, and the U.S. financial 
markets.
    Identification of Critical Services; Designation of Dates and Times 
for Specific Actions. The Proposed Rule would provide that, upon making 
a determination to initiate the Wind-down Plan, the Board would 
identify the critical and non-critical services that would be 
transferred to the Transferee at the Transfer Time (as defined below 
and in the Proposed Rule), as well as any non-critical services that 
would not be transferred to the Transferee. The proposed Wind-down Rule 
would establish that any services transferred to the Transferee will 
only be provided by the Transferee as of the Transfer Time, and that 
any non-critical services that are not transferred to the Transferee 
would be terminated at the Transfer Time. The Proposed Rule would also 
provide that the Board would establish (1) an effective time for the 
transfer of NSCC's business to a Transferee (``Transfer Time''), (2) 
the last day that transactions may be submitted to NSCC for processing 
(``Last Transaction Acceptance Date''), and (3) the last day that 
transactions submitted to NSCC will be settled (``Last Settlement 
Date'').
    Treatment of Pending Transactions. The Wind-down Rule would also 
authorize the Board to provide for the settlement of pending 
transactions prior to the Transfer Time, so long as the Corporation 
Default Rule has not been triggered. For example, the Proposed Rule 
would provide the Board with the ability to, if it deems practicable, 
based on NSCC's resources at that time, allow pending transactions to 
complete prior to the transfer of NSCC's business to a Transferee. The 
Board would also have the ability to allow Members to only submit 
trades that would effectively offset pending positions or provide that 
transactions will be processed in accordance with special or exception 
processing procedures. The Proposed Rule is designed to enable these 
actions in order to facilitate settlement of pending transactions and 
reduce claims against NSCC that would have to be satisfied after the 
transfer has been effected. If none of these actions are deemed 
practicable (or if the Corporation Default Rule has been triggered), 
then the provisions of the proposed Corporation Default Rule would 
apply to the treatment of open, pending transactions.
    The Proposed Rule would make clear, however, that NSCC would not 
accept any transactions for processing after the Last Transaction 
Acceptance Date or which are designated to settle after the Last 
Settlement Date. Any transactions to be processed and/or settled after 
the Transfer Time would be required to be submitted to the Transferee, 
and would not be NSCC's responsibility.
    Notice Provisions. The proposed Wind-down Rule would provide that, 
upon a decision to implement the Wind-down Plan, NSCC would provide 
Members and Limited Members and its regulators with a notice that 
includes material information relating to the Wind-down Plan and the 
anticipated transfer of NSCC's membership and business, including, for 
example, (1) a brief statement of the reasons for the decision to 
implement the Wind-down Plan; (2) identification of the Transferee and 
information regarding the transaction by which the transfer of NSCC's 
business would be effected; (3) the Transfer Time, Last Transaction 
Acceptance Date, and Last Settlement Date; and (4) identification of 
Eligible Members and Eligible Limited Members, and the critical and 
non-critical services that would be transferred to the Transferee at 
the Transfer Time, as well as those Non-Eligible Members and Non-
Eligible Limited Members (as defined in the Proposed Rule), and any 
non-critical services that would not be included in the transfer. NSCC 
would also make available the rules and procedures and membership 
agreements of the Transferee.
    Transfer of Membership. The proposed Wind-down Rule would address 
the expected transfer of NSCC's membership to the Transferee, which 
NSCC would seek to effectuate by entering into an arrangement with a 
Failover Transferee, or by using commercially reasonable efforts to 
enter into such an arrangement with a Third Party Transferee. 
Therefore, the Wind-down Rule would provide Members, Limited Members 
and Settling Banks with notice that, in connection with the 
implementation of the Wind-down Plan and with no further action 
required by any party, (1) their membership with NSCC would transfer to 
the Transferee, (2) they would become party to a membership agreement 
with such Transferee, and (3) they would have all of the rights and be 
subject to all of the obligations applicable to their membership status 
under the rules of the Transferee. These provisions would not apply to 
any Member or Limited Member that is either in default of an obligation 
to NSCC or has provided notice of its election to withdraw from 
membership. Further, the proposed Wind-down Rule would make clear that 
it would not prohibit (1) Members and Limited Members that are not 
transferred by operation of the Wind-down Rule from applying for 
membership with the Transferee, or (2) Members, Limited Members, and 
Settling Banks that would be transferred to the Transferee from 
withdrawing from membership with the Transferee.\55\
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    \55\ The Members and Limited Members whose membership is 
transferred to the Transferee pursuant to the proposed Wind-down 
Rule would submit transactions to be processed and settled subject 
to the rules and procedures of the Transferee, including any 
applicable margin charges or other financial obligations.

