Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Amendment No. 1 to an Advance Notice To Amend the Loss Allocation Rules and Make Other Changes, 38375-38393 [2018-16712]

Download as PDF Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 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 DTC 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–DTC– 2017–804 and should be submitted on or before August 21, 2018. By the Commission. Robert W. Errett, Deputy Secretary. [FR Doc. 2018–16714 Filed 8–3–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–83748; File No. SR–NSCC– 2017–806] Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Amendment No. 1 to an Advance Notice To Amend the Loss Allocation Rules and Make Other Changes sradovich on DSK3GMQ082PROD with NOTICES July 31, 2018. On December 18, 2017, National Securities Clearing Corporation (‘‘NSCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–NSCC–2017–806 (‘‘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 VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 (‘‘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 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, and on July 6, 2018, submitted a response to the Commission’s request for additional 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–2017–018) 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. 82428 (January 2, 2018), 83 FR 897 (January 8, 2018) (SR–NSCC–2017–018). 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. 82670 (February 8, 2018), 83 FR 6626 (February 14, 2018) (SR–DTC–2017–022; SR–FICC–2017–022; SR– NSCC–2017–018). 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. 82910 (March 20, 2018), 83 FR 12968 (March 26, 2018) (SR–NSCC–2017–018). 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 Nos. 83510 (June 25, 2018), 83 FR 30791 (June 29, 2018) (SR– DTC–2017–022; SR–FICC–2017–022; SR–NSCC– 2017–018). On June 28, 2018, NSCC filed Amendment No. 1 to the Proposed Rule Change. See Securities Exchange Act Release No. 83633 (July 13, 2018), 83 FR 34227 (July 19, 2018) (SR– NSCC–2017–018). 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. 82584 (January 24, 2018), 83 FR 4377 (January 30, 2018) (SR–NSCC–2017–806). 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 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. PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 38375 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.4 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 This Advance Notice consists of proposed modifications to NSCC’s Rules and Procedures (‘‘Rules’’) in order to amend provisions in the Rules regarding loss allocation as well as make other changes, as described in greater detail below.5 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 Written comments relating to this proposal have not been solicited or received. NSCC will notify the Commission of any written comments received by NSCC. 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. 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. 5 Capitalized terms not defined herein are defined in the Rules, available at https://www.dtcc.com/∼/ media/Files/Downloads/legal/rules/nscc_rules.pdf. E:\FR\FM\06AUN1.SGM 06AUN1 38376 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES (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 Advance Notice previously filed by NSCC on December 18, 2017.6 This Amendment amends and replaces the Advance Notice in its entirety. NSCC submits this Amendment in order to further clarify the operation of the proposed rule changes on loss allocation by providing additional information and examples. In particular, this Amendment would: (i) Clarify which Members would be subject to loss allocation with respect to Defaulting Member Events (as defined below and in the proposed rule change) and Declared Non-Default Loss Events (as defined below and in the proposed rule change) occurring during an Event Period (as defined below and in the proposed rule change). Specifically, pursuant to the Amendment, proposed Section 4 of Rule 4 would provide that each Member that is a Member on the first day of an Event Period would be obligated to pay its pro rata share of losses and liabilities arising out of or relating to each Defaulting Member Event (other than a Defaulting Member Event with respect to which it is the Defaulting Member (as defined below and in the proposed rule change)) and each Declared Non-Default Loss Event occurring during the Event Period. Proposed Section 4 of Rule 4 would also make it clear that any Member for which NSCC ceases to act on a non-business day, triggering an Event Period that commences on the next business day, would be deemed to be a Member on the first day of that Event Period. (ii) Clarify the obligations and Loss Allocation Cap (as defined below and in the proposed rule change) of a Member that withdraws from membership in respect of a loss allocation round. Specifically, pursuant to the Amendment, proposed Section 6 of Rule 4 would provide that the Member would nevertheless remain obligated for its pro rata share of losses and liabilities with respect to any Event Period for which it is otherwise obligated under Rule 4; however, its aggregate obligation would be limited to the amount of its Loss Allocation Cap as fixed in the round for which it withdrew. (iii) Clarify that a Member would be obligated to NSCC for all losses and liabilities incurred by NSCC arising out of or relating to any Defaulting Member 6 See Securities Exchange Act Release No. 82584 (January 24, 2018), 83 FR 4377 (January 30, 2018) (SR–NSCC–2017–806). VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 Event with respect to the Member. Specifically, pursuant to the Amendment, proposed Section 4 of Rule 4 would provide that each Member would be obligated to NSCC for the entire amount of any loss or liability incurred by NSCC arising out of or relating to any Defaulting Member Event with respect to such Member. (iv) Clarify that, although a Defaulting Member would not be allocated a ratable share of losses and liabilities arising out of or relating to its own Defaulting Member Event, it would remain obligated to NSCC for all such losses and liabilities. Specifically, pursuant to the Amendment, proposed Section 10 of Rule 4 would provide that no loss allocation under Rule 4 would constitute a waiver of any claim NSCC may have against a Member for any loss or liability to which the Member is subject under the Rules, including, without limitation, any loss or liability to which it may be subject under Rule 4. In addition, pursuant to the Amendment, NSCC is making other clarifying and technical changes to the proposed rule change, as proposed herein. Nature of the Proposed Change The primary purpose of this proposed rule change is to amend NSCC’s loss allocation rules in order to enhance the resiliency of NSCC’s loss allocation process so that NSCC can take timely action to address multiple loss events that occur in succession during a short period of time (defined and explained in detail below). In connection therewith, the proposed rule change would (i) align the loss allocation rules of the three clearing agencies of The Depository Trust & Clearing Corporation (‘‘DTCC’’), namely The Depository Trust Company (‘‘DTC’’), Fixed Income Clearing Corporation (‘‘FICC’’) (including the Government Securities Division (‘‘FICC/ GSD’’) and the Mortgage-Backed Securities Division (‘‘FICC/MBSD’’)), and NSCC (collectively, the ‘‘DTCC Clearing Agencies’’), so as to provide consistent treatment, to the extent practicable and appropriate, especially for firms that are participants of two or more DTCC Clearing Agencies, (ii) increase transparency and accessibility of the loss allocation rules by enhancing their readability and clarity, (iii) reduce the time within which NSCC is required to return a former Member’s Clearing Fund deposit, (iv) increase clarity of the voluntary termination provisions, and (v) make conforming and technical changes. PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 (i) Background Central counterparties (‘‘CCPs’’) play a key role in financial markets by mitigating counterparty credit risk on transactions between market participants. CCPs achieve this by providing guaranties to participants and, as a consequence, are typically exposed to credit risks that could lead to default losses. In addition, in performing its critical functions, a CCP could be exposed to non-default losses that are otherwise incident to the CCP’s clearance and settlement business. A CCP’s rulebook should provide a complete description of how losses would be allocated to participants if the size of the losses exceeded the CCP’s pre-funded resources. Doing so provides for an orderly allocation of losses, and potentially allows the CCP to continue providing critical services to the market and thereby results in significant financial stability benefits. In addition, a clear description of the loss allocation process offers transparency and accessibility to the CCP’s participants. Current NSCC Loss Allocation Process As a CCP, NSCC’s loss allocation process is a key component of its risk management process. Risk management is the foundation of NSCC’s ability to guarantee settlement, as well as the means by which NSCC protects itself and its Members from the risks inherent in the clearance and settlement process. NSCC’s risk management process must account for the fact that, in certain extreme circumstances, the collateral and other financial resources that secure NSCC’s risk exposures may not be sufficient to fully cover losses resulting from the liquidation of the portfolio of a Member for whom NSCC has ceased to act.7 The Rules currently provide for a loss allocation process through which both NSCC (by applying no less than 25% of its retained earnings in accordance with Addendum E) and its Members would share in the allocation of a loss resulting from the default of a Member for whom NSCC has ceased to act pursuant to the Rules. The Rules also recognize that NSCC may incur losses outside the context of a defaulting Member that are otherwise incident to NSCC’s clearance and settlement business. 7 When NSCC restricts a Member’s access to services generally, NSCC is said to have ‘‘ceased to act’’ for the Member. Rule 46 (Restrictions on Access to Services) sets out the circumstances under which NSCC may cease to act for a Member, and Rule 18 (Procedures for When the Corporation Declines or Ceases to Act) sets out the types of actions NSCC may take when it ceases to act for a Member. Supra note 5. E:\FR\FM\06AUN1.SGM 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices NSCC’s loss allocation rules currently provide that in the event NSCC ceases to act for a Member, the amounts on deposit to the Clearing Fund from the defaulting Member, along with any other resources of, or attributable to, the defaulting Member that NSCC may access under the Rules (e.g., payments from Clearing Agency Cross-Guaranty Agreements), are the first source of funds NSCC would use to cover any losses that may result from the closeout of the defaulting Member’s guaranteed positions. If these amounts are not sufficient to cover all losses incurred, then NSCC will apply the following available resources, in the following loss allocation waterfall order: First, as provided in Addendum E, NSCC’s corporate contribution of at least 25 percent of NSCC’s retained earnings existing at the time of a Member impairment, or such greater amount as the Board of Directors may determine; and Second, if a loss still remains, as and in the manner provided in Rule 4, the required Clearing Fund deposits of Members who are non-defaulting Members on the date of default. Pursuant to current Section 5 of Rule 4, if, as a result of applying the Clearing Fund deposit of a Member, the Member’s actual Clearing Fund deposit is less than its Required Deposit, it will be required to eliminate such deficiency in order to satisfy its Required Deposit amount. Pursuant to current Section 4 of Rule 4, Members can also be assessed for non-default losses incident to the operation of the clearance and settlement business of NSCC. Pursuant to current Section 8 of Rule 4, Members may withdraw from membership within specified timeframes after a loss allocation charge to limit their obligation for future assessments. Overview of the Proposed Rule Changes sradovich on DSK3GMQ082PROD with NOTICES A. Changes To Enhance Resiliency of NSCC’s Loss Allocation Process In order to enhance the resiliency of NSCC’s loss allocation process, NSCC proposes to change the manner in which each of the aspects of the loss allocation waterfall described above would be employed. NSCC would retain the current core loss allocation process following the application of the defaulting Member’s resources, i.e., first, by applying NSCC’s corporate contribution, and second, by pro rata allocations to Members. However, NSCC would clarify or adjust certain elements and introduce certain new loss allocation concepts, as further discussed below. In addition, the proposed rule change would address the loss VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 allocation process as it relates to losses arising from or relating to multiple default or non-default events in a short period of time, also as described below. Accordingly, NSCC is proposing five (5) key changes to enhance NSCC’s loss allocation process: (1) Changing the Calculation and Application of NSCC’s Corporate Contribution As stated above, Addendum E currently provides that NSCC will contribute no less than 25% of its retained earnings (or such higher amount as the Board of Directors shall determine) to a loss or liability that is not satisfied by the impaired Member’s Clearing Fund deposit. Under the proposal, NSCC would amend the calculation of its corporate contribution from a percentage of its retained earnings to a mandatory amount equal to 50% of the NSCC General Business Risk Capital Requirement.8 NSCC’s General Business Risk Capital Requirement, as defined in NSCC’s Clearing Agency Policy on Capital Requirements,9 is, at a minimum, equal to the regulatory capital that NSCC is required to maintain in compliance with Rule 17Ad–22(e)(15) under the Act.10 The proposed Corporate Contribution (as defined in the proposed rule change) would be held in addition to NSCC’s General Business Risk Capital Requirement. Currently, the Rules do not require NSCC to contribute its retained earnings to losses and liabilities other than those from Member impairments. Under the proposal, NSCC would apply its corporate contribution to non-default losses as well. The proposed Corporate Contribution would apply to losses arising from Defaulting Member Events and Declared Non-Default Loss Events (as such terms are defined below and in the proposed rule change), and would be a mandatory contribution by NSCC prior to any allocation of the loss among NSCC’s Members.11 As proposed, if the 8 NSCC calculates its General Business Risk Capital Requirement as the amount equal to the greatest of (i) an amount determined based on its general business profile, (ii) an amount determined based on the time estimated to execute a recovery or orderly wind-down of NSCC’s critical operations, and (iii) an amount determined based on an analysis of NSCC’s estimated operating expenses for a six (6) month period. 9 See Securities Exchange Act Release No. 81105 (July 7, 2017), 82 FR 32399 (July 13, 2017) (SR– NSCC–2017–004). 10 17 CFR 240.17Ad–22(e)(15). 11 The proposed rule change would not require a Corporate Contribution with respect to the use of the Clearing Fund as a liquidity resource; however, if NSCC uses the Clearing Fund as a liquidity resource for more than 30 calendar days, as set forth in proposed Section 2 of Rule 4, then NSCC would PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 38377 Corporate Contribution is fully or partially used against a loss or liability relating to an Event Period, the Corporate Contribution would be reduced to the remaining unused amount, if any, during the following two hundred fifty (250) business days 12 in order to permit NSCC to replenish the Corporate Contribution.13 To ensure transparency, Members would receive notice of any such reduction to the Corporate Contribution. As compared to the current approach of applying ‘‘no less than’’ a percentage of retained earnings to defaulting Member losses, the proposed Corporate Contribution would be a fixed percentage of NSCC’s General Business Risk Capital Requirement, which would provide greater transparency and accessibility to Members. The proposed Corporate Contribution would apply not only towards losses and liabilities arising out of or relating to Defaulting Member Events but also those arising out of or relating to Declared NonDefault Loss Events, which is consistent with the current industry guidance that ‘‘a CCP should identify the amount of its own resources to be applied towards losses arising from custody and investment risk, to bolster confidence that participants’ assets are prudently safeguarded.’’ 14 Under the current Addendum E, NSCC has the discretion to contribute amounts higher than the specified percentage of retained earnings, as determined by the Board of Directors, to any loss or liability incurred by NSCC as result of a Member’s impairment. This option would be retained and expanded under the proposal so that it would be clear that NSCC can voluntarily apply amounts greater than the Corporate Contribution against any have to consider the amount used as a loss to the Clearing Fund incurred as a result of a Defaulting Member Event and allocate the loss pursuant to proposed Section 4 of Rule 4, which would then require the application of a Corporate Contribution. 12 Rule 1 defines ‘‘business day’’ as ‘‘any day on which the Corporation is open for business. However, on any business day that banks or transfer agencies in New York State are closed or a Qualified Securities Depository is closed, no deliveries of securities and no payments of money shall be made through the facilities of the Corporation.’’ Supra note 5. 13 NSCC believes that two hundred and fifty (250) business days would be a reasonable estimate of the time frame that NSCC would require to replenish the Corporate Contribution by equity in accordance with NSCC’s Clearing Agency Policy on Capital Requirements, including a conservative additional period to account for any potential delays and/or unknown exigencies in times of distress. 14 See Resilience of central counterparties (CCPs): Further guidance on the PFMI, issued by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions, at 42 (July 2017), available at www.bis.org/cpmi/publ/d163.pdf. E:\FR\FM\06AUN1.SGM 06AUN1 38378 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices loss or liability (including non-default losses) of NSCC, if the Board of Directors, in its sole discretion, believes such to be appropriate under the factual situation existing at the time. The proposed rule changes relating to the calculation and application of the Corporate Contribution are set forth in proposed Sections 4 and 5 of Rule 4, as further described below. sradovich on DSK3GMQ082PROD with NOTICES (2) Introducing an Event Period In order to clearly define the obligations of NSCC and its Members regarding loss allocation and to balance the need to manage the risk of sequential loss events against Members’ need for certainty concerning their maximum loss allocation exposures, NSCC is proposing to introduce the concept of an ‘‘Event Period’’ to the Rules to address the losses and liabilities that may arise from or relate to multiple Defaulting Member Events and/or Declared Non-Default Loss Events that arise in quick succession. Specifically, the proposal would group Defaulting Member Events and Declared Non-Default Loss Events occurring in a period of ten (10) business days (‘‘Event Period’’) for purposes of allocating losses to Members in one or more rounds (as described below), subject to the limitations of loss allocation set forth in the proposed rule change and as explained below.15 In the case of a loss or liability arising from or relating to a Defaulting Member Event, an Event Period would begin on the day NSCC notifies Members that it has ceased to act 16 for the Defaulting Member (or the next business day, if such day is not a business day). In the case of a loss or liability arising from or relating to a Declared Non-Default Loss Event, an Event Period would begin on the day that NSCC notifies Members of the Declared Non-Default Loss Event (or the next business day, if such day is not a business day). If a subsequent Defaulting Member Event or Declared Non-Default Loss Event occurs during an Event Period, any losses or liabilities arising out of or relating to any such subsequent event would be resolved as losses or liabilities that are part of the same Event Period, without extending the duration of such Event Period. An Event Period may include both Defaulting Member Events and Declared 15 NSCC believes that having a ten (10) business day Event Period would provide a reasonable period of time to encompass potential sequential Defaulting Member Events or Declared Non-Default Loss Events that are likely to be closely linked to an initial event and/or a severe market dislocation episode, while still providing appropriate certainty for Members concerning their maximum exposure to mutualized losses with respect to such events. 16 Supra note 7. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 Non-Default Loss Events, and there would not be separate Event Periods for Defaulting Member Events or Declared Non-Default Loss Events occurring during overlapping ten (10) business day periods. The amount of losses that may be allocated by NSCC, subject to the required Corporate Contribution, and to which a Loss Allocation Cap would apply for any Member that elects to withdraw from membership in respect of a loss allocation round, would include any and all losses from any Defaulting Member Events and any Declared Non-Default Loss Events during the Event Period, regardless of the amount of time, during or after the Event Period, required for such losses to be crystallized and allocated.17 The proposed rule changes relating to the implementation of an Event Period are set forth in proposed Section 4 of Rule 4, as further described below. (3) Introducing the Concept of ‘‘Rounds’’ and Loss Allocation Notice Pursuant to the proposed rule change, a loss allocation ‘‘round’’ would mean a series of loss allocations relating to an Event Period, the aggregate amount of which is limited by the sum of the Loss Allocation Caps of affected Members (a ‘‘round cap’’). When the aggregate amount of losses allocated in a round equals the round cap, any additional losses relating to the applicable Event Period would be allocated in one or more subsequent rounds, in each case subject to a round cap for that round. NSCC may continue the loss allocation process in successive rounds until all losses from the Event Period are allocated among Members that have not submitted a Loss Allocation Withdrawal Notice in accordance with proposed Section 6 of Rule 4. Each loss allocation would be communicated to Members by the issuance of a notice that advises the Members of the amount being allocated to them (‘‘Loss Allocation Notice’’). Each Member’s pro rata share of losses and liabilities to be allocated in any round would be equal to (i) the average of its Required Fund Deposit for the seventy (70) business days preceding the first day of the applicable Event Period or such shorter period of time that the Member has been a Member (each Member’s ‘‘Average RFD’’), 17 As discussed below, each Member that is a Member on the first day of an Event Period would be obligated to pay its pro rata share of losses and liabilities arising out of or relating to each Defaulting Member Event (other than a Defaulting Member Event with respect to which it is the Defaulting Member) and each Declared Non-Default Loss Event occurring during the Event Period. PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 divided by (ii) the sum of Average RFD amounts of all Members subject to loss allocation in such round. Each Loss Allocation Notice would specify the relevant Event Period and the round to which it relates. The first Loss Allocation Notice in any first, second, or subsequent round would expressly state that such Loss Allocation Notice reflects the beginning of the first, second, or subsequent round, as the case may be, and that each Member in that round has five (5) business days from the issuance of such first Loss Allocation Notice for the round to notify NSCC of its election to withdraw from membership with NSCC pursuant to proposed Section 6 of Rule 4, and thereby benefit from its Loss Allocation Cap.18 The ‘‘Loss Allocation Cap’’ of a Member would be equal to the greater of (x) its Required Fund Deposit on the first day of the applicable Event Period and (y) its Average RFD. After a first round of loss allocations with respect to an Event Period, only Members that have not submitted a Loss Allocation Withdrawal Notice in accordance with proposed Section 6 of Rule 4 would be subject to further loss allocation with respect to that Event Period. The amount of any second or subsequent round cap may differ from the first or preceding round cap because there may be fewer Members in a second or subsequent round if Members elect to withdraw from membership with NSCC as provided in proposed Section 6 of Rule 4 following the first Loss Allocation Notice in any round. For example, for illustrative purposes only, after the required Corporate Contribution, if NSCC has a $5 billion loss determined with respect to an Event Period and the sum of Loss Allocation Caps for all Members subject to the loss allocation is $4 billion, the first round would begin when NSCC issues the first Loss Allocation Notice for that Event Period. NSCC could issue one or more Loss Allocation Notices for the first round until the sum of losses allocated equals $4 billion. Once the $4 billion is allocated, the first round 18 Pursuant to the current Section 8 of Rule 4, the time period for a participant to give notice of its election to terminate its business with NSCC in respect of a pro rata charge is ten (10) business days after receiving notice of a pro rata charge. Supra note 5. NSCC believes that it is appropriate to shorten such time period from ten (10) business days to five (5) business days because NSCC needs timely notice of which Members would remain in its membership for purposes of calculating the loss allocation for any subsequent round. NSCC believes that five (5) business days would provide Members with sufficient time to decide whether to cap their loss allocation obligations by withdrawing from their membership in NSCC. E:\FR\FM\06AUN1.SGM 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES would end and NSCC would need a second round in order to allocate the remaining $1 billion of loss. NSCC would then issue a Loss Allocation Notice for the $1 billion and this notice would be the first Loss Allocation Notice for the second round. The issuance of the Loss Allocation Notice for the $1 billion would begin the second round. The proposed rule change would link the Loss Allocation Cap to a round in order to provide Members the option to limit their loss allocation exposure at the beginning of each round. As proposed and as described further below, a Member could limit its loss allocation exposure to its Loss Allocation Cap by providing notice of its election to withdraw from membership within five (5) business days after the issuance of the first Loss Allocation Notice in any round. The proposed rule changes relating to the implementation of ‘‘rounds’’ and Loss Allocation Notices are set forth in proposed Section 4 of Rule 4, as further described below. (4) Implementing a ‘‘Look-Back’’ Period To Calculate a Member’s Loss Allocation Pro Rata Share and Its Loss Allocation Cap Currently, the Rules calculate a Member’s pro rata share for purposes of loss allocation based on the Member’s ‘‘allocation for a System,’’ which in turn is based on settlement dollar amounts. Therefore, a Member’s loss allocation obligations are currently based on the Member’s activity in each of the various services or ‘‘Systems’’ offered by NSCC.19 The Rules do not anticipate the possibility of more than one Defaulting Member Event or Declared Non-Default Loss Event in quick succession. Given NSCC’s risk-based margining methodology, NSCC believes that it would be more appropriate to determine a Member’s pro rata share of losses and liabilities based on the amount of risk that the Member brings to NSCC, which is represented by the Member’s Required Deposit (NSCC is proposing that ‘‘Required Deposits’’ be renamed ‘‘Required Fund Deposits,’’ as described below). Accordingly, NSCC is proposing to calculate each Member’s pro rata share of losses and liabilities to be allocated in any round (as described above and in the proposed rule change) to be equal to (i) the Member’s Average RFD divided by (ii) the sum of Average RFD amounts for all Members that are subject to loss allocation in such round. 19 NSCC’s current loss allocation rules pre-date NSCC’s move to a risk-based margining methodology. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 Additionally, as described above and in the proposed rule change, if a Member withdraws from membership pursuant to proposed Section 6 of Rule 4, NSCC is proposing that the Member’s Loss Allocation Cap be equal to the greater of (i) its Required Fund Deposit on the first day of the applicable Event Period or (ii) its Average RFD. NSCC believes that employing a backward-looking average to calculate a Member’s loss allocation pro rata share and Loss Allocation Cap would disincentivize Member behavior that could heighten volatility or reduce liquidity in markets in the midst of a financial crisis. Specifically, the proposed look-back period would discourage a Member from reducing its settlement activity during a time of stress primarily to limit its loss allocation pro rata share, which, as proposed, would now be based on the Member’s average settlement activity over the look-back period rather than its settlement activity at a point in time that the Member may not be able to estimate. Similarly, NSCC believes that taking a backward-looking average into consideration when determining a Member’s Loss Allocation Cap would also deter a Member from reducing its settlement activity during a time of stress primarily to limit its Loss Allocation Cap. NSCC believes that having a look-back period of seventy (70) business days is appropriate, because it would be long enough to enable NSCC to capture a full calendar quarter of a Member’s activities, including quarterly option expirations, and smooth out the impact from any abnormalities and/or arbitrariness that may have occurred, but not too long that the Member’s business strategy and outlook could have shifted significantly, resulting in material changes to the size of its portfolios. The proposed rule changes relating to the implementation of a look-back period are set forth in proposed Section 4 of Rule 4, as further described below. (5) Capping Withdrawing Members’ Loss Allocation Exposure and Related Changes NSCC’s current loss allocation rules allow a Member to withdraw if the Member notifies NSCC, within ten (10) business days after receipt of notice of a pro rata charge, of its election to terminate its membership and thereby avail itself of a cap on loss allocation, which is its Required Deposit as fixed immediately prior to the time of the pro rata charge. As discussed above, the proposed rule change would continue providing Members the opportunity to PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 38379 limit their loss allocation exposure by offering withdrawal options; however, the cap on loss allocation would be calculated differently and the associated withdrawal process would also be modified as it relates to withdrawals associated with the loss allocation process. In particular, the proposed rule change would shorten the withdrawal notification period from ten (10) business days to five (5) business days, and would also change the beginning of such notification period from the receipt of the notice of a pro rata charge to the issuance of the notice, as further described below. As proposed, if a Member timely provides notice of its withdrawal from membership in respect of a loss allocation round, the maximum amount of losses it would be responsible for would be its Loss Allocation Cap,20 provided that the Member complies with the requirements of the withdrawal process in proposed Section 6 of Rule 4.21 Currently, NSCC’s loss allocation provisions provide that if a pro rata charge is made against a Member’s actual Clearing Fund deposit, and as result thereof the Member’s deposit is less than its Required Deposit, the Member will, upon demand by NSCC, be required to replenish its deposit to eliminate the deficiency within such time as NSCC shall require. To increase transparency of the timeframe under which NSCC would require funds from Members to satisfy their loss allocation obligations, NSCC is proposing that Members would receive two (2) business days’ notice of a loss allocation, and Members would be required to pay the requisite amount no later than the second business day following issuance of such notice.22 Members would have five (5) business days 23 from the issuance of the first Loss Allocation Notice in any round of an Event Period to decide whether to withdraw from membership.24 20 If a Member’s Loss Allocation Cap exceeds the Member’s then-current Required Fund Deposit, it must still cover the excess amount. 21 For the avoidance of doubt, pursuant to Section 13(d) of Rule 4(A) (Supplemental Liquidity Deposits), a Special Activity Supplemental Deposit of a Member may not be used to calculate or be applied to satisfy any pro rata charge pursuant to Section 4 of Rule 4. Supra note 5. 22 NSCC believes that allowing Members two (2) business days to satisfy their loss allocation obligations would provide Members sufficient notice to arrange funding, if necessary, while allowing NSCC to address losses in a timely manner. 23 Supra note 18. 24 NSCC believes that setting the start date of the withdrawal notification period to the date of issuance of a notice would provide a single withdrawal timeframe that would be consistent across the Members. E:\FR\FM\06AUN1.SGM 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES 38380 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices Each round would allow a Member the opportunity to notify NSCC of its election to withdraw from membership after satisfaction of the losses allocated in such round. Multiple Loss Allocation Notices may be issued with respect to each round to allocate losses up to the round cap. Specifically, the first round and each subsequent round of loss allocation would allocate losses up to a round cap of the aggregate of all Loss Allocation Caps of those Members included in the round. If a Member provides notice of its election to withdraw from membership, it would be subject to loss allocation in that round, up to its Loss Allocation Cap. If the first round of loss allocation does not fully cover NSCC’s losses, a second round will be noticed to those Members that did not elect to withdraw from membership in the previous round; however, as noted above, the amount of any second or subsequent round cap may differ from the first or preceding round cap because there may be fewer Members in a second or subsequent round if Members elect to withdraw from membership with NSCC as provided in proposed Section 6 of Rule 4 following the first Loss Allocation Notice in any round. Pursuant to the proposed rule change, in order to avail itself of its Loss Allocation Cap, a Member would need to follow the requirements in proposed Section 6 of Rule 4, which would provide that the Member must: (i) Specify in its Loss Allocation Withdrawal Notice (as defined below and in the proposed rule change) an effective date of withdrawal, which date shall be no later than ten (10) business days following the last day of the applicable Loss Allocation Withdrawal Notification Period (as defined below and in the proposed rule change) (i.e., no later than ten (10) business days after the 5th business day following the first Loss Allocation Notice in that round of loss allocation),25 (ii) cease all activity that would result in transactions being submitted to NSCC for clearance and settlement for which such Member would be obligated to perform, where the scheduled final settlement date would be later than the effective date of the Member’s withdrawal, and (iii) ensure that all clearance and settlement activity for which such Member is obligated to NSCC is fully and finally 25 NSCC believes that having an effective date of withdrawal that is not later than ten (10) business days following the last day of the Loss Allocation Withdrawal Notification Period would provide Members with a reasonable period of time to wind down their activities at NSCC while minimizing any uncertainty typically associated with a longer withdrawal period. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 settled by the effective date of the Member’s withdrawal, including, without limitation, by resolving by such date all fails and buy-in obligations. As proposed, a Member that withdraws in compliance with proposed Section 6 of Rule 4 would remain obligated for its pro rata share of losses and liabilities with respect to any Event Period for which it is otherwise obligated under Rule 4; however, its aggregate obligation would be limited to the amount of its Loss Allocation Cap (as fixed in the round for which it withdrew). The proposed rule changes are designed to enable NSCC to continue the loss allocation process in successive rounds until all of NSCC’s losses are allocated. To the extent that a Member’s Loss Allocation Cap exceeds the Member’s Required Fund Deposit on the first day of the applicable Event Period, NSCC may in its discretion retain any excess amounts on deposit from the Member, up to the Member’s Loss Allocation Cap. The proposed rule changes relating to capping withdrawing Members’ loss allocation exposure and related changes to the withdrawal process are set forth in proposed Sections 4 and 6 of Rule 4, as further described below. B. Changes To Align Loss Allocation Rules The proposed rule changes would align the loss allocation rules, to the extent practicable and appropriate, of the three DTCC Clearing Agencies so as to provide consistent treatment, especially for firms that are participants of two or more DTCC Clearing Agencies. As proposed, the loss allocation waterfall and certain related provisions, e.g., returning a former Member’s Clearing Fund, would be consistent across the DTCC Clearing Agencies to the extent practicable and appropriate. The proposed rule changes of NSCC that would align loss allocation rules of the DTCC Clearing Agencies are set forth in proposed Sections 1, 2, 7, and 12 of Rule 4, as further described below. C. Clarifying Changes Relating to Loss Allocation The proposed rule changes are intended to make the provisions in the Rules governing loss allocation more transparent and accessible to Members. In particular, NSCC is proposing the following changes relating to loss allocation to clarify Members’ obligations for Declared Non-Default Loss Events. Aside from losses that NSCC might face as a result of a Defaulting Member Event, NSCC could incur non-default PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 losses incident to its clearance and settlement business.26 The Rules currently permit NSCC to apply Clearing Fund to non-default losses. Specifically, pursuant to Section 2(b) of Rule 4,27 NSCC can use the Clearing Fund to satisfy losses or liabilities of NSCC incident to the operation of the clearance and settlement business of NSCC. Section II of Addendum K provides additional details regarding the application of the Clearing Fund to losses outside of a System. If there is a failure of NSCC following a non-default loss, such occurrence would affect Members in much the same way as a failure of NSCC following a Defaulting Member Event. Accordingly, NSCC is proposing rule changes to enhance the provisions relating to nondefault losses by clarifying Members’ obligations for such losses. Specifically, NSCC is proposing enhancement of the governance around non-default losses that would trigger loss allocation to Members by specifying that the Board of Directors would have to determine that there is a non-default loss that may be a significant and substantial loss or liability that may materially impair the ability of NSCC to provide clearance and settlement services in an orderly manner and will potentially generate losses to be mutualized among the Members in order to ensure that NSCC may continue to offer clearance and settlement services in an orderly manner. The proposed rule change would provide that NSCC would then be required to promptly notify Members of this determination, which is referred to in the proposed rule as a Declared NonDefault Loss Event. In addition, NSCC is proposing to better align the interests of NSCC with those of its Members by stipulating a mandatory Corporate Contribution apply to a Declared NonDefault Loss Event prior to any allocation of the loss among Members, as described above. Additionally, NSCC is proposing language to clarify Members’ obligations for Declared NonDefault Loss Events. The proposed rule changes relating to Declared Non-Default Loss Events and Members’ obligations for such events are set forth in proposed Section 4 of Rule 4, as further described below. 26 Non-default losses may arise from events such as damage to physical assets, a cyber-attack, or custody and investment losses. 27 Section 2(b) of Rule 4 provides that ‘‘the use of the Clearing Fund . . . shall be limited to satisfaction of losses or liabilities of the Corporation incident to the operation of the clearance and settlement business of the Corporation other than losses and liabilities of a System.’’ Supra note 5. E:\FR\FM\06AUN1.SGM 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES D. Reduce the Time Within Which NSCC Is Required To Return a Former Member’s Clearing Fund Deposit The proposed rule change would reduce the time period in which NSCC may retain a Member’s Clearing Fund deposit. Specifically, NSCC proposes that if a Member gives notice to NSCC of its election to withdraw from membership, NSCC will return the Member’s Actual Deposit in the form of (i) cash or securities within thirty (30) calendar days and (ii) Eligible Letters of Credit within ninety (90) calendar days, after all of the Member’s transactions have settled and all matured and contingent obligations to NSCC for which the Member was responsible while a Member have been satisfied, except NSCC may retain for up to two (2) years the Actual Deposits from Members who have Sponsored Accounts at DTC. NSCC believes that shortening the time period for the return of a Member’s Clearing Fund deposit would be helpful to firms who have exited NSCC so that they could have use of the deposits sooner than under the current Rules while at the same time protecting NSCC because such return would only occur if all obligations of the terminating Member to NSCC have been satisfied, which would include both matured as well as contingent obligations. The proposed rule changes relating to the reduced time period in which NSCC is required to return the Clearing Fund deposit of a former Member are set forth in proposed Section 7 of Rule 4, as further described below. The foregoing changes as well as other changes (including a number of conforming and technical changes) that NSCC is proposing in order to improve the transparency and accessibility of the Rules are described in detail below. E. Loss Allocation Waterfall Comparison The following example 28 illustrates the differences between the current and proposed loss allocation provisions: Assumptions: (i) Member A defaults on a business day (Day 1). On the same day, NSCC ceases to act for Member A and notifies Members of the cease to act. After liquidating Member A’s portfolio and applying Member A’s Clearing Fund deposit, NSCC has a loss of $350 million. (ii) Member X voluntarily retires from membership five (5) business days after 28 For purposes of this example, NSCC has assumed that the losses occurred with guaranteed CNS activity of Members, and NSCC allocated all such Members’ deposits to the Clearing Fund to CNS activity (which is typically more than 99% of the NSCC daily gross settlement amount). VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 NSCC ceases to act for Member A (Day 6). (iii) Member B defaults seven (7) business days after NSCC ceases to act for Member A (Day 8). On the same day, NSCC ceases to act for Member B and notifies Members of the cease to act. After liquidating Member B’s portfolio and applying Member B’s Clearing Fund deposit, NSCC has a loss of $350 million. (iv) The current NSCC loss provisions require NSCC to contribute no less than 25% of its retained earnings as a corporate contribution. For the purposes of this example, it is assumed that NSCC will contribute 25% of its retained earnings. The amount of NSCC’s retained earnings is $416 million. (v) NSCC’s General Business Risk Capital Requirement is $154 million. Current Loss Allocation: Under the current loss allocation provisions, with respect to the losses arising out of Member A’s default, NSCC will contribute $104 million ($416 million * 25%) from retained earnings and then allocate the remaining loss of $246 million ($350 million ¥ $104 million) to Members. With respect to losses arising out of Member B’s default, NSCC will contribute $78 million (($416 million ¥ $104 million) * 25%) from retained earnings and then allocate the remaining loss of $272 million ($350 million ¥ $78 million) to Members. Because Member X voluntarily retired before NSCC ceased to act for Member B, Member X is not subject to loss allocation with respect to losses arising out of Member B’s default. Altogether, with respect to losses arising out of defaults of Member A and Member B, NSCC will contribute $182 million of retained earnings and will allocate losses of $518 million to Members. Proposed Loss Allocation: Under the proposed loss allocation provisions, a Defaulting Member Event with respect to Member A’s default would have occurred on Day One, and a Defaulting Member Event with respect to Member B’s default would have occurred on Day 8. Because the Defaulting Member Events occurred during a 10-business day period, they would be grouped together into an Event Period for purposes of allocating losses to Members. The Event Period would begin on the 1st business day and end on the 10th business day. With respect to losses arising out of Member A’s default, NSCC would apply a Corporate Contribution of $77 million ($154 million * 50%) and then allocate the remaining loss of $273 million ($350 million ¥ $77 million) to Members. PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 38381 With respect to losses arising out of Member B’s default, NSCC would not apply a Corporate Contribution since it would have already contributed the maximum Corporate Contribution of 50% of its General Business Risk Capital Requirement. NSCC would allocate the losses of $350 million arising out of Member B’s default to Members. Because Member X was a Member on the first day of the Event Period, Member X would be subject to loss allocation with respect to all events occurring during the Event Period, even if the event occurred after its retirement. Therefore, Member X would be subject to loss allocation with respect to Member B’s default. Altogether, with respect to losses arising out of defaults of Member A and Member B, NSCC would apply a Corporate Contribution of $77 million and would allocate losses of $623 million to Members. The principal differences in the above example are due to (i) the proposed changes to the calculation and application of the Corporate Contribution and (ii) the proposed introduction of an Event Period. (ii) Detailed Description of the Proposed Rule Changes Related to Loss Allocation A. Proposed Changes to Rule 4 (Clearing Fund) Overview of Rule 4 (Clearing Fund) Rule 4 currently addresses Clearing Fund requirements and loss allocation obligations. While Procedure XV addresses the various Clearing Fund calculations, Rule 4 sets forth rights, obligations and other aspects associated with the Clearing Fund, as well as the loss allocation process. Rule 4 is currently organized into 12 sections. NSCC is proposing changes to each section, and consolidating provisions in Rule 4 relating to Mutual Fund Services and Insurance and Retirement Processing Services into new sections, as described below. Section 1 Section 1 of Rule 4 currently sets forth the requirement that each Member and Mutual Fund/Insurance Services Member shall, and each Fund Member and Insurance Carrier/Retirement Services Member may, be required to make a deposit to the Clearing Fund. Section 1 currently provides that each participant’s Required Deposit is based on one or more formulas specified by NSCC’s Board of Directors. The basis of each such formula is participants’ usage of NSCC’s facilities. Section 1 also currently sets forth the minimum E:\FR\FM\06AUN1.SGM 06AUN1 38382 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES amount of each participant category’s Required Deposit. Current Section 1 allows a portion of a participant’s Clearing Fund deposit to be evidenced by an open account indebtedness secured by Eligible Clearing Fund Securities, subject to certain limitations set forth in Procedure XV, and sets forth the various requirements associated with the deposit of Eligible Clearing Fund Securities. Current Section 1 also permits NSCC to require participants to post a letter of credit where NSCC believes the participants present legal risk. Current Section 1 also provides that NSCC allocate the Clearing Fund by types of service (e.g., Mutual Fund Services) as well as by Systems (e.g., CNS), and divide the Clearing Fund into separate ‘‘Allocations’’ for each such service and separate ‘‘Funds’’ for each such System. Under the proposed rule change, NSCC is proposing to add a subheading of ‘‘Required Fund Deposits’’ to Section 1 and restructure Section 1 so that it applies to Members only and delete references to Mutual Fund/Insurance Services Members, Fund Members and Insurance Carrier/Retirement Services Members from Section 1.29 Provisions of Rule 4 regarding Mutual Fund/ Insurance Services Members and Fund Members would be covered in a new proposed Section 13 to Rule 4, discussed below. Provisions of Rule 4 regarding Insurance Carrier/Retirement Services Members would be covered in a new proposed Section 14 to Rule 4, discussed below. Under the proposed rule change, Section 1 would continue to have the same provisions as they relate to Members except for the following: (i) The language throughout the section would be reorganized, streamlined and clarified, (ii) ‘‘Required Deposits’’ would be renamed ‘‘Required Fund Deposits,’’ 30 which is a more descriptive term to refer to Members’ deposits required for the Clearing Fund, and would harmonize with the rules of FICC/GSD and FICC/MBSD 31 and the 29 In addition to Section 1 of Rule 4, NSCC is proposing to delete references to Mutual Fund/ Insurance Services Members, Fund Members and Insurance Carrier/Retirement Services Members from Sections 2, 3, 4, 5, 6, 7, 8, 9, and 12 of Rule 4. 30 In addition to Section 1 of Rule 4, NSCC is proposing to rename ‘‘Required Deposits’’ to ‘‘Required Fund Deposits’’ in Sections 2, 3, 4, 8, 9, and 11 of Rule 4. 31 FICC/GSD Rulebook (‘‘FICC/GSD Rules’’), available at https://dtcc.com/∼/media/Files/ Downloads/legal/rules/ficc_gov_rules.pdf and FICC/ MBSD Clearing Rules (‘‘FICC/MBSD Rules’’), available at https://dtcc.com/∼/media/Files/ Downloads/legal/rules/ficc_mbsd_rules.pdf. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 term used in such rules,32 (iii) a sentence would be added regarding additional deposits maintained by the Members at NSCC, (iv) the provision regarding the Clearing Fund being allocated by Systems and services would be deleted,33 and (v) change ‘‘Rules’’ to ‘‘Rules and Procedures’’ to better reflect the name of NSCC’s rulebook.34 The proposed sentence regarding additional deposits to the Clearing Fund would permit Members to post such additional deposits at their discretion and would make clear that such additional deposits would be deemed to be part of the Clearing Fund and the Member’s Actual Deposit (as discussed below and as defined in the proposed rule change) but would not be deemed to be part of the Member’s Required Fund Deposit. NSCC proposes to add language in Section 1 to make it clear that each Member would grant NSCC a first priority perfected security interest in its right, title and interest in and to any Eligible Clearing Fund Securities, funds and assets pledged to NSCC to secure the Member’s open account indebtedness or placed by the Member in NSCC’s possession (or its agents acting on its behalf) to secure all such Member’s obligations to NSCC, and that NSCC would be entitled to exercise the rights of a pledgee under common law and a secured party under Articles 8 and 9 of the New York Uniform Commercial Code with respect to such assets. The additional language would further harmonize the Rules with language used in the FICC/GSD Rules and FICC/MBSD Rules,35 thus providing consistent treatment of pledged resources for firms that are members of both NSCC and FICC. NSCC proposes to clarify the language in footnote 2 of Section 1. In addition, NSCC proposes to add ‘‘Eligible Letter of Credit’’ as a defined term to refer to letters of credit posted by participants if required by NSCC,36 which would harmonize the term with the term used in the FICC/GSD Rules and FICC/MBSD 32 See FICC/GSD Rule 1 (Definitions) and FICC/ MBSD Rule 1 (Definitions), supra note 31. 33 In addition to Section 1 of Rule 4, NSCC is proposing to delete references to the Clearing Fund being allocated by Systems and services from Sections 2, 3, and 4 of Rule 4. 34 In addition to Section 1 of Rule 4, NSCC is proposing to change ‘‘Rules’’ to ‘‘Rules and Procedures’’ in Sections 9 and 12 of Rule 4. 35 See Section 4 of FICC/GSD Rule 4 and Section 4 of FICC/MBSD Rule 4, supra note 31. 36 In addition to Section 1 of Rule 4, NSCC is also proposing to rename ‘‘Letter of Credit’’ to ‘‘Eligible Letter of Credit’’ in Sections 2 and 12 of Rule 4. PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 Rules,37 thus providing consistent terminology for firms that are members of both NSCC and FICC. Similarly, NSCC proposes to add ‘‘Actual Deposit’’ as a defined term in Section 1 to refer to Eligible Clearing Fund Securities, funds and assets pledged to NSCC to secure a Member’s open account indebtedness or placed by a Member in the possession of NSCC (or its agents acting on its behalf) and any Eligible Letters of Credit issued on behalf of a Member in favor of NSCC. Instead of requiring participants to pledge Eligible Clearing Fund Securities to NSCC’s account at a Qualified Securities Depository designated by the participants, NSCC proposes to clarify and streamline Section 1 of proposed Rule 4 to provide that Eligible Clearing Fund Securities pledged to secure a Member’s open account indebtedness would be delivered to NSCC’s account at DTC. NSCC would delete the provision regarding allocation of the Clearing Fund by Systems and services, as this provision is no longer relevant under the proposed rule change. Provisions relating to Mutual Fund Services and Insurance and Retirement Processing Services in Section 1 (as well as other sections in Rule 4) would be consolidated in the proposed new Sections 13 and 14, entitled ‘‘Mutual Fund Deposits’’ and ‘‘Insurance Deposits,’’ respectively. To consolidate provisions regarding the maintenance, investment and permitted use of Clearing Fund, NSCC would move the last paragraph of Section 1 about segregation and maintenance of Clearing Fund (again, in terms of ‘‘Fund,’’ ‘‘System,’’ and ‘‘Allocation,’’ as discussed above) to Section 2. In addition, NSCC proposes to correct a typographical error in the reference to a footnote in Section 1 of Rule 4. Specifically, there is an incorrect reference to footnote 22 in the second paragraph of Section 1 in current Rule 4. NSCC is proposing to change this reference to reflect the correct footnote, which is footnote 2. Section 2 Section 2 of Rule 4 currently covers the permitted uses of the Clearing Fund (again by ‘‘Fund’’ and ‘‘Allocation,’’ as set forth in current Section 1), including the investment of Clearing Fund Cash and Cash Receipts, as well as participants’ rights to any interest earned or paid on pledged Eligible 37 See FICC/GSD Rule 1 (Definitions) and FICC/ MBSD Rule 1 (Definitions), supra note 31. E:\FR\FM\06AUN1.SGM 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices Clearing Fund Securities or cash deposits. NSCC is proposing to add a subheading of ‘‘Permitted Use, Investment, and Maintenance of Clearing Fund Assets’’ to Section 2 and restructure Section 2 so that it applies to Members only. NSCC is also proposing to restructure Section 2 so that the permitted use of Clearing Fund appears first, then the investment of Clearing Fund, followed by maintenance of Clearing Fund. Under the proposed rule change, the permitted use of Clearing Fund paragraph would continue to have the same provisions as they relate to how the Clearing Fund can be used by NSCC, except the provisions would be streamlined and clarified. Specifically, in order to be consistent with the proposed change in Section 4 (as described below) regarding NSCC requiring Members to pay their loss allocation amounts (leaving their Required Fund Deposits intact), NSCC is proposing to modify the permitted use of Clearing Fund to make it clear that the Clearing Fund can be used by NSCC to secure each Member’s performance of obligations to NSCC, including each Member’s obligations with respect to any loss allocations as set forth in Section 4 of Rule 4. NSCC is also proposing to delete the defined term of Cash Receipts and related provisions from Rule 4 because, unlike the Clearing Fund, Cash Receipts are money payments received from participants and payable to others; therefore, NSCC believes that continuing to include Cash Receipts in Rule 4 is no longer necessary and may cause confusion among Members. NSCC is proposing to add a paragraph that provides that each time NSCC uses any part of the Clearing Fund to provide liquidity to NSCC to meet its settlement obligations, including, without limitation, through the direct use of cash in the Clearing Fund or through the pledge or rehypothecation of pledged Eligible Clearing Fund Securities in order to secure liquidity for more than thirty (30) calendar days, NSCC, at the close of business on the 30th calendar day (or on the first business day thereafter) from the day of such use, would consider the amount used but not yet repaid as a loss to the Clearing Fund incurred as a result of a Defaulting Member Event and immediately allocate such loss in accordance with proposed Section 4 of Rule 4. NSCC believes that this proposed change would increase transparency and accessibility of the Rules for Members by specifying a point in time by which NSCC would need to replenish the Clearing Fund through VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 loss allocation if NSCC uses the Clearing Fund to provide or secure liquidity to NSCC to meet its settlement obligations. NSCC believes that a period of thirty (30) calendar days would be appropriate because it would provide sufficient time for NSCC to determine whether it would be able to obtain the necessary funds from liquidation of the portfolio of the Defaulting Member to repay the used Clearing Fund amount. In addition, this proposed change would also harmonize this section with the comparable section in the FICC/GSD Rules and FICC/MBSD Rules,38 so as to provide consistent treatment for firms that are members of both NSCC and FICC. Proposed Section 2 would continue to have the same provisions concerning the investment and maintenance of the Clearing Fund, except these provisions would also be streamlined and clarified. Specifically, NSCC is proposing language to make it clear that it may invest cash in the Clearing Fund in accordance with the Clearing Agency Investment Policy adopted by NSCC.39 NSCC would revise the relocated sentence from Section 1 which provides that NSCC shall not be required to segregate any Clearing Fund (again, in terms of ‘‘Fund,’’ ‘‘System,’’ and ‘‘Allocation,’’ as discussed above) in order to (i) conform to the proposed deletions in Section 1 and use the newly defined term of ‘‘Actual Deposit’’ as set forth in Section 1 and (ii) make clear that NSCC would not be required to segregate a Member’s Actual Deposit but that NSCC would maintain books and records concerning the assets that constitute each Member’s Actual Deposit. Under the proposed rule change, Members would continue to be entitled to any interest earned or paid on 38 See Section 5 of FICC/GSD Rule 4 and Section 5 of FICC/MBSD Rule 4, supra note 31. 39 See Securities Exchange Act Release No. 79528 (December 12, 2016), 81 FR 91232 (December 16, 2016) (SR–NSCC–2016–003). The Clearing Agency Investment Policy (the ‘‘Policy’’) governs the management, custody, and investment of cash deposited to the Clearing Fund, the proprietary liquid net assets (cash and cash equivalents) of NSCC and other funds held by NSCC. The Policy sets forth guiding principles for the investment of those funds, which include adherence to a conservative investment philosophy that places the highest priority on maximizing liquidity and avoiding risk, as well as mandating the segregation and separation of funds. The Policy also addresses the process for evaluating credit ratings of counterparties and identifies permitted investments within specified parameters. In general, assets are required to be held by regulated and creditworthy financial institution counterparties and invested in financial instruments that, with respect to the Clearing Fund, may include deposits with banks, including the Federal Reserve Bank of New York, collateralized reverse-repurchase agreements, direct obligations of the U.S. government and moneymarket mutual funds. PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 38383 Clearing Fund cash deposits and pledged Eligible Clearing Fund Securities; however, NSCC is proposing additional language to make it clear that interest on pledged Eligible Clearing Fund Securities that is received by NSCC would be credited to a Member’s cash deposits to the Clearing Fund, except in the event of a default by such Member on any obligations to NSCC, in which case NSCC may exercise its rights under proposed Section 3 of Rule 4. Section 3 Section 3 of Rule 4 currently provides that NSCC may apply a participant’s actual deposit to any obligation the participant has to NSCC that the participant has failed to satisfy and to any Cross-Guaranty Obligation. Participants are required to eliminate any resulting deficiencies in their Required Deposits within such time as NSCC requires. Section 3 also currently provides for the manner in which loss allocation would apply with respect to Off-the-Market Transactions. Under the proposed rule change, NSCC is proposing to add a subheading of ‘‘Application of Clearing Fund Deposits and Other Amounts to Members’ Obligations’’ and to delete provisions that do not apply to Members and/or that reference the Clearing Fund being allocated into Funds/Allocations by Systems and services. Under the proposed rule change, NSCC would retain the provisions in Section 3 regarding applying the Member’s Actual Deposit to satisfy an obligation to NSCC that a Member fails to satisfy and the requirement to replenish the Required Fund Deposit as necessary, but NSCC proposes to add clarifying language that, in addition to a Member’s Actual Deposit, NSCC will also apply any amounts available under a Clearing Agency Cross-Guaranty Agreement and any proceeds therefrom to satisfy the obligation. NSCC also proposes to add language making it clear that NSCC may take any and all actions with respect to the assets and amounts referenced in the prior sentence, including assignment, transfer, and sale of any Eligible Clearing Fund Securities, that NSCC determines is appropriate. Under the proposed rule change, NSCC would move the provision regarding allocation of losses from Offthe-Market Transactions to proposed Section 4 of Rule 4, which addresses allocation of losses to Members. NSCC would streamline and clarify the remaining provisions for transparency and accessibility. E:\FR\FM\06AUN1.SGM 06AUN1 38384 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES Section 4 and Section 5 Current Section 4 of Rule 4 contains NSCC’s current loss allocation waterfall, which would be initiated if NSCC incurs a loss or liability in a System that is not satisfied pursuant to current Section 3. Section 4 currently provides for the following loss allocation waterfall: (i) Application of NSCC’s existing retained earnings or such lesser part 40 of the existing retained earnings unless the Board of Directors elects to apply the Fund/Allocation for a particular System or service. (ii) If a loss or liability remains after the application of the retained earnings, NSCC would apply the Clearing Fund (this application is subject to the current structure where the Rules provide that the Clearing Fund is allocated to different Systems/services). a. NSCC is required to provide participants and the Commission with 5 business days’ prior notice before applying the Clearing Fund. b. Participants (other than those responsible for causing the loss or liability) would be charged pro rata based upon their allocation to the applicable Fund, less any amounts that participants were required to deposit pursuant to Rule 15. Section 5 of Rule 4 currently states that if a pro rata charge is made pursuant to Rule 4 against a participant’s actual Clearing Fund deposit, and as a consequence thereof the participant’s remaining deposit is less than its Required Deposit, the participant would, upon demand by NSCC, be required to replenish its deposit to eliminate the deficiency within such time as NSCC shall require. Current Section 5 further provides that if the participant does not take this required action, NSCC may take disciplinary action against the participant, and any disciplinary action taken against the participant or the voluntary or involuntary termination of the participant’s membership will not affect the obligations of the participant to NSCC or any remedy to which NSCC may be entitled under applicable law. Under the proposed rule change, NSCC is proposing to add a subheading of ‘‘Loss Allocation Waterfall, Off-theMarket Transactions’’ to Section 4 and delete provisions that do not apply to Members and/or that reference the Clearing Fund being allocated into 40 Addendum E provides that NSCC ‘‘will apply no less than twenty-five percent (25%) of its retained earnings, existing at the time of a Member impairment which gives rise to a loss or liability not satisfied by the impaired Member’s Clearing Fund deposit, to such loss or liability.’’ Supra note 5. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 Funds/Allocations by System or service. In addition, NSCC is proposing to restructure its loss allocation waterfall as described below. Under the proposal, Section 4 would make clear that the loss allocation waterfall applies to any loss and liability incurred by NSCC arising out of or relating to a Defaulting Member Event or a Declared Non-Default Loss Event. As proposed, Section 4 would provide that, for the purposes of Rule 4, the term ‘‘Defaulting Member’’ would mean a Member for which NSCC has ceased to act pursuant to Rule 46,41 the term ‘‘Defaulting Member Event’’ would mean the determination by NSCC to cease to act for a Member pursuant to Rule 46, and the term ‘‘Declared NonDefault Loss Event’’ would mean the determination by the Board of Directors that a loss or liability incident to the clearance and settlement business of NSCC may be a significant and substantial loss or liability that may materially impair the ability of NSCC to provide clearance and settlement services in an orderly manner and will potentially generate losses to be mutualized among Members in order to ensure that NSCC may continue to offer clearance and settlement services in an orderly manner. Proposed Section 4 would establish the concept of an ‘‘Event Period’’ to provide for a clear and transparent way of handling multiple loss events occurring in a period of ten (10) business days, which would be grouped into an Event Period.42 As stated above, both Defaulting Member Events or Declared Non-Default Loss Events could occur within the same Event Period. Under the proposal, an Event Period with respect to a Defaulting Member Event would begin on the day NSCC notifies participants that it has ceased to act for the Defaulting Member (or the next business day, if such day is not a business day). In the case of a Declared Non-Default Loss Event, an Event Period would begin on the day that NSCC notifies Members of the Declared NonDefault Loss Event (or the next business day, if such day is not a business day). If a subsequent Defaulting Member Event or Declared Non-Default Loss Event occurs during an Event Period, any losses or liabilities arising out of or relating to any such subsequent event would be resolved as losses or liabilities that are part of the same Event Period, 41 NSCC may cease to act for a Member pursuant to any of the circumstances set forth under Rule 46 (Restrictions on Access to Services), including, but not limited to, in the event the Member is in default of any delivery of funds or securities to NSCC. Supra note 5. 42 Supra note 15. PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 without extending the duration of such Event Period. As proposed, each Member would be obligated to NSCC for the entire amount of any loss or liability incurred by NSCC arising out of or relating to any Defaulting Member Event with respect to such Member. Under the proposal, to the extent that such loss or liability is not satisfied pursuant to proposed Section 3 of Rule 4, NSCC would apply a Corporate Contribution thereto and charge the remaining amount of such loss or liability ratably to other Members, as provided in proposed Section 4. Under proposed Section 4, the loss allocation waterfall would begin with a corporate contribution from NSCC (‘‘Corporate Contribution’’), as is the case under the current Rules, but in a different form than under the current Section 4 of Rule 4. Today, pursuant to Addendum E, in the event of a Member impairment, NSCC is required to apply at least 25% of its retained earnings existing at the time of a Member impairment; however, no corporate contribution from NSCC is currently required for losses resulting other than those from Member impairments. Under the proposal, NSCC would amend Section 5 to add a subheading of ‘‘Corporate Contribution’’ and define NSCC’s Corporate Contribution with respect to any loss allocation pursuant to proposed Section 4 of Rule 4, whether arising out of or relating to a Defaulting Member Event or a Declared Non-Default Loss Event, as an amount that is equal to fifty (50) percent of the amount calculated by NSCC in respect of its General Business Risk Capital Requirement as of the end of the calendar quarter immediately preceding the Event Period.43 The proposed rule change would specify that NSCC’s General Business Risk Capital Requirement, as defined in NSCC’s Clearing Agency Policy on Capital Requirements,44 is, at a minimum, equal to the regulatory capital that NSCC is required to maintain in compliance with Rule 17Ad–22(e)(15) under the Act.45 As proposed, if NSCC applies the Corporate Contribution to a loss or liability arising out of or relating to one or more Defaulting Member Events or Declared Non-Default Loss Events relating to an Event Period, then for any subsequent Event Periods that occur during the two hundred fifty (250) business days thereafter,46 the Corporate Contribution would be reduced to the 43 Supra note 8. note 9. 45 Supra note 10. 46 Supra note 13. 44 Supra E:\FR\FM\06AUN1.SGM 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices remaining unused portion of the Corporate Contribution amount that was applied for the first Event Period. Proposed Section 5 would require NSCC to notify Members of any such reduction to the Corporate Contribution. Currently, the Rules do not require NSCC to contribute its retained earnings to losses and liabilities other than from Member impairments. Under the proposal, NSCC would expand the application of its corporate contribution beyond losses and liabilities from Member impairments. The proposed Corporate Contribution would apply to losses or liabilities relating to or arising out of Defaulting Member Events and Declared Non-Default Loss Events, and would be a mandatory loss contribution by NSCC prior to any allocation of the loss among Members. Addendum E currently provides NSCC the option to contribute amounts higher than the specified percentage of retained earnings, as determined by the Board of Directors, to any loss or liability incurred by NSCC as the result of a Member’s impairment. This option would be retained and expanded under the proposal to also cover non-default losses. Proposed Section 5 would provide that nothing in the Rules would prevent NSCC from voluntarily applying amounts greater than the Corporate Contribution against any NSCC loss or liability, whether arising out of or relating to a Defaulting Member Event or a Declared Non-Default Loss Event, if the Board of Directors, in its sole discretion, believes such to be appropriate under the factual situation existing at the time. Proposed Section 4 of Rule 4 would provide that NSCC shall apply the Corporate Contribution to losses and liabilities that arise out of or relate to one or more Defaulting Member Events and/or Declared Non-Default Loss Events that occur within an Event Period. The proposed rule change also provides that if losses and liabilities with respect to such Event Period remain unsatisfied following application of the Corporate Contribution, NSCC would allocate such losses and liabilities to Members, as described below. Proposed Section 4 of Rule 4 would also retain the requirement of loss allocation among Members if a loss or liability remains after the application of the Corporate Contribution, as described above. In contrast to the current Section 4 where NSCC would apply Members’ Required Deposits to the mutualized loss allocation amounts, under the proposal, NSCC would require Members to pay their loss allocation amounts (leaving their Required Fund Deposits VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 intact).47 Loss allocation obligations would continue to be calculated based upon a Member’s pro rata share of losses and liabilities (although the pro rata share would be calculated differently than it is today), and Members would still retain the ability to voluntarily withdraw from membership and cap their loss allocation obligation (although the loss allocation obligation would also be calculated differently than it is today). The proposed rule change to Section 4 of Rule 4 would clarify that each Member that is a Member on the first day of an Event Period would be obligated to pay its pro rata share of losses and liabilities arising out of or relating to each Defaulting Member Event (other than a Defaulting Member Event with respect to which it is the Defaulting Member) and each Declared Non-Default Loss Event occurring during the Event Period. The proposal would make it clear that any Member for which NSCC ceases to act on a nonbusiness day, triggering an Event Period that commences on the next business day, shall be deemed to be a Member on the first day of that Event Period. Under the proposed rule change, a loss allocation ‘‘round’’ would mean a series of loss allocations relating to an Event Period, the aggregate amount of which is limited by the round cap. When the aggregate amount of losses allocated in a round equals the round cap, any additional losses relating to the applicable Event Period would be allocated in one or more subsequent rounds, in each case subject to a round cap for that round. NSCC may continue the loss allocation process in successive rounds until all losses from the Event Period are allocated among Members that have not submitted a Loss Allocation Withdrawal Notice in 47 NSCC believes that shifting from the two-step methodology of applying the Clearing Fund and then requiring Members to immediately replenish it, to requiring direct payment would increase efficiency while preserving the right to charge a Member’s Clearing Fund deposits in the event the Member does not timely pay. Such a failure to pay would trigger recourse to the Clearing Fund deposits of the Member under proposed Section 3 of Rule 4. In addition, this change would provide greater stability for NSCC in times of stress by allowing NSCC to retain the Clearing Fund, its critical prefunded resource, while charging loss allocations. NSCC believes doing so would allow NSCC to cover its current credit exposures to Members at all times. By retaining the Clearing Fund as proposed, NSCC could use the Clearing Fund to secure the performance obligations of Members to NSCC, including their payment obligation for any loss allocation, while maintaining access to prefunded resources. By being able to manage its current credit exposures throughout the loss allocation process, NSCC would be able to continue to provide its critical operations and services during what would be expected to be a stressful period. PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 38385 accordance with proposed Section 6 of Rule 4. As proposed, each loss allocation would be communicated to Members by the issuance of a Loss Allocation Notice. Under the proposal, each Member’s pro rata share of losses and liabilities to be allocated in any round would be equal to (i) the Member’s Average RFD divided by (ii) the sum of Average RFD amounts of all Members subject to loss allocation in such round. Each Loss Allocation Notice would specify the relevant Event Period and the round to which it relates. The first Loss Allocation Notice in any first, second, or subsequent round would expressly state that such Loss Allocation Notice reflects the beginning of the first, second, or subsequent round, as the case may be, and that each Member in that round has five (5) business days from the issuance of such first Loss Allocation Notice for the round (such period, a ‘‘Loss Allocation Withdrawal Notification Period’’) to notify NSCC of its election to withdraw from membership with NSCC pursuant to proposed Section 6 of Rule 4, and thereby benefit from its Loss Allocation Cap.48 As proposed, the ‘‘Loss Allocation Cap’’ of a Member would be equal to the greater of (x) its Required Fund Deposit on the first day of the applicable Event Period and (y) its Average RFD. NSCC is proposing to clarify that after a first round of loss allocation with respect to an Event Period, only Members that have not submitted a Loss Allocation Withdrawal Notice in accordance with proposed Section 6 of Rule 4 would be subject to further loss allocation with respect to that Event Period. As proposed, Members would have two (2) business days after NSCC issues a first round Loss Allocation Notice to pay the amount specified in any such notice.49 On a subsequent round (i.e., if the first round did not cover the entire loss of the Event Period because NSCC was only able to allocate up to the round cap), Members would also have two (2) business days after notice by NSCC to pay their loss allocation amounts (again subject to their Loss Allocation Caps), unless Members have notified (or will timely notify) NSCC of their election to withdraw from membership with respect to a prior loss allocation round pursuant to proposed Section 6 of Rule 4. As proposed, Section 4 would also provide that, to the extent that a Member’s Loss Allocation Cap exceeds 48 Supra 49 Supra E:\FR\FM\06AUN1.SGM note 18. note 22. 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES 38386 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices the Member’s Required Fund Deposit on the first day of the applicable Event Period, NSCC may in its discretion retain any excess amounts on deposit from the Member, up to the Member’s Loss Allocation Cap. Under the proposal, if a Member fails to make its required payment in respect of a Loss Allocation Notice by the time such payment is due, NSCC would have the right to proceed against such Member as a Member that has failed to satisfy an obligation in accordance with proposed Section 3 of Rule 4 described above. Members who wish to withdraw would be required to comply with the requirements in proposed Section 6 of Rule 4, described further below. Specifically, proposed Section 4 of Rule 4 would provide that if, after notifying NSCC of its election to withdraw from membership pursuant to proposed Section 6 of Rule 4, the Member fails to comply with the provisions of proposed Section 6 of Rule 4, its notice of withdrawal would be deemed void and any further losses resulting from the applicable Event Period may be allocated against it as if it had not given such notice. Under the proposal, NSCC would delete the provision in current Section 4 of Rule 4 that requires NSCC to provide Members and the Commission with 5 business days’ prior notice before applying the Clearing Fund to a loss or liability because such requirement would no longer be relevant under the proposed rule change. Under the proposed rule change, NSCC would notify Members subject to loss allocation of the amounts being allocated to them in one or more Loss Allocation Notices. As proposed, instead of applying the Clearing Fund, NSCC would require Members to pay their loss allocation amounts (leaving their Clearing Fund deposits intact). In order to conform to these proposed rule changes, NSCC is proposing to eliminate the required notification to Members regarding the application of Clearing Fund in current Section 4 of Rule 4. NSCC is also proposing to delete the required notification to the Commission regarding the application of Clearing Fund in the same section. While as a practical matter, NSCC would notify the Commission of a decision to loss allocate, NSCC does not believe such notification needs to be specified in the Rules. Under the proposed rule change, NSCC would move the provision related to Off-the-Market Transactions from current Section 3 of Rule 4 to proposed Section 4 of Rule 4 and clarify that (i) a loss or liability of NSCC in connection with the close-out or liquidation of an VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 Off-the-Market Transaction would be allocated to the Member that was the counterparty to such transaction and (ii) no allocation would be made if the Defaulting Member satisfied all applicable intraday mark-to-market margin charges assessed by NSCC with respect to the Off-the-Market Transaction prior to its default.50 Section 6 Proposed Section 6 of Rule 4 would include the provisions regarding withdrawal from membership currently covered by Section 8 of Rule 4. NSCC believes that relocating the provisions on withdrawal from membership as it pertains to loss allocation, so that it comes right after the section on the loss allocation waterfall, would provide for the better organization of Rule 4. As proposed, the subheading for Section 6 would read ‘‘Withdrawal Following Loss Allocation.’’ Currently, Section 8 of Rule 4 provides that participants may notify NSCC within ten (10) business days after receipt of notice of a pro rata charge that they have elected to terminate their membership and thereby avail themselves of a cap on loss allocation, which is currently their Required Deposit as fixed immediately prior to the time of the pro rata charge. As stated above, under the proposed rule change, a Member who wishes to withdraw from membership in respect of a loss allocation round must provide notice of its election to withdraw (‘‘Loss Allocation Withdrawal Notice’’) within five (5) business days from the issuance of the first Loss Allocation Notice in any round.51 In order to avail itself of its Loss Allocation Cap, the Member would need to follow the requirements in proposed Section 6 of Rule 4, which would provide that the Member must: (i) Specify in its Loss Allocation Withdrawal Notice an effective date for withdrawal from membership, which date shall not be later than ten (10) business days following the last day of the Loss Allocation Withdrawal Notification Period (i.e., no later than ten (10) business days after the 5th business day following the first Loss Allocation Notice in that round of loss allocation),52 (ii) cease all activity that would result in transactions being submitted to NSCC for clearance and settlement for which such Member 50 See Securities Exchange Act Release No. 79598 (December 19, 2016), 81 FR 94462 (December 23, 2016) (SR–NSCC–2016–005), at 94465, and Securities Exchange Act Release No. 79592 (December 19, 2016), 81 FR 94448 (December 23, 2016) (SR–NSCC–2016–803), at 94452. 51 Supra note 18. 52 Supra note 25. PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 would be obligated to perform, where the scheduled final settlement date would be later than the effective date of the Member’s withdrawal, and (iii) ensure that all clearance and settlement activity for which such Member is obligated to NSCC is fully and finally settled by the effective date of the Member’s withdrawal, including, without limitation, by resolving by such date all fails and buy-in obligations. Proposed Section 6 of Rule 4 would provide that a Member that withdraws in compliance with the requirements of proposed Section 6 of Rule 4 would nevertheless remain obligated for its pro rata share of losses and liabilities with respect to any Event Period for which it is otherwise obligated under proposed Rule 4; however, the Member’s aggregate obligation would be limited to the amount of its Loss Allocation Cap (as fixed in the round for which it withdrew). NSCC is proposing to include a sentence in proposed Section 6 of Rule 4 to make it clear that if the Member fails to comply with the requirements set forth in that section, its Loss Allocation Withdrawal Notice will be deemed void, and the Member will remain subject to further loss allocations pursuant to proposed Section 4 of Rule 4 as if it had not given such notice. Currently, Section 8 also contains provisions regarding additional pro rata charges that may be made by NSCC for the same loss or liability under the existing loss allocation process and the applicable caps that participants wishing to voluntarily terminate their membership after such additional pro rata charges are noticed may avail themselves of. These provisions would be replaced by the loss allocation process contained in proposed Section 4 described above. Section 7 As proposed, Section 7 would cover the provisions on the return of a Member’s Clearing Fund deposit that are currently covered by Section 6 of Rule 4. Proposed Section 7’s subheading would be ‘‘Return of Members’ Clearing Fund Deposits’’ and would apply only to Members. Currently, with respect to the return of Clearing Fund deposits, Section 6 of Rule 4 states that NSCC will return a participant’s Clearing Fund deposit 90 days after 3 conditions are met: (i) The participant ceases to be a participant, (ii) all transactions open at the time the participant ceases to be a participant which could result in a charge to the Clearing Fund have been closed, and (iii) all obligations of the participant to NSCC have been satisfied or have been E:\FR\FM\06AUN1.SGM 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices deducted from the participant’s Clearing Fund deposit by NSCC, provided that the participant has provided NSCC with satisfactory indemnities or guarantees or another participant has been substituted on all transactions and obligations of the participant. Current Section 6 provides further that in the absence of an acceptable guarantee, indemnity or substitution, NSCC will retain the entire Clearing Fund deposit of a participant if such deposit is less than $100,000 for two (2) years (or four (4) years for Members who have Sponsored Accounts at a Qualified Securities Depository) after conditions described in (i), (ii) and (iii) of the paragraph above have occurred. If the participant’s Clearing Fund deposit is equal to or greater than $100,000, NSCC will retain the greater of twenty-five (25) percent of a participant’s average Clearing Fund requirement over the twelve (12) months immediately prior to the date the participant ceased to be a participant, or $100,000 for two (2) years (or four (4) years for Members who have Sponsored Accounts at a Qualified Securities Depository) after conditions described in (i), (ii) and (iii) of the paragraph above have occurred. Current Section 6 states that if a participant made a deposit with respect to the Mutual Fund Services or Insurance and Retirement Processing Services, the participant will be entitled to the return of this deposit ninety (90) days after all associated transactions in these services have been satisfied. Finally, Section 6 currently provides that any obligation of a participant to NSCC unsatisfied at the time the participant ceases to be a participant will not be affected by such cessation of membership. Proposed Section 7 would reduce the period in which NSCC may retain a Member’s Clearing Fund deposit. Specifically, NSCC proposes that if a Member gives notice to NSCC of its election to withdraw from membership, NSCC will return the Member’s Actual Deposit in the form of (i) cash or securities within thirty (30) calendar days and (ii) Eligible Letters of Credit within ninety (90) calendar days, after all of the Member’s transactions have settled and all matured and contingent obligations to NSCC for which the Member was responsible while a Member have been satisfied, except NSCC may retain for up to two (2) years the Actual Deposits from Members who have Sponsored Accounts at DTC. NSCC believes that shortening the time periods for the return of a Member’s Clearing Fund deposit would be helpful to firms who have exited NSCC so that they could have use of the deposits VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 sooner than under the current Rules, while at the same time protecting NSCC because such return would only occur if all obligations of the terminating Member to NSCC have been satisfied. Proposed Section 7 would also harmonize the retention period for a Member’s deposits to the Clearing Fund with the FICC/GSD Rules,53 thus providing consistent treatment for firms that are members of both NSCC and FICC. Similarly, the Clearing Fund deposit retention for Members who have Sponsored Accounts at DTC would be reduced in order to stay consistent with the proposed retention period in the rules of DTC.54 In addition, NSCC proposes to make it clear that a Member’s obligations to NSCC would include both matured as well as contingent obligations. Section 8 Proposed Section 8 of Rule 4 would cover the subject matter currently covered in Section 7 of Rule 4. Proposed Section 8’s subheading would be ‘‘Changes in Members’ Required Fund Deposits’’ and would apply only to Members. Currently, Section 7 of Rule 4 requires participants to satisfy any increase in their Required Deposit within such time as NSCC requires. At the time the increase becomes effective, the participant’s obligations to NSCC will be determined in accordance with the increased Required Deposit whether or not the Member has so increased its deposit. NSCC is not proposing any substantive changes to this provision, which will be renumbered as Section 8 of Rule 4 under the proposed rule change, except for streamlining the provision and limiting its application to Members as stated above. 