Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, To Amend the Loss Allocation Rules and Make Other Changes, 44977-44984 [2018-19053]
Download as PDF
<![CDATA[
Federal Register / Vol. 83, No. 171 / Tuesday, September 4, 2018 / Notices
which is this Recovery/Wind-down
Capital Requirement. Therefore, the
Commission finds that the R&W Plan is
consistent with Rules 17Ad–22(e)(15)(i)
and (ii) under the Act.69
III. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
Act and in particular with the
requirements of Section 17A of the
Act 70 and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,71 that
proposed rule change SR–DTC–2017–
021, as modified by Amendment No. 1,
be, and it hereby is, approved 72 as of
the date of this order or the date of a
notice by the Commission authorizing
DTC to implement advance notice SR–
DTC–2017–803, as modified by
Amendment No. 1, whichever is later.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.73
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–19054 Filed 8–31–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83971; File No. SR–NSCC–
2017–018]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Order Approving a
Proposed Rule Change, as Modified by
Amendment No. 1, To Amend the Loss
Allocation Rules and Make Other
Changes
August 28, 2018.
sradovich on DSK3GMQ082PROD with NOTICES
On December 18, 2017, National
Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
proposed rule change SR–NSCC–2017–
018 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder 2 to
amend its loss allocation rules and make
other conforming and technical
69 17
CFR 240.17Ad–22(e)(15)(i) and (ii).
U.S.C. 78q–1.
71 15 U.S.C. 78s(b)(2).
72 In approving the Proposed Rule Change, the
Commission has considered the Proposed Rule
Change’s impact on efficiency, competition, and
capital formation. See 15 U.S.C. 78c(f).
73 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
70 15
VerDate Sep<11>2014
17:54 Aug 31, 2018
Jkt 244001
changes.3 The proposed rule change was
published for comment in the Federal
Register on January 8, 2018.4 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.5 On March 20, 2018, the
Commission instituted proceedings to
determine whether to approve or
3 On December 18, 2017, NSCC filed the proposed
rule change as advance notice SR–NSCC–2017–806
with the Commission 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) of the Act (‘‘Advance Notice’’). 12 U.S.C.
5465(e)(1) and 17 CFR 240.19b–4(n)(1)(i),
respectively. The Advance Notice was published for
comment in the Federal Register on January 30,
2018. In that publication, the Commission also
extended the review period of the Advance Notice
for an additional 60 days, pursuant to Section
806(e)(1)(H) of the Clearing Supervision Act. 12
U.S.C. 5465(e)(1)(H); Securities Exchange Act
Release No. 82584 (January 24, 2018), 83 FR 4377
(January 30, 2018) (SR–NSCC–2017–806). 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 until 60 days from the date the
information required by the Commission was
received by the Commission. 12 U.S.C.
5465(e)(1)(D); see 12 U.S.C. 5465(e)(1)(E)(ii) and
(G)(ii); 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. 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 filed on December 18,
2017, which was published in the Federal Register
on August 6, 2018. Securities Exchange Act Release
No. 83748 (July 31, 2018), 83 FR 38375 (August 6,
2018) (SR–NSCC–2017–806). NSCC submitted a
courtesy copy of Amendment No. 1 to the Advance
Notice through the Commission’s electronic public
comment letter mechanism. Accordingly,
Amendment No. 1 to the Advance Notice has been
publicly available on the Commission’s website at
https://www.sec.gov/rules/sro/nscc-an.htm since
June 29, 2018. On July 6, 2018, the Commission
received a response to its request for additional
information in consideration of the Advance Notice,
which, in turn, added a further 60 days to the
review period pursuant to Section 806(e)(1)(E) and
(G) of the Clearing Supervision Act. 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. The Commission did not
receive any comments. The proposal, as set forth in
both the Advance Notice and the proposed rule
change, each as modified by Amendments No. 1,
shall not take effect until all required regulatory
actions are completed.
4 Securities Exchange Act Release No. 82428
(January 2, 2018), 83 FR 897 (January 8, 2018) (SR–
NSCC–2017–018).
5 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).
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
44977
disapprove the proposed rule change.6
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.7
On June 28, 2018, NSCC filed
Amendment No. 1 to the proposed rule
change to amend and replace in its
entirety the proposed rule change as
originally filed on December 18, 2017.8
The Commission did not receive any
comments. This order approves the
proposed rule change, as modified by
Amendment No. 1 (hereinafter,
‘‘Proposed Rule Change’’).
I. Description
The Proposed Rule Change consists of
proposed changes to NSCC’s Rules and
Procedures (‘‘Rules’’) 9 in order to (1)
modify the loss allocation process; (2)
align NSCC’s loss allocation rule among
the three clearing agencies of The
Depository Trust & Clearing Corporation
(‘‘DTCC’’)—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’’); 10 (3) reduce the time within
which NSCC is required to return a
former Member’s Clearing Fund deposit;
and (4) make conforming and technical
changes. Each of these proposed
changes is described below. A detailed
description of the specific rule text
changes proposed in this Advance
6 Securities Exchange Act Release No. 82910
(March 20, 2018), 83 FR 12968 (March 26, 2018)
(SR–NSCC–2017–018).
7 Securities Exchange Act Release No. 83510
(June 25, 2018), 83 FR 30791 (June 29, 2018) (SR–
DTC–2017–022, SR–FICC–2017–022, SR–NSCC–
2017–018).
8 Securities Exchange Act Release No. 83633 (July
13, 2018), 83 FR 34227 (July 19, 2018) (SR–NSCC–
2017–018) (‘‘Notice of Amendment No. 1’’). NSCC
submitted a courtesy copy of Amendment No. 1 to
the proposed rule change through the Commission’s
electronic public comment letter mechanism.
Accordingly, Amendment No. 1 to the proposed
rule change has been publicly available on the
Commission’s website at https://www.sec.gov/rules/
sro/nscc-an.htm since June 29, 2018.
9 Each capitalized term not otherwise defined
herein has its respective meaning as set forth in the
Rules, available at https://www.dtcc.com/∼/media/
Files/Downloads/legal/rules/nscc_rules.pdf.
10 DTCC is a user-owned and user-governed
holding company and is the parent company of
DTC, FICC, and NSCC. DTCC operates on a shared
services model with respect to the DTCC Clearing
Agencies. Most corporate functions are established
and managed on an enterprise-wide basis pursuant
to intercompany agreements under which it is
generally DTCC that provides a relevant service to
a DTCC Clearing Agency.
E:\FR\FM\04SEN1.SGM
04SEN1
44978
Federal Register / Vol. 83, No. 171 / Tuesday, September 4, 2018 / Notices
Notice can be found in the Notice of
Amendment No. 1.11
sradovich on DSK3GMQ082PROD with NOTICES
A. Changes to the Loss Allocation
Process
NSCC’s loss allocation rules currently
provide that in the event NSCC ceases
to act 12 for a Member, the amount 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, 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 order: (1) As provided in
Addendum E of the Rules, 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 (2) if a loss still remains, as
provided in Rule 4, the required
Clearing Fund deposits of nondefaulting 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.
NSCC proposes to change the manner
in which each of the aspects of the loss
allocation process described above
would be employed. The proposal
would clarify or adjust certain elements
and introduce certain new loss
allocation concepts, as further discussed
below. In addition, the proposal would
address the loss allocation process as it
relates to losses arising from or relating
to multiple default or non-default events
11 See
Notice of Amendment No. 1, supra note 8.
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 9.
12 When
VerDate Sep<11>2014
17:54 Aug 31, 2018
Jkt 244001
in a short period of time, also as
described below.
NSCC proposes six key changes to
enhance NSCC’s loss allocation process.
Specifically, NSCC proposes to make
changes regarding (1) the Corporate
Contribution, (2) the Event Period, (3)
the loss allocation round and notice, (4)
the look-back period, (5) the loss
allocation withdrawal notice and cap,
and (6) the governance around nondefault losses, each of which is
discussed below.
(1) Corporate Contribution
Addendum E of the Rules currently
provides that NSCC will contribute no
less than 25 percent 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 percent
of the NSCC General Business Risk
Capital Requirement.13
NSCC’s General Business Risk Capital
Requirement, as defined in NSCC’s
Clearing Agency Policy on Capital
Requirements,14 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.15
The proposed Corporate Contribution
would be held in addition to NSCC’s
General Business Risk Capital
Requirement.