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[[Page 38340]]

    Comparability Period. The proposed automatic mechanism for the 
transfer of NSCC's membership is intended to provide NSCC's membership 
with continuous access to critical services in the event of NSCC's 
wind-down, and to facilitate the continued prompt and accurate 
clearance and settlement of securities transactions. Further to this 
goal, the proposed Wind-down Rule would provide that NSCC would enter 
into arrangements with a Failover Transferee, or would use commercially 
reasonable efforts to enter into arrangements with a Third Party 
Transferee, providing that, in either case, with respect to the 
critical services and any non-critical services that are transferred 
from NSCC to the Transferee, for at least a period of time to be agreed 
upon (``Comparability Period''), the business transferred from NSCC to 
the Transferee would be operated in a manner that is comparable to the 
manner in which the business was previously operated by NSCC. 
Specifically, the proposed Wind-down Rule would provide that: (1) the 
rules of the Transferee and terms of membership agreements would be 
comparable in substance and effect to the analogous Rules and 
membership agreements of NSCC; (2) the rights and obligations of any 
Members, Limited Members and Settling Banks that are transferred to the 
Transferee would be comparable in substance and effect to their rights 
and obligations as to NSCC; and (3) the Transferee would operate the 
transferred business and provide any services that are transferred in a 
comparable manner to which such services were provided by NSCC. The 
purpose of these provisions and the intended effect of the proposed 
Wind-down Rule is to facilitate a smooth transition of NSCC's business 
to a Transferee and to provide that, for at least the Comparability 
Period, the Transferee (1) would operate the transferred business in a 
manner that is comparable in substance and effect to the manner in 
which the business was operated by NSCC, and (2) would not require 
sudden and disruptive changes in the systems, operations and business 
practices of the new members of the Transferee.
    Subordination of Claims Provisions and Miscellaneous Matters. The 
proposed Wind-down Rule would also include a provision addressing the 
subordination of unsecured claims against NSCC of Members and Limited 
Members who fail to participate in NSCC's recovery efforts (i.e., such 
firms are delinquent in their obligations to NSCC or elect to retire 
from NSCC in order to minimize their obligations with respect to the 
allocation of losses, pursuant to the Rules). This provision is 
designed to incentivize Members to participate in NSCC's recovery 
efforts.\56\
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    \56\ Nothing in the proposed Wind-down Rule would seek to 
prevent a Member, Limited Member or Settling Bank that retired its 
membership at NSCC from applying for membership with the Transferee. 
Once its NSCC membership is terminated, however, such firm would not 
be able to benefit from the membership assignment that would be 
effected by this proposed Wind-down Rule, and it would have to apply 
for membership directly with the Transferee, subject to its 
membership application and review process.
---------------------------------------------------------------------------