53 Section 10 of FICC/GSD Rule 4, in relevant part, states that ‘‘If a Netting Member gives notice to the Corporation pursuant to Rule 3 of its election to terminate its membership in the Netting System, the Member’s deposits to the Clearing Fund in the form of cash or securities shall be returned to it within 30 calendar days thereafter . . . provided that all amounts owing to the Corporation by the Member have been paid to the Corporation prior to such return and the Member has no remaining open Net Settlement Position, Fail Net Settlement Position, or Forward Net Settlement Position.’’ Supra note 31. 54 On December 18, 2017, DTC submitted a proposed rule change and an advance notice to enhance its rules regarding allocation of losses. See Securities Exchange Act Release Nos. 82426 (January 2, 2018), 83 FR 913 (January 8, 2018) (SR– DTC–2017–022) and 82582 (January 24, 2018), 83 FR 4297 (January 30, 2018) (SR–DTC–2017–804). On June 28, 2018, DTC submitted amendments to the proposed rule change and advance notice. Copies of the amendments to the proposed rule change and the advance notice are available at https://www.dtcc.com/legal/sec-rule-filings.aspx. PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 38387 Section 9 Currently, Section 9 of Rule 4 addresses situations where a participant has excess deposits in the Clearing Fund (i.e., amounts above its Required Deposit). The current provision provides that NSCC will, on any day that NSCC has determined and provided notification that an excess deposit exists with respect to a participant, return an excess amount requested by a participant that follows the formats and timeframe established by NSCC for such request. The current provision makes clear that NSCC will not return the requested excess amount (i) until any amount required to be charged against the participant’s Required Deposit is paid by the participant to NSCC and/or (ii) if NSCC determines that the participant’s current month’s use of one or more services is materially different than the previous month’s use upon which such excess is based. Section 9 currently makes clear that, notwithstanding any of the foregoing, NSCC may, in its discretion, withhold any or all of a participant’s excess deposit if the participant has been placed on the Watch List.55 Current Section 9 also makes clear that nothing in this section limits NSCC’s rights under Rule 15.56 Proposed Section 9 would add a subheading ‘‘Excess Clearing Fund Deposits’’ and would apply only to Members. NSCC is not proposing any substantive changes to this provision, except for streamlining the provisions in this section and eliminating the condition described in clause (i) of the paragraph above that limits participants’ ability to request the return of excess amounts on deposit in the Clearing Fund and replacing clause (ii) of the paragraph above with a clause that provides NSCC may, in its discretion, withhold any or all of a participant’s excess deposit if NSCC determines that the Member’s anticipated activities in NSCC in the near future may reasonably be expected to be materially different than its activities of the recent past. NSCC believes that the proposed additional clause would protect NSCC and its participants because the clause would allow NSCC to retain excess 55 Pursuant to Section 4 of Rule 2B, a Member could be placed on the Watch List either based on its credit rating of 5, 6 or 7, which can either be generated by the Credit Risk Rating Matrix or from a manual downgrade, or when NSCC deems such placement as necessary to protect NSCC and its Members. Supra note 5. 56 Rule 15 permits NSCC to require a Member, Limited Member or any applicant to become either to furnish NSCC adequate assurances of the entity’s financial responsibility and operational capability as NSCC may deem necessary. Supra note 5. E:\FR\FM\06AUN1.SGM 06AUN1 38388 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices deposits to cover an expected near-term increase in a Member’s Required Fund Deposit amount due to the anticipated change in the Member’s activities. The proposed additional clause would also align NSCC’s Rules with that of FICC/ GSD and FICC/MBSD,57 thus providing consistent treatment for firms that are members of both NSCC and FICC. Section 10 Current Section 10 of Rule 4 provides for crediting persons against whom losses are charged pursuant to Rule 4 if there is a subsequent recovery of such losses by NSCC. NSCC is not proposing any changes to this section other than (i) making it clear that no loss allocation under proposed Rule 4 would constitute a waiver of any claim NSCC may have against a Member for any losses or liabilities to which the Member is subject under the Rules, including, without limitation, any loss or liability to which it may be subject under proposed Rule 4, and (ii) adding a subheading ‘‘No Waiver; Subsequent Recovery Against Loss Amounts’’ and replacing ‘‘persons’’ with ‘‘Persons,’’ which is currently defined in Rule 1 (Definitions and Descriptions) to mean ‘‘a partnership, corporation, limited liability corporation or other organization, entity or an individual.’’ NSCC is proposing the change in (i) above to preserve its legal rights and to make it clear to Members that loss allocation under proposed Rule 4 would not be deemed as NSCC waiving any claims it may have against a Member for any losses or liabilities to which the Member is subject under the Rules. With respect to the proposed change in (ii) above, given that NSCC is a corporation, NSCC believes that the term ‘‘Person’’ already includes NSCC; however, for increased clarity, NSCC is proposing to add ‘‘including the Corporation’’ to make it clear to Members that if there is a subsequent recovery of losses charged pursuant to Rule 4, the net amount of the recovery would be credited to Persons, including NSCC, against whom the loss was charged in proportion to the amounts charged against them. sradovich on DSK3GMQ082PROD with NOTICES Section 11 Current Section 11 of Rule 4 provides that a participant may withdraw Eligible Clearing Fund Securities from pledge, provided that the participant has deposited cash with, or pledged additional Eligible Clearing Fund 57 See Section 9 of FICC/GSD Rule 4 (Clearing Fund and Loss Allocation) and Section 9 of FICC/ MBSD Rule 4 (Clearing Fund and Loss Allocation). Supra note 31. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 Securities to, NSCC that, in the aggregate, secure the open account indebtedness of the participant and/or satisfy the participant’s Required Deposit. Proposed Section 11 would add a subheading ‘‘Substitution or Withdrawal of Pledged Securities’’ and would apply only to Members. NSCC is not proposing any substantive changes to this provision, except for changes to improve the transparency and accessibility of this section. Section 12 Current Section 12 of Rule 4 makes it clear that NSCC has certain rights with respect to the Clearing Fund. Proposed Section 12 would add a subheading ‘‘Authority of Corporation’’ and would apply only to Members. NSCC is not proposing any substantive changes to this provision, except to clarify that a reference to 30 days in current Section 12 would mean 30 calendar days. Section 13 NSCC is proposing to add a new Section 13 to Rule 4 that would be entitled ‘‘Mutual Fund Deposits.’’ Under the proposal, NSCC would consolidate provisions from various sections in the current Rule 4 concerning Mutual Fund/ Insurance Services Members and Fund Members and group them into proposed Section 13. Aside from the consolidation, NSCC is not proposing any substantive changes to these provisions, except for changes to (i) reduce NSCC’s retention period of Mutual Fund Deposits when a Mutual Fund Participant (as defined below and in the proposed rule change) elects to withdraw from membership, in order to harmonize it with the proposed change in Section 7, as described above, and (ii) improve the transparency and accessibility of the provisions. Proposed Section 13 would provide that each Member that uses the Mutual Fund Services to submit mutual fund purchases, redemptions, or exchanges to any Fund Member or another Member and each Mutual Fund/Insurance Services Member would, and each Fund Member (collectively with such Members and Mutual Fund/Insurance Services Members, ‘‘Mutual Fund Participants’’) may, be required to make a cash deposit to the Clearing Fund in the amounts determined in accordance with Procedure XV and other applicable Rules (its ‘‘Mutual Fund Deposit’’ and, unless specified otherwise, for the purposes of the Rules, Required Fund Deposits shall include Mutual Fund Deposits). In the case of a Member, its Mutual Fund Deposit would be a separate and additional component of such Member’s deposit to the Clearing PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 Fund but not part of the Member’s Required Fund Deposit for purposes of calculating pro rata loss allocations pursuant to proposed Section 4 of Rule 4. As in the current Rules, proposed Section 13 would also provide that if any Mutual Fund Participant fails to satisfy any obligation to NSCC relating to Mutual Fund Services, notwithstanding NSCC’s right to reverse in whole or in part any credit previously given to the contra side to any outstanding Mutual Fund Services transaction of the Mutual Fund/ Insurance Services Member, NSCC would first apply such Mutual Fund Participant’s Mutual Fund Deposit. If after such application any loss or liability remains and if such Mutual Fund Participant is a Member that is not otherwise obligated to NSCC, NSCC would apply such Member’s Actual Deposit in accordance with proposed Section 3 of Rule 4. NSCC would next allocate any further remaining loss or liability to the other Mutual Fund Participants in successive rounds of loss allocations in each case up to the aggregate of Mutual Fund Deposits from non-defaulting Mutual Fund Participants, and after the first such round, Mutual Fund Participants that have not submitted a Loss Allocation Withdrawal Notice in accordance with proposed Section 6 of Rule 4, following the procedures and timeframes set forth in proposed Sections 4 and 6 of Rule 4 as if such Mutual Fund Participants are Members. If any loss or liability remains thereafter and there are no continuing Mutual Fund Participants, NSCC would proceed with loss allocations to Members for a Defaulting Member Event in accordance with proposed Section 4 of Rule 4. As proposed, Section 13 would reduce NSCC’s retention period of Mutual Fund Deposits from ninety (90) days under the current Section 6 of Rule 4 to thirty (30) calendar days. Specifically, NSCC is proposing that a Mutual Fund Participant that elects to withdraw from membership would be entitled to the return of its Mutual Fund Deposit no later than thirty (30) calendar days after all of its transactions have settled and it has satisfied all of its matured and contingent obligations to NSCC for which such Mutual Fund Participant was responsible while a Mutual Fund Participant. NSCC is proposing this change in order to harmonize the retention period of Mutual Fund Deposit with the proposed Clearing Fund retention period in proposed Section 7 of Rule 4, as described above. E:\FR\FM\06AUN1.SGM 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES As proposed, Section 13 would make it clear that NSCC’s rights, authority and obligations with respect to deposits to the Clearing Fund as set forth in Rule 4 would apply to Mutual Fund Deposits. Section 14 NSCC is proposing to add a new Section 14 to Rule 4 that would be entitled ‘‘Insurance Deposits.’’ Under the proposal, NSCC would consolidate provisions from various sections in current Rule 4 concerning Insurance Carrier/Retirement Services Members and group them into proposed Section 14. Aside from the consolidation, NSCC is not proposing any substantive changes to these provisions, except for changes to (i) reduce NSCC’s retention period of Insurance Deposits when an Insurance Participant (as defined below and in the proposed rule change) elects to withdraw from membership, in order to harmonize it with proposed Section 7, as described above, and (ii) improve the transparency and accessibility of the provisions. As in the current Rules, proposed Section 14 would provide that each Mutual Fund/Insurance Services Member that uses the Insurance and Retirement Processing Services and each Insurance Carrier/Retirement Services Member (collectively, ‘‘Insurance Participants’’) may be required to make a cash deposit to the Clearing Fund in the amounts determined in accordance with Procedure XV and other applicable Rules (its ‘‘Insurance Deposit’’ and, unless specified otherwise, for the purposes of the Rules, Required Fund Deposits shall include Insurance Deposits). Proposed Section 14 would also provide that if any Insurance Participant fails to satisfy any obligation to NSCC relating to the Insurance and Retirement Processing Services, NSCC would first apply such Insurance Participant’s Insurance Deposit. If after such application any loss or liability remains, NSCC would allocate the remaining loss or liability to the other Insurance Participants in successive rounds of loss allocations in each case up to the aggregate of Insurance Deposits from non-defaulting Insurance Participants, and after the first such round, Insurance Participants that have not submitted a Loss Allocation Withdrawal Notice in accordance with proposed Section 6 of Rule 4, following the procedures and timeframes set forth in proposed Sections 4 and 6 of Rule 4 as if such Insurance Participants are Members. If any loss or liability remains thereafter and there are no continuing Insurance Participants, NSCC would proceed with loss allocations to VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 Members for a Defaulting Member Event in accordance with proposed Section 4 of Rule 4. As proposed, Section 14 would reduce NSCC’s retention period of Insurance Deposits from ninety (90) days under the current Section 6 of Rule 4 to thirty (30) calendar days. Specifically, NSCC is proposing that an Insurance Participant that elects to withdraw from membership would be entitled to the return of its Insurance Deposit no later than thirty (30) calendar days after all of its transactions have settled and it has satisfied all of its matured and contingent obligations to NSCC for which such Insurance Participant was responsible while an Insurance Participant. NSCC is proposing this change in order to harmonize the retention period of Insurance Deposit with the proposed Clearing Fund retention period in proposed Section 7 of Rule 4, as described above. As proposed, Section 14 would make it clear that NSCC’s rights, authority and obligations with respect to deposits to the Clearing Fund as set forth in Rule 4 would apply to Insurance Deposits. B. Proposed Changes to Addendum E (Statement of Policy—Application of Retained Earnings—Member Impairments) and Addendum K (Interpretation of the Board of Directors—Application of Clearing Fund) Addendum E is a statement of policy that currently provides that NSCC will apply no less than twenty-five (25) percent of its retained earnings to cover losses or liabilities from a Member’s impairment that is not otherwise satisfied by the impaired Member’s Clearing Fund deposit. NSCC is proposing to delete Addendum E in its entirety because it would no longer be relevant given the proposed rule change relating to the Corporate Contribution discussed above. NSCC is proposing to modify Addendum K to delete all provisions associated with loss allocation and application of the Clearing Fund in connection with a loss or liability incurred by NSCC, including modifying the title of Addendum K. These provisions would no longer be necessary under the proposed rule change because the loss allocation process in its entirety would be governed by Rule 4. In addition, the current language in Addendum K regarding allocation by System would no longer be applicable under the proposed rule change as described above. NSCC would retain the provisions in Addendum K that pertain PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 38389 to NSCC’s guaranty and rename Addendum K ‘‘The Corporation’s Guaranty.’’ NSCC is also proposing to replace ‘‘Rules’’ with ‘‘Rules and Procedures’’ to better reflect the name of NSCC’s rulebook. (iii) Other Proposed Rule Changes NSCC is proposing changes to Rule 1 (Definitions and Descriptions), Rule 2B (Ongoing Membership Requirements and Monitoring), Rule 4(A) (Supplemental Liquidity Deposits), Rule 13 (Exception Processing), Rule 15 (Assurances of Financial Responsibility and Operational Capability), Rule 42 (Wind-Down of a Member, Fund Member or Insurance Carrier/Retirement Services Member), Procedure III (Trade Recording Service (Interface with Qualified Clearing Agencies)), Procedure XV (Clearing Fund Formula and Other Matters), and Addendum O (Admission of Non-US Entities as Direct NSCC Members). NSCC is proposing changes to these Rules in order to conform them with the proposed changes to Rule 4 as well as to make certain technical changes to these Rules. Specifically, NSCC is proposing to add the following defined terms to Rule 1, in alphabetical order: Actual Deposit, Average RFD, Clearing Fund Cash, Corporate Contribution, Declared NonDefault Loss Event, Defaulting Member, Defaulting Member Event, Eligible Letter of Credit, Event Period, Insurance Deposit, Insurance Participant, Issuer, Lender, Loss Allocation Cap, Loss Allocation Notice, Loss Allocation Withdrawal Notice, Loss Allocation Withdrawal Notification Period, Mutual Fund Deposit, Mutual Fund Participant, Required Fund Deposit, Termination Date, and Voluntary Termination Notice. NSCC is proposing to delete the defined term ‘‘The Corporation’’ in Rule 1 and replace it with ‘‘Corporation’’ in Rule 1. NSCC is proposing to replace ‘‘Required Deposits’’ with ‘‘Required Fund Deposits’’ in Rule 2B, Rule 4(A), Rule 15, Rule 42, Procedure III, and Procedure XV. NSCC is proposing to replace ‘‘Rules’’ with ‘‘Rules and Procedures’’ in Rule 1, Rule 2B, Rule 13, Rule 15, and Procedure III. NSCC is also proposing to replace ‘‘Letter of Credit’’ with ‘‘Eligible Letter of Credit’’ in Rule 42 and Addendum O. In addition, in Section 5 of Rule 2B, NSCC proposes to change the reference to Section 8 of Rule 4 to reflect the updated section number, which would be to Section 4 of Rule 4. NSCC is also proposing conforming changes to this section to ensure that termination provisions in the Rules, whether voluntary or in response to a loss E:\FR\FM\06AUN1.SGM 06AUN1 38390 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices allocation, are consistent with one another to the extent appropriate. Currently, Section 5 of Rule 2B provides that participants may elect to voluntarily retire their membership by providing NSCC with written notice of such termination. Such termination will not be effective until accepted by NSCC, which shall be evidenced by a notice to NSCC’s participants announcing the participant’s retirement and the effective date of the retirement, which is defined as the ‘‘Retirement Date.’’ This section also provides that a participant’s voluntary termination of membership shall not affect its obligations to NSCC. Where appropriate, NSCC is proposing changes to align Section 5 of Rule 2B with the proposed new Section 6 of Rule 4, both of which address termination of membership. Specifically, NSCC is proposing to rename the subheading of Section 5 of Rule 2B to ‘‘Voluntary Termination’’ and to change ‘‘retirement’’ to ‘‘termination’’ and ‘‘Retirement Date’’ to ‘‘Termination Date’’ throughout Section 5 of Rule 2B. NSCC is also proposing to provide that when a participant elects to voluntarily terminate its membership by providing NSCC a written notice of such termination (‘‘Voluntary Termination Notice’’), the participant must specify in its Voluntary Termination Notice a desired date for its withdrawal, provided such date shall not be prior to the scheduled final settlement date of any remaining obligation owed by the participant to NSCC as of the time such Voluntary Termination Notice is submitted to NSCC, unless otherwise approved by NSCC. NSCC is retaining the provision that makes it clear that the termination will not be effective until accepted by NSCC.58 NSCC is also retaining the provision that describes NSCC’s acceptance of the termination; however, NSCC is proposing to make it clear that such acceptance, as evidenced by a notice to NSCC’s participants, would (i) be no later than ten (10) business days after the receipt of the Voluntary Termination Notice from the participant and (ii) announce the last trade date for the participant instead of the Termination Date. In addition, NSCC is proposing to make it clear that the Termination Date would be the final settlement date of all transactions of the sradovich on DSK3GMQ082PROD with NOTICES 58 Unlike the Voluntary Termination Notice, the Loss Allocation Withdrawal Notice as proposed in Section 6 of Rule 4 does not require explicit acceptance by NSCC to be effective. NSCC believes that requiring explicit acceptance of the Loss Allocation Withdrawal Notice could complicate the loss allocation process and potentially result in membership withdrawal being delayed as well as detract from the objective to have NSCC know on a timely basis which Members would remain subject to the subsequent rounds of loss allocation. VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 participant. NSCC is proposing these clarifying changes so that the Rules would align more closely with NSCC’s current practice. As an example, Member A submits a Voluntary Termination Notice to NSCC on April 1st indicating its desired termination date is June 15th. NSCC would accept such termination request by issuing a notice to Members within 10 business days from April 1st; such notice would provide that the last trade date for Member A is June 12th, and the effective date of Member A’s NSCC membership termination would be the final settlement date of all transactions of Member A. In contrast, if Member A submits a Voluntary Termination Notice on April 1st and indicates its desired termination date is April 5th, NSCC would either (i) accept such termination notice by issuing a notice to Members on or before April 5th; such notice would provide that the last trade date for Member A is April 2nd, and the effective date of Member A’s NSCC membership termination would be the final settlement date of all transactions of Member A, or (ii) if NSCC requires additional time to process the termination, NSCC would accept such termination notice by issuing notice to Members after April 5th but still within 10 business days from April 1st; such notice would provide that the last trade date for Member A is a date after April 2nd, and the effective date of Member A’s NSCC membership termination would be the final settlement date of all transactions of Member A. NSCC is also proposing to clarify that after the close of business on the Termination Date,59 a participant that terminates its membership shall no longer be eligible or required to submit transactions to NSCC for clearance and settlement, unless the Board of Directors determines otherwise in order to ensure an orderly liquidation of the participant’s open obligations. If any transaction is submitted to NSCC by such participant that is scheduled to settle after the Termination Date, the participant’s Voluntary Termination Notice would be deemed void and the participant would remain subject to the Rules as if it had not given such notice. Furthermore, NSCC is proposing to add a sentence to Section 5 of Rule 2B to refer participants to Sections 7, 13 and 14 of Rule 4, as applicable, regarding provisions on the return of a participant’s Clearing Fund deposit and to specify that if an Event Period were to occur after a participant has 59 Account(s) of a terminating participant are generally deactivated after the close of business on the Termination Date. PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 submitted its Voluntary Termination Notice but on or prior to the Termination Date, in order for such participant to benefit from its Loss Allocation Cap pursuant to Section 4 of Rule 4, the participant would need to comply with the provisions of Section 6 of Rule 4 and submit a Loss Allocation Withdrawal Notice, which notice, upon submission, would supersede and void any pending Voluntary Termination Notice previously submitted by the participant. As an example, if an Event Period occurs after submission of the Voluntary Termination Notice by a Member but on or prior to the Termination Date, and the Member does not subsequently submit a Loss Allocation Withdrawal Notice as proposed in Section 6 of Rule 4, then the Member would not benefit from its Loss Allocation Cap, i.e., the Member would remain obligated for its pro rata share of losses and liabilities with respect to any Event Period that commenced on or prior to the Termination Date. In Rule 4(A), NSCC proposes to amend Section 11 to update a crossreference to the time period for the refund of deposits to the Clearing Fund when a Member ceases to be a participant in order to align it with proposed Section 7 of Rule 4, which would reduce the time period from 90 days to 30 calendar days. NSCC is also proposing to add a reference to Section 13 of Rule 4 in clause (c) of Section 13 of Rule 4(A) in order to specify that a Special Activity Supplemental Deposit of a Member may be used to satisfy a loss or liability as provided in such new proposed Section 13. NSCC is also proposing technical changes in Sections 2 and 13 of Rule 4(A) to reflect new proposed defined terms in the Rules. In Rule 13, NSCC would replace ‘‘System’’ with ‘‘system’’ to reflect the proposed deletion of ‘‘System’’ as a defined term from Rule 4 and Addendum K. In Procedure XV, NSCC would replace ‘‘Qualified Securities Depository’’ with ‘‘DTC’’ to be consistent with the proposed change in Section 1 of Rule 4. Member Outreach Beginning in August 2017, NSCC conducted outreach to Members in order to provide them with advance notice of the proposed changes. As of the date of this filing, no written comments relating to the proposed changes have been received in response to this outreach. The Commission will be notified of any written comments received. E:\FR\FM\06AUN1.SGM 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices Implementation Timeframe Pending Commission approval, NSCC expects to implement this proposal within two (2) business days after approval. Members would be advised of the implementation date of this proposal through issuance of an NSCC Important Notice. sradovich on DSK3GMQ082PROD with NOTICES Expected Effect on Risks to the Clearing Agency, Its Participants and the Market NSCC believes that the proposed rule changes to enhance the resiliency of NSCC’s loss allocation process and to shorten the time within which NSCC is required to return a former Member’s Clearing Fund deposit would reduce the risk of uncertainty to NSCC, its Members and the market overall. Specifically, by modifying the calculation of NSCC’s corporate contribution, NSCC would apply a mandatory fixed percentage of its General Business Risk Capital Requirement (as compared to the current Rules which provide for ‘‘no less than’’ a percentage of retained earnings), which would provide greater transparency and accessibility to Members as to how much NSCC would contribute in the event of a loss or liability. By modifying the application of NSCC’s corporate contribution to apply to Declared Non-Default Loss Events, in addition to Defaulting Member Events, on a mandatory basis, NSCC would expand the application of its corporate contribution beyond losses and liabilities from Member impairments, which would better align the interests of NSCC with those of its Members by stipulating a mandatory application of the Corporate Contribution to a Declared Non-Default Loss Event prior to any allocation of the loss among Members. Taken together, these proposed rule changes would enhance the overall resiliency of NSCC’s loss allocation process by enhancing the calculation and application of NSCC’s Corporate Contribution, which is one of the key elements of NSCC’s loss allocation process. Moreover, by providing greater transparency and accessibility to Members, as stated above, the proposed rule changes regarding the Corporate Contribution, including the proposed replenishment period, would allow Members to better assess the adequacy of NSCC’s loss allocation process. By introducing the concept of an Event Period, NSCC would be able to group Defaulting Member Events and Declared Non-Default Loss Events occurring in a period of ten (10) business days for purposes of allocating losses to Members. NSCC believes that VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 the Event Period would provide a defined structure for the loss allocation process to encompass potential sequential Defaulting Member Events or Declared Non-Default Loss Events that are likely to be closely linked to an initial event and/or market dislocation episode. Having this structure would enhance the overall resiliency of NSCC’s loss allocation process because NSCC would be better equipped to address losses that may arise from multiple Defaulting Member Events and/or Declared Non-Default Loss Events that arise in quick succession. Moreover, the proposed Event Period structure would provide certainty for Members concerning their maximum exposure to mutualized losses with respect to such events. By introducing the concept of ‘‘rounds’’ (and accompanying Loss Allocation Notices) and applying this concept to the timing of loss allocation payments and the Member withdrawal process in connection with the loss allocation process, NSCC would (i) set forth a defined amount that it would allocate to Members during each round (i.e., the round cap), (ii) advise Members of loss allocation obligation information as well as round information through the issuance of Loss Allocation Notices, and (iii) provide Members with the option to limit their loss allocation exposure after the issuance of the first Loss Allocation Notice in each round. These proposed rule changes would enhance the overall resiliency of NSCC’s loss allocation process because they would enable NSCC to continue the loss allocation process in successive rounds until all of NSCC’s losses are allocated and enable NSCC to identify continuing Members for purposes of calculating subsequent loss allocation obligations in successive rounds. Moreover, the proposed rule changes would define for Members a clear manner and process in which they could cap their loss allocation exposure to NSCC. By implementing a ‘‘look-back’’ period to calculate a Member’s loss allocation obligations and its Loss Allocation Cap, NSCC would discourage Members from reducing their settlement activity during a time of stress primarily to limit their loss allocation obligations. By determining a Member’s loss allocation obligations based on the average of its Required Fund Deposit over a look-back period and its Loss Allocation Cap based on the greater of its Required Fund Deposit or the average thereof over a look-back period, NSCC would be able to calculate a Member’s pro rata share of losses and liabilities based on the amount of risk that the Member brings to NSCC. These PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 38391 proposed rule changes would enhance the overall resiliency of NSCC’s loss allocation process because they would deter Members from reducing their settlement activity during a time of stress primarily to limit their Loss Allocation Caps. By reducing the time within which NSCC is required to return a former Member’s Clearing Fund deposit, NSCC would enable firms that have exited NSCC to have access to their funds sooner than under the current Rules, while at the same time protecting NSCC and its provision of clearance and settlement services because such return would only occur if all obligations of the terminating Member to NSCC have been satisfied. As such, NSCC would maintain the requisite level of Clearing Fund deposit to ensure that it can continue to meet its clearance and settlement obligations. Management of Identified Risks NSCC is proposing the rule changes as described in detail above in order to enhance the resiliency of NSCC’s loss allocation process and provide transparency and accessibility to Members regarding NSCC’s loss allocation process. Consistency With the Clearing Supervision Act The proposed rule change would be consistent with Section 805(b) of the Clearing Supervision Act.60 The objectives and principles of Section 805(b) of the Clearing Supervision Act are to promote robust risk management, promote safety and soundness, reduce systemic risks, and support the stability of the broader financial system.61 The proposed rule change would enhance the resiliency of NSCC’s loss allocation process by (1) modifying the calculation and application of NSCC’s corporate contribution, (2) introducing an Event Period, (3) introducing the concept of ‘‘rounds’’ (and accompanying Loss Allocation Notices) and applying this concept to the timing of loss allocation payments and the Member withdrawal process in connection with the loss allocation process, and (4) implementing a ‘‘look-back’’ period to calculate a Member’s loss allocation obligation (which would replace the current calculation of a Member’s loss allocation obligation based on the Member’s activity in each of the various services or ‘‘Systems’’ offered by NSCC) and its Loss Allocation Cap. Together, these proposed rule changes would (i) create greater certainty for Members 60 12 U.S.C. 5464(b). 61 Id. E:\FR\FM\06AUN1.SGM 06AUN1 sradovich on DSK3GMQ082PROD with NOTICES 38392 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices regarding NSCC’s obligation towards a loss, (ii) more clearly specify NSCC’s and Members’ obligations toward a loss and balance the need to manage the risk of sequential defaults and other potential loss events against Members’ need for certainty concerning their maximum exposures, and (iii) provide Members the opportunity to limit their exposure to NSCC by capping their exposure to loss allocation. Reducing the risk of uncertainty to NSCC, its Members and the market overall would promote robust risk management, promote safety and soundness, reduce systemic risks, and support the stability of the broader financial system. Therefore, NSCC believes that the proposed rule change to enhance the resiliency of NSCC’s loss allocation process is consistent with the objectives and principles of Section 805(b) of the Clearing Supervision Act cited above. By reducing the time within which NSCC is required to return a former Member’s Clearing Fund deposit, NSCC would enable firms that have exited NSCC to have access to their funds sooner than under the current Rules while at the same time protecting NSCC and its provision of clearance and settlement services because such return would only occur if all obligations of the terminating Member to NSCC have been satisfied. As such, NSCC would maintain the requisite level of Clearing Fund deposit to ensure that it can continue to meet its clearance and settlement obligations. Enabling NSCC to continue to meet its clearance and settlement obligations would promote robust risk management, promote safety and soundness, reduce systemic risks, and support the stability of the broader financial system. Therefore, NSCC believes that this proposed rule change is consistent with the objectives and principles of Section 805(b) of the Clearing Supervision Act cited above. The proposed rule change is also consistent with Rules 17Ad–22(e)(13) and 17Ad–22(e)(23)(i), promulgated under the Act.62 Rule 17Ad–22(e)(13) under the Act requires, in part, that NSCC establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure NSCC has the authority and operational capacity to take timely action to contain losses and continue to meet its obligations.63 As described above, the proposed rule changes to (1) modify the calculation and application of NSCC’s corporate contribution, (2) introduce an Event Period, (3) introduce the concept of ‘‘rounds’’ (and CFR 240.17Ad–22(e)(13) and (e)(23)(i). 63 17 CFR 240.17Ad–22(e)(13). accompanying Loss Allocation Notices) and apply this concept to the timing of loss allocation payments and the Member withdrawal process in connection with the loss allocation process, and (4) implement a ‘‘lookback’’ period to calculate a Member’s loss allocation obligation (which would replace the current calculation of a Member’s loss allocation obligation based on the Member’s activity in each of the various services or ‘‘Systems’’ offered by NSCC) and its Loss Allocation Cap, taken together, are designed to enhance the resiliency of NSCC’s loss allocation process. Having a resilient loss allocation process would help ensure that NSCC can effectively and timely address losses relating to or arising out of either the default of one or more Members or one or more nondefault loss events, which in turn would help NSCC contain losses and continue to meet its clearance and settlement obligations. Therefore, NSCC believes that the proposed rule changes to enhance the resiliency of NSCC’s loss allocation process are consistent with Rule 17Ad–22(e)(13) under the Act. Rule 17Ad–22(e)(23)(i) under the Act requires NSCC to establish, implement, maintain and enforce written policies and procedures reasonably designed to publicly disclose all relevant rules and material procedures, including key aspects of NSCC’s default rules and procedures.64 The proposed rule changes to (i) align the loss allocation rules of the DTCC Clearing Agencies, (ii) improve the overall transparency and accessibility of the provisions in the Rules governing loss allocation, and (iii) make conforming and technical changes, would not only ensure that NSCC’s loss allocation rules are, to the extent practicable and appropriate, consistent with the loss allocation rules of other DTCC Clearing Agencies, but also would help to ensure that NSCC’s loss allocation rules are transparent and clear to Members. Aligning the loss allocation rules of the DTCC Clearing Agencies would provide consistent treatment, to the extent practicable and appropriate, especially for firms that are participants of two or more DTCC Clearing Agencies. Having transparent and clear loss allocation rules would enable Members to better understand the key aspects of NSCC’s default rules and procedures and provide Members with increased predictability and certainty regarding their exposures and obligations. As such, NSCC believes that the proposed rule changes to align the loss allocation rules of the DTCC Clearing Agencies as well as to improve 62 17 VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 64 17 PO 00000 CFR 240.17Ad–22(e)(23)(i). Frm 00120 Fmt 4703 Sfmt 4703 the overall transparency and accessibility of NSCC’s loss allocation rules are consistent with Rule 17Ad22(e)(23)(i) under the Act. Similarly, the proposed rule changes to NSCC’s voluntary termination provisions would improve the clarity of the Rules and help to ensure that NSCC’s voluntary termination process is transparent and clear to Members. Having clear voluntary termination provisions would enable Members to better understand NSCC’s voluntary termination process and provide Members with increased predictability and certainty regarding their rights and obligations with respect to such process. As such, NSCC believes that the proposed rule changes to the voluntary termination provision are also consistent with Rule 17Ad–22(e)(23)(i) under the Act. 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 E:\FR\FM\06AUN1.SGM 06AUN1 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices • Send an email to rule-comments@ sec.gov. Please include File Number SR– NSCC–2017–806 on the subject line. SECURITIES AND EXCHANGE COMMISSION Paper Comments [Release No. 34–83749; File No. SR–NYSE 2018–28] • 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–2017–806. 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– 2017–806 and should be submitted on or before August 21, 2018. By the Commission. Robert W. Errett, Deputy Secretary. [FR Doc. 2018–16712 Filed 8–3–18; 8:45 am] sradovich on DSK3GMQ082PROD with NOTICES BILLING CODE 8011–01–P Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Designation of a Longer Period on Commission Action of Proposed Rule Change To Make Permanent the Retail Liquidity Program Pilot, NYSE Rule 107C, Which Is Set To Expire on December 31, 2018 July 31, 2018. On June 4, 2018, New York Stock Exchange LLC (‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to make permanent the Exchange’s Retail Liquidity Program Pilot. The proposed rule change was published for comment in the Federal Register on June 21, 2018.3 The Commission has received no comment letters on the proposed rule change. Section 19(b)(2) of the Act 4 provides that within 45 days of the publication of notice of the filing of a proposed rule change, or within such longer period up to 90 days as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding, or as to which the self-regulatory organization consents, the Commission shall either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved. The 45th day after publication of the notice for this proposed rule change is August 5, 2018. The Commission is extending this 45day time period. The Commission finds it appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider this proposed rule change. Accordingly, the Commission, pursuant to Section 19(b)(2) of the Act,5 designates September 19, 2018, as the date by which the Commission shall either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 83454 (June 15, 2018), 83 FR 28874. 4 15 U.S.C. 78s(b)(2). 5 Id. 2 17 VerDate Sep<11>2014 17:36 Aug 03, 2018 Jkt 244001 PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 38393 rule change (File No. SR–NYSE–2018– 28). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.6 Robert W. Errett, Deputy Secretary. [FR Doc. 2018–16723 Filed 8–3–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–83747; File No. SR–FICC– 2017–806] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Amendment No. 1 to an Advance Notice To Amend the Loss Allocation Rules and Make Other Changes July 31, 2018. On December 18, 2017, Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–FICC–2017–806 (‘‘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 6 17 CFR 200.30–3(a)(31). U.S.C. 5465(e)(1) and 17 CFR 240.19b– 4(n)(1)(i), respectively. On December 18, 2017, FICC filed the Advance Notice as a proposed rule change (SR–FICC–2017–022) 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. 82427 (January 2, 2018), 83 FR 854 (January 8, 2018) (SR–FICC–2017–022). 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. 82670 (February 8, 2018), 83 FR 6626 (February 14, 2018) (SR–DTC–2017–022; SR–FICC–2017–022; SR– NSCC–2017–018). 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. 82909 (March 20, 2018), 83 FR 12990 (March 26, 2018) (SR–FICC–2017–022). 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 Nos. 83510 (June 25, 2018), 83 FR 30791 (June 29, 2018) (SR– DTC–2017–022; SR–FICC–2017–022; SR–NSCC– 2017–018). On June 28, 2018, FICC filed Amendment No. 1 to the Proposed Rule Change. 1 12 E:\FR\FM\06AUN1.SGM Continued 06AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 151 (Monday, August 6, 2018)]
[Notices]
[Pages 38375-38393]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16712]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83748; File No. SR-NSCC-2017-806]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Amendment No. 1 to an Advance Notice 
To Amend the Loss Allocation Rules and Make Other Changes