Under the current Addendum E of the
Rules, 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 NSCC can
voluntarily apply amounts greater than
the Corporate Contribution against any
loss or liability (including non-default
losses) of NSCC, if the Board of
Directors, in its sole discretion, believes
13 NSCC calculates its General Business Risk
Capital Requirement as the amount equal to the
greatest of (1) an amount determined based on its
general business profile, (2) an amount determined
based on the time estimated to execute a recovery
or orderly wind-down of NSCC’s critical operations,
and (3) an amount determined based on an analysis
of NSCC’s estimated operating expenses for a six
month period.
14 See Securities Exchange Act Release No. 81105
(July 7, 2017), 82 FR 32399 (July 13, 2017) (SR–
DTC–2017–003, SR–NSCC–2017–004, SR–FICC–
2017–007).
15 17 CFR 240.17Ad–22(e)(15).
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
such to be appropriate under the factual
situation existing at the time.
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 defined in the proposed change, and
would be a mandatory contribution by
NSCC prior to any allocation of the loss
among NSCC’s Members.16
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 250 business days
in order to permit NSCC to replenish the
Corporate Contribution.17 Under the
proposal, Members would receive notice
of any such reduction to the Corporate
Contribution.
(2) Event Period
NSCC states that 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 proposes 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
within a period of 10 business days
(‘‘Event Period’’) for purposes of
allocating losses to Members in one or
16 NSCC does not propose to apply the Corporate
Contribution if the Clearing Fund is used 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.
17 NSCC states that 250 business days would be
a reasonable estimate of the time frame that NSCC
would be required 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.
E:\FR\FM\04SEN1.SGM
04SEN1
Federal Register / Vol. 83, No. 171 / Tuesday, September 4, 2018 / Notices
more rounds, subject to the limitations
of loss allocation as explained below.18
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 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 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.19
sradovich on DSK3GMQ082PROD with NOTICES
(3) Loss Allocation Round and Loss
Allocation Notice
Under the proposal, 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
18 NSCC states that having a 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.
19 Under the proposal, 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.
VerDate Sep<11>2014
17:54 Aug 31, 2018
Jkt 244001
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 each
Member of the amount being allocated
to it (‘‘Loss Allocation Notice’’). Each
Member’s pro rata share of losses and
liabilities to be allocated in any round
would be equal to (1) the average of its
Required Fund Deposit for the 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 (2) 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 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.20 In other words, the proposed
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. After a first round of loss
allocations with respect to an Event
Period, only Members that have not
submitted a Loss Allocation Withdrawal
20 Pursuant to current Section 8 of Rule 4, the
time period for a Member to give notice of its
election to terminate its business with NSCC in
respect of a pro rata charge is 10 business days after
receiving notice of a pro rata charge. Supra note 9.
NSCC states that it would be appropriate to shorten
such time period from 10 business days to five
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 states that five
business days would provide Members with
sufficient time to decide whether to cap their loss
allocation obligations by withdrawing from their
membership in NSCC.
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
44979
Notice, in accordance with proposed
Section 6 of Rule 4, would be subject to
further loss allocation with respect to
that Event Period.
NSCC’s current loss allocation
provisions provide that if a 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. Under the
proposal, Members would receive two
business days’ notice of a loss
allocation, and be required to pay the
requisite amount no later than the
second business day following the
issuance of such notice.21
(4) Look-Back Period
Currently, the Rules calculate a
Member’s pro rata share for purposes of
loss allocation based on the Member’s
activity in each of the various services
or Systems offered by NSCC.22 NSCC
states 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
proposes that ‘‘Required Deposits’’ be
renamed ‘‘Required Fund Deposits,’’ as
described below). Accordingly, NSCC
proposes to calculate each Member’s pro
rata share of losses and liabilities to be
allocated in any round (as described
above) to be equal to (1) the Member’s
Average RFD divided by (2) the sum of
Average RFD amounts for all Members
that are subject to loss allocation in such
round. The proposed rule would define
a Member’s Average RFD as the average
of the Member’s Required Fund Deposit
for the 70 business days 23 preceding the
first day of the applicable Event Period
or such shorter period of time that the
Member has been a Member.
Additionally, if a Member withdraws
from membership pursuant to proposed
21 NSCC states that allowing Members two
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.
22 NSCC states that its current loss allocation
rules pre-date NSCC’s move to a risk-based
margining methodology.
23 NSCC states that having a look-back period of
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.
E:\FR\FM\04SEN1.SGM
04SEN1
44980
Federal Register / Vol. 83, No. 171 / Tuesday, September 4, 2018 / Notices
sradovich on DSK3GMQ082PROD with NOTICES
Section 6 of Rule 4, NSCC proposes that
the Member’s Loss Allocation Cap be
equal to the greater of (1) its Required
Fund Deposit on the first day of the
applicable Event Period or (2) its
Average RFD.
NSCC states 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, NSCC
states that 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 states 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.
(5) Loss Allocation Withdrawal Notice
and Loss Allocation Cap
NSCC’s current loss allocation rules
allow a Member to withdraw if the
Member notifies NSCC, within 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.
The proposed change would shorten the
withdrawal notification period from 10
business days to five 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.24 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.
Pursuant to the proposed change, in
order to avail itself of its Loss Allocation
Cap, a Member would be able to elect
to withdraw from membership by
following the requirements in proposed
Section 6 of Rule 4: (1) Specify in its
Loss Allocation Withdrawal Notice (as
24 NSCC states 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.
VerDate Sep<11>2014
17:54 Aug 31, 2018
Jkt 244001
defined below) an effective date of
withdrawal, which date shall be no later
than 10 business days following the last
day of the applicable Loss Allocation
Withdrawal Notification Period (as
defined below) (i.e., no later than 10
business days after the fifth business
day following the first Loss Allocation
Notice in that round of loss
allocation); 25 (2) 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 (3)
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.
Under the current Rules, a Member’s
cap on loss allocation is its Required
Deposit as fixed immediately prior to
the time of the pro rata charge. Under
the proposal, 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. In addition, 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; 26 however, its
aggregate obligation would be limited to
the amount of its Loss Allocation Cap as
fixed in the round for which it
withdrew.27 If the first round of loss
allocation does not fully cover NSCC’s
losses, a second round would be noticed
to those Members that did not elect to
withdraw from membership in the
previous round; however, 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
25 NSCC states that having an effective date of
withdrawal that is not later than 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.
26 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 9.
27 If a Member’s Loss Allocation Cap exceeds the
Member’s then-current Required Fund Deposit, it
must still cover the excess amount.
PO 00000
Frm 00124
Fmt 4703
Sfmt 4703
from membership with NSCC as
provided in proposed Section 6 of Rule
4 following the first Loss Allocation
Notice in any round. 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.
(6) Declared Non-Default Loss Event
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.28 The Rules
currently permit NSCC to apply the
Clearing Fund to non-default losses.
Specifically, pursuant to Section 2(b) of
Rule 4,29 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 of the
Rules provides additional details
regarding the application of the Clearing
Fund to losses outside of a System.
NSCC proposes to enhance 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 would 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 change would
provide that NSCC would then be
required to promptly notify Members of
this determination, which would be
referred to as a Declared Non-Default
Loss Event. In addition, NSCC proposes
to specify that a mandatory Corporate
Contribution would apply to a Declared
Non-Default Loss Event prior to any
allocation of the loss among Members,
as described above. Additionally, NSCC
proposes language to clarify Members’
obligations for Declared Non-Default
Loss Events.
28 Non-default losses may arise from events such
as damage to physical assets, a cyber-attack, or
custody and investment losses.
29 Current 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 9.
E:\FR\FM\04SEN1.SGM
04SEN1
Federal Register / Vol. 83, No. 171 / Tuesday, September 4, 2018 / Notices
B. Changes To Align the Loss Allocation
Rules
The proposed 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 for firms
that are participants of multiple DTCC
Clearing Agencies. As proposed, the loss
allocation process and certain related
provisions would be consistent across
the DTCC Clearing Agencies to the
extent practicable and appropriate.