    The proposed Wind-down Rule would address other ex-ante matters 
including provisions providing that Members, Limited Members and 
Settling Banks (1) will assist and cooperate with NSCC to effectuate 
the transfer of NSCC's business to a Transferee, (2) consent to the 
provisions of the rule, and (3) grant NSCC power of attorney to execute 
and deliver on their behalf documents and instruments that may be 
requested by the Transferee. Finally, the Proposed Rule would include a 
limitation of liability for any actions taken or omitted to be taken by 
NSCC pursuant to the Proposed Rule. The purpose of the limitation of 
liability is to facilitate and protect NSCC's ability to act 
expeditiously in response to extraordinary events. As noted, such 
limitation of liability would be available only following triggering of 
the Wind-down Plan. In addition, and as a separate matter, the 
limitation of liability provides Members with transparency for the 
unlikely situation when those extraordinary events could occur, as well 
supporting the legal framework within which NSCC would take such 
actions. These provisions, collectively, are designed to enable NSCC to 
take such acts as the Board determines necessary to effectuate an 
orderly transfer and wind-down of its business should recovery efforts 
prove unsuccessful.
Rule 60 (Market Disruption and Force Majeure)
    The proposed Rule 60 (``Force Majeure Rule'') would address NSCC's 
authority to take certain actions upon the occurrence, and during the 
pendency, of a ``Market Disruption Event,'' as defined therein. The 
Proposed Rule is designed to clarify NSCC's ability to take actions to 
address extraordinary events outside of the control of NSCC and of its 
membership, and to mitigate the effect of such events by facilitating 
the continuity of services (or, if deemed necessary, the temporary 
suspension of services). To that end, under the proposed Force Majeure 
Rule, NSCC would be entitled, during the pendency of a Market 
Disruption Event, to (1) suspend the provision of any or all services, 
and (2) take, or refrain from taking, or require Members and Limited 
Members to take, or refrain from taking, any actions it considers 
appropriate to address, alleviate, or mitigate the event and facilitate 
the continuation of NSCC's services as may be practicable.
    The proposed Force Majeure Rule would identify the events or 
circumstances that would be considered a ``Market Disruption Event,'' 
including, for example, events that lead to the suspension or 
limitation of trading or banking in the markets in which NSCC operates, 
or the unavailability or failure of any material payment, bank 
transfer, wire or securities settlement systems. The proposed Force 
Majeure Rule would define the governance procedures for how NSCC would 
determine whether, and how, to implement the provisions of the rule. A 
determination that a Market Disruption Event has occurred would 
generally be made by the Board, but the Proposed Rule would provide for 
limited, interim delegation of authority to a specified officer or 
management committee if the Board would not be able to take timely 
action. In the event such delegated authority is exercised, the 
proposed Force Majeure Rule would require that the Board be convened as 
promptly as practicable, no later than five Business Days after such 
determination has been made, to ratify, modify, or rescind the action. 
The proposed Force Majeure Rule would also provide for prompt 
notification to the Commission, and advance consultation with 
Commission staff, when practicable, including notification when an 
event is no longer continuing and the relevant actions are terminated. 
The Proposed Rule would require Members and Limited Members to notify 
NSCC immediately upon becoming aware of a Market Disruption Event, and, 
likewise, would require NSCC to notify Members and Limited Members if 
it has triggered the Proposed Rule and of actions taken or intended to 
be taken thereunder.
    Finally, the Proposed Rule would address other related matters, 
including a limitation of liability for any failure or delay in 
performance, in whole or in part, arising out of the Market Disruption 
Event. The purpose of the limitation of liability would be similar to 
the purpose of the analogous provision in the proposed Wind-down

[[Page 38341]]