July 31, 2018.
    On December 18, 2017, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') advance notice SR-NSCC-2017-806 (``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-2017-018) 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. 
82428 (January 2, 2018), 83 FR 897 (January 8, 2018) (SR-NSCC-2017-
018). 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. 82670 (February 8, 2018), 83 
FR 6626 (February 14, 2018) (SR-DTC-2017-022; SR-FICC-2017-022; SR-
NSCC-2017-018). 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. 82910 
(March 20, 2018), 83 FR 12968 (March 26, 2018) (SR-NSCC-2017-018). 
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 Nos. 83510 (June 25, 2018), 83 FR 30791 (June 29, 2018) (SR-
DTC-2017-022; SR-FICC-2017-022; SR-NSCC-2017-018). On June 28, 2018, 
NSCC filed Amendment No. 1 to the Proposed Rule Change. See 
Securities Exchange Act Release No. 83633 (July 13, 2018), 83 FR 
34227 (July 19, 2018) (SR-NSCC-2017-018). 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. 82584 (January 24, 
2018), 83 FR 4377 (January 30, 2018) (SR-NSCC-2017-806). 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 
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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    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, and on July 6, 2018, 
submitted a response to the Commission's 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.\4\
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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. 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

    This Advance Notice consists of proposed modifications to NSCC's 
Rules and Procedures (``Rules'') in order to amend provisions in the 
Rules regarding loss allocation as well as make other changes, as 
described in greater detail below.\5\
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    \5\ Capitalized terms not defined herein are defined in the 
Rules, available at https://www.dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
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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

    Written comments relating to this proposal have not been solicited 
or received. NSCC will notify the Commission of any written comments 
received by NSCC.