C. Accelerated Return of Former
Member’s Clearing Fund Deposit
NSCC proposes to reduce the time 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
would return the Member’s Actual
Deposit in the form of (1) cash or
securities within 30 calendar days and
(2) Eligible Letters of Credit within 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 that NSCC may retain
for up to two years the Actual Deposits
from Members who have Sponsored
Accounts at DTC.
NSCC states that shortening the time
for the return of a Member’s Clearing
Fund deposit would be helpful to firms
that have exited NSCC, so that such
firms could have use of the deposits
sooner than under the current Rules.
However, 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.
sradovich on DSK3GMQ082PROD with NOTICES
D. Conforming and Technical Changes
NSCC proposes to make various
conforming and technical changes
necessary to harmonize the remaining
current Rules with the proposed
changes. The proposed defined terms in
the loss allocation process would be
included in Rule 1 (Definitions and
Descriptions), and obsolete terms would
be replaced with the proposed terms. In
addition, the rule numbers appear in the
remaining current Rules would be
updated to reflect the changes made by
the proposal. NSCC further proposes to
modify its Voluntary Termination
process to avoid any potential conflicts
with the loss allocation process.
VerDate Sep<11>2014
17:54 Aug 31, 2018
Jkt 244001
II. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act 30
directs the Commission to approve a
proposed rule change of a selfregulatory organization if it finds that
the proposed rule change is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to such organization. After
careful review, the Commission finds
that the Proposed Rule Change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to NSCC. In
particular, the Commission finds that
the Proposed Rule Change is consistent
with Section 17A(b)(3)(F) of the Act,31
Rule 17Ad–22(e)(4)(viii) under the
Act,32 Rule 17Ad–22(e)(13) under the
Act,33 and Rules 17Ad–22(e)(23)(i) and
(ii) under the Act.34
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act
requires, in part, that a registered
clearing agency have rules designed to
assure the safeguarding of securities and
funds which are in the custody or
control of the clearing agency, to remove
impediments to and perfect the
mechanism of a national system for the
prompt and accurate clearance and
settlement of securities transactions,
and to protect investors and the public
interest.35
The Commission believes that the
proposal to change the loss allocation
process is designed to assure the
safeguarding of securities and funds
which are in the custody or control of
the clearing agency. As described above,
NSCC proposes to make a number of
changes to its loss allocation process as
described above. First, NSCC would
modify the calculation of its Corporate
Contribution to apply a mandatory fixed
percentage of its General Business Risk
Capital Requirement as compared to the
current Rules that provide for a ‘‘no less
than’’ percentage of retained earnings.
The proposed changes also would
clarify that the proposed Corporate
Contribution would apply to Declared
Non-Default Loss Events, as well as
Defaulting Member Events, on a
mandatory basis. Moreover, the
proposal specifies that if the Corporate
Contribution is applied to a loss or
liability relating to an Event Period,
then for any subsequent Event Periods
30 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
32 17 CFR 240.17Ad–22(e)(4)(viii).
33 17 CFR 240.17Ad–22(e)(13).
34 17 CFR 240.17Ad–22(e)(23)(i) and (ii).
35 15 U.S.C. 78q–1(b)(3)(F).
31 15
PO 00000
Frm 00125
Fmt 4703
Sfmt 4703
44981
that occur during the 250 business days
thereafter, the Corporate Contribution
would be reduced to the remaining,
unused portion of the Corporate
Contribution. The Commission believes
that these changes set clear expectations
about how and when NSCC’s Corporate
Contribution would be applied to help
address a loss, and allow NSCC to better
anticipate and prepare for potential risk
exposures that may arise during an
Event Period.
Second, as described above, NSCC
proposes to determine a Member’s loss
allocation obligation based on the
average of its Required Fund Deposit
over a look-back period of 70 business
days and to determine its Loss
Allocation Cap based on the greater of
its Required Fund Deposit or the
average thereof over a look-back period
of 70 business days. These proposed
changes are designed to allow NSCC to
calculate a Member’s pro rata share of
losses and liabilities based on the
amount of risk that the Member brings
to NSCC. Moreover, using a look-back
period to determine a Member’s loss
allocation obligation is designed to deter
Members from reducing their settlement
activities during a time of stress
primarily to limit their Loss Allocation
Caps. As a result of these changes, the
Commission believes that NSCC should
be in a better position to manage its risk
by curtailing the chance that reduced
settlement activities contribute to higher
volatility or lower liquidity during an
already stressed period.
Third, as described above, NSCC
proposes to introduce the concept of an
Event Period, which would group
Defaulting Member Events and Declared
Non-Default Loss Events occurring
within a period of 10 business days for
purposes of allocating losses to
Members in one or more rounds. Under
the current Rules, every time NSCC
incurs a loss or liability, NSCC will
initiate its current loss allocation
process by applying its retained
earnings and allocating losses. However,
the current Rules do not contemplate a
situation where loss events occur in
quick succession. Accordingly, even if
multiple losses occur within a short
period, the current Rules dictate that
NSCC start the loss allocation process
separately for each loss event. Having
multiple loss allocation calculations and
notices from NSCC and withdrawal
notices from Members after multiple
sequential loss events could cause
heighten operational complexity and,
therefore, risk for NSCC, since NSCC
would have to process and track
multiple notices while performing its
other critical operations during a time of
significant stress.
E:\FR\FM\04SEN1.SGM
04SEN1
sradovich on DSK3GMQ082PROD with NOTICES
44982
Federal Register / Vol. 83, No. 171 / Tuesday, September 4, 2018 / Notices
Therefore, the Commission believes
that the proposed change to introduce
an Event Period would provide a more
defined and transparent structure,
compared to the current loss allocation
process described immediately above,
helping to reduce complexity in and the
resources needed to effectuate the
process, thus mitigating operational
risk. Overall, such an improved
structure should enable both NSCC and
each Member to more effectively
manage the risks and potential financial
obligations presented by sequential
Defaulting Member Events or Declared
Non-Default Loss Events that are likely
to arise in quick succession, and could
be closely linked to an initial event and/
or market dislocation episode. In other
words, the proposed Event Period
structure should help clarify and define
for both NSCC and Members how NSCC
would initiate a single defined loss
allocation process to cover all loss
events within 10 business days. As a
result, all loss allocation calculation and
notices from NSCC and potential
withdrawal notices from Members
would be tied back to one Event Period
instead of each individual loss event.
Fourth, as described above, the
proposal would improve upon the
current loss allocation approach laid out
in NSCC’s Rules by providing for a loss
allocation round, a Loss Allocation
Notice process, a Loss Allocation
Withdrawal Notice process, and a Loss
Allocation Cap. A loss allocation round
would be a series of loss allocations
relating to an Event Period, the
aggregate amount of which would be
limited by the round cap. When the
losses allocated in a round equals the
round cap, any additional losses relating
to the Event Period would be allocated
in subsequent rounds until all losses
from the Event Period are allocated
among Members. Each loss allocation
would be communicated to Members by
the issuance of a Loss Allocation Notice.
Each Member in a loss allocation round
would have five business days from the
issuance of the first Loss Allocation
Notice for the round to notify NSCC of
its election to withdraw from
membership with NSCC, and thereby
benefit from its Loss Allocation Cap.
The Loss Allocation Cap of a Member
would be equal to the greater of its
Required Fund Deposit on the first day
of the applicable Event Period and its
Average RFD. Members would have two
business days after NSCC issues a first
round Loss Allocation Notice to pay the
amount specified in the notice.
The Commission believes that the
changes to (1) establish a specific Event
Period, (2) continue the loss allocation
process in successive rounds, (3) clearly
VerDate Sep<11>2014
17:54 Aug 31, 2018
Jkt 244001
communicate with its Members
regarding their loss allocation
obligations, and (4) effectively identify
continuing Members for the purpose of
calculating loss allocation obligations in
successive rounds, are designed to make
NSCC’s loss allocation process more
certain. In addition, the changes are
designed to provide Members with a
clear set of procedures that operate
within the proposed loss allocation
structure, and provide increased
predictability and certainty regarding
Members’ exposures and obligations.