Rule, which is to facilitate and protect NSCC's ability to act 
expeditiously in response to extraordinary events.
Proposed Change to the Rule Numbers
    In order to align the order of the Proposed Rules with the order of 
comparable rules in the rulebooks of the other Clearing Agencies, NSCC 
is also proposing to re-number the current Rule 42 (Wind-down of a 
Member, Fund Member or Insurance Carrier/Retirement Services Member) to 
Rule 40, which is currently reserved for future user, as shown on 
Exhibit 5b, hereto.
Expected Effect on and Management of Risk
    NSCC believes the proposal to adopt the R&W Plan and the Proposed 
Rules would enable it to better manage its risks. As described above, 
the Recovery Plan would identify the recovery tools and the risk 
management activities that NSCC may use to address risks of uncovered 
losses or shortfalls resulting from a Member default and losses arising 
from non-default events. By creating a framework for its management of 
risks across an evolving stress scenario and providing a roadmap for 
actions it may employ to monitor and, as needed, stabilize its 
financial condition, the Recovery Plan would strengthen NSCC's ability 
to manage risk. The Wind-down Plan would also enable NSCC to better 
manage its risks by establishing the strategy and framework for its 
orderly wind-down and the transfer of NSCC's business when the Wind-
down Plan is triggered. By creating clear mechanisms for the transfer 
of NSCC's membership and business, the Wind-down Plan would facilitate 
continued access to NSCC's critical services and minimize market impact 
of the transfer and enable NSCC to better manage risks related to its 
wind-down.
    NSCC believes the Proposed Rules would enable it to better manage 
its risks by facilitating, and providing a legal basis for, the 
implementation of critical aspects of the R&W Plan. The Proposed Rules 
would provide Members and Limited Members with transparency around 
those provisions of the R&W Plan that relate to their and NSCC's 
rights, responsibilities and obligations. Therefore, NSCC believes the 
Proposed Rules would enable it to better manage its risks by providing 
this transparency and creating certainty, to the extent practicable, 
around the occurrence of a Market Disruption Event or a Corporation 
Default (as such terms are defined in the respective Proposed Rules), 
and around the implementation of the Wind-down Plan.
Consistency With the Clearing Supervision Act
    The stated purpose of Title VIII of the Clearing Supervision Act is 
to mitigate systemic risk in the financial system and promote financial 
stability by, among other things, promoting uniform risk management 
standards for systemically important financial market utilities and 
strengthening the liquidity of systemically important financial market 
utilities.\57\ Section 805(a)(2) of the Clearing Supervision Act \58\ 
also authorizes the Commission to prescribe risk management standards 
for the payment, clearing, and settlement activities of designated 
clearing entities, like NSCC, for which the Commission is the 
supervisory agency. Section 805(b) of the Clearing Supervision Act \59\ 
states that the objectives and principles for risk management standards 
prescribed under Section 805(a) shall be to promote robust risk 
management, promote safety and soundness, reduce systemic risks, and 
support the stability of the broader financial system.
---------------------------------------------------------------------------

    \57\ 12 U.S.C. 5461(b).
    \58\ Id. at 5464(a)(2).
    \59\ Id. at 5464(b).
---------------------------------------------------------------------------

    NSCC believes that the proposal is consistent with Section 805(b) 
of the Clearing Supervision Act because it is designed to address each 
of these objectives. The Recovery Plan and the proposed Force Majeure 
Rule would promote robust risk management and would reduce systemic 
risks by providing NSCC with a roadmap for actions it may employ to 
monitor and manage its risks, and, as needed, to stabilize its 
financial condition in the event those risks materialize. Further, the 
Recovery Plan would identify the triggers of recovery tools, but would 
not provide that those triggers necessitate the use of those tools. 
Instead, the Recovery Plan would provide that the triggers of these 
tools lead to escalation to an appropriate management body, which would 
have the authority and flexibility to respond appropriately to the 
situation. Essentially, the Recovery Plan and the proposed Force 
Majeure Rule are designed to minimize losses to both NSCC and Members 
by giving NSCC the ability to determine the most appropriate way to 
address each stress situation. This approach would allow for proper 
evaluation of the situation and the possible impacts of the use of the 
available recovery tools in order to minimize the negative effects of 
the stress situation, and would reduce systemic risks related to the 
implementation of the Recovery Plan and the underlying recovery tools.
    The Wind-down Plan and the proposed Corporation Default Rule and 
Wind-down Rule, which would facilitate the implementation of the Wind-
down Plan, would promote safety and soundness and would support the 
stability of the broader financial system, because they would establish 
a framework for the orderly wind-down of NSCC's business and would set 
forth clear mechanics for the transfer of its critical services and 
membership, as well as clear provisions concerning the treatment of 
open, guaranteed CNS transactions in the event of NSCC's default. By 
designing the Wind-down Plan and these Proposed Rules to enable the 
continuity of NSCC's critical services and membership, NSCC believes 
they would promote safety and soundness and would support stability in 
the broader financial system in the event the Wind-down Plan is 
implemented.
    By assisting NSCC to promote robust risk management, promote safety 
and soundness, reduce systemic risks, and support the stability of the 
broader financial system, as described above, NSCC believes the 
proposal is consistent with Section 805(b) of the Clearing Supervision 
Act.\60\
---------------------------------------------------------------------------