[[Page 38376]]



(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 Advance 
Notice previously filed by NSCC on December 18, 2017.\6\ This Amendment 
amends and replaces the Advance Notice in its entirety. NSCC submits 
this Amendment in order to further clarify the operation of the 
proposed rule changes on loss allocation by providing additional 
information and examples. In particular, this Amendment would:
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    \6\ See Securities Exchange Act Release No. 82584 (January 24, 
2018), 83 FR 4377 (January 30, 2018) (SR-NSCC-2017-806).
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    (i) Clarify which Members would be subject to loss allocation with 
respect to Defaulting Member Events (as defined below and in the 
proposed rule change) and Declared Non-Default Loss Events (as defined 
below and in the proposed rule change) occurring during an Event Period 
(as defined below and in the proposed rule change). Specifically, 
pursuant to the Amendment, proposed Section 4 of Rule 4 would provide 
that each Member that is a Member on the first day of an Event Period 
would be obligated to pay its pro rata share of losses and liabilities 
arising out of or relating to each Defaulting Member Event (other than 
a Defaulting Member Event with respect to which it is the Defaulting 
Member (as defined below and in the proposed rule change)) and each 
Declared Non-Default Loss Event occurring during the Event Period. 
Proposed Section 4 of Rule 4 would also make it clear that any Member 
for which NSCC ceases to act on a non-business day, triggering an Event 
Period that commences on the next business day, would be deemed to be a 
Member on the first day of that Event Period.
    (ii) Clarify the obligations and Loss Allocation Cap (as defined 
below and in the proposed rule change) of a Member that withdraws from 
membership in respect of a loss allocation round. Specifically, 
pursuant to the Amendment, proposed Section 6 of Rule 4 would provide 
that the Member would nevertheless remain obligated for its pro rata 
share of losses and liabilities with respect to any Event Period for 
which it is otherwise obligated under Rule 4; however, its aggregate 
obligation would be limited to the amount of its Loss Allocation Cap as 
fixed in the round for which it withdrew.
    (iii) Clarify that a Member would be obligated to NSCC for all 
losses and liabilities incurred by NSCC arising out of or relating to 
any Defaulting Member Event with respect to the Member. Specifically, 
pursuant to the Amendment, proposed Section 4 of Rule 4 would provide 
that each Member would be obligated to NSCC for the entire amount of 
any loss or liability incurred by NSCC arising out of or relating to 
any Defaulting Member Event with respect to such Member.
    (iv) Clarify that, although a Defaulting Member would not be 
allocated a ratable share of losses and liabilities arising out of or 
relating to its own Defaulting Member Event, it would remain obligated 
to NSCC for all such losses and liabilities. Specifically, pursuant to 
the Amendment, proposed Section 10 of Rule 4 would provide that no loss 
allocation under Rule 4 would constitute a waiver of any claim NSCC may 
have against a Member for any loss or liability to which the Member is 
subject under the Rules, including, without limitation, any loss or 
liability to which it may be subject under Rule 4.
    In addition, pursuant to the Amendment, NSCC is making other 
clarifying and technical changes to the proposed rule change, as 
proposed herein.
Nature of the Proposed Change
    The primary purpose of this proposed rule change is to amend NSCC's 
loss allocation rules in order to enhance the resiliency of NSCC's loss 
allocation process so that NSCC can take timely action to address 
multiple loss events that occur in succession during a short period of 
time (defined and explained in detail below). In connection therewith, 
the proposed rule change would (i) align the loss allocation rules of 
the three clearing agencies of The Depository Trust & Clearing 
Corporation (``DTCC''), namely The Depository Trust Company (``DTC''), 
Fixed Income Clearing Corporation (``FICC'') (including the Government 
Securities Division (``FICC/GSD'') and the Mortgage-Backed Securities 
Division (``FICC/MBSD'')), and NSCC (collectively, the ``DTCC Clearing 
Agencies''), so as to provide consistent treatment, to the extent 
practicable and appropriate, especially for firms that are participants 
of two or more DTCC Clearing Agencies, (ii) increase transparency and 
accessibility of the loss allocation rules by enhancing their 
readability and clarity, (iii) reduce the time within which NSCC is 
required to return a former Member's Clearing Fund deposit, (iv) 
increase clarity of the voluntary termination provisions, and (v) make 
conforming and technical changes.
(i) Background
    Central counterparties (``CCPs'') play a key role in financial 
markets by mitigating counterparty credit risk on transactions between 
market participants. CCPs achieve this by providing guaranties to 
participants and, as a consequence, are typically exposed to credit 
risks that could lead to default losses. In addition, in performing its 
critical functions, a CCP could be exposed to non-default losses that 
are otherwise incident to the CCP's clearance and settlement business.
    A CCP's rulebook should provide a complete description of how 
losses would be allocated to participants if the size of the losses 
exceeded the CCP's pre-funded resources. Doing so provides for an 
orderly allocation of losses, and potentially allows the CCP to 
continue providing critical services to the market and thereby results 
in significant financial stability benefits. In addition, a clear 
description of the loss allocation process offers transparency and 
accessibility to the CCP's participants.
Current NSCC Loss Allocation Process
    As a CCP, NSCC's loss allocation process is a key component of its 
risk management process. Risk management is the foundation of NSCC's 
ability to guarantee settlement, as well as the means by which NSCC 
protects itself and its Members from the risks inherent in the 
clearance and settlement process. NSCC's risk management process must 
account for the fact that, in certain extreme circumstances, the 
collateral and other financial resources that secure NSCC's risk 
exposures may not be sufficient to fully cover losses resulting from 
the liquidation of the portfolio of a Member for whom NSCC has ceased 
to act.\7\
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    \7\ When NSCC restricts a Member's access to services generally, 
NSCC is said to have ``ceased to act'' for the Member. Rule 46 
(Restrictions on Access to Services) sets out the circumstances 
under which NSCC may cease to act for a Member, and Rule 18 
(Procedures for When the Corporation Declines or Ceases to Act) sets 
out the types of actions NSCC may take when it ceases to act for a 
Member. Supra note 5.
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    The Rules currently provide for a loss allocation process through 
which both NSCC (by applying no less than 25% of its retained earnings 
in accordance with Addendum E) and its Members would share in the 
allocation of a loss resulting from the default of a Member for whom 
NSCC has ceased to act pursuant to the Rules. The Rules also recognize 
that NSCC may incur losses outside the context of a defaulting Member 
that are otherwise incident to NSCC's clearance and settlement 
business.

[[Page 38377]]

    NSCC's loss allocation rules currently provide that in the event 
NSCC ceases to act for a Member, the amounts on deposit to the Clearing 
Fund from the defaulting Member, along with any other resources of, or 
attributable to, the defaulting Member that NSCC may access under the 
Rules (e.g., payments from Clearing Agency Cross-Guaranty Agreements), 
are the first source of funds NSCC would use to cover any losses that 
may result from the closeout of the defaulting Member's guaranteed 
positions. If these amounts are not sufficient to cover all losses 
incurred, then NSCC will apply the following available resources, in 
the following loss allocation waterfall order:
    First, as provided in Addendum E, NSCC's corporate contribution of 
at least 25 percent of NSCC's retained earnings existing at the time of 
a Member impairment, or such greater amount as the Board of Directors 
may determine; and
    Second, if a loss still remains, as and in the manner provided in 
Rule 4, the required Clearing Fund deposits of Members who are non-
defaulting Members on the date of default.
    Pursuant to current Section 5 of Rule 4, if, as a result of 
applying the Clearing Fund deposit of a Member, the Member's actual 
Clearing Fund deposit is less than its Required Deposit, it will be 
required to eliminate such deficiency in order to satisfy its Required 
Deposit amount. Pursuant to current Section 4 of Rule 4, Members can 
also be assessed for non-default losses incident to the operation of 
the clearance and settlement business of NSCC. Pursuant to current 
Section 8 of Rule 4, Members may withdraw from membership within 
specified timeframes after a loss allocation charge to limit their 
obligation for future assessments.
Overview of the Proposed Rule Changes
A. Changes To Enhance Resiliency of NSCC's Loss Allocation Process
    In order to enhance the resiliency of NSCC's loss allocation 
process, NSCC proposes to change the manner in which each of the 
aspects of the loss allocation waterfall described above would be 
employed. NSCC would retain the current core loss allocation process 
following the application of the defaulting Member's resources, i.e., 
first, by applying NSCC's corporate contribution, and second, by pro 
rata allocations to Members. However, NSCC would clarify or adjust 
certain elements and introduce certain new loss allocation concepts, as 
further discussed below. In addition, the proposed rule change would 
address the loss allocation process as it relates to losses arising 
from or relating to multiple default or non-default events in a short 
period of time, also as described below.
    Accordingly, NSCC is proposing five (5) key changes to enhance 
NSCC's loss allocation process:
(1) Changing the Calculation and Application of NSCC's Corporate 
Contribution
    As stated above, Addendum E currently provides that NSCC will 
contribute no less than 25% of its retained earnings (or such higher 
amount as the Board of Directors shall determine) to a loss or 
liability that is not satisfied by the impaired Member's Clearing Fund 
deposit. Under the proposal, NSCC would amend the calculation of its 
corporate contribution from a percentage of its retained earnings to a 
mandatory amount equal to 50% of the NSCC General Business Risk Capital 
Requirement.\8\ NSCC's General Business Risk Capital Requirement, as 
defined in NSCC's Clearing Agency Policy on Capital Requirements,\9\ 
is, at a minimum, equal to the regulatory capital that NSCC is required 
to maintain in compliance with Rule 17Ad-22(e)(15) under the Act.\10\ 
The proposed Corporate Contribution (as defined in the proposed rule 
change) would be held in addition to NSCC's General Business Risk 
Capital Requirement.
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    \8\ NSCC calculates its General Business Risk Capital 
Requirement as the amount equal to the greatest of (i) an amount 
determined based on its general business profile, (ii) an amount 
determined based on the time estimated to execute a recovery or 
orderly wind-down of NSCC's critical operations, and (iii) an amount 
determined based on an analysis of NSCC's estimated operating 
expenses for a six (6) month period.
    \9\ See Securities Exchange Act Release No. 81105 (July 7, 
2017), 82 FR 32399 (July 13, 2017) (SR-NSCC-2017-004).
    \10\ 17 CFR 240.17Ad-22(e)(15).
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    Currently, the Rules do not require NSCC to contribute its retained 
earnings to losses and liabilities other than those from Member 
impairments. Under the proposal, NSCC would apply its corporate 
contribution to non-default losses as well. The proposed Corporate 
Contribution would apply to losses arising from Defaulting Member 
Events and Declared Non-Default Loss Events (as such terms are defined 
below and in the proposed rule change), and would be a mandatory 
contribution by NSCC prior to any allocation of the loss among NSCC's 
Members.\11\ As proposed, if the Corporate Contribution is fully or 
partially used against a loss or liability relating to an Event Period, 
the Corporate Contribution would be reduced to the remaining unused 
amount, if any, during the following two hundred fifty (250) business 
days \12\ in order to permit NSCC to replenish the Corporate 
Contribution.\13\ To ensure transparency, Members would receive notice 
of any such reduction to the Corporate Contribution.
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    \11\ The proposed rule change would not require a Corporate 
Contribution with respect to the use of the Clearing Fund as a 
liquidity resource; however, if NSCC uses the Clearing Fund as a 
liquidity resource for more than 30 calendar days, as set forth in 
proposed Section 2 of Rule 4, then NSCC would have to consider the 
amount used as a loss to the Clearing Fund incurred as a result of a 
Defaulting Member Event and allocate the loss pursuant to proposed 
Section 4 of Rule 4, which would then require the application of a 
Corporate Contribution.
    \12\ Rule 1 defines ``business day'' as ``any day on which the 
Corporation is open for business. However, on any business day that 
banks or transfer agencies in New York State are closed or a 
Qualified Securities Depository is closed, no deliveries of 
securities and no payments of money shall be made through the 
facilities of the Corporation.'' Supra note 5.
    \13\ NSCC believes that two hundred and fifty (250) business 
days would be a reasonable estimate of the time frame that NSCC 
would require to replenish the Corporate Contribution by equity in 
accordance with NSCC's Clearing Agency Policy on Capital 
Requirements, including a conservative additional period to account 
for any potential delays and/or unknown exigencies in times of 
distress.
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    As compared to the current approach of applying ``no less than'' a 
percentage of retained earnings to defaulting Member losses, the 
proposed Corporate Contribution would be a fixed percentage of NSCC's 
General Business Risk Capital Requirement, which would provide greater 
transparency and accessibility to Members. The proposed Corporate 
Contribution would apply not only towards losses and liabilities 
arising out of or relating to Defaulting Member Events but also those 
arising out of or relating to Declared Non-Default Loss Events, which 
is consistent with the current industry guidance that ``a CCP should 
identify the amount of its own resources to be applied towards losses 
arising from custody and investment risk, to bolster confidence that 
participants' assets are prudently safeguarded.'' \14\
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    \14\ See Resilience of central counterparties (CCPs): Further 
guidance on the PFMI, issued by the Committee on Payments and Market 
Infrastructures and the International Organization of Securities 
Commissions, at 42 (July 2017), available at www.bis.org/cpmi/publ/d163.pdf.
---------------------------------------------------------------------------

    Under the current Addendum E, NSCC has the discretion to contribute 
amounts higher than the specified percentage of retained earnings, as 
determined by the Board of Directors, to any loss or liability incurred 
by NSCC as result of a Member's impairment. This option would be 
retained and expanded under the proposal so that it would be clear that 
NSCC can voluntarily apply amounts greater than the Corporate 
Contribution against any

[[Page 38378]]

loss or liability (including non-default losses) of NSCC, if the Board 
of Directors, in its sole discretion, believes such to be appropriate 
under the factual situation existing at the time.
    The proposed rule changes relating to the calculation and 
application of the Corporate Contribution are set forth in proposed 
Sections 4 and 5 of Rule 4, as further described below.
(2) Introducing an Event Period
    In order to clearly define the obligations of NSCC and its Members 
regarding loss allocation and to balance the need to manage the risk of 
sequential loss events against Members' need for certainty concerning 
their maximum loss allocation exposures, NSCC is proposing to introduce 
the concept of an ``Event Period'' to the Rules to address the losses 
and liabilities that may arise from or relate to multiple Defaulting 
Member Events and/or Declared Non-Default Loss Events that arise in 
quick succession. Specifically, the proposal would group Defaulting 
Member Events and Declared Non-Default Loss Events occurring in a 
period of ten (10) business days (``Event Period'') for purposes of 
allocating losses to Members in one or more rounds (as described 
below), subject to the limitations of loss allocation set forth in the 
proposed rule change and as explained below.\15\ In the case of a loss 
or liability arising from or relating to a Defaulting Member Event, an 
Event Period would begin on the day NSCC notifies Members that it has 
ceased to act \16\ for the Defaulting Member (or the next business day, 
if such day is not a business day). In the case of a loss or liability 
arising from or relating to a Declared Non-Default Loss Event, an Event 
Period would begin on the day that NSCC notifies Members of the 
Declared Non-Default Loss Event (or the next business day, if such day 
is not a business day). If a subsequent Defaulting Member Event or 
Declared Non-Default Loss Event occurs during an Event Period, any 
losses or liabilities arising out of or relating to any such subsequent 
event would be resolved as losses or liabilities that are part of the 
same Event Period, without extending the duration of such Event Period. 
An Event Period may include both Defaulting Member Events and Declared 
Non-Default Loss Events, and there would not be separate Event Periods 
for Defaulting Member Events or Declared Non-Default Loss Events 
occurring during overlapping ten (10) business day periods.
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    \15\ NSCC believes that having a ten (10) business day Event 
Period would provide a reasonable period of time to encompass 
potential sequential Defaulting Member Events or Declared Non-
Default Loss Events that are likely to be closely linked to an 
initial event and/or a severe market dislocation episode, while 
still providing appropriate certainty for Members concerning their 
maximum exposure to mutualized losses with respect to such events.
    \16\ Supra note 7.
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    The amount of losses that may be allocated by NSCC, subject to the 
required Corporate Contribution, and to which a Loss Allocation Cap 
would apply for any Member that elects to withdraw from membership in 
respect of a loss allocation round, would include any and all losses 
from any Defaulting Member Events and any Declared Non-Default Loss 
Events during the Event Period, regardless of the amount of time, 
during or after the Event Period, required for such losses to be 
crystallized and allocated.\17\
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    \17\ As discussed below, each Member that is a Member on the 
first day of an Event Period would be obligated to pay its pro rata 
share of losses and liabilities arising out of or relating to each 
Defaulting Member Event (other than a Defaulting Member Event with 
respect to which it is the Defaulting Member) and each Declared Non-
Default Loss Event occurring during the Event Period.
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    The proposed rule changes relating to the implementation of an 
Event Period are set forth in proposed Section 4 of Rule 4, as further 
described below.
(3) Introducing the Concept of ``Rounds'' and Loss Allocation Notice
    Pursuant to the proposed rule change, a loss allocation ``round'' 
would mean a series of loss allocations relating to an Event Period, 
the aggregate amount of which is limited by the sum of the Loss 
Allocation Caps of affected Members (a ``round cap''). When the 
aggregate amount of losses allocated in a round equals the round cap, 
any additional losses relating to the applicable Event Period would be 
allocated in one or more subsequent rounds, in each case subject to a 
round cap for that round. NSCC may continue the loss allocation process 
in successive rounds until all losses from the Event Period are 
allocated among Members that have not submitted a Loss Allocation 
Withdrawal Notice in accordance with proposed Section 6 of Rule 4.
    Each loss allocation would be communicated to Members by the 
issuance of a notice that advises the Members of the amount being 
allocated to them (``Loss Allocation Notice''). Each Member's pro rata 
share of losses and liabilities to be allocated in any round would be 
equal to (i) the average of its Required Fund Deposit for the seventy 
(70) business days preceding the first day of the applicable Event 
Period or such shorter period of time that the Member has been a Member 
(each Member's ``Average RFD''), divided by (ii) the sum of Average RFD 
amounts of all Members subject to loss allocation in such round.
    Each Loss Allocation Notice would specify the relevant Event Period 
and the round to which it relates. The first Loss Allocation Notice in 
any first, second, or subsequent round would expressly state that such 
Loss Allocation Notice reflects the beginning of the first, second, or 
subsequent round, as the case may be, and that each Member in that 
round has five (5) business days from the issuance of such first Loss 
Allocation Notice for the round to notify NSCC of its election to 
withdraw from membership with NSCC pursuant to proposed Section 6 of 
Rule 4, and thereby benefit from its Loss Allocation Cap.\18\ The 
``Loss Allocation Cap'' of a Member would be equal to the greater of 
(x) its Required Fund Deposit on the first day of the applicable Event 
Period and (y) its Average RFD.
---------------------------------------------------------------------------

    \18\ Pursuant to the current Section 8 of Rule 4, the time 
period for a participant to give notice of its election to terminate 
its business with NSCC in respect of a pro rata charge is ten (10) 
business days after receiving notice of a pro rata charge. Supra 
note 5.
    NSCC believes that it is appropriate to shorten such time period 
from ten (10) business days to five (5) business days because NSCC 
needs timely notice of which Members would remain in its membership 
for purposes of calculating the loss allocation for any subsequent 
round. NSCC believes that five (5) business days would provide 
Members with sufficient time to decide whether to cap their loss 
allocation obligations by withdrawing from their membership in NSCC.
---------------------------------------------------------------------------

    After a first round of loss allocations with respect to an Event 
Period, only Members that have not submitted a Loss Allocation 
Withdrawal Notice in accordance with proposed Section 6 of Rule 4 would 
be subject to further loss allocation with respect to that Event 
Period.
    The amount of any second or subsequent round cap may differ from 
the first or preceding round cap because there may be fewer Members in 
a second or subsequent round if Members elect to withdraw from 
membership with NSCC as provided in proposed Section 6 of Rule 4 
following the first Loss Allocation Notice in any round.
    For example, for illustrative purposes only, after the required 
Corporate Contribution, if NSCC has a $5 billion loss determined with 
respect to an Event Period and the sum of Loss Allocation Caps for all 
Members subject to the loss allocation is $4 billion, the first round 
would begin when NSCC issues the first Loss Allocation Notice for that 
Event Period. NSCC could issue one or more Loss Allocation Notices for 
the first round until the sum of losses allocated equals $4 billion. 
Once the $4 billion is allocated, the first round

[[Page 38379]]

would end and NSCC would need a second round in order to allocate the 
remaining $1 billion of loss. NSCC would then issue a Loss Allocation 
Notice for the $1 billion and this notice would be the first Loss 
Allocation Notice for the second round. The issuance of the Loss 
Allocation Notice for the $1 billion would begin the second round.
    The proposed rule change would link the Loss Allocation Cap to a 
round in order to provide Members the option to limit their loss 
allocation exposure at the beginning of each round. As proposed and as 
described further below, a Member could limit its loss allocation 
exposure to its Loss Allocation Cap by providing notice of its election 
to withdraw from membership within five (5) business days after the 
issuance of the first Loss Allocation Notice in any round.
    The proposed rule changes relating to the implementation of 
``rounds'' and Loss Allocation Notices are set forth in proposed 
Section 4 of Rule 4, as further described below.
(4) Implementing a ``Look-Back'' Period To Calculate a Member's Loss 
Allocation Pro Rata Share and Its Loss Allocation Cap
    Currently, the Rules calculate a Member's pro rata share for 
purposes of loss allocation based on the Member's ``allocation for a 
System,'' which in turn is based on settlement dollar amounts. 
Therefore, a Member's loss allocation obligations are currently based 
on the Member's activity in each of the various services or ``Systems'' 
offered by NSCC.\19\ The Rules do not anticipate the possibility of 
more than one Defaulting Member Event or Declared Non-Default Loss 
Event in quick succession.
---------------------------------------------------------------------------

    \19\ NSCC's current loss allocation rules pre-date NSCC's move 
to a risk-based margining methodology.
---------------------------------------------------------------------------

    Given NSCC's risk-based margining methodology, NSCC believes that 
it would be more appropriate to determine a Member's pro rata share of 
losses and liabilities based on the amount of risk that the Member 
brings to NSCC, which is represented by the Member's Required Deposit 
(NSCC is proposing that ``Required Deposits'' be renamed ``Required 
Fund Deposits,'' as described below). Accordingly, NSCC is proposing to 
calculate each Member's pro rata share of losses and liabilities to be 
allocated in any round (as described above and in the proposed rule 
change) to be equal to (i) the Member's Average RFD divided by (ii) the 
sum of Average RFD amounts for all Members that are subject to loss 
allocation in such round.
    Additionally, as described above and in the proposed rule change, 
if a Member withdraws from membership pursuant to proposed Section 6 of 
Rule 4, NSCC is proposing that the Member's Loss Allocation Cap be 
equal to the greater of (i) its Required Fund Deposit on the first day 
of the applicable Event Period or (ii) its Average RFD.
    NSCC believes that employing a backward-looking average to 
calculate a Member's loss allocation pro rata share and Loss Allocation 
Cap would disincentivize Member behavior that could heighten volatility 
or reduce liquidity in markets in the midst of a financial crisis. 
Specifically, the proposed look-back period would discourage a Member 
from reducing its settlement activity during a time of stress primarily 
to limit its loss allocation pro rata share, which, as proposed, would 
now be based on the Member's average settlement activity over the look-
back period rather than its settlement activity at a point in time that 
the Member may not be able to estimate. Similarly, NSCC believes that 
taking a backward-looking average into consideration when determining a 
Member's Loss Allocation Cap would also deter a Member from reducing 
its settlement activity during a time of stress primarily to limit its 
Loss Allocation Cap.
    NSCC believes that having a look-back period of seventy (70) 
business days is appropriate, because it would be long enough to enable 
NSCC to capture a full calendar quarter of a Member's activities, 
including quarterly option expirations, and smooth out the impact from 
any abnormalities and/or arbitrariness that may have occurred, but not 
too long that the Member's business strategy and outlook could have 
shifted significantly, resulting in material changes to the size of its 
portfolios.
    The proposed rule changes relating to the implementation of a look-
back period are set forth in proposed Section 4 of Rule 4, as further 
described below.
(5) Capping Withdrawing Members' Loss Allocation Exposure and Related 
Changes
    NSCC's current loss allocation rules allow a Member to withdraw if 
the Member notifies NSCC, within ten (10) business days after receipt 
of notice of a pro rata charge, of its election to terminate its 
membership and thereby avail itself of a cap on loss allocation, which 
is its Required Deposit as fixed immediately prior to the time of the 
pro rata charge. As discussed above, the proposed rule change would 
continue providing Members the opportunity to limit their loss 
allocation exposure by offering withdrawal options; however, the cap on 
loss allocation would be calculated differently and the associated 
withdrawal process would also be modified as it relates to withdrawals 
associated with the loss allocation process. In particular, the 
proposed rule change would shorten the withdrawal notification period 
from ten (10) business days to five (5) business days, and would also 
change the beginning of such notification period from the receipt of 
the notice of a pro rata charge to the issuance of the notice, as 
further described below. As proposed, if a Member timely provides 
notice of its withdrawal from membership in respect of a loss 
allocation round, the maximum amount of losses it would be responsible 
for would be its Loss Allocation Cap,\20\ provided that the Member 
complies with the requirements of the withdrawal process in proposed 
Section 6 of Rule 4.\21\
---------------------------------------------------------------------------

    \20\ If a Member's Loss Allocation Cap exceeds the Member's 
then-current Required Fund Deposit, it must still cover the excess 
amount.
    \21\ For the avoidance of doubt, pursuant to Section 13(d) of 
Rule 4(A) (Supplemental Liquidity Deposits), a Special Activity 
Supplemental Deposit of a Member may not be used to calculate or be 
applied to satisfy any pro rata charge pursuant to Section 4 of Rule 
4. Supra note 5.
---------------------------------------------------------------------------

    Currently, NSCC's loss allocation provisions provide that if a pro 
rata charge is made against a Member's actual Clearing Fund deposit, 
and as result thereof the Member's deposit is less than its Required 
Deposit, the Member will, upon demand by NSCC, be required to replenish 
its deposit to eliminate the deficiency within such time as NSCC shall 
require. To increase transparency of the timeframe under which NSCC 
would require funds from Members to satisfy their loss allocation 
obligations, NSCC is proposing that Members would receive two (2) 
business days' notice of a loss allocation, and Members would be 
required to pay the requisite amount no later than the second business 
day following issuance of such notice.\22\ Members would have five (5) 
business days \23\ from the issuance of the first Loss Allocation 
Notice in any round of an Event Period to decide whether to withdraw 
from membership.\24\
---------------------------------------------------------------------------

    \22\ NSCC believes that allowing Members two (2) business days 
to satisfy their loss allocation obligations would provide Members 
sufficient notice to arrange funding, if necessary, while allowing 
NSCC to address losses in a timely manner.
    \23\ Supra note 18.
    \24\ NSCC believes that setting the start date of the withdrawal 
notification period to the date of issuance of a notice would 
provide a single withdrawal timeframe that would be consistent 
across the Members.

---------------------------------------------------------------------------

[[Page 38380]]

    Each round would allow a Member the opportunity to notify NSCC of 
its election to withdraw from membership after satisfaction of the 
losses allocated in such round. Multiple Loss Allocation Notices may be 
issued with respect to each round to allocate losses up to the round 
cap.
    Specifically, the first round and each subsequent round of loss 
allocation would allocate losses up to a round cap of the aggregate of 
all Loss Allocation Caps of those Members included in the round. If a 
Member provides notice of its election to withdraw from membership, it 
would be subject to loss allocation in that round, up to its Loss 
Allocation Cap. If the first round of loss allocation does not fully 
cover NSCC's losses, a second round will be noticed to those Members 
that did not elect to withdraw from membership in the previous round; 
however, as noted above, the amount of any second or subsequent round 
cap may differ from the first or preceding round cap because there may 
be fewer Members in a second or subsequent round if Members elect to 
withdraw from membership with NSCC as provided in proposed Section 6 of 
Rule 4 following the first Loss Allocation Notice in any round.
    Pursuant to the proposed rule change, in order to avail itself of 
its Loss Allocation Cap, a Member would need to follow the requirements 
in proposed Section 6 of Rule 4, which would provide that the Member 
must: (i) Specify in its Loss Allocation Withdrawal Notice (as defined 
below and in the proposed rule change) an effective date of withdrawal, 
which date shall be no later than ten (10) business days following the 
last day of the applicable Loss Allocation Withdrawal Notification 
Period (as defined below and in the proposed rule change) (i.e., no 
later than ten (10) business days after the 5th business day following 
the first Loss Allocation Notice in that round of loss allocation),\25\ 
(ii) cease all activity that would result in transactions being 
submitted to NSCC for clearance and settlement for which such Member 
would be obligated to perform, where the scheduled final settlement 
date would be later than the effective date of the Member's withdrawal, 
and (iii) ensure that all clearance and settlement activity for which 
such Member is obligated to NSCC is fully and finally settled by the 
effective date of the Member's withdrawal, including, without 
limitation, by resolving by such date all fails and buy-in obligations.
---------------------------------------------------------------------------

    \25\ NSCC believes that having an effective date of withdrawal 
that is not later than ten (10) business days following the last day 
of the Loss Allocation Withdrawal Notification Period would provide 
Members with a reasonable period of time to wind down their 
activities at NSCC while minimizing any uncertainty typically 
associated with a longer withdrawal period.
---------------------------------------------------------------------------

    As proposed, a Member that withdraws in compliance with proposed 
Section 6 of Rule 4 would remain obligated for its pro rata share of 
losses and liabilities with respect to any Event Period for which it is 
otherwise obligated under Rule 4; however, its aggregate obligation 
would be limited to the amount of its Loss Allocation Cap (as fixed in 
the round for which it withdrew).
    The proposed rule changes are designed to enable NSCC to continue 
the loss allocation process in successive rounds until all of NSCC's 
losses are allocated. To the extent that a Member's Loss Allocation Cap 
exceeds the Member's Required Fund Deposit on the first day of the 
applicable Event Period, NSCC may in its discretion retain any excess 
amounts on deposit from the Member, up to the Member's Loss Allocation 
Cap.
    The proposed rule changes relating to capping withdrawing Members' 
loss allocation exposure and related changes to the withdrawal process 
are set forth in proposed Sections 4 and 6 of Rule 4, as further 
described below.