Furthermore, by grouping all loss events
within 10 business days, the loss
allocation process relating to multiple
loss events can be streamlined. With
enhanced certainty, predictability, and
efficiency, NSCC would then be able to
better manage its risks from loss events
occurring in quick succession, and
Members would be able to better
manage their risks by deciding whether
and when to withdraw from
membership and limit their exposures
to NSCC. Furthermore, the proposed
changes are designed to reduce liquidity
risk to Members by providing a two-day
window to arrange funding to pay for
loss allocation, while still allowing
NSCC to address losses in a timely
manner.
Fifth, as described above, NSCC
proposes to clarify the governance
around Declared Non-Default Loss
Events by providing 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 its services
in an orderly manner. NSCC also
proposes to provide that NSCC would
then be required to promptly notify
Members of this determination and start
the loss allocation process concerning
the loss stemming from a Declared NonDefault Loss Event. The Commission
believes that these changes should
provide an orderly and transparent
procedure to allocate a non-default loss
by requiring the Board of Directors to
make a definitive decision to announce
an occurrence of a Declared Non-Default
Loss Event, and requiring NSCC to
provide a notice to Members of the
decision. The Commission further
believes that an orderly and transparent
procedure should result in a risk
management process at NSCC that is
more robust as a result of enhanced
governance around NSCC’s response to
non-default losses.
Collectively, the Commission believes
that the proposed changes to NSCC’s
loss allocation process would provide
greater transparency, certainty, and
efficiency to NSCC regarding the
PO 00000
Frm 00126
Fmt 4703
Sfmt 4703
amount of resources and the instances
in which NSCC would apply the
resources to address risks arising from
Defaulting Member Events and Declared
Non-Default Loss Events, which could
occur in quick succession. The
Commission believes that the
transparency, certainty, and efficiency
would afford NSCC better predictability
regarding its risk exposure, and in turn,
would allow a risk management process
at NSCC that is more effectively
responsive to such events and would
improve NSCC’s ability to continue to
operate in a safe and sound manner
during such events. Therefore, the
Commission believes that these
proposed changes would better equip
NSCC to assure the safeguarding of
securities and funds which are in the
custody or control of NSCC.
In addition, the Commission believes
that the proposed rule changes to align
NSCC’s loss allocation rules with the
loss allocation rules of the other DTCC
Clearing Agencies, to the extent
practicable and appropriate, are
designed to remove impediments to and
perfect the mechanism of a national
system for the prompt and accurate
clearance and settlement of securities
transactions. As described above, the
alignment of NSCC’s loss allocation
rules with the other NSCC Clearing
Agencies is designed to help provide
consistent treatment for firms that are
participants of multiple DTCC Clearing
Agencies. The Commission believes that
providing consistent treatment through
consistent procedures among the DTCC
Clearing Agencies would help firms that
participate in multiple DTCC Clearing
Agencies from encountering
unnecessary complexities and confusion
stemming from differences in
procedures regarding loss allocation
processes, particularly at times of
significant stress. Accordingly, by
removing potential unnecessary
complexities and confusion due to
different loss allocation rules of the
DTCC Clearing Agencies, the
Commission believes that the proposal
is designed to remove impediments to
and perfect the mechanism of a national
system for the prompt and accurate
clearance and settlement of securities
transactions.
Finally, the Commission believes that
the proposed rule change to (1) reduce
the time within which NSCC is required
to return a former Member’s Clearing
Fund deposit that is cash or securities
from 90 days to 30 calendar days, and
(2) make conforming and technical
changes necessary to harmonize the
current Rules with the proposed
changes are designed to protect
investors and the public interest. First,
E:\FR\FM\04SEN1.SGM
04SEN1
Federal Register / Vol. 83, No. 171 / Tuesday, September 4, 2018 / Notices
the Commission believes that the
reduction in time to return the deposits
would enable firms that have exited
NSCC to have access to their funds
sooner than under the current Rules.
While acknowledging that the reduction
in time could lesson NSCC’s flexibility
in liquidity management for the period
between 31 calendar days and 90 days,
the Commission believes that NSCC’s
procedures would continue to protect
NSCC and its clearance and settlement
services because a Member’s Clearing
Fund deposit would only be returned if
all obligations of the terminating
Member to NSCC have been satisfied.
Therefore, NSCC could maintain
necessary coverage for possible claims
arising in connection with the NSCC
activities of a former Member. Second,
the conforming and technical changes
are designed to provide clear and
coherent Rules concerning loss
allocation process to NSCC and its
Members. The Commission believes that
clear and coherent Rules should help
enhance the ability of NSCC and
Members to more effectively plan for,
manage, and address the risks and
financial obligations that loss events
present to NSCC and its Members.
Accordingly, the Commission believes
that these two changes are designed to
protect investors and the public interest
by (1) reducing financial risks for
NSCC’s former Members, and (2)
providing clear and coherent Rules to
NSCC and Members.
For the reasons above, the
Commission believes that the Proposed
Rule Change is consistent with Section
17A(b)(3)(F) of the Act.36
B. Consistency With Rule 17Ad–
22(e)(4)(viii)
Rule 17Ad–22(e)(4)(viii) under the
Act requires, in part, that a covered
clearing agency 37 establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
effectively identify, measure, monitor,
and manage its credit exposures to
participants and those arising from its
payment, clearing, and settlement
processes, including by addressing
36 15
U.S.C. 78q–1(b)(3)(F).
‘‘covered clearing agency’’ means, among
other things, a clearing agency registered with the
Commission under Section 17A of the Exchange
Act (15 U.S.C. 78q–1 et seq.) that is designated
systemically important by the Financial Stability
Oversight Counsel (‘‘FSOC’’) pursuant to the
Clearing Supervision Act (12 U.S.C. 5461 et seq.).
See 17 CFR 240.17Ad–22(a)(5) and (6). On July 18,
2012, FSOC designated NSCC as systemically
important. U.S. Department of the Treasury, ‘‘FSOC
Makes First Designations in Effort to Protect Against
Future Financial Crises,’’ available at https://
www.treasury.gov/press-center/press-releases/
Pages/tg1645.aspx. Therefore, NSCC is a covered
clearing agency.
sradovich on DSK3GMQ082PROD with NOTICES
37 A
VerDate Sep<11>2014
17:54 Aug 31, 2018
Jkt 244001
allocation of credit losses the covered
clearing agency may face if its collateral
and other resources are insufficient to
fully cover its credit exposures.38
As described above, the proposal
would revise the loss allocation process
to address how NSCC would manage
loss events, including Defaulting
Member Events. Under the proposal, if
losses arise out of or relate to a
Defaulting Member Event, NSCC would
first apply its Corporate Contribution. If
those funds prove insufficient, the
proposal provides for allocating the
remaining losses to the remaining
Members through the proposed process.
Accordingly, the Commission believes
that the proposal is reasonably designed
to manage NSCC’s credit exposures to
its Members, by addressing allocation of
credit losses.
Therefore, the Commission believes
that NSCC’s proposal is consistent with
Rule 17Ad–22(e)(4)(viii) under the
Act.39
C. Consistency With Rule 17Ad–
22(e)(13)
Rule 17Ad–22(e)(13) under the Act
requires, in part, that a covered clearing
agency establish, implement, maintain
and enforce written policies and
procedures reasonably designed to
ensure the covered clearing agency has
the authority to take timely action to
contain losses and liquidity demands
and continue to meet its obligations.40
As described above, the proposal
would establish a more detailed and
structured loss allocation process by (1)
modifying the calculation and
application of the Corporate
Contribution; (2) introducing an Event
Period; (3) introducing a loss allocation
round and notice process; (4)
implementing a look-back period to
calculate a Member’s loss allocation
obligation; (5) modifying the withdrawal
process and the cap of withdrawing
Member’s loss allocation exposure; and
(6) providing the governance around a
non-default loss. The Commission
believes that each of these proposed
changes helps establish a more
transparent and clear loss allocation
process and authority of NSCC to take
certain actions, such as announcing a
Declared Non-Default Loss Event,
within the loss allocation process.