    \60\ Id.
---------------------------------------------------------------------------

    NSCC also believes that the proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. In particular, NSCC 
believes that the R&W Plan, each of the Proposed Rules, and the 
proposed change to Rule numbers are consistent with Section 
17A(b)(3)(F) of the Act,\61\ the R&W Plan and each of the Proposed 
Rules are consistent with Rule 17Ad-22(e)(3)(ii) under the Act,\62\ and 
the R&W Plan is consistent with Rule 17Ad-22(e)(15)(ii) under the 
Act,\63\ for the reasons described below.
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78q-1(b)(3)(F).
    \62\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \63\ Id. at 240.17Ad-22(e)(15)(ii).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of NSCC be designed to promote the prompt and accurate clearance and 
settlement of securities transactions, and to assure the safeguarding 
of securities and funds which are in the custody or control of NSCC or 
for which it is responsible.\64\ The Recovery Plan and the proposed 
Force Majeure Rule would promote the prompt and accurate clearance and 
settlement of securities transactions by providing NSCC with a roadmap 
for actions it may employ to mitigate losses, and monitor and, as 
needed, stabilize, its financial condition, which would

[[Page 38342]]

allow it to continue its critical clearance and settlement services in 
stress situations. Further, as described above, the Recovery Plan is 
designed to identify the actions and tools NSCC may use to address and 
minimize losses to both NSCC and Members. The Recovery Plan and the 
proposed Force Majeure Rule would provide NSCC's management and the 
Board with guidance in this regard by identifying the indicators and 
governance around the use and application of such tools to enable them 
to address stress situations in a manner most appropriate for the 
circumstances. Therefore, the Recovery Plan and the proposed Force 
Majeure Rule would also contribute to the safeguarding of securities 
and funds which are in the custody or control of NSCC or for which it 
is responsible by enabling actions that would address and minimize 
losses.
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Wind-down Plan and the proposed Corporation Default Rule and 
Wind-down Rule, which would both facilitate the implementation of the 
Wind-down Plan, would also promote the prompt and accurate clearance 
and settlement of securities transactions and assure the safeguarding 
of securities and funds which are in the custody or control of NSCC or 
for which it is responsible. The Wind-down Plan and the proposed 
Corporation Default Rule and Wind-down Rule would collectively 
establish a framework for the transfer and orderly wind-down of NSCC's 
business. These proposals would establish clear mechanisms for the 
transfer of NSCC's critical services and membership, and for the 
treatment of open, guaranteed CNS transactions in the event of NSCC's 
default. By doing so, the Wind-down Plan and these Proposed Rules are 
designed to facilitate the continuity of NSCC's critical services and 
enable Members and Limited Members to maintain access to NSCC's 
services through the transfer of its membership in the event NSCC 
defaults or the Wind-down Plan is triggered by the Board. Therefore, by 
facilitating the continuity of NSCC's critical clearance and settlement 
services, NSCC believes the proposals would promote the prompt and 
accurate clearance and settlement of securities transactions. Further, 
by creating a framework for the transfer and orderly wind-down of 
NSCC's business, NSCC believes the proposals would enhance the 
safeguarding of securities and funds which are in the custody or 
control of NSCC or for which it is responsible.
    Finally, the proposed change to the Rule numbers would align the 
order of the Proposed Rules with the order of comparable rules in the 
rulebooks of the other Clearing Agencies. Therefore, NSCC believes the 
proposed change would create ease of reference, particularly for 
Members that are also participants of the other Clearing Agencies, and, 
as such, would assist in promoting the prompt and accurate clearance 
and settlement of securities transactions.
    Therefore, NSCC believes the R&W Plan, each of the Proposed Rules, 
and the proposed change to Rule numbers are consistent with the 
requirements of Section 17A(b)(3)(F) of the Act.\65\
---------------------------------------------------------------------------