B. Changes To Align Loss Allocation Rules
    The proposed rule changes would align the loss allocation rules, to 
the extent practicable and appropriate, of the three DTCC Clearing 
Agencies so as to provide consistent treatment, especially for firms 
that are participants of two or more DTCC Clearing Agencies. As 
proposed, the loss allocation waterfall and certain related provisions, 
e.g., returning a former Member's Clearing Fund, would be consistent 
across the DTCC Clearing Agencies to the extent practicable and 
appropriate. The proposed rule changes of NSCC that would align loss 
allocation rules of the DTCC Clearing Agencies are set forth in 
proposed Sections 1, 2, 7, and 12 of Rule 4, as further described 
below.
C. Clarifying Changes Relating to Loss Allocation
    The proposed rule changes are intended to make the provisions in 
the Rules governing loss allocation more transparent and accessible to 
Members. In particular, NSCC is proposing the following changes 
relating to loss allocation to clarify Members' obligations for 
Declared Non-Default Loss Events.
    Aside from losses that NSCC might face as a result of a Defaulting 
Member Event, NSCC could incur non-default losses incident to its 
clearance and settlement business.\26\ The Rules currently permit NSCC 
to apply Clearing Fund to non-default losses. Specifically, pursuant to 
Section 2(b) of Rule 4,\27\ NSCC can use the Clearing Fund to satisfy 
losses or liabilities of NSCC incident to the operation of the 
clearance and settlement business of NSCC. Section II of Addendum K 
provides additional details regarding the application of the Clearing 
Fund to losses outside of a System.
---------------------------------------------------------------------------

    \26\ Non-default losses may arise from events such as damage to 
physical assets, a cyber-attack, or custody and investment losses.
    \27\ Section 2(b) of Rule 4 provides that ``the use of the 
Clearing Fund . . . shall be limited to satisfaction of losses or 
liabilities of the Corporation incident to the operation of the 
clearance and settlement business of the Corporation other than 
losses and liabilities of a System.'' Supra note 5.
---------------------------------------------------------------------------

    If there is a failure of NSCC following a non-default loss, such 
occurrence would affect Members in much the same way as a failure of 
NSCC following a Defaulting Member Event. Accordingly, NSCC is 
proposing rule changes to enhance the provisions relating to non-
default losses by clarifying Members' obligations for such losses.
    Specifically, NSCC is proposing enhancement of the governance 
around non-default losses that would trigger loss allocation to Members 
by specifying that the Board of Directors would have to determine that 
there is a non-default loss that may be a significant and substantial 
loss or liability that may materially impair the ability of NSCC to 
provide clearance and settlement services in an orderly manner and will 
potentially generate losses to be mutualized among the Members in order 
to ensure that NSCC may continue to offer clearance and settlement 
services in an orderly manner. The proposed rule change would provide 
that NSCC would then be required to promptly notify Members of this 
determination, which is referred to in the proposed rule as a Declared 
Non-Default Loss Event. In addition, NSCC is proposing to better align 
the interests of NSCC with those of its Members by stipulating a 
mandatory Corporate Contribution apply to a Declared Non-Default Loss 
Event prior to any allocation of the loss among Members, as described 
above. Additionally, NSCC is proposing language to clarify Members' 
obligations for Declared Non-Default Loss Events.
    The proposed rule changes relating to Declared Non-Default Loss 
Events and Members' obligations for such events are set forth in 
proposed Section 4 of Rule 4, as further described below.

[[Page 38381]]

D. Reduce the Time Within Which NSCC Is Required To Return a Former 
Member's Clearing Fund Deposit
    The proposed rule change would reduce the time period in which NSCC 
may retain a Member's Clearing Fund deposit. Specifically, NSCC 
proposes that if a Member gives notice to NSCC of its election to 
withdraw from membership, NSCC will return the Member's Actual Deposit 
in the form of (i) cash or securities within thirty (30) calendar days 
and (ii) Eligible Letters of Credit within ninety (90) calendar days, 
after all of the Member's transactions have settled and all matured and 
contingent obligations to NSCC for which the Member was responsible 
while a Member have been satisfied, except NSCC may retain for up to 
two (2) years the Actual Deposits from Members who have Sponsored 
Accounts at DTC.
    NSCC believes that shortening the time period for the return of a 
Member's Clearing Fund deposit would be helpful to firms who have 
exited NSCC so that they could have use of the deposits sooner than 
under the current Rules while at the same time protecting NSCC because 
such return would only occur if all obligations of the terminating 
Member to NSCC have been satisfied, which would include both matured as 
well as contingent obligations.
    The proposed rule changes relating to the reduced time period in 
which NSCC is required to return the Clearing Fund deposit of a former 
Member are set forth in proposed Section 7 of Rule 4, as further 
described below.
    The foregoing changes as well as other changes (including a number 
of conforming and technical changes) that NSCC is proposing in order to 
improve the transparency and accessibility of the Rules are described 
in detail below.
E. Loss Allocation Waterfall Comparison
    The following example \28\ illustrates the differences between the 
current and proposed loss allocation provisions:
---------------------------------------------------------------------------

    \28\ For purposes of this example, NSCC has assumed that the 
losses occurred with guaranteed CNS activity of Members, and NSCC 
allocated all such Members' deposits to the Clearing Fund to CNS 
activity (which is typically more than 99% of the NSCC daily gross 
settlement amount).
---------------------------------------------------------------------------

    Assumptions:
    (i) Member A defaults on a business day (Day 1). On the same day, 
NSCC ceases to act for Member A and notifies Members of the cease to 
act. After liquidating Member A's portfolio and applying Member A's 
Clearing Fund deposit, NSCC has a loss of $350 million.
    (ii) Member X voluntarily retires from membership five (5) business 
days after NSCC ceases to act for Member A (Day 6).
    (iii) Member B defaults seven (7) business days after NSCC ceases 
to act for Member A (Day 8). On the same day, NSCC ceases to act for 
Member B and notifies Members of the cease to act. After liquidating 
Member B's portfolio and applying Member B's Clearing Fund deposit, 
NSCC has a loss of $350 million.
    (iv) The current NSCC loss provisions require NSCC to contribute no 
less than 25% of its retained earnings as a corporate contribution. For 
the purposes of this example, it is assumed that NSCC will contribute 
25% of its retained earnings. The amount of NSCC's retained earnings is 
$416 million.
    (v) NSCC's General Business Risk Capital Requirement is $154 
million.
    Current Loss Allocation:
    Under the current loss allocation provisions, with respect to the 
losses arising out of Member A's default, NSCC will contribute $104 
million ($416 million * 25%) from retained earnings and then allocate 
the remaining loss of $246 million ($350 million - $104 million) to 
Members.
    With respect to losses arising out of Member B's default, NSCC will 
contribute $78 million (($416 million - $104 million) * 25%) from 
retained earnings and then allocate the remaining loss of $272 million 
($350 million - $78 million) to Members. Because Member X voluntarily 
retired before NSCC ceased to act for Member B, Member X is not subject 
to loss allocation with respect to losses arising out of Member B's 
default.
    Altogether, with respect to losses arising out of defaults of 
Member A and Member B, NSCC will contribute $182 million of retained 
earnings and will allocate losses of $518 million to Members.
    Proposed Loss Allocation:
    Under the proposed loss allocation provisions, a Defaulting Member 
Event with respect to Member A's default would have occurred on Day 
One, and a Defaulting Member Event with respect to Member B's default 
would have occurred on Day 8. Because the Defaulting Member Events 
occurred during a 10-business day period, they would be grouped 
together into an Event Period for purposes of allocating losses to 
Members. The Event Period would begin on the 1st business day and end 
on the 10th business day.
    With respect to losses arising out of Member A's default, NSCC 
would apply a Corporate Contribution of $77 million ($154 million * 
50%) and then allocate the remaining loss of $273 million ($350 million 
- $77 million) to Members. With respect to losses arising out of Member 
B's default, NSCC would not apply a Corporate Contribution since it 
would have already contributed the maximum Corporate Contribution of 
50% of its General Business Risk Capital Requirement. NSCC would 
allocate the losses of $350 million arising out of Member B's default 
to Members. Because Member X was a Member on the first day of the Event 
Period, Member X would be subject to loss allocation with respect to 
all events occurring during the Event Period, even if the event 
occurred after its retirement. Therefore, Member X would be subject to 
loss allocation with respect to Member B's default.
    Altogether, with respect to losses arising out of defaults of 
Member A and Member B, NSCC would apply a Corporate Contribution of $77 
million and would allocate losses of $623 million to Members. The 
principal differences in the above example are due to (i) the proposed 
changes to the calculation and application of the Corporate 
Contribution and (ii) the proposed introduction of an Event Period.
(ii) Detailed Description of the Proposed Rule Changes Related to Loss 
Allocation
A. Proposed Changes to Rule 4 (Clearing Fund)
Overview of Rule 4 (Clearing Fund)
    Rule 4 currently addresses Clearing Fund requirements and loss 
allocation obligations. While Procedure XV addresses the various 
Clearing Fund calculations, Rule 4 sets forth rights, obligations and 
other aspects associated with the Clearing Fund, as well as the loss 
allocation process. Rule 4 is currently organized into 12 sections. 
NSCC is proposing changes to each section, and consolidating provisions 
in Rule 4 relating to Mutual Fund Services and Insurance and Retirement 
Processing Services into new sections, as described below.
Section 1
    Section 1 of Rule 4 currently sets forth the requirement that each 
Member and Mutual Fund/Insurance Services Member shall, and each Fund 
Member and Insurance Carrier/Retirement Services Member may, be 
required to make a deposit to the Clearing Fund. Section 1 currently 
provides that each participant's Required Deposit is based on one or 
more formulas specified by NSCC's Board of Directors. The basis of each 
such formula is participants' usage of NSCC's facilities. Section 1 
also currently sets forth the minimum

[[Page 38382]]

amount of each participant category's Required Deposit.
    Current Section 1 allows a portion of a participant's Clearing Fund 
deposit to be evidenced by an open account indebtedness secured by 
Eligible Clearing Fund Securities, subject to certain limitations set 
forth in Procedure XV, and sets forth the various requirements 
associated with the deposit of Eligible Clearing Fund Securities. 
Current Section 1 also permits NSCC to require participants to post a 
letter of credit where NSCC believes the participants present legal 
risk.
    Current Section 1 also provides that NSCC allocate the Clearing 
Fund by types of service (e.g., Mutual Fund Services) as well as by 
Systems (e.g., CNS), and divide the Clearing Fund into separate 
``Allocations'' for each such service and separate ``Funds'' for each 
such System.
    Under the proposed rule change, NSCC is proposing to add a 
subheading of ``Required Fund Deposits'' to Section 1 and restructure 
Section 1 so that it applies to Members only and delete references to 
Mutual Fund/Insurance Services Members, Fund Members and Insurance 
Carrier/Retirement Services Members from Section 1.\29\ Provisions of 
Rule 4 regarding Mutual Fund/Insurance Services Members and Fund 
Members would be covered in a new proposed Section 13 to Rule 4, 
discussed below. Provisions of Rule 4 regarding Insurance Carrier/
Retirement Services Members would be covered in a new proposed Section 
14 to Rule 4, discussed below.
---------------------------------------------------------------------------

    \29\ In addition to Section 1 of Rule 4, NSCC is proposing to 
delete references to Mutual Fund/Insurance Services Members, Fund 
Members and Insurance Carrier/Retirement Services Members from 
Sections 2, 3, 4, 5, 6, 7, 8, 9, and 12 of Rule 4.
---------------------------------------------------------------------------

    Under the proposed rule change, Section 1 would continue to have 
the same provisions as they relate to Members except for the following: 
(i) The language throughout the section would be reorganized, 
streamlined and clarified, (ii) ``Required Deposits'' would be renamed 
``Required Fund Deposits,'' \30\ which is a more descriptive term to 
refer to Members' deposits required for the Clearing Fund, and would 
harmonize with the rules of FICC/GSD and FICC/MBSD \31\ and the term 
used in such rules,\32\ (iii) a sentence would be added regarding 
additional deposits maintained by the Members at NSCC, (iv) the 
provision regarding the Clearing Fund being allocated by Systems and 
services would be deleted,\33\ and (v) change ``Rules'' to ``Rules and 
Procedures'' to better reflect the name of NSCC's rulebook.\34\
---------------------------------------------------------------------------

    \30\ In addition to Section 1 of Rule 4, NSCC is proposing to 
rename ``Required Deposits'' to ``Required Fund Deposits'' in 
Sections 2, 3, 4, 8, 9, and 11 of Rule 4.
    \31\ FICC/GSD Rulebook (``FICC/GSD Rules''), available at http:/
/dtcc.com/~/media/Files/Downloads/legal/rules/ficc_gov_rules.pdf and 
FICC/MBSD Clearing Rules (``FICC/MBSD Rules''), available at https://
dtcc.com/~/media/Files/Downloads/legal/rules/ficc_mbsd_rules.pdf.
    \32\ See FICC/GSD Rule 1 (Definitions) and FICC/MBSD Rule 1 
(Definitions), supra note 31.
    \33\ In addition to Section 1 of Rule 4, NSCC is proposing to 
delete references to the Clearing Fund being allocated by Systems 
and services from Sections 2, 3, and 4 of Rule 4.
    \34\ In addition to Section 1 of Rule 4, NSCC is proposing to 
change ``Rules'' to ``Rules and Procedures'' in Sections 9 and 12 of 
Rule 4.
---------------------------------------------------------------------------

    The proposed sentence regarding additional deposits to the Clearing 
Fund would permit Members to post such additional deposits at their 
discretion and would make clear that such additional deposits would be 
deemed to be part of the Clearing Fund and the Member's Actual Deposit 
(as discussed below and as defined in the proposed rule change) but 
would not be deemed to be part of the Member's Required Fund Deposit.
    NSCC proposes to add language in Section 1 to make it clear that 
each Member would grant NSCC a first priority perfected security 
interest in its right, title and interest in and to any Eligible 
Clearing Fund Securities, funds and assets pledged to NSCC to secure 
the Member's open account indebtedness or placed by the Member in 
NSCC's possession (or its agents acting on its behalf) to secure all 
such Member's obligations to NSCC, and that NSCC would be entitled to 
exercise the rights of a pledgee under common law and a secured party 
under Articles 8 and 9 of the New York Uniform Commercial Code with 
respect to such assets. The additional language would further harmonize 
the Rules with language used in the FICC/GSD Rules and FICC/MBSD 
Rules,\35\ thus providing consistent treatment of pledged resources for 
firms that are members of both NSCC and FICC.
---------------------------------------------------------------------------

    \35\ See Section 4 of FICC/GSD Rule 4 and Section 4 of FICC/MBSD 
Rule 4, supra note 31.
---------------------------------------------------------------------------

    NSCC proposes to clarify the language in footnote 2 of Section 1. 
In addition, NSCC proposes to add ``Eligible Letter of Credit'' as a 
defined term to refer to letters of credit posted by participants if 
required by NSCC,\36\ which would harmonize the term with the term used 
in the FICC/GSD Rules and FICC/MBSD Rules,\37\ thus providing 
consistent terminology for firms that are members of both NSCC and 
FICC.
---------------------------------------------------------------------------

    \36\ In addition to Section 1 of Rule 4, NSCC is also proposing 
to rename ``Letter of Credit'' to ``Eligible Letter of Credit'' in 
Sections 2 and 12 of Rule 4.
    \37\ See FICC/GSD Rule 1 (Definitions) and FICC/MBSD Rule 1 
(Definitions), supra note 31.
---------------------------------------------------------------------------

    Similarly, NSCC proposes to add ``Actual Deposit'' as a defined 
term in Section 1 to refer to Eligible Clearing Fund Securities, funds 
and assets pledged to NSCC to secure a Member's open account 
indebtedness or placed by a Member in the possession of NSCC (or its 
agents acting on its behalf) and any Eligible Letters of Credit issued 
on behalf of a Member in favor of NSCC.
    Instead of requiring participants to pledge Eligible Clearing Fund 
Securities to NSCC's account at a Qualified Securities Depository 
designated by the participants, NSCC proposes to clarify and streamline 
Section 1 of proposed Rule 4 to provide that Eligible Clearing Fund 
Securities pledged to secure a Member's open account indebtedness would 
be delivered to NSCC's account at DTC.
    NSCC would delete the provision regarding allocation of the 
Clearing Fund by Systems and services, as this provision is no longer 
relevant under the proposed rule change. Provisions relating to Mutual 
Fund Services and Insurance and Retirement Processing Services in 
Section 1 (as well as other sections in Rule 4) would be consolidated 
in the proposed new Sections 13 and 14, entitled ``Mutual Fund 
Deposits'' and ``Insurance Deposits,'' respectively.
    To consolidate provisions regarding the maintenance, investment and 
permitted use of Clearing Fund, NSCC would move the last paragraph of 
Section 1 about segregation and maintenance of Clearing Fund (again, in 
terms of ``Fund,'' ``System,'' and ``Allocation,'' as discussed above) 
to Section 2.
    In addition, NSCC proposes to correct a typographical error in the 
reference to a footnote in Section 1 of Rule 4. Specifically, there is 
an incorrect reference to footnote 22 in the second paragraph of 
Section 1 in current Rule 4. NSCC is proposing to change this reference 
to reflect the correct footnote, which is footnote 2.
Section 2
    Section 2 of Rule 4 currently covers the permitted uses of the 
Clearing Fund (again by ``Fund'' and ``Allocation,'' as set forth in 
current Section 1), including the investment of Clearing Fund Cash and 
Cash Receipts, as well as participants' rights to any interest earned 
or paid on pledged Eligible

[[Page 38383]]

Clearing Fund Securities or cash deposits.
    NSCC is proposing to add a subheading of ``Permitted Use, 
Investment, and Maintenance of Clearing Fund Assets'' to Section 2 and 
restructure Section 2 so that it applies to Members only. NSCC is also 
proposing to restructure Section 2 so that the permitted use of 
Clearing Fund appears first, then the investment of Clearing Fund, 
followed by maintenance of Clearing Fund.
    Under the proposed rule change, the permitted use of Clearing Fund 
paragraph would continue to have the same provisions as they relate to 
how the Clearing Fund can be used by NSCC, except the provisions would 
be streamlined and clarified. Specifically, in order to be consistent 
with the proposed change in Section 4 (as described below) regarding 
NSCC requiring Members to pay their loss allocation amounts (leaving 
their Required Fund Deposits intact), NSCC is proposing to modify the 
permitted use of Clearing Fund to make it clear that the Clearing Fund 
can be used by NSCC to secure each Member's performance of obligations 
to NSCC, including each Member's obligations with respect to any loss 
allocations as set forth in Section 4 of Rule 4. NSCC is also proposing 
to delete the defined term of Cash Receipts and related provisions from 
Rule 4 because, unlike the Clearing Fund, Cash Receipts are money 
payments received from participants and payable to others; therefore, 
NSCC believes that continuing to include Cash Receipts in Rule 4 is no 
longer necessary and may cause confusion among Members.
    NSCC is proposing to add a paragraph that provides that each time 
NSCC uses any part of the Clearing Fund to provide liquidity to NSCC to 
meet its settlement obligations, including, without limitation, through 
the direct use of cash in the Clearing Fund or through the pledge or 
rehypothecation of pledged Eligible Clearing Fund Securities in order 
to secure liquidity for more than thirty (30) calendar days, NSCC, at 
the close of business on the 30th calendar day (or on the first 
business day thereafter) from the day of such use, would consider the 
amount used but not yet repaid as a loss to the Clearing Fund incurred 
as a result of a Defaulting Member Event and immediately allocate such 
loss in accordance with proposed Section 4 of Rule 4. NSCC believes 
that this proposed change would increase transparency and accessibility 
of the Rules for Members by specifying a point in time by which NSCC 
would need to replenish the Clearing Fund through loss allocation if 
NSCC uses the Clearing Fund to provide or secure liquidity to NSCC to 
meet its settlement obligations. NSCC believes that a period of thirty 
(30) calendar days would be appropriate because it would provide 
sufficient time for NSCC to determine whether it would be able to 
obtain the necessary funds from liquidation of the portfolio of the 
Defaulting Member to repay the used Clearing Fund amount. In addition, 
this proposed change would also harmonize this section with the 
comparable section in the FICC/GSD Rules and FICC/MBSD Rules,\38\ so as 
to provide consistent treatment for firms that are members of both NSCC 
and FICC.
---------------------------------------------------------------------------

    \38\ See Section 5 of FICC/GSD Rule 4 and Section 5 of FICC/MBSD 
Rule 4, supra note 31.
---------------------------------------------------------------------------

    Proposed Section 2 would continue to have the same provisions 
concerning the investment and maintenance of the Clearing Fund, except 
these provisions would also be streamlined and clarified. Specifically, 
NSCC is proposing language to make it clear that it may invest cash in 
the Clearing Fund in accordance with the Clearing Agency Investment 
Policy adopted by NSCC.\39\ NSCC would revise the relocated sentence 
from Section 1 which provides that NSCC shall not be required to 
segregate any Clearing Fund (again, in terms of ``Fund,'' ``System,'' 
and ``Allocation,'' as discussed above) in order to (i) conform to the 
proposed deletions in Section 1 and use the newly defined term of 
``Actual Deposit'' as set forth in Section 1 and (ii) make clear that 
NSCC would not be required to segregate a Member's Actual Deposit but 
that NSCC would maintain books and records concerning the assets that 
constitute each Member's Actual Deposit.
---------------------------------------------------------------------------

    \39\ See Securities Exchange Act Release No. 79528 (December 12, 
2016), 81 FR 91232 (December 16, 2016) (SR-NSCC-2016-003). The 
Clearing Agency Investment Policy (the ``Policy'') governs the 
management, custody, and investment of cash deposited to the 
Clearing Fund, the proprietary liquid net assets (cash and cash 
equivalents) of NSCC and other funds held by NSCC. The Policy sets 
forth guiding principles for the investment of those funds, which 
include adherence to a conservative investment philosophy that 
places the highest priority on maximizing liquidity and avoiding 
risk, as well as mandating the segregation and separation of funds. 
The Policy also addresses the process for evaluating credit ratings 
of counterparties and identifies permitted investments within 
specified parameters. In general, assets are required to be held by 
regulated and creditworthy financial institution counterparties and 
invested in financial instruments that, with respect to the Clearing 
Fund, may include deposits with banks, including the Federal Reserve 
Bank of New York, collateralized reverse-repurchase agreements, 
direct obligations of the U.S. government and money-market mutual 
funds.
---------------------------------------------------------------------------

    Under the proposed rule change, Members would continue to be 
entitled to any interest earned or paid on Clearing Fund cash deposits 
and pledged Eligible Clearing Fund Securities; however, NSCC is 
proposing additional language to make it clear that interest on pledged 
Eligible Clearing Fund Securities that is received by NSCC would be 
credited to a Member's cash deposits to the Clearing Fund, except in 
the event of a default by such Member on any obligations to NSCC, in 
which case NSCC may exercise its rights under proposed Section 3 of 
Rule 4.
Section 3
    Section 3 of Rule 4 currently provides that NSCC may apply a 
participant's actual deposit to any obligation the participant has to 
NSCC that the participant has failed to satisfy and to any Cross-
Guaranty Obligation. Participants are required to eliminate any 
resulting deficiencies in their Required Deposits within such time as 
NSCC requires. Section 3 also currently provides for the manner in 
which loss allocation would apply with respect to Off-the-Market 
Transactions.
    Under the proposed rule change, NSCC is proposing to add a 
subheading of ``Application of Clearing Fund Deposits and Other Amounts 
to Members' Obligations'' and to delete provisions that do not apply to 
Members and/or that reference the Clearing Fund being allocated into 
Funds/Allocations by Systems and services. Under the proposed rule 
change, NSCC would retain the provisions in Section 3 regarding 
applying the Member's Actual Deposit to satisfy an obligation to NSCC 
that a Member fails to satisfy and the requirement to replenish the 
Required Fund Deposit as necessary, but NSCC proposes to add clarifying 
language that, in addition to a Member's Actual Deposit, NSCC will also 
apply any amounts available under a Clearing Agency Cross-Guaranty 
Agreement and any proceeds therefrom to satisfy the obligation. NSCC 
also proposes to add language making it clear that NSCC may take any 
and all actions with respect to the assets and amounts referenced in 
the prior sentence, including assignment, transfer, and sale of any 
Eligible Clearing Fund Securities, that NSCC determines is appropriate.
    Under the proposed rule change, NSCC would move the provision 
regarding allocation of losses from Off-the-Market Transactions to 
proposed Section 4 of Rule 4, which addresses allocation of losses to 
Members. NSCC would streamline and clarify the remaining provisions for 
transparency and accessibility.