Further, having a more transparent and
clear loss allocation process as proposed
would provide clear authority to NSCC
to allocate losses from Defaulting
Member Events and Declared NonDefault Loss Events and take timely
38 17
CFR 240.17Ad–22(e)(4)(viii).
39 Id.
40 17
PO 00000
actions to contain losses, and continue
to meet its clearance and settlement
obligations.
Therefore, the Commission believes
that NSCC’s proposal is consistent with
Rule 17Ad–22(e)(13) under the Act.41
D. Consistency With Rule 17Ad–
22(e)(23)(i) and (ii)
Rule 17Ad–22(e)(23)(i) under the Act
requires that a covered clearing agency
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to publicly disclose
all relevant rules and material
procedures, including key aspects of its
default rules and procedures.42 Rule
17Ad–22(e)(23)(ii) under the Act
requires that a covered clearing agency
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to provide
sufficient information to enable
participants to identify and evaluate the
risks, fees, and other material costs they
incur by participating in the covered
clearing agency.43
As described above, the proposal
would publicly disclose how NSCC’s
Corporate Contribution would be
calculated and applied. In addition, the
proposal would establish and publicly
disclose a detailed procedure in the
Rules for loss allocation. More
specifically, the proposed changes
would establish an Event Period, loss
allocation rounds, a look-back period to
calculate each Member’s loss allocation
obligation, a withdrawal process
followed by a loss allocation process,
and a Loss Allocation Cap that would
apply to Members after withdrawal.
Additionally, the proposal would align
the loss allocation rules across the
DTCC Clearing Agencies to help provide
consistent treatment, and clarify that
non-default losses would trigger loss
allocation to Members. The proposal
would also provide for and make known
to members the procedures to trigger a
loss allocation procedure, contribute
NSCC’s Corporate Contribution, allocate
losses, and withdraw and limit
Member’s loss exposure. Accordingly,
the Commission believes that the
proposal is reasonably designed to (1)
publicly disclose all relevant rules and
material procedures concerning key
aspects of NSCC’s default rules and
procedures, and (2) provide sufficient
information to enable Members to
identify and evaluate the risks by
participating in NSCC.
Therefore, the Commission believes
that NSCC’s proposal is consistent with
41 Id.
42 17
CFR 240.17Ad–22(e)(13).
Frm 00127
Fmt 4703
Sfmt 4703
44983
43 17
E:\FR\FM\04SEN1.SGM
CFR 240.17Ad–22(e)(23)(i).
CFR 240.17Ad–22(e)(23)(ii).
04SEN1
44984
Federal Register / Vol. 83, No. 171 / Tuesday, September 4, 2018 / Notices
Rules 17Ad–22(e)(23)(i) and (ii) under
the Act.44
comments on the proposed rule change
from interested persons.
III. Conclusion
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes amend Rule
7.31–E relating to Reserve Orders, to rename two order types, and to delete
inoperative rule text. The proposed rule
change is available on the Exchange’s
website at www.nyse.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
Act and in particular with the
requirements of Section 17A of the
Act 45 and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,46 that
proposed rule change SR–NSCC–2017–
018, as modified by Amendment No. 1,
be, and it hereby is, approved 47 as of
the date of this order or the date of a
notice by the Commission authorizing
NSCC to implement advance notice SR–
NSCC–2017–806, as modified by
Amendment No. 1, whichever is later.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.48
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–19053 Filed 8–31–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83967; File No. SR–
NYSEARCA–2018–61]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Rule 7.31–E
Relating To Reserve Orders, To ReName Two Order Types, and To Delete
Inoperative Rule Text
August 28, 2018.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on August
15, 2018, NYSE Arca, Inc. (‘‘Exchange’’
or ‘‘NYSE Arca’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
sradovich on DSK3GMQ082PROD with NOTICES
44 17
CFR 240.17Ad–22(e)(23)(i) and (ii).
U.S.C. 78q–1.
46 15 U.S.C. 78s(b)(2).
47 In approving the Proposed Rule Change, the
Commission has considered the Proposed Rule
Change’s impact on efficiency, competition, and
capital formation. See 15 U.S.C. 78c(f).
48 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
45 15
VerDate Sep<11>2014
17:54 Aug 31, 2018
Jkt 244001
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Rule 7.31–E relating to Reserve Orders,
to re-name two order types, and to
delete inoperative rule text.
Background
Rule 7.31–E(d)(1) defines a Reserve
Order as a Limit or Inside Limit Order
with a quantity of the size displayed
and with a reserve quantity of the size
(‘‘reserve interest’’) that is not
displayed. The displayed quantity of a
Reserve Order is ranked Priority 2—
Display Orders and the reserve interest
is ranked Priority 3—Non-Display
Orders.4 Rule 7.31–E(d)(1)(A) provides
that on entry, the display quantity of a
Reserve Order must be entered in round
lots and the displayed portion of a
Reserve Order will be replenished
following any execution. That rule
further provides that the Exchange will
display the full size of the Reserve
Order when the unfilled quantity is less
than the minimum display size for the
order. Rule 7.31–E(d)(1)(B) provides that
each time a Reserve Order is
4 The terms ‘‘Priority 2—Display Orders’’ and
‘‘Priority 3—Non-Display Orders’’ are defined in
Rule 7.36–E(e).
PO 00000
Frm 00128
Fmt 4703
Sfmt 4703
replenished from reserve interest, a new
working time is assigned to the
replenished quantity of the Reserve
Order, while the reserve interest retains
the working time of original order entry.
Pursuant to Rule 7.31–E(d)(1)(C), a
Reserve Order must be designated Day
and may be combined with an Arca
Only Order or a Primary Pegged Order.
Rule 7.31–E(d)(2) defines a ‘‘Limit
Non-Displayed Order,’’ which is a Limit
Order that is not displayed and does not
route. Rule 7.31–E(e)(1) defines an
‘‘Arca Only Order,’’ which is a Limit
Order that does not route.
Proposed Rule Change Relating to Order
Type Names
The Exchange proposes nonsubstantive amendments to Rules 7.31–
E and 7.46–E to re-name the ‘‘Arca Only
Order’’ as the ‘‘Non-Routable Limit
Order.’’ This proposed rule change is
based on the term used by the
Exchange’s affiliate, NYSE American
LLC (‘‘NYSE American’’) for the same
order type.
The Exchange also proposes nonsubstantive amendments to Rules 7.31–
E and 7.46–E to re-name the ‘‘Limit
Non-Displayed Order’’ as the ‘‘NonDisplayed Limit Order.’’ The Exchange
believes that this proposed rule change
would conform the style of this order
type with the name ‘‘Non-Routable
Limit Order.’’ The Exchange therefore
believes that this proposed rule change
would promote clarity and consistency
in its rules.
Proposed Rule Change Relating to
Reserve Orders
The Exchange proposes to amend
Rule 7.31–E(d)(1) to change the manner
by which the display portion of a
Reserve Order would be replenished. As
proposed, rather than replenishing the
display quantity following any
execution, the Exchange proposes to
replenish the Reserve Order when the
display quantity is decremented to
below a round lot. The changes that the
Exchange is proposing to Rule 7.31
relating to Reserve Orders (and Primary
Pegged Orders) are identical to changes
that were recently approved for the
Exchange’s affiliate, New York Stock
Exchange LLC (‘‘NYSE’’).5 In addition,
the proposed changes to how Reserve
Orders would be replenished are
consistent with how Reserve Orders are
replenished on other equity exchanges.6
5 See Securities Exchange Act Release No. 83768
(August 3, 2018), 83 FR 39488 (August 9, 2018)
(SR–NYSE–2018–26) (Approval Order).
6 See Cboe BZX Exchange, Inc. (‘‘BZX’’) Rule
11.9(c)(1); Nasdaq Stock Market LLC (‘‘Nasdaq’’)
Rule 7503(h).
E:\FR\FM\04SEN1.SGM
04SEN1
]]>Agencies
[Federal Register Volume 83, Number 171 (Tuesday, September 4, 2018)]
[Notices]
[Pages 44977-44984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19053]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83971; File No. SR-NSCC-2017-018]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving a Proposed Rule Change, as Modified by
Amendment No. 1, To Amend the Loss Allocation Rules and Make Other
Changes
August 28, 2018.