    \65\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(3)(ii) under the Act requires NSCC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to maintain a sound risk management framework for 
comprehensively managing legal, credit, liquidity, operational, general 
business, investment, custody, and other risks that arise in or are 
borne by the covered clearing agency, which includes plans for the 
recovery and orderly wind-down of the covered clearing agency 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses.\66\ The R&W Plan and the 
Proposed Rules are designed to meet the requirements of Rule 17Ad-
22(e)(3)(ii).\67\
---------------------------------------------------------------------------

    \66\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \67\ Id.
---------------------------------------------------------------------------

    The R&W Plan would be maintained by NSCC in compliance with Rule 
17Ad-22(e)(3)(ii) in that it provides plans for the recovery and 
orderly wind-down of NSCC necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses, as 
described above.\68\ Specifically, the Recovery Plan would define the 
risk management activities, stress conditions and indicators, and tools 
that NSCC may use to address stress scenarios that could eventually 
prevent it from being able to provide its critical services as a going 
concern. Through the framework of the Crisis Continuum, the Recovery 
Plan would address measures that NSCC may take to address risks of 
credit losses and liquidity shortfalls, and other losses that could 
arise from a Member default. The Recovery Plan would also address the 
management of general business risks and other non-default risks that 
could lead to losses.
---------------------------------------------------------------------------

    \68\ Id.
---------------------------------------------------------------------------

    The Wind-down Plan would be triggered by a determination by the 
Board that recovery efforts have not been, or are unlikely to be, 
successful in returning NSCC to viability as a going concern. Once 
triggered, the Wind-down Plan would set forth clear mechanisms for the 
transfer of NSCC's membership and business, and would be designed to 
facilitate continued access to NSCC's critical services and to minimize 
market impact of the transfer. By establishing the framework and 
strategy for the execution of the transfer and wind-down of NSCC in 
order to facilitate continuous access to NSCC's critical services, the 
Wind-down Plan establishes a plan for the orderly wind-down of NSCC. 
Therefore, NSCC believes the R&W Plan would provide plans for the 
recovery and orderly wind-down of the covered clearing agency 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses, and, as such, meets the 
requirements of Rule 17Ad-22(e)(3)(ii).\69\
---------------------------------------------------------------------------

    \69\ Id.
---------------------------------------------------------------------------

    As described in greater detail above, the Proposed Rules are 
designed to facilitate the execution of the R&W Plan, provide Members 
and Limited Members with transparency regarding the material provisions 
of the Plan, and provide NSCC with a legal basis for implementation of 
those provisions. As such, NSCC also believes the Proposed Rules meet 
the requirements of Rule 17Ad-22(e)(3)(ii).\70\
---------------------------------------------------------------------------

    \70\ Id.
---------------------------------------------------------------------------

    NSCC has evaluated the recovery tools that would be identified in 
the Recovery Plan and has determined that these tools are 
comprehensive, effective, and transparent, and that such tools provide 
appropriate incentives to NSCC's Members to manage the risks they 
present. The recovery tools, as outlined in the Recovery Plan and in 
the proposed Force Majeure Rule, provide NSCC with a comprehensive set 
of options to address its material risks and support the resiliency of 
its critical services under a range of stress scenarios. NSCC also 
believes the recovery tools are effective, as NSCC has both legal basis 
and operational capability to execute these tools in a timely and 
reliable manner. Many of the recovery tools are provided for in the 
Rules; Members are bound by the Rules through their membership 
agreements with NSCC, and the Rules are adopted pursuant to a framework 
established by Rule 19b-4 under the Act,\71\ providing a legal basis 
for the recovery tools found therein. Other recovery tools have legal 
basis in contractual arrangements to which NSCC is a party, as 
described above. Further, as many of the tools are embedded in NSCC's 
ongoing risk management practices or are embedded into its predefined 
default-management

[[Page 38343]]

procedures, NSCC is able to execute these tools, in most cases, when 
needed and without material operational or organizational delay.
---------------------------------------------------------------------------

    \71\ Id. at 240.19b-4.
---------------------------------------------------------------------------