[[Page 38384]]

Section 4 and Section 5
    Current Section 4 of Rule 4 contains NSCC's current loss allocation 
waterfall, which would be initiated if NSCC incurs a loss or liability 
in a System that is not satisfied pursuant to current Section 3. 
Section 4 currently provides for the following loss allocation 
waterfall:
    (i) Application of NSCC's existing retained earnings or such lesser 
part \40\ of the existing retained earnings unless the Board of 
Directors elects to apply the Fund/Allocation for a particular System 
or service.
---------------------------------------------------------------------------

    \40\ Addendum E provides that NSCC ``will apply no less than 
twenty-five percent (25%) of its retained earnings, existing at the 
time of a Member impairment which gives rise to a loss or liability 
not satisfied by the impaired Member's Clearing Fund deposit, to 
such loss or liability.'' Supra note 5.
---------------------------------------------------------------------------

    (ii) If a loss or liability remains after the application of the 
retained earnings, NSCC would apply the Clearing Fund (this application 
is subject to the current structure where the Rules provide that the 
Clearing Fund is allocated to different Systems/services).
    a. NSCC is required to provide participants and the Commission with 
5 business days' prior notice before applying the Clearing Fund.
    b. Participants (other than those responsible for causing the loss 
or liability) would be charged pro rata based upon their allocation to 
the applicable Fund, less any amounts that participants were required 
to deposit pursuant to Rule 15.
    Section 5 of Rule 4 currently states that if a pro rata charge is 
made pursuant to Rule 4 against a participant's actual Clearing Fund 
deposit, and as a consequence thereof the participant's remaining 
deposit is less than its Required Deposit, the participant would, upon 
demand by NSCC, be required to replenish its deposit to eliminate the 
deficiency within such time as NSCC shall require. Current Section 5 
further provides that if the participant does not take this required 
action, NSCC may take disciplinary action against the participant, and 
any disciplinary action taken against the participant or the voluntary 
or involuntary termination of the participant's membership will not 
affect the obligations of the participant to NSCC or any remedy to 
which NSCC may be entitled under applicable law.
    Under the proposed rule change, NSCC is proposing to add a 
subheading of ``Loss Allocation Waterfall, Off-the-Market 
Transactions'' to Section 4 and delete provisions that do not apply to 
Members and/or that reference the Clearing Fund being allocated into 
Funds/Allocations by System or service. In addition, NSCC is proposing 
to restructure its loss allocation waterfall as described below.
    Under the proposal, Section 4 would make clear that the loss 
allocation waterfall applies to any loss and liability incurred by NSCC 
arising out of or relating to a Defaulting Member Event or a Declared 
Non-Default Loss Event.
    As proposed, Section 4 would provide that, for the purposes of Rule 
4, the term ``Defaulting Member'' would mean a Member for which NSCC 
has ceased to act pursuant to Rule 46,\41\ the term ``Defaulting Member 
Event'' would mean the determination by NSCC to cease to act for a 
Member pursuant to Rule 46, and the term ``Declared Non-Default Loss 
Event'' would mean the determination by the Board of Directors that a 
loss or liability incident to the clearance and settlement business of 
NSCC may be a significant and substantial loss or liability that may 
materially impair the ability of NSCC to provide clearance and 
settlement services in an orderly manner and will potentially generate 
losses to be mutualized among Members in order to ensure that NSCC may 
continue to offer clearance and settlement services in an orderly 
manner. Proposed Section 4 would establish the concept of an ``Event 
Period'' to provide for a clear and transparent way of handling 
multiple loss events occurring in a period of ten (10) business days, 
which would be grouped into an Event Period.\42\ As stated above, both 
Defaulting Member Events or Declared Non-Default Loss Events could 
occur within the same Event Period.
---------------------------------------------------------------------------

    \41\ NSCC may cease to act for a Member pursuant to any of the 
circumstances set forth under Rule 46 (Restrictions on Access to 
Services), including, but not limited to, in the event the Member is 
in default of any delivery of funds or securities to NSCC. Supra 
note 5.
    \42\ Supra note 15.
---------------------------------------------------------------------------

    Under the proposal, an Event Period with respect to a Defaulting 
Member Event would begin on the day NSCC notifies participants that it 
has ceased to act for the Defaulting Member (or the next business day, 
if such day is not a business day). In the case of a Declared Non-
Default Loss Event, an Event Period would begin on the day that NSCC 
notifies Members of the Declared Non-Default Loss Event (or the next 
business day, if such day is not a business day). If a subsequent 
Defaulting Member Event or Declared Non-Default Loss Event occurs 
during an Event Period, any losses or liabilities arising out of or 
relating to any such subsequent event would be resolved as losses or 
liabilities that are part of the same Event Period, without extending 
the duration of such Event Period.
    As proposed, each Member would be obligated to NSCC for the entire 
amount of any loss or liability incurred by NSCC arising out of or 
relating to any Defaulting Member Event with respect to such Member. 
Under the proposal, to the extent that such loss or liability is not 
satisfied pursuant to proposed Section 3 of Rule 4, NSCC would apply a 
Corporate Contribution thereto and charge the remaining amount of such 
loss or liability ratably to other Members, as provided in proposed 
Section 4.
    Under proposed Section 4, the loss allocation waterfall would begin 
with a corporate contribution from NSCC (``Corporate Contribution''), 
as is the case under the current Rules, but in a different form than 
under the current Section 4 of Rule 4. Today, pursuant to Addendum E, 
in the event of a Member impairment, NSCC is required to apply at least 
25% of its retained earnings existing at the time of a Member 
impairment; however, no corporate contribution from NSCC is currently 
required for losses resulting other than those from Member impairments. 
Under the proposal, NSCC would amend Section 5 to add a subheading of 
``Corporate Contribution'' and define NSCC's Corporate Contribution 
with respect to any loss allocation pursuant to proposed Section 4 of 
Rule 4, whether arising out of or relating to a Defaulting Member Event 
or a Declared Non-Default Loss Event, as an amount that is equal to 
fifty (50) percent of the amount calculated by NSCC in respect of its 
General Business Risk Capital Requirement as of the end of the calendar 
quarter immediately preceding the Event Period.\43\ The proposed rule 
change would specify that NSCC's General Business Risk Capital 
Requirement, as defined in NSCC's Clearing Agency Policy on Capital 
Requirements,\44\ is, at a minimum, equal to the regulatory capital 
that NSCC is required to maintain in compliance with Rule 17Ad-
22(e)(15) under the Act.\45\
---------------------------------------------------------------------------

    \43\ Supra note 8.
    \44\ Supra note 9.
    \45\ Supra note 10.
---------------------------------------------------------------------------

    As proposed, if NSCC applies the Corporate Contribution to a loss 
or liability arising out of or relating to one or more Defaulting 
Member Events or Declared Non-Default Loss Events relating to an Event 
Period, then for any subsequent Event Periods that occur during the two 
hundred fifty (250) business days thereafter,\46\ the Corporate 
Contribution would be reduced to the

[[Page 38385]]

remaining unused portion of the Corporate Contribution amount that was 
applied for the first Event Period. Proposed Section 5 would require 
NSCC to notify Members of any such reduction to the Corporate 
Contribution.
---------------------------------------------------------------------------

    \46\ Supra note 13.
---------------------------------------------------------------------------

    Currently, the Rules do not require NSCC to contribute its retained 
earnings to losses and liabilities other than from Member impairments. 
Under the proposal, NSCC would expand the application of its corporate 
contribution beyond losses and liabilities from Member impairments. The 
proposed Corporate Contribution would apply to losses or liabilities 
relating to or arising out of Defaulting Member Events and Declared 
Non-Default Loss Events, and would be a mandatory loss contribution by 
NSCC prior to any allocation of the loss among Members.
    Addendum E currently provides NSCC the option to contribute amounts 
higher than the specified percentage of retained earnings, as 
determined by the Board of Directors, to any loss or liability incurred 
by NSCC as the result of a Member's impairment. This option would be 
retained and expanded under the proposal to also cover non-default 
losses. Proposed Section 5 would provide that nothing in the Rules 
would prevent NSCC from voluntarily applying amounts greater than the 
Corporate Contribution against any NSCC loss or liability, whether 
arising out of or relating to a Defaulting Member Event or a Declared 
Non-Default Loss Event, if the Board of Directors, in its sole 
discretion, believes such to be appropriate under the factual situation 
existing at the time.
    Proposed Section 4 of Rule 4 would provide that NSCC shall apply 
the Corporate Contribution to losses and liabilities that arise out of 
or relate to one or more Defaulting Member Events and/or Declared Non-
Default Loss Events that occur within an Event Period. The proposed 
rule change also provides that if losses and liabilities with respect 
to such Event Period remain unsatisfied following application of the 
Corporate Contribution, NSCC would allocate such losses and liabilities 
to Members, as described below.
    Proposed Section 4 of Rule 4 would also retain the requirement of 
loss allocation among Members if a loss or liability remains after the 
application of the Corporate Contribution, as described above. In 
contrast to the current Section 4 where NSCC would apply Members' 
Required Deposits to the mutualized loss allocation amounts, under the 
proposal, NSCC would require Members to pay their loss allocation 
amounts (leaving their Required Fund Deposits intact).\47\ Loss 
allocation obligations would continue to be calculated based upon a 
Member's pro rata share of losses and liabilities (although the pro 
rata share would be calculated differently than it is today), and 
Members would still retain the ability to voluntarily withdraw from 
membership and cap their loss allocation obligation (although the loss 
allocation obligation would also be calculated differently than it is 
today).
---------------------------------------------------------------------------

    \47\ NSCC believes that shifting from the two-step methodology 
of applying the Clearing Fund and then requiring Members to 
immediately replenish it, to requiring direct payment would increase 
efficiency while preserving the right to charge a Member's Clearing 
Fund deposits in the event the Member does not timely pay. Such a 
failure to pay would trigger recourse to the Clearing Fund deposits 
of the Member under proposed Section 3 of Rule 4. In addition, this 
change would provide greater stability for NSCC in times of stress 
by allowing NSCC to retain the Clearing Fund, its critical prefunded 
resource, while charging loss allocations. NSCC believes doing so 
would allow NSCC to cover its current credit exposures to Members at 
all times. By retaining the Clearing Fund as proposed, NSCC could 
use the Clearing Fund to secure the performance obligations of 
Members to NSCC, including their payment obligation for any loss 
allocation, while maintaining access to prefunded resources. By 
being able to manage its current credit exposures throughout the 
loss allocation process, NSCC would be able to continue to provide 
its critical operations and services during what would be expected 
to be a stressful period.
---------------------------------------------------------------------------

    The proposed rule change to Section 4 of Rule 4 would clarify that 
each Member that is a Member on the first day of an Event Period would 
be obligated to pay its pro rata share of losses and liabilities 
arising out of or relating to each Defaulting Member Event (other than 
a Defaulting Member Event with respect to which it is the Defaulting 
Member) and each Declared Non-Default Loss Event occurring during the 
Event Period. The proposal would make it clear that any Member for 
which NSCC ceases to act on a non-business day, triggering an Event 
Period that commences on the next business day, shall be deemed to be a 
Member on the first day of that Event Period.
    Under the proposed rule change, a loss allocation ``round'' would 
mean a series of loss allocations relating to an Event Period, the 
aggregate amount of which is limited by the round cap. When the 
aggregate amount of losses allocated in a round equals the round cap, 
any additional losses relating to the applicable Event Period would be 
allocated in one or more subsequent rounds, in each case subject to a 
round cap for that round. NSCC may continue the loss allocation process 
in successive rounds until all losses from the Event Period are 
allocated among Members that have not submitted a Loss Allocation 
Withdrawal Notice in accordance with proposed Section 6 of Rule 4.
    As proposed, each loss allocation would be communicated to Members 
by the issuance of a Loss Allocation Notice. Under the proposal, each 
Member's pro rata share of losses and liabilities to be allocated in 
any round would be equal to (i) the Member's Average RFD divided by 
(ii) the sum of Average RFD amounts of all Members subject to loss 
allocation in such round.
    Each Loss Allocation Notice would specify the relevant Event Period 
and the round to which it relates. The first Loss Allocation Notice in 
any first, second, or subsequent round would expressly state that such 
Loss Allocation Notice reflects the beginning of the first, second, or 
subsequent round, as the case may be, and that each Member in that 
round has five (5) business days from the issuance of such first Loss 
Allocation Notice for the round (such period, a ``Loss Allocation 
Withdrawal Notification Period'') to notify NSCC of its election to 
withdraw from membership with NSCC pursuant to proposed Section 6 of 
Rule 4, and thereby benefit from its Loss Allocation Cap.\48\ As 
proposed, the ``Loss Allocation Cap'' of a Member would be equal to the 
greater of (x) its Required Fund Deposit on the first day of the 
applicable Event Period and (y) its Average RFD.
---------------------------------------------------------------------------

    \48\ Supra note 18.
---------------------------------------------------------------------------

    NSCC is proposing to clarify that after a first round of loss 
allocation with respect to an Event Period, only Members that have not 
submitted a Loss Allocation Withdrawal Notice in accordance with 
proposed Section 6 of Rule 4 would be subject to further loss 
allocation with respect to that Event Period.
    As proposed, Members would have two (2) business days after NSCC 
issues a first round Loss Allocation Notice to pay the amount specified 
in any such notice.\49\ On a subsequent round (i.e., if the first round 
did not cover the entire loss of the Event Period because NSCC was only 
able to allocate up to the round cap), Members would also have two (2) 
business days after notice by NSCC to pay their loss allocation amounts 
(again subject to their Loss Allocation Caps), unless Members have 
notified (or will timely notify) NSCC of their election to withdraw 
from membership with respect to a prior loss allocation round pursuant 
to proposed Section 6 of Rule 4.
---------------------------------------------------------------------------

    \49\ Supra note 22.
---------------------------------------------------------------------------

    As proposed, Section 4 would also provide that, to the extent that 
a Member's Loss Allocation Cap exceeds

[[Page 38386]]

the Member's Required Fund Deposit on the first day of the applicable 
Event Period, NSCC may in its discretion retain any excess amounts on 
deposit from the Member, up to the Member's Loss Allocation Cap.
    Under the proposal, if a Member fails to make its required payment 
in respect of a Loss Allocation Notice by the time such payment is due, 
NSCC would have the right to proceed against such Member as a Member 
that has failed to satisfy an obligation in accordance with proposed 
Section 3 of Rule 4 described above. Members who wish to withdraw would 
be required to comply with the requirements in proposed Section 6 of 
Rule 4, described further below. Specifically, proposed Section 4 of 
Rule 4 would provide that if, after notifying NSCC of its election to 
withdraw from membership pursuant to proposed Section 6 of Rule 4, the 
Member fails to comply with the provisions of proposed Section 6 of 
Rule 4, its notice of withdrawal would be deemed void and any further 
losses resulting from the applicable Event Period may be allocated 
against it as if it had not given such notice.
    Under the proposal, NSCC would delete the provision in current 
Section 4 of Rule 4 that requires NSCC to provide Members and the 
Commission with 5 business days' prior notice before applying the 
Clearing Fund to a loss or liability because such requirement would no 
longer be relevant under the proposed rule change. Under the proposed 
rule change, NSCC would notify Members subject to loss allocation of 
the amounts being allocated to them in one or more Loss Allocation 
Notices. As proposed, instead of applying the Clearing Fund, NSCC would 
require Members to pay their loss allocation amounts (leaving their 
Clearing Fund deposits intact). In order to conform to these proposed 
rule changes, NSCC is proposing to eliminate the required notification 
to Members regarding the application of Clearing Fund in current 
Section 4 of Rule 4. NSCC is also proposing to delete the required 
notification to the Commission regarding the application of Clearing 
Fund in the same section. While as a practical matter, NSCC would 
notify the Commission of a decision to loss allocate, NSCC does not 
believe such notification needs to be specified in the Rules.
    Under the proposed rule change, NSCC would move the provision 
related to Off-the-Market Transactions from current Section 3 of Rule 4 
to proposed Section 4 of Rule 4 and clarify that (i) a loss or 
liability of NSCC in connection with the close-out or liquidation of an 
Off-the-Market Transaction would be allocated to the Member that was 
the counterparty to such transaction and (ii) no allocation would be 
made if the Defaulting Member satisfied all applicable intraday mark-
to-market margin charges assessed by NSCC with respect to the Off-the-
Market Transaction prior to its default.\50\
---------------------------------------------------------------------------

    \50\ See Securities Exchange Act Release No. 79598 (December 19, 
2016), 81 FR 94462 (December 23, 2016) (SR-NSCC-2016-005), at 94465, 
and Securities Exchange Act Release No. 79592 (December 19, 2016), 
81 FR 94448 (December 23, 2016) (SR-NSCC-2016-803), at 94452.
---------------------------------------------------------------------------

Section 6
    Proposed Section 6 of Rule 4 would include the provisions regarding 
withdrawal from membership currently covered by Section 8 of Rule 4. 
NSCC believes that relocating the provisions on withdrawal from 
membership as it pertains to loss allocation, so that it comes right 
after the section on the loss allocation waterfall, would provide for 
the better organization of Rule 4. As proposed, the subheading for 
Section 6 would read ``Withdrawal Following Loss Allocation.''
    Currently, Section 8 of Rule 4 provides that participants may 
notify NSCC within ten (10) business days after receipt of notice of a 
pro rata charge that they have elected to terminate their membership 
and thereby avail themselves of a cap on loss allocation, which is 
currently their Required Deposit as fixed immediately prior to the time 
of the pro rata charge.
    As stated above, under the proposed rule change, a Member who 
wishes to withdraw from membership in respect of a loss allocation 
round must provide notice of its election to withdraw (``Loss 
Allocation Withdrawal Notice'') within five (5) business days from the 
issuance of the first Loss Allocation Notice in any round.\51\ In order 
to avail itself of its Loss Allocation Cap, the Member would need to 
follow the requirements in proposed Section 6 of Rule 4, which would 
provide that the Member must: (i) Specify in its Loss Allocation 
Withdrawal Notice an effective date for withdrawal from membership, 
which date shall not be later than ten (10) business days following the 
last day of the Loss Allocation Withdrawal Notification Period (i.e., 
no later than ten (10) business days after the 5th business day 
following the first Loss Allocation Notice in that round of loss 
allocation),\52\ (ii) cease all activity that would result in 
transactions being submitted to NSCC for clearance and settlement for 
which such Member would be obligated to perform, where the scheduled 
final settlement date would be later than the effective date of the 
Member's withdrawal, and (iii) ensure that all clearance and settlement 
activity for which such Member is obligated to NSCC is fully and 
finally settled by the effective date of the Member's withdrawal, 
including, without limitation, by resolving by such date all fails and 
buy-in obligations.
---------------------------------------------------------------------------

    \51\ Supra note 18.
    \52\ Supra note 25.
---------------------------------------------------------------------------

    Proposed Section 6 of Rule 4 would provide that a Member that 
withdraws in compliance with the requirements of proposed Section 6 of 
Rule 4 would nevertheless remain obligated for its pro rata share of 
losses and liabilities with respect to any Event Period for which it is 
otherwise obligated under proposed Rule 4; however, the Member's 
aggregate obligation would be limited to the amount of its Loss 
Allocation Cap (as fixed in the round for which it withdrew).
    NSCC is proposing to include a sentence in proposed Section 6 of 
Rule 4 to make it clear that if the Member fails to comply with the 
requirements set forth in that section, its Loss Allocation Withdrawal 
Notice will be deemed void, and the Member will remain subject to 
further loss allocations pursuant to proposed Section 4 of Rule 4 as if 
it had not given such notice.
    Currently, Section 8 also contains provisions regarding additional 
pro rata charges that may be made by NSCC for the same loss or 
liability under the existing loss allocation process and the applicable 
caps that participants wishing to voluntarily terminate their 
membership after such additional pro rata charges are noticed may avail 
themselves of. These provisions would be replaced by the loss 
allocation process contained in proposed Section 4 described above.
Section 7
    As proposed, Section 7 would cover the provisions on the return of 
a Member's Clearing Fund deposit that are currently covered by Section 
6 of Rule 4. Proposed Section 7's subheading would be ``Return of 
Members' Clearing Fund Deposits'' and would apply only to Members.
    Currently, with respect to the return of Clearing Fund deposits, 
Section 6 of Rule 4 states that NSCC will return a participant's 
Clearing Fund deposit 90 days after 3 conditions are met: (i) The 
participant ceases to be a participant, (ii) all transactions open at 
the time the participant ceases to be a participant which could result 
in a charge to the Clearing Fund have been closed, and (iii) all 
obligations of the participant to NSCC have been satisfied or have been

[[Page 38387]]

deducted from the participant's Clearing Fund deposit by NSCC, provided 
that the participant has provided NSCC with satisfactory indemnities or 
guarantees or another participant has been substituted on all 
transactions and obligations of the participant.
    Current Section 6 provides further that in the absence of an 
acceptable guarantee, indemnity or substitution, NSCC will retain the 
entire Clearing Fund deposit of a participant if such deposit is less 
than $100,000 for two (2) years (or four (4) years for Members who have 
Sponsored Accounts at a Qualified Securities Depository) after 
conditions described in (i), (ii) and (iii) of the paragraph above have 
occurred. If the participant's Clearing Fund deposit is equal to or 
greater than $100,000, NSCC will retain the greater of twenty-five (25) 
percent of a participant's average Clearing Fund requirement over the 
twelve (12) months immediately prior to the date the participant ceased 
to be a participant, or $100,000 for two (2) years (or four (4) years 
for Members who have Sponsored Accounts at a Qualified Securities 
Depository) after conditions described in (i), (ii) and (iii) of the 
paragraph above have occurred.
    Current Section 6 states that if a participant made a deposit with 
respect to the Mutual Fund Services or Insurance and Retirement 
Processing Services, the participant will be entitled to the return of 
this deposit ninety (90) days after all associated transactions in 
these services have been satisfied.
    Finally, Section 6 currently provides that any obligation of a 
participant to NSCC unsatisfied at the time the participant ceases to 
be a participant will not be affected by such cessation of membership.
    Proposed Section 7 would reduce the period in which NSCC may retain 
a Member's Clearing Fund deposit. Specifically, NSCC proposes that if a 
Member gives notice to NSCC of its election to withdraw from 
membership, NSCC will return the Member's Actual Deposit in the form of 
(i) cash or securities within thirty (30) calendar days and (ii) 
Eligible Letters of Credit within ninety (90) calendar days, after all 
of the Member's transactions have settled and all matured and 
contingent obligations to NSCC for which the Member was responsible 
while a Member have been satisfied, except NSCC may retain for up to 
two (2) years the Actual Deposits from Members who have Sponsored 
Accounts at DTC. NSCC believes that shortening the time periods for the 
return of a Member's Clearing Fund deposit would be helpful to firms 
who have exited NSCC so that they could have use of the deposits sooner 
than under the current Rules, while at the same time protecting NSCC 
because such return would only occur if all obligations of the 
terminating Member to NSCC have been satisfied. Proposed Section 7 
would also harmonize the retention period for a Member's deposits to 
the Clearing Fund with the FICC/GSD Rules,\53\ thus providing 
consistent treatment for firms that are members of both NSCC and FICC. 
Similarly, the Clearing Fund deposit retention for Members who have 
Sponsored Accounts at DTC would be reduced in order to stay consistent 
with the proposed retention period in the rules of DTC.\54\ In 
addition, NSCC proposes to make it clear that a Member's obligations to 
NSCC would include both matured as well as contingent obligations.
---------------------------------------------------------------------------

    \53\ Section 10 of FICC/GSD Rule 4, in relevant part, states 
that ``If a Netting Member gives notice to the Corporation pursuant 
to Rule 3 of its election to terminate its membership in the Netting 
System, the Member's deposits to the Clearing Fund in the form of 
cash or securities shall be returned to it within 30 calendar days 
thereafter . . . provided that all amounts owing to the Corporation 
by the Member have been paid to the Corporation prior to such return 
and the Member has no remaining open Net Settlement Position, Fail 
Net Settlement Position, or Forward Net Settlement Position.'' Supra 
note 31.
    \54\ On December 18, 2017, DTC submitted a proposed rule change 
and an advance notice to enhance its rules regarding allocation of 
losses. See Securities Exchange Act Release Nos. 82426 (January 2, 
2018), 83 FR 913 (January 8, 2018) (SR-DTC-2017-022) and 82582 
(January 24, 2018), 83 FR 4297 (January 30, 2018) (SR-DTC-2017-804). 
On June 28, 2018, DTC submitted amendments to the proposed rule 
change and advance notice. Copies of the amendments to the proposed 
rule change and the advance notice are available at https://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------

Section 8
    Proposed Section 8 of Rule 4 would cover the subject matter 
currently covered in Section 7 of Rule 4. Proposed Section 8's 
subheading would be ``Changes in Members' Required Fund Deposits'' and 
would apply only to Members.
    Currently, Section 7 of Rule 4 requires participants to satisfy any 
increase in their Required Deposit within such time as NSCC requires. 
At the time the increase becomes effective, the participant's 
obligations to NSCC will be determined in accordance with the increased 
Required Deposit whether or not the Member has so increased its 
deposit. NSCC is not proposing any substantive changes to this 
provision, which will be renumbered as Section 8 of Rule 4 under the 
proposed rule change, except for streamlining the provision and 
limiting its application to Members as stated above.
Section 9
    Currently, Section 9 of Rule 4 addresses situations where a 
participant has excess deposits in the Clearing Fund (i.e., amounts 
above its Required Deposit). The current provision provides that NSCC 
will, on any day that NSCC has determined and provided notification 
that an excess deposit exists with respect to a participant, return an 
excess amount requested by a participant that follows the formats and 
timeframe established by NSCC for such request. The current provision 
makes clear that NSCC will not return the requested excess amount (i) 
until any amount required to be charged against the participant's 
Required Deposit is paid by the participant to NSCC and/or (ii) if NSCC 
determines that the participant's current month's use of one or more 
services is materially different than the previous month's use upon 
which such excess is based. Section 9 currently makes clear that, 
notwithstanding any of the foregoing, NSCC may, in its discretion, 
withhold any or all of a participant's excess deposit if the 
participant has been placed on the Watch List.\55\ Current Section 9 
also makes clear that nothing in this section limits NSCC's rights 
under Rule 15.\56\
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    \55\ Pursuant to Section 4 of Rule 2B, a Member could be placed 
on the Watch List either based on its credit rating of 5, 6 or 7, 
which can either be generated by the Credit Risk Rating Matrix or 
from a manual downgrade, or when NSCC deems such placement as 
necessary to protect NSCC and its Members. Supra note 5.
    \56\ Rule 15 permits NSCC to require a Member, Limited Member or 
any applicant to become either to furnish NSCC adequate assurances 
of the entity's financial responsibility and operational capability 
as NSCC may deem necessary. Supra note 5.
---------------------------------------------------------------------------

    Proposed Section 9 would add a subheading ``Excess Clearing Fund 
Deposits'' and would apply only to Members. NSCC is not proposing any 
substantive changes to this provision, except for streamlining the 
provisions in this section and eliminating the condition described in 
clause (i) of the paragraph above that limits participants' ability to 
request the return of excess amounts on deposit in the Clearing Fund 
and replacing clause (ii) of the paragraph above with a clause that 
provides NSCC may, in its discretion, withhold any or all of a 
participant's excess deposit if NSCC determines that the Member's 
anticipated activities in NSCC in the near future may reasonably be 
expected to be materially different than its activities of the recent 
past. NSCC believes that the proposed additional clause would protect 
NSCC and its participants because the clause would allow NSCC to retain 
excess

[[Page 38388]]

deposits to cover an expected near-term increase in a Member's Required 
Fund Deposit amount due to the anticipated change in the Member's 
activities. The proposed additional clause would also align NSCC's 
Rules with that of FICC/GSD and FICC/MBSD,\57\ thus providing 
consistent treatment for firms that are members of both NSCC and FICC.
---------------------------------------------------------------------------

    \57\ See Section 9 of FICC/GSD Rule 4 (Clearing Fund and Loss 
Allocation) and Section 9 of FICC/MBSD Rule 4 (Clearing Fund and 
Loss Allocation). Supra note 31.
---------------------------------------------------------------------------

Section 10
    Current Section 10 of Rule 4 provides for crediting persons against 
whom losses are charged pursuant to Rule 4 if there is a subsequent 
recovery of such losses by NSCC. NSCC is not proposing any changes to 
this section other than (i) making it clear that no loss allocation 
under proposed Rule 4 would constitute a waiver of any claim NSCC may 
have against a Member for any losses or liabilities to which the Member 
is subject under the Rules, including, without limitation, any loss or 
liability to which it may be subject under proposed Rule 4, and (ii) 
adding a subheading ``No Waiver; Subsequent Recovery Against Loss 
Amounts'' and replacing ``persons'' with ``Persons,'' which is 
currently defined in Rule 1 (Definitions and Descriptions) to mean ``a 
partnership, corporation, limited liability corporation or other 
organization, entity or an individual.'' NSCC is proposing the change 
in (i) above to preserve its legal rights and to make it clear to 
Members that loss allocation under proposed Rule 4 would not be deemed 
as NSCC waiving any claims it may have against a Member for any losses 
or liabilities to which the Member is subject under the Rules. With 
respect to the proposed change in (ii) above, given that NSCC is a 
corporation, NSCC believes that the term ``Person'' already includes 
NSCC; however, for increased clarity, NSCC is proposing to add 
``including the Corporation'' to make it clear to Members that if there 
is a subsequent recovery of losses charged pursuant to Rule 4, the net 
amount of the recovery would be credited to Persons, including NSCC, 
against whom the loss was charged in proportion to the amounts charged 
against them.
Section 11
    Current Section 11 of Rule 4 provides that a participant may 
withdraw Eligible Clearing Fund Securities from pledge, provided that 
the participant has deposited cash with, or pledged additional Eligible 
Clearing Fund Securities to, NSCC that, in the aggregate, secure the 
open account indebtedness of the participant and/or satisfy the 
participant's Required Deposit. Proposed Section 11 would add a 
subheading ``Substitution or Withdrawal of Pledged Securities'' and 
would apply only to Members. NSCC is not proposing any substantive 
changes to this provision, except for changes to improve the 
transparency and accessibility of this section.
Section 12
    Current Section 12 of Rule 4 makes it clear that NSCC has certain 
rights with respect to the Clearing Fund. Proposed Section 12 would add 
a subheading ``Authority of Corporation'' and would apply only to 
Members. NSCC is not proposing any substantive changes to this 
provision, except to clarify that a reference to 30 days in current 
Section 12 would mean 30 calendar days.
Section 13
    NSCC is proposing to add a new Section 13 to Rule 4 that would be 
entitled ``Mutual Fund Deposits.'' Under the proposal, NSCC would 
consolidate provisions from various sections in the current Rule 4 
concerning Mutual Fund/Insurance Services Members and Fund Members and 
group them into proposed Section 13. Aside from the consolidation, NSCC 
is not proposing any substantive changes to these provisions, except 
for changes to (i) reduce NSCC's retention period of Mutual Fund 
Deposits when a Mutual Fund Participant (as defined below and in the 
proposed rule change) elects to withdraw from membership, in order to 
harmonize it with the proposed change in Section 7, as described above, 
and (ii) improve the transparency and accessibility of the provisions.
    Proposed Section 13 would provide that each Member that uses the 
Mutual Fund Services to submit mutual fund purchases, redemptions, or 
exchanges to any Fund Member or another Member and each Mutual Fund/
Insurance Services Member would, and each Fund Member (collectively 
with such Members and Mutual Fund/Insurance Services Members, ``Mutual 
Fund Participants'') may, be required to make a cash deposit to the 
Clearing Fund in the amounts determined in accordance with Procedure XV 
and other applicable Rules (its ``Mutual Fund Deposit'' and, unless 
specified otherwise, for the purposes of the Rules, Required Fund 
Deposits shall include Mutual Fund Deposits). In the case of a Member, 
its Mutual Fund Deposit would be a separate and additional component of 
such Member's deposit to the Clearing Fund but not part of the Member's 
Required Fund Deposit for purposes of calculating pro rata loss 
allocations pursuant to proposed Section 4 of Rule 4.
    As in the current Rules, proposed Section 13 would also provide 
that if any Mutual Fund Participant fails to satisfy any obligation to 
NSCC relating to Mutual Fund Services, notwithstanding NSCC's right to 
reverse in whole or in part any credit previously given to the contra 
side to any outstanding Mutual Fund Services transaction of the Mutual 
Fund/Insurance Services Member, NSCC would first apply such Mutual Fund 
Participant's Mutual Fund Deposit. If after such application any loss 
or liability remains and if such Mutual Fund Participant is a Member 
that is not otherwise obligated to NSCC, NSCC would apply such Member's 
Actual Deposit in accordance with proposed Section 3 of Rule 4. NSCC 
would next allocate any further remaining loss or liability to the 
other Mutual Fund Participants in successive rounds of loss allocations 
in each case up to the aggregate of Mutual Fund Deposits from non-
defaulting Mutual Fund Participants, and after the first such round, 
Mutual Fund Participants that have not submitted a Loss Allocation 
Withdrawal Notice in accordance with proposed Section 6 of Rule 4, 
following the procedures and timeframes set forth in proposed Sections 
4 and 6 of Rule 4 as if such Mutual Fund Participants are Members. If 
any loss or liability remains thereafter and there are no continuing 
Mutual Fund Participants, NSCC would proceed with loss allocations to 
Members for a Defaulting Member Event in accordance with proposed 
Section 4 of Rule 4.
    As proposed, Section 13 would reduce NSCC's retention period of 
Mutual Fund Deposits from ninety (90) days under the current Section 6 
of Rule 4 to thirty (30) calendar days. Specifically, NSCC is proposing 
that a Mutual Fund Participant that elects to withdraw from membership 
would be entitled to the return of its Mutual Fund Deposit no later 
than thirty (30) calendar days after all of its transactions have 
settled and it has satisfied all of its matured and contingent 
obligations to NSCC for which such Mutual Fund Participant was 
responsible while a Mutual Fund Participant. NSCC is proposing this 
change in order to harmonize the retention period of Mutual Fund 
Deposit with the proposed Clearing Fund retention period in proposed 
Section 7 of Rule 4, as described above.