On December 18, 2017, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2017-018 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder \2\ to amend its loss allocation rules and
make other conforming and technical changes.\3\ The proposed rule
change was published for comment in the Federal Register on January 8,
2018.\4\ 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.\5\
On March 20, 2018, the Commission instituted proceedings to determine
whether to approve or disapprove the proposed rule change.\6\ 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.\7\ On June 28, 2018, NSCC filed Amendment No.
1 to the proposed rule change to amend and replace in its entirety the
proposed rule change as originally filed on December 18, 2017.\8\ The
Commission did not receive any comments. This order approves the
proposed rule change, as modified by Amendment No. 1 (hereinafter,
``Proposed Rule Change'').
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On December 18, 2017, NSCC filed the proposed rule change as
advance notice SR-NSCC-2017-806 with the Commission 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) of the Act (``Advance Notice''). 12 U.S.C.
5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i), respectively. The Advance
Notice was published for comment in the Federal Register on January
30, 2018. In that publication, the Commission also extended the
review period of the Advance Notice for an additional 60 days,
pursuant to Section 806(e)(1)(H) of the Clearing Supervision Act. 12
U.S.C. 5465(e)(1)(H); Securities Exchange Act Release No. 82584
(January 24, 2018), 83 FR 4377 (January 30, 2018) (SR-NSCC-2017-
806). 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 until 60 days from the date the
information required by the Commission was received by the
Commission. 12 U.S.C. 5465(e)(1)(D); see 12 U.S.C. 5465(e)(1)(E)(ii)
and (G)(ii); 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. 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 filed on December 18,
2017, which was published in the Federal Register on August 6, 2018.
Securities Exchange Act Release No. 83748 (July 31, 2018), 83 FR
38375 (August 6, 2018) (SR-NSCC-2017-806). NSCC submitted a courtesy
copy of Amendment No. 1 to the Advance Notice through the
Commission's electronic public comment letter mechanism.
Accordingly, Amendment No. 1 to the Advance Notice has been publicly
available on the Commission's website at https://www.sec.gov/rules/sro/nscc-an.htm since June 29, 2018. On July 6, 2018, the Commission
received a response to its request for additional information in
consideration of the Advance Notice, which, in turn, added a further
60 days to the review period pursuant to Section 806(e)(1)(E) and
(G) of the Clearing Supervision Act. 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. The Commission did not
receive any comments. The proposal, as set forth in both the Advance
Notice and the proposed rule change, each as modified by Amendments
No. 1, shall not take effect until all required regulatory actions
are completed.
\4\ Securities Exchange Act Release No. 82428 (January 2, 2018),
83 FR 897 (January 8, 2018) (SR-NSCC-2017-018).
\5\ 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).
\6\ Securities Exchange Act Release No. 82910 (March 20, 2018),
83 FR 12968 (March 26, 2018) (SR-NSCC-2017-018).
\7\ Securities Exchange Act Release No. 83510 (June 25, 2018),
83 FR 30791 (June 29, 2018) (SR-DTC-2017-022, SR-FICC-2017-022, SR-
NSCC-2017-018).
\8\ Securities Exchange Act Release No. 83633 (July 13, 2018),
83 FR 34227 (July 19, 2018) (SR-NSCC-2017-018) (``Notice of
Amendment No. 1''). NSCC submitted a courtesy copy of Amendment No.
1 to the proposed rule change through the Commission's electronic
public comment letter mechanism. Accordingly, Amendment No. 1 to the
proposed rule change has been publicly available on the Commission's
website at https://www.sec.gov/rules/sro/nscc-an.htm since June 29,
2018.
---------------------------------------------------------------------------
I. Description
The Proposed Rule Change consists of proposed changes to NSCC's
Rules and Procedures (``Rules'') \9\ in order to (1) modify the loss
allocation process; (2) align NSCC's loss allocation rule among the
three clearing agencies of The Depository Trust & Clearing Corporation
(``DTCC'')--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''); \10\ (3) reduce the time within which NSCC is required to
return a former Member's Clearing Fund deposit; and (4) make conforming
and technical changes. Each of these proposed changes is described
below. A detailed description of the specific rule text changes
proposed in this Advance
[[Page 44978]]
Notice can be found in the Notice of Amendment No. 1.\11\
---------------------------------------------------------------------------
\9\ Each capitalized term not otherwise defined herein has its
respective meaning as set forth in the Rules, available at https://
www.dtcc.com/~/media/Files/Downloads/legal/rules/nscc_rules.pdf.
\10\ DTCC is a user-owned and user-governed holding company and
is the parent company of DTC, FICC, and NSCC. DTCC operates on a
shared services model with respect to the DTCC Clearing Agencies.
Most corporate functions are established and managed on an
enterprise-wide basis pursuant to intercompany agreements under
which it is generally DTCC that provides a relevant service to a
DTCC Clearing Agency.
\11\ See Notice of Amendment No. 1, supra note 8.
---------------------------------------------------------------------------
A. Changes to the Loss Allocation Process
NSCC's loss allocation rules currently provide that in the event
NSCC ceases to act \12\ for a Member, the amount 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, 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 order: (1) As provided in Addendum E of the
Rules, 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 (2) if a
loss still remains, as provided in Rule 4, the required Clearing Fund
deposits of non-defaulting Members on the date of default.
---------------------------------------------------------------------------
\12\ 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 9.
---------------------------------------------------------------------------
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.
NSCC proposes to change the manner in which each of the aspects of
the loss allocation process described above would be employed. The
proposal would clarify or adjust certain elements and introduce certain
new loss allocation concepts, as further discussed below. In addition,
the proposal 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.
NSCC proposes six key changes to enhance NSCC's loss allocation
process. Specifically, NSCC proposes to make changes regarding (1) the
Corporate Contribution, (2) the Event Period, (3) the loss allocation
round and notice, (4) the look-back period, (5) the loss allocation
withdrawal notice and cap, and (6) the governance around non-default
losses, each of which is discussed below.
(1) Corporate Contribution
Addendum E of the Rules currently provides that NSCC will
contribute no less than 25 percent 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 percent of the NSCC General Business Risk
Capital Requirement.\13\
---------------------------------------------------------------------------
\13\ NSCC calculates its General Business Risk Capital
Requirement as the amount equal to the greatest of (1) an amount
determined based on its general business profile, (2) an amount
determined based on the time estimated to execute a recovery or
orderly wind-down of NSCC's critical operations, and (3) an amount
determined based on an analysis of NSCC's estimated operating
expenses for a six month period.
---------------------------------------------------------------------------
NSCC's General Business Risk Capital Requirement, as defined in
NSCC's Clearing Agency Policy on Capital Requirements,\14\ 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.\15\ The
proposed Corporate Contribution would be held in addition to NSCC's
General Business Risk Capital Requirement.
---------------------------------------------------------------------------
\14\ See Securities Exchange Act Release No. 81105 (July 7,
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003, SR-NSCC-2017-
004, SR-FICC-2017-007).
\15\ 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------
Under the current Addendum E of the Rules, 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 NSCC
can voluntarily apply amounts greater than the Corporate Contribution
against any 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.
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 defined in the proposed
change, and would be a mandatory contribution by NSCC prior to any
allocation of the loss among NSCC's Members.\16\
---------------------------------------------------------------------------
\16\ NSCC does not propose to apply the Corporate Contribution
if the Clearing Fund is used 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.
---------------------------------------------------------------------------
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 250 business days in order to permit NSCC
to replenish the Corporate Contribution.\17\ Under the proposal,
Members would receive notice of any such reduction to the Corporate
Contribution.
---------------------------------------------------------------------------
\17\ NSCC states that 250 business days would be a reasonable
estimate of the time frame that NSCC would be required 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.
---------------------------------------------------------------------------
(2) Event Period
NSCC states that 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
proposes 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 within a period of 10 business days (``Event Period'') for
purposes of allocating losses to Members in one or
[[Page 44979]]
more rounds, subject to the limitations of loss allocation as explained
below.\18\
---------------------------------------------------------------------------
\18\ NSCC states that having a 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.
---------------------------------------------------------------------------
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 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 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.\19\
---------------------------------------------------------------------------
\19\ Under the proposal, 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.