    The majority of the recovery tools are also transparent, as they 
are, or are proposed to be, included in the Rules, which are publicly 
available. NSCC believes the recovery tools also provide appropriate 
incentives to the Members, as they are designed to control the amount 
of risk they present to NSCC's clearance and settlement system. 
Members' financial obligations to NSCC, particularly their Required 
Deposits to the Clearing Fund, are measured by the risk posed by the 
Members' activity in NSCC's systems, which incentivizes them to manage 
that risk which would correspond to lower financial obligations. 
Finally, NSCC's Recovery Plan provides for a continuous evaluation of 
the systemic consequences of executing its recovery tools, with the 
goal of minimizing their negative impact. The Recovery Plan would 
outline various indicators over a timeline of increasing stress, the 
Crisis Continuum, with escalation triggers to NSCC management or the 
Board, as appropriate. This approach would allow for timely evaluation 
of the situation and the possible impacts of the use of a recovery tool 
in order to minimize the negative effects of the stress scenario. 
Therefore, NSCC believes that the recovery tools that would be 
identified and described in its Recovery Plan, including the authority 
provided to it in the proposed Force Majeure Rule, would meet the 
criteria identified within guidance published by the Commission in 
connection with the adoption of Rule 17Ad-22(e)(3)(ii).\72\
---------------------------------------------------------------------------

    \72\ Supra note 45.
---------------------------------------------------------------------------

    Therefore, NSCC believes the R&W Plan and each of the Proposed 
Rules are consistent with Rule 17Ad-22(e)(3)(ii).\73\
---------------------------------------------------------------------------

    \73\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(15)(ii) under the Act requires NSCC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to identify, monitor, and manage its general 
business risk and hold sufficient LNA to cover potential general 
business losses so that NSCC can continue operations and services as a 
going concern if those losses materialize, including by holding LNA 
equal to the greater of either (x) six months of the covered clearing 
agency's current operating expenses, or (y) the amount determined by 
the board of directors to be sufficient to ensure a recovery or orderly 
wind-down of critical operations and services of the covered clearing 
agency.\74\ While the Capital Policy addresses how NSCC holds LNA in 
compliance with these requirements, the Wind-down Plan would include an 
analysis that would estimate the amount of time and the costs to 
achieve a recovery or orderly wind-down of NSCC's critical operations 
and services, and would provide that the Board review and approve this 
analysis and estimation annually. The Wind-down Plan would also provide 
that the estimate would be the ``Recovery/Wind-down Capital 
Requirement'' under the Capital Policy. Under that policy, the General 
Business Risk Capital Requirement, which is the sufficient amount of 
LNA that NSCC should hold to cover potential general business losses so 
that it can continue operations and services as a going concern if 
those losses materialize, is calculated as the greatest of three 
estimated amounts, one of which is this Recovery/Wind-down Capital 
Requirement. Therefore, NSCC believes the R&W Plan, as it interrelates 
with the Capital Policy, is consistent with Rule 17Ad-
22(e)(15)(ii).\75\
---------------------------------------------------------------------------

    \74\ Id. at 240.17Ad-22(e)(15)(ii).
    \75\ Id.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Advance Notice, and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. The clearing agency shall not implement the proposed change 
if the Commission has any objection to the proposed change.
    A proposed change may be implemented in less than 60 days from the 
date the advance notice is filed, or the date further information 
requested by the Commission is received, if the Commission notifies the 
clearing agency in writing that it does not object to the proposed 
change and authorizes the clearing agency to implement the proposed 
change on an earlier date, subject to any conditions imposed by the 
Commission.
    The clearing agency shall post notice on its website of proposed 
changes that are implemented.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NSCC-2017-805 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NSCC-2017-805. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the Advance Notice that are filed with the 
Commission, and all written communications relating to the Advance 
Notice between the Commission and any person, other than those that may 
be withheld from the public in accordance with the provisions of 5 
U.S.C. 552, will be available for website viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of NSCC and on DTCC's website 
(https://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NSCC-2017-805 and should be submitted on 
or before August 21, 2018.

    By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-16711 Filed 8-3-18; 8:45 am]
 BILLING CODE 8011-01-P

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