[[Page 38389]]

    As proposed, Section 13 would make it clear that NSCC's rights, 
authority and obligations with respect to deposits to the Clearing Fund 
as set forth in Rule 4 would apply to Mutual Fund Deposits.
Section 14
    NSCC is proposing to add a new Section 14 to Rule 4 that would be 
entitled ``Insurance Deposits.'' Under the proposal, NSCC would 
consolidate provisions from various sections in current Rule 4 
concerning Insurance Carrier/Retirement Services Members and group them 
into proposed Section 14. Aside from the consolidation, NSCC is not 
proposing any substantive changes to these provisions, except for 
changes to (i) reduce NSCC's retention period of Insurance Deposits 
when an Insurance Participant (as defined below and in the proposed 
rule change) elects to withdraw from membership, in order to harmonize 
it with proposed Section 7, as described above, and (ii) improve the 
transparency and accessibility of the provisions.
    As in the current Rules, proposed Section 14 would provide that 
each Mutual Fund/Insurance Services Member that uses the Insurance and 
Retirement Processing Services and each Insurance Carrier/Retirement 
Services Member (collectively, ``Insurance Participants'') may be 
required to make a cash deposit to the Clearing Fund in the amounts 
determined in accordance with Procedure XV and other applicable Rules 
(its ``Insurance Deposit'' and, unless specified otherwise, for the 
purposes of the Rules, Required Fund Deposits shall include Insurance 
Deposits). Proposed Section 14 would also provide that if any Insurance 
Participant fails to satisfy any obligation to NSCC relating to the 
Insurance and Retirement Processing Services, NSCC would first apply 
such Insurance Participant's Insurance Deposit. If after such 
application any loss or liability remains, NSCC would allocate the 
remaining loss or liability to the other Insurance Participants in 
successive rounds of loss allocations in each case up to the aggregate 
of Insurance Deposits from non-defaulting Insurance Participants, and 
after the first such round, Insurance Participants that have not 
submitted a Loss Allocation Withdrawal Notice in accordance with 
proposed Section 6 of Rule 4, following the procedures and timeframes 
set forth in proposed Sections 4 and 6 of Rule 4 as if such Insurance 
Participants are Members. If any loss or liability remains thereafter 
and there are no continuing Insurance Participants, NSCC would proceed 
with loss allocations to Members for a Defaulting Member Event in 
accordance with proposed Section 4 of Rule 4.
    As proposed, Section 14 would reduce NSCC's retention period of 
Insurance Deposits from ninety (90) days under the current Section 6 of 
Rule 4 to thirty (30) calendar days. Specifically, NSCC is proposing 
that an Insurance Participant that elects to withdraw from membership 
would be entitled to the return of its Insurance Deposit no later than 
thirty (30) calendar days after all of its transactions have settled 
and it has satisfied all of its matured and contingent obligations to 
NSCC for which such Insurance Participant was responsible while an 
Insurance Participant. NSCC is proposing this change in order to 
harmonize the retention period of Insurance Deposit with the proposed 
Clearing Fund retention period in proposed Section 7 of Rule 4, as 
described above.
    As proposed, Section 14 would make it clear that NSCC's rights, 
authority and obligations with respect to deposits to the Clearing Fund 
as set forth in Rule 4 would apply to Insurance Deposits.
B. Proposed Changes to Addendum E (Statement of Policy--Application of 
Retained Earnings--Member Impairments) and Addendum K (Interpretation 
of the Board of Directors--Application of Clearing Fund)
    Addendum E is a statement of policy that currently provides that 
NSCC will apply no less than twenty-five (25) percent of its retained 
earnings to cover losses or liabilities from a Member's impairment that 
is not otherwise satisfied by the impaired Member's Clearing Fund 
deposit. NSCC is proposing to delete Addendum E in its entirety because 
it would no longer be relevant given the proposed rule change relating 
to the Corporate Contribution discussed above.
    NSCC is proposing to modify Addendum K to delete all provisions 
associated with loss allocation and application of the Clearing Fund in 
connection with a loss or liability incurred by NSCC, including 
modifying the title of Addendum K. These provisions would no longer be 
necessary under the proposed rule change because the loss allocation 
process in its entirety would be governed by Rule 4. In addition, the 
current language in Addendum K regarding allocation by System would no 
longer be applicable under the proposed rule change as described above. 
NSCC would retain the provisions in Addendum K that pertain to NSCC's 
guaranty and rename Addendum K ``The Corporation's Guaranty.'' NSCC is 
also proposing to replace ``Rules'' with ``Rules and Procedures'' to 
better reflect the name of NSCC's rulebook.
(iii) Other Proposed Rule Changes
    NSCC is proposing changes to Rule 1 (Definitions and Descriptions), 
Rule 2B (Ongoing Membership Requirements and Monitoring), Rule 4(A) 
(Supplemental Liquidity Deposits), Rule 13 (Exception Processing), Rule 
15 (Assurances of Financial Responsibility and Operational Capability), 
Rule 42 (Wind-Down of a Member, Fund Member or Insurance Carrier/
Retirement Services Member), Procedure III (Trade Recording Service 
(Interface with Qualified Clearing Agencies)), Procedure XV (Clearing 
Fund Formula and Other Matters), and Addendum O (Admission of Non-US 
Entities as Direct NSCC Members). NSCC is proposing changes to these 
Rules in order to conform them with the proposed changes to Rule 4 as 
well as to make certain technical changes to these Rules.
    Specifically, NSCC is proposing to add the following defined terms 
to Rule 1, in alphabetical order: Actual Deposit, Average RFD, Clearing 
Fund Cash, Corporate Contribution, Declared Non-Default Loss Event, 
Defaulting Member, Defaulting Member Event, Eligible Letter of Credit, 
Event Period, Insurance Deposit, Insurance Participant, Issuer, Lender, 
Loss Allocation Cap, Loss Allocation Notice, Loss Allocation Withdrawal 
Notice, Loss Allocation Withdrawal Notification Period, Mutual Fund 
Deposit, Mutual Fund Participant, Required Fund Deposit, Termination 
Date, and Voluntary Termination Notice.
    NSCC is proposing to delete the defined term ``The Corporation'' in 
Rule 1 and replace it with ``Corporation'' in Rule 1. NSCC is proposing 
to replace ``Required Deposits'' with ``Required Fund Deposits'' in 
Rule 2B, Rule 4(A), Rule 15, Rule 42, Procedure III, and Procedure XV. 
NSCC is proposing to replace ``Rules'' with ``Rules and Procedures'' in 
Rule 1, Rule 2B, Rule 13, Rule 15, and Procedure III. NSCC is also 
proposing to replace ``Letter of Credit'' with ``Eligible Letter of 
Credit'' in Rule 42 and Addendum O.
    In addition, in Section 5 of Rule 2B, NSCC proposes to change the 
reference to Section 8 of Rule 4 to reflect the updated section number, 
which would be to Section 4 of Rule 4. NSCC is also proposing 
conforming changes to this section to ensure that termination 
provisions in the Rules, whether voluntary or in response to a loss

[[Page 38390]]

allocation, are consistent with one another to the extent appropriate.
    Currently, Section 5 of Rule 2B provides that participants may 
elect to voluntarily retire their membership by providing NSCC with 
written notice of such termination. Such termination will not be 
effective until accepted by NSCC, which shall be evidenced by a notice 
to NSCC's participants announcing the participant's retirement and the 
effective date of the retirement, which is defined as the ``Retirement 
Date.'' This section also provides that a participant's voluntary 
termination of membership shall not affect its obligations to NSCC.
    Where appropriate, NSCC is proposing changes to align Section 5 of 
Rule 2B with the proposed new Section 6 of Rule 4, both of which 
address termination of membership. Specifically, NSCC is proposing to 
rename the subheading of Section 5 of Rule 2B to ``Voluntary 
Termination'' and to change ``retirement'' to ``termination'' and 
``Retirement Date'' to ``Termination Date'' throughout Section 5 of 
Rule 2B. NSCC is also proposing to provide that when a participant 
elects to voluntarily terminate its membership by providing NSCC a 
written notice of such termination (``Voluntary Termination Notice''), 
the participant must specify in its Voluntary Termination Notice a 
desired date for its withdrawal, provided such date shall not be prior 
to the scheduled final settlement date of any remaining obligation owed 
by the participant to NSCC as of the time such Voluntary Termination 
Notice is submitted to NSCC, unless otherwise approved by NSCC. NSCC is 
retaining the provision that makes it clear that the termination will 
not be effective until accepted by NSCC.\58\ NSCC is also retaining the 
provision that describes NSCC's acceptance of the termination; however, 
NSCC is proposing to make it clear that such acceptance, as evidenced 
by a notice to NSCC's participants, would (i) be no later than ten (10) 
business days after the receipt of the Voluntary Termination Notice 
from the participant and (ii) announce the last trade date for the 
participant instead of the Termination Date. In addition, NSCC is 
proposing to make it clear that the Termination Date would be the final 
settlement date of all transactions of the participant. NSCC is 
proposing these clarifying changes so that the Rules would align more 
closely with NSCC's current practice.
---------------------------------------------------------------------------

    \58\ Unlike the Voluntary Termination Notice, the Loss 
Allocation Withdrawal Notice as proposed in Section 6 of Rule 4 does 
not require explicit acceptance by NSCC to be effective. NSCC 
believes that requiring explicit acceptance of the Loss Allocation 
Withdrawal Notice could complicate the loss allocation process and 
potentially result in membership withdrawal being delayed as well as 
detract from the objective to have NSCC know on a timely basis which 
Members would remain subject to the subsequent rounds of loss 
allocation.
---------------------------------------------------------------------------

    As an example, Member A submits a Voluntary Termination Notice to 
NSCC on April 1st indicating its desired termination date is June 15th. 
NSCC would accept such termination request by issuing a notice to 
Members within 10 business days from April 1st; such notice would 
provide that the last trade date for Member A is June 12th, and the 
effective date of Member A's NSCC membership termination would be the 
final settlement date of all transactions of Member A. In contrast, if 
Member A submits a Voluntary Termination Notice on April 1st and 
indicates its desired termination date is April 5th, NSCC would either 
(i) accept such termination notice by issuing a notice to Members on or 
before April 5th; such notice would provide that the last trade date 
for Member A is April 2nd, and the effective date of Member A's NSCC 
membership termination would be the final settlement date of all 
transactions of Member A, or (ii) if NSCC requires additional time to 
process the termination, NSCC would accept such termination notice by 
issuing notice to Members after April 5th but still within 10 business 
days from April 1st; such notice would provide that the last trade date 
for Member A is a date after April 2nd, and the effective date of 
Member A's NSCC membership termination would be the final settlement 
date of all transactions of Member A.
    NSCC is also proposing to clarify that after the close of business 
on the Termination Date,\59\ a participant that terminates its 
membership shall no longer be eligible or required to submit 
transactions to NSCC for clearance and settlement, unless the Board of 
Directors determines otherwise in order to ensure an orderly 
liquidation of the participant's open obligations. If any transaction 
is submitted to NSCC by such participant that is scheduled to settle 
after the Termination Date, the participant's Voluntary Termination 
Notice would be deemed void and the participant would remain subject to 
the Rules as if it had not given such notice. Furthermore, NSCC is 
proposing to add a sentence to Section 5 of Rule 2B to refer 
participants to Sections 7, 13 and 14 of Rule 4, as applicable, 
regarding provisions on the return of a participant's Clearing Fund 
deposit and to specify that if an Event Period were to occur after a 
participant has submitted its Voluntary Termination Notice but on or 
prior to the Termination Date, in order for such participant to benefit 
from its Loss Allocation Cap pursuant to Section 4 of Rule 4, the 
participant would need to comply with the provisions of Section 6 of 
Rule 4 and submit a Loss Allocation Withdrawal Notice, which notice, 
upon submission, would supersede and void any pending Voluntary 
Termination Notice previously submitted by the participant. As an 
example, if an Event Period occurs after submission of the Voluntary 
Termination Notice by a Member but on or prior to the Termination Date, 
and the Member does not subsequently submit a Loss Allocation 
Withdrawal Notice as proposed in Section 6 of Rule 4, then the Member 
would not benefit from its Loss Allocation Cap, i.e., the Member would 
remain obligated for its pro rata share of losses and liabilities with 
respect to any Event Period that commenced on or prior to the 
Termination Date.
---------------------------------------------------------------------------

    \59\ Account(s) of a terminating participant are generally 
deactivated after the close of business on the Termination Date.
---------------------------------------------------------------------------

    In Rule 4(A), NSCC proposes to amend Section 11 to update a cross-
reference to the time period for the refund of deposits to the Clearing 
Fund when a Member ceases to be a participant in order to align it with 
proposed Section 7 of Rule 4, which would reduce the time period from 
90 days to 30 calendar days. NSCC is also proposing to add a reference 
to Section 13 of Rule 4 in clause (c) of Section 13 of Rule 4(A) in 
order to specify that a Special Activity Supplemental Deposit of a 
Member may be used to satisfy a loss or liability as provided in such 
new proposed Section 13. NSCC is also proposing technical changes in 
Sections 2 and 13 of Rule 4(A) to reflect new proposed defined terms in 
the Rules.
    In Rule 13, NSCC would replace ``System'' with ``system'' to 
reflect the proposed deletion of ``System'' as a defined term from Rule 
4 and Addendum K. In Procedure XV, NSCC would replace ``Qualified 
Securities Depository'' with ``DTC'' to be consistent with the proposed 
change in Section 1 of Rule 4.
Member Outreach
    Beginning in August 2017, NSCC conducted outreach to Members in 
order to provide them with advance notice of the proposed changes. As 
of the date of this filing, no written comments relating to the 
proposed changes have been received in response to this outreach. The 
Commission will be notified of any written comments received.

[[Page 38391]]

Implementation Timeframe
    Pending Commission approval, NSCC expects to implement this 
proposal within two (2) business days after approval. Members would be 
advised of the implementation date of this proposal through issuance of 
an NSCC Important Notice.
Expected Effect on Risks to the Clearing Agency, Its Participants and 
the Market
    NSCC believes that the proposed rule changes to enhance the 
resiliency of NSCC's loss allocation process and to shorten the time 
within which NSCC is required to return a former Member's Clearing Fund 
deposit would reduce the risk of uncertainty to NSCC, its Members and 
the market overall. Specifically, by modifying the calculation of 
NSCC's corporate contribution, NSCC would apply a mandatory fixed 
percentage of its General Business Risk Capital Requirement (as 
compared to the current Rules which provide for ``no less than'' a 
percentage of retained earnings), which would provide greater 
transparency and accessibility to Members as to how much NSCC would 
contribute in the event of a loss or liability. By modifying the 
application of NSCC's corporate contribution to apply to Declared Non-
Default Loss Events, in addition to Defaulting Member Events, on a 
mandatory basis, NSCC would expand the application of its corporate 
contribution beyond losses and liabilities from Member impairments, 
which would better align the interests of NSCC with those of its 
Members by stipulating a mandatory application of the Corporate 
Contribution to a Declared Non-Default Loss Event prior to any 
allocation of the loss among Members. Taken together, these proposed 
rule changes would enhance the overall resiliency of NSCC's loss 
allocation process by enhancing the calculation and application of 
NSCC's Corporate Contribution, which is one of the key elements of 
NSCC's loss allocation process. Moreover, by providing greater 
transparency and accessibility to Members, as stated above, the 
proposed rule changes regarding the Corporate Contribution, including 
the proposed replenishment period, would allow Members to better assess 
the adequacy of NSCC's loss allocation process.
    By introducing the concept of an Event Period, NSCC would be able 
to group Defaulting Member Events and Declared Non-Default Loss Events 
occurring in a period of ten (10) business days for purposes of 
allocating losses to Members. NSCC believes that the Event Period would 
provide a defined structure for the loss allocation process to 
encompass potential sequential Defaulting Member Events or Declared 
Non-Default Loss Events that are likely to be closely linked to an 
initial event and/or market dislocation episode. Having this structure 
would enhance the overall resiliency of NSCC's loss allocation process 
because NSCC would be better equipped to address losses that may arise 
from multiple Defaulting Member Events and/or Declared Non-Default Loss 
Events that arise in quick succession. Moreover, the proposed Event 
Period structure would provide certainty for Members concerning their 
maximum exposure to mutualized losses with respect to such events.
    By introducing the concept of ``rounds'' (and accompanying Loss 
Allocation Notices) and applying this concept to the timing of loss 
allocation payments and the Member withdrawal process in connection 
with the loss allocation process, NSCC would (i) set forth a defined 
amount that it would allocate to Members during each round (i.e., the 
round cap), (ii) advise Members of loss allocation obligation 
information as well as round information through the issuance of Loss 
Allocation Notices, and (iii) provide Members with the option to limit 
their loss allocation exposure after the issuance of the first Loss 
Allocation Notice in each round. These proposed rule changes would 
enhance the overall resiliency of NSCC's loss allocation process 
because they would enable NSCC to continue the loss allocation process 
in successive rounds until all of NSCC's losses are allocated and 
enable NSCC to identify continuing Members for purposes of calculating 
subsequent loss allocation obligations in successive rounds. Moreover, 
the proposed rule changes would define for Members a clear manner and 
process in which they could cap their loss allocation exposure to NSCC.
    By implementing a ``look-back'' period to calculate a Member's loss 
allocation obligations and its Loss Allocation Cap, NSCC would 
discourage Members from reducing their settlement activity during a 
time of stress primarily to limit their loss allocation obligations. By 
determining a Member's loss allocation obligations based on the average 
of its Required Fund Deposit over a look-back period and its Loss 
Allocation Cap based on the greater of its Required Fund Deposit or the 
average thereof over a look-back period, NSCC would be able to 
calculate a Member's pro rata share of losses and liabilities based on 
the amount of risk that the Member brings to NSCC. These proposed rule 
changes would enhance the overall resiliency of NSCC's loss allocation 
process because they would deter Members from reducing their settlement 
activity during a time of stress primarily to limit their Loss 
Allocation Caps.
    By reducing the time within which NSCC is required to return a 
former Member's Clearing Fund deposit, NSCC would enable firms that 
have exited NSCC to have access to their funds sooner than under the 
current Rules, while at the same time protecting NSCC and its provision 
of clearance and settlement services because such return would only 
occur if all obligations of the terminating Member to NSCC have been 
satisfied. As such, NSCC would maintain the requisite level of Clearing 
Fund deposit to ensure that it can continue to meet its clearance and 
settlement obligations.
Management of Identified Risks
    NSCC is proposing the rule changes as described in detail above in 
order to enhance the resiliency of NSCC's loss allocation process and 
provide transparency and accessibility to Members regarding NSCC's loss 
allocation process.
Consistency With the Clearing Supervision Act
    The proposed rule change would be consistent with Section 805(b) of 
the Clearing Supervision Act.\60\ The objectives and principles of 
Section 805(b) of the Clearing Supervision Act are to promote robust 
risk management, promote safety and soundness, reduce systemic risks, 
and support the stability of the broader financial system.\61\
---------------------------------------------------------------------------

    \60\ 12 U.S.C. 5464(b).
    \61\ Id.
---------------------------------------------------------------------------

    The proposed rule change would enhance the resiliency of NSCC's 
loss allocation process by (1) modifying the calculation and 
application of NSCC's corporate contribution, (2) introducing an Event 
Period, (3) introducing the concept of ``rounds'' (and accompanying 
Loss Allocation Notices) and applying this concept to the timing of 
loss allocation payments and the Member withdrawal process in 
connection with the loss allocation process, and (4) implementing a 
``look-back'' period to calculate a Member's loss allocation obligation 
(which would replace the current calculation of a Member's loss 
allocation obligation based on the Member's activity in each of the 
various services or ``Systems'' offered by NSCC) and its Loss 
Allocation Cap. Together, these proposed rule changes would (i) create 
greater certainty for Members

[[Page 38392]]

regarding NSCC's obligation towards a loss, (ii) more clearly specify 
NSCC's and Members' obligations toward a loss and balance the need to 
manage the risk of sequential defaults and other potential loss events 
against Members' need for certainty concerning their maximum exposures, 
and (iii) provide Members the opportunity to limit their exposure to 
NSCC by capping their exposure to loss allocation. Reducing the risk of 
uncertainty to NSCC, its Members and the market overall would promote 
robust risk management, promote safety and soundness, reduce systemic 
risks, and support the stability of the broader financial system. 
Therefore, NSCC believes that the proposed rule change to enhance the 
resiliency of NSCC's loss allocation process is consistent with the 
objectives and principles of Section 805(b) of the Clearing Supervision 
Act cited above.
    By reducing the time within which NSCC is required to return a 
former Member's Clearing Fund deposit, NSCC would enable firms that 
have exited NSCC to have access to their funds sooner than under the 
current Rules while at the same time protecting NSCC and its provision 
of clearance and settlement services because such return would only 
occur if all obligations of the terminating Member to NSCC have been 
satisfied. As such, NSCC would maintain the requisite level of Clearing 
Fund deposit to ensure that it can continue to meet its clearance and 
settlement obligations. Enabling NSCC to continue to meet its clearance 
and settlement obligations would promote robust risk management, 
promote safety and soundness, reduce systemic risks, and support the 
stability of the broader financial system. Therefore, NSCC believes 
that this proposed rule change is consistent with the objectives and 
principles of Section 805(b) of the Clearing Supervision Act cited 
above.
    The proposed rule change is also consistent with Rules 17Ad-
22(e)(13) and 17Ad-22(e)(23)(i), promulgated under the Act.\62\ Rule 
17Ad-22(e)(13) under the Act requires, in part, that NSCC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to ensure NSCC has the authority and operational 
capacity to take timely action to contain losses and continue to meet 
its obligations.\63\ As described above, the proposed rule changes to 
(1) modify the calculation and application of NSCC's corporate 
contribution, (2) introduce an Event Period, (3) introduce the concept 
of ``rounds'' (and accompanying Loss Allocation Notices) and apply this 
concept to the timing of loss allocation payments and the Member 
withdrawal process in connection with the loss allocation process, and 
(4) implement a ``look-back'' period to calculate a Member's loss 
allocation obligation (which would replace the current calculation of a 
Member's loss allocation obligation based on the Member's activity in 
each of the various services or ``Systems'' offered by NSCC) and its 
Loss Allocation Cap, taken together, are designed to enhance the 
resiliency of NSCC's loss allocation process. Having a resilient loss 
allocation process would help ensure that NSCC can effectively and 
timely address losses relating to or arising out of either the default 
of one or more Members or one or more non-default loss events, which in 
turn would help NSCC contain losses and continue to meet its clearance 
and settlement obligations. Therefore, NSCC believes that the proposed 
rule changes to enhance the resiliency of NSCC's loss allocation 
process are consistent with Rule 17Ad-22(e)(13) under the Act.
---------------------------------------------------------------------------

    \62\ 17 CFR 240.17Ad-22(e)(13) and (e)(23)(i).
    \63\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(23)(i) under the Act requires NSCC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to publicly disclose all relevant rules and 
material procedures, including key aspects of NSCC's default rules and 
procedures.\64\ The proposed rule changes to (i) align the loss 
allocation rules of the DTCC Clearing Agencies, (ii) improve the 
overall transparency and accessibility of the provisions in the Rules 
governing loss allocation, and (iii) make conforming and technical 
changes, would not only ensure that NSCC's loss allocation rules are, 
to the extent practicable and appropriate, consistent with the loss 
allocation rules of other DTCC Clearing Agencies, but also would help 
to ensure that NSCC's loss allocation rules are transparent and clear 
to Members. Aligning the loss allocation rules of the DTCC Clearing 
Agencies would provide consistent treatment, to the extent practicable 
and appropriate, especially for firms that are participants of two or 
more DTCC Clearing Agencies. Having transparent and clear loss 
allocation rules would enable Members to better understand the key 
aspects of NSCC's default rules and procedures and provide Members with 
increased predictability and certainty regarding their exposures and 
obligations. As such, NSCC believes that the proposed rule changes to 
align the loss allocation rules of the DTCC Clearing Agencies as well 
as to improve the overall transparency and accessibility of NSCC's loss 
allocation rules are consistent with Rule 17Ad-22(e)(23)(i) under the 
Act.
---------------------------------------------------------------------------

    \64\ 17 CFR 240.17Ad-22(e)(23)(i).
---------------------------------------------------------------------------

    Similarly, the proposed rule changes to NSCC's voluntary 
termination provisions would improve the clarity of the Rules and help 
to ensure that NSCC's voluntary termination process is transparent and 
clear to Members. Having clear voluntary termination provisions would 
enable Members to better understand NSCC's voluntary termination 
process and provide Members with increased predictability and certainty 
regarding their rights and obligations with respect to such process. As 
such, NSCC believes that the proposed rule changes to the voluntary 
termination provision are also consistent with Rule 17Ad-22(e)(23)(i) 
under the Act.

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

[[Page 38393]]

     Send an email to [email protected]. Please include 
File Number SR-NSCC-2017-806 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-2017-806. 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-2017-806 and should be submitted on 
or before August 21, 2018.

    By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-16712 Filed 8-3-18; 8:45 am]
 BILLING CODE 8011-01-P

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