---------------------------------------------------------------------------
(3) Loss Allocation Round and Loss Allocation Notice
Under the proposal, 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 each Member of the amount being
allocated to it (``Loss Allocation Notice''). Each Member's pro rata
share of losses and liabilities to be allocated in any round would be
equal to (1) the average of its Required Fund Deposit for the 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 (2) 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 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.\20\ In other
words, the proposed 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. 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.
---------------------------------------------------------------------------
\20\ Pursuant to current Section 8 of Rule 4, the time period
for a Member to give notice of its election to terminate its
business with NSCC in respect of a pro rata charge is 10 business
days after receiving notice of a pro rata charge. Supra note 9. NSCC
states that it would be appropriate to shorten such time period from
10 business days to five 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
states that five business days would provide Members with sufficient
time to decide whether to cap their loss allocation obligations by
withdrawing from their membership in NSCC.
---------------------------------------------------------------------------
NSCC's current loss allocation provisions provide that if a 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.
Under the proposal, Members would receive two business days' notice of
a loss allocation, and be required to pay the requisite amount no later
than the second business day following the issuance of such notice.\21\
---------------------------------------------------------------------------
\21\ NSCC states that allowing Members two 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.
---------------------------------------------------------------------------
(4) Look-Back Period
Currently, the Rules calculate a Member's pro rata share for
purposes of loss allocation based on the Member's activity in each of
the various services or Systems offered by NSCC.\22\ NSCC states 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 proposes that ``Required Deposits'' be renamed ``Required Fund
Deposits,'' as described below). Accordingly, NSCC proposes to
calculate each Member's pro rata share of losses and liabilities to be
allocated in any round (as described above) to be equal to (1) the
Member's Average RFD divided by (2) the sum of Average RFD amounts for
all Members that are subject to loss allocation in such round. The
proposed rule would define a Member's Average RFD as the average of the
Member's Required Fund Deposit for the 70 business days \23\ preceding
the first day of the applicable Event Period or such shorter period of
time that the Member has been a Member. Additionally, if a Member
withdraws from membership pursuant to proposed
[[Page 44980]]
Section 6 of Rule 4, NSCC proposes that the Member's Loss Allocation
Cap be equal to the greater of (1) its Required Fund Deposit on the
first day of the applicable Event Period or (2) its Average RFD.
---------------------------------------------------------------------------
\22\ NSCC states that its current loss allocation rules pre-date
NSCC's move to a risk-based margining methodology.
\23\ NSCC states that having a look-back period of 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.
---------------------------------------------------------------------------
NSCC states 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,
NSCC states that 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 states 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.
(5) Loss Allocation Withdrawal Notice and Loss Allocation Cap
NSCC's current loss allocation rules allow a Member to withdraw if
the Member notifies NSCC, within 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. The
proposed change would shorten the withdrawal notification period from
10 business days to five 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.\24\ 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.
---------------------------------------------------------------------------
\24\ NSCC states 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.
---------------------------------------------------------------------------
Pursuant to the proposed change, in order to avail itself of its
Loss Allocation Cap, a Member would be able to elect to withdraw from
membership by following the requirements in proposed Section 6 of Rule
4: (1) Specify in its Loss Allocation Withdrawal Notice (as defined
below) an effective date of withdrawal, which date shall be no later
than 10 business days following the last day of the applicable Loss
Allocation Withdrawal Notification Period (as defined below) (i.e., no
later than 10 business days after the fifth business day following the
first Loss Allocation Notice in that round of loss allocation); \25\
(2) 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 (3) 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 states that having an effective date of withdrawal
that is not later than 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.
---------------------------------------------------------------------------
Under the current Rules, a Member's cap on loss allocation is its
Required Deposit as fixed immediately prior to the time of the pro rata
charge. Under the proposal, 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. In addition, 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; \26\ however, its aggregate
obligation would be limited to the amount of its Loss Allocation Cap as
fixed in the round for which it withdrew.\27\ If the first round of
loss allocation does not fully cover NSCC's losses, a second round
would be noticed to those Members that did not elect to withdraw from
membership in the previous round; however, 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. 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.
---------------------------------------------------------------------------
\26\ 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 9.
\27\ If a Member's Loss Allocation Cap exceeds the Member's
then-current Required Fund Deposit, it must still cover the excess
amount.
---------------------------------------------------------------------------
(6) Declared Non-Default Loss Event
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.\28\ The Rules currently permit NSCC
to apply the Clearing Fund to non-default losses. Specifically,
pursuant to Section 2(b) of Rule 4,\29\ 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
of the Rules provides additional details regarding the application of
the Clearing Fund to losses outside of a System.
---------------------------------------------------------------------------
\28\ Non-default losses may arise from events such as damage to
physical assets, a cyber-attack, or custody and investment losses.
\29\ Current 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 9.
---------------------------------------------------------------------------
NSCC proposes to enhance 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 would 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 change would provide that NSCC would then be
required to promptly notify Members of this determination, which would
be referred to as a Declared Non-Default Loss Event. In addition, NSCC
proposes to specify that a mandatory Corporate Contribution would apply
to a Declared Non-Default Loss Event prior to any allocation of the
loss among Members, as described above. Additionally, NSCC proposes
language to clarify Members' obligations for Declared Non-Default Loss
Events.
[[Page 44981]]
B. Changes To Align the Loss Allocation Rules
The proposed 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 for firms that are participants
of multiple DTCC Clearing Agencies. As proposed, the loss allocation
process and certain related provisions would be consistent across the
DTCC Clearing Agencies to the extent practicable and appropriate.
C. Accelerated Return of Former Member's Clearing Fund Deposit
NSCC proposes to reduce the time 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 would return the Member's Actual Deposit in the form
of (1) cash or securities within 30 calendar days and (2) Eligible
Letters of Credit within 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 that NSCC may retain for up to two years the Actual
Deposits from Members who have Sponsored Accounts at DTC.
NSCC states that shortening the time for the return of a Member's
Clearing Fund deposit would be helpful to firms that have exited NSCC,
so that such firms could have use of the deposits sooner than under the
current Rules. However, 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.
D. Conforming and Technical Changes
NSCC proposes to make various conforming and technical changes
necessary to harmonize the remaining current Rules with the proposed
changes. The proposed defined terms in the loss allocation process
would be included in Rule 1 (Definitions and Descriptions), and
obsolete terms would be replaced with the proposed terms. In addition,
the rule numbers appear in the remaining current Rules would be updated
to reflect the changes made by the proposal. NSCC further proposes to
modify its Voluntary Termination process to avoid any potential
conflicts with the loss allocation process.
II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \30\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that the proposed rule change is consistent with the requirements
of the Act and the rules and regulations thereunder applicable to such
organization. After careful review, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to NSCC. In particular,
the Commission finds that the Proposed Rule Change is consistent with
Section 17A(b)(3)(F) of the Act,\31\ Rule 17Ad-22(e)(4)(viii) under the
Act,\32\ Rule 17Ad-22(e)(13) under the Act,\33\ and Rules 17Ad-
22(e)(23)(i) and (ii) under the Act.\34\
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78s(b)(2)(C).
\31\ 15 U.S.C. 78q-1(b)(3)(F).
\32\ 17 CFR 240.17Ad-22(e)(4)(viii).
\33\ 17 CFR 240.17Ad-22(e)(13).
\34\ 17 CFR 240.17Ad-22(e)(23)(i) and (ii).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, in part, that a
registered clearing agency have rules designed to assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency, to remove impediments to and perfect
the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions, and to protect
investors and the public interest.\35\
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The Commission believes that the proposal to change the loss
allocation process is designed to assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency.
As described above, NSCC proposes to make a number of changes to its
loss allocation process as described above. First, NSCC would modify
the calculation of its Corporate Contribution to apply a mandatory
fixed percentage of its General Business Risk Capital Requirement as
compared to the current Rules that provide for a ``no less than''
percentage of retained earnings. The proposed changes also would
clarify that the proposed Corporate Contribution would apply to
Declared Non-Default Loss Events, as well as Defaulting Member Events,
on a mandatory basis. Moreover, the proposal specifies that if the
Corporate Contribution is applied to a loss or liability relating to an
Event Period, then for any subsequent Event Periods that occur during
the 250 business days thereafter, the Corporate Contribution would be
reduced to the remaining, unused portion of the Corporate Contribution.
The Commission believes that these changes set clear expectations about
how and when NSCC's Corporate Contribution would be applied to help
address a loss, and allow NSCC to better anticipate and prepare for
potential risk exposures that may arise during an Event Period.
Second, as described above, NSCC proposes to determine a Member's
loss allocation obligation based on the average of its Required Fund
Deposit over a look-back period of 70 business days and to determine
its Loss Allocation Cap based on the greater of its Required Fund
Deposit or the average thereof over a look-back period of 70 business
days. These proposed changes are designed to allow NSCC to calculate a
Member's pro rata share of losses and liabilities based on the amount
of risk that the Member brings to NSCC. Moreover, using a look-back
period to determine a Member's loss allocation obligation is designed
to deter Members from reducing their settlement activities during a
time of stress primarily to limit their Loss Allocation Caps. As a
result of these changes, the Commission believes that NSCC should be in
a better position to manage its risk by curtailing the chance that
reduced settlement activities contribute to higher volatility or lower
liquidity during an already stressed period.
Third, as described above, NSCC proposes to introduce the concept
of an Event Period, which would group Defaulting Member Events and
Declared Non-Default Loss Events occurring within a period of 10
business days for purposes of allocating losses to Members in one or
more rounds. Under the current Rules, every time NSCC incurs a loss or
liability, NSCC will initiate its current loss allocation process by
applying its retained earnings and allocating losses. However, the
current Rules do not contemplate a situation where loss events occur in
quick succession. Accordingly, even if multiple losses occur within a
short period, the current Rules dictate that NSCC start the loss
allocation process separately for each loss event. Having multiple loss
allocation calculations and notices from NSCC and withdrawal notices
from Members after multiple sequential loss events could cause heighten
operational complexity and, therefore, risk for NSCC, since NSCC would
have to process and track multiple notices while performing its other
critical operations during a time of significant stress.
[[Page 44982]]
Therefore, the Commission believes that the proposed change to
introduce an Event Period would provide a more defined and transparent
structure, compared to the current loss allocation process described
immediately above, helping to reduce complexity in and the resources
needed to effectuate the process, thus mitigating operational risk.
Overall, such an improved structure should enable both NSCC and each
Member to more effectively manage the risks and potential financial
obligations presented by sequential Defaulting Member Events or
Declared Non-Default Loss Events that are likely to arise in quick
succession, and could be closely linked to an initial event and/or
market dislocation episode. In other words, the proposed Event Period
structure should help clarify and define for both NSCC and Members how
NSCC would initiate a single defined loss allocation process to cover
all loss events within 10 business days. As a result, all loss
allocation calculation and notices from NSCC and potential withdrawal
notices from Members would be tied back to one Event Period instead of
each individual loss event.
Fourth, as described above, the proposal would improve upon the
current loss allocation approach laid out in NSCC's Rules by providing
for a loss allocation round, a Loss Allocation Notice process, a Loss
Allocation Withdrawal Notice process, and a Loss Allocation Cap. A loss
allocation round would be a series of loss allocations relating to an
Event Period, the aggregate amount of which would be limited by the
round cap. When the losses allocated in a round equals the round cap,
any additional losses relating to the Event Period would be allocated
in subsequent rounds until all losses from the Event Period are
allocated among Members. Each loss allocation would be communicated to
Members by the issuance of a Loss Allocation Notice. Each Member in a
loss allocation round would have five business days from the issuance
of the first Loss Allocation Notice for the round to notify NSCC of its
election to withdraw from membership with NSCC, and thereby benefit
from its Loss Allocation Cap. The Loss Allocation Cap of a Member would
be equal to the greater of its Required Fund Deposit on the first day
of the applicable Event Period and its Average RFD. Members would have
two business days after NSCC issues a first round Loss Allocation
Notice to pay the amount specified in the notice.
The Commission believes that the changes to (1) establish a
specific Event Period, (2) continue the loss allocation process in
successive rounds, (3) clearly communicate with its Members regarding
their loss allocation obligations, and (4) effectively identify
continuing Members for the purpose of calculating loss allocation
obligations in successive rounds, are designed to make NSCC's loss
allocation process more certain. In addition, the changes are designed
to provide Members with a clear set of procedures that operate within
the proposed loss allocation structure, and provide increased
predictability and certainty regarding Members' exposures and
obligations. Furthermore, by grouping all loss events within 10
business days, the loss allocation process relating to multiple loss
events can be streamlined. With enhanced certainty, predictability, and
efficiency, NSCC would then be able to better manage its risks from
loss events occurring in quick succession, and Members would be able to
better manage their risks by deciding whether and when to withdraw from
membership and limit their exposures to NSCC. Furthermore, the proposed
changes are designed to reduce liquidity risk to Members by providing a
two-day window to arrange funding to pay for loss allocation, while
still allowing NSCC to address losses in a timely manner.
Fifth, as described above, NSCC proposes to clarify the governance
around Declared Non-Default Loss Events by providing 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 its services in an
orderly manner. NSCC also proposes to provide that NSCC would then be
required to promptly notify Members of this determination and start the
loss allocation process concerning the loss stemming from a Declared
Non-Default Loss Event. The Commission believes that these changes
should provide an orderly and transparent procedure to allocate a non-
default loss by requiring the Board of Directors to make a definitive
decision to announce an occurrence of a Declared Non-Default Loss
Event, and requiring NSCC to provide a notice to Members of the
decision. The Commission further believes that an orderly and
transparent procedure should result in a risk management process at
NSCC that is more robust as a result of enhanced governance around
NSCC's response to non-default losses.
Collectively, the Commission believes that the proposed changes to
NSCC's loss allocation process would provide greater transparency,
certainty, and efficiency to NSCC regarding the amount of resources and
the instances in which NSCC would apply the resources to address risks
arising from Defaulting Member Events and Declared Non-Default Loss
Events, which could occur in quick succession. The Commission believes
that the transparency, certainty, and efficiency would afford NSCC
better predictability regarding its risk exposure, and in turn, would
allow a risk management process at NSCC that is more effectively
responsive to such events and would improve NSCC's ability to continue
to operate in a safe and sound manner during such events. Therefore,
the Commission believes that these proposed changes would better equip
NSCC to assure the safeguarding of securities and funds which are in
the custody or control of NSCC.
In addition, the Commission believes that the proposed rule changes
to align NSCC's loss allocation rules with the loss allocation rules of
the other DTCC Clearing Agencies, to the extent practicable and
appropriate, are designed to remove impediments to and perfect the
mechanism of a national system for the prompt and accurate clearance
and settlement of securities transactions. As described above, the
alignment of NSCC's loss allocation rules with the other NSCC Clearing
Agencies is designed to help provide consistent treatment for firms
that are participants of multiple DTCC Clearing Agencies. The
Commission believes that providing consistent treatment through
consistent procedures among the DTCC Clearing Agencies would help firms
that participate in multiple DTCC Clearing Agencies from encountering
unnecessary complexities and confusion stemming from differences in
procedures regarding loss allocation processes, particularly at times
of significant stress. Accordingly, by removing potential unnecessary
complexities and confusion due to different loss allocation rules of
the DTCC Clearing Agencies, the Commission believes that the proposal
is designed to remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions.
Finally, the Commission believes that the proposed rule change to
(1) reduce the time within which NSCC is required to return a former
Member's Clearing Fund deposit that is cash or securities from 90 days
to 30 calendar days, and (2) make conforming and technical changes
necessary to harmonize the current Rules with the proposed changes are
designed to protect investors and the public interest. First,
[[Page 44983]]
the Commission believes that the reduction in time to return the
deposits would enable firms that have exited NSCC to have access to
their funds sooner than under the current Rules. While acknowledging
that the reduction in time could lesson NSCC's flexibility in liquidity
management for the period between 31 calendar days and 90 days, the
Commission believes that NSCC's procedures would continue to protect
NSCC and its clearance and settlement services because a Member's
Clearing Fund deposit would only be returned if all obligations of the
terminating Member to NSCC have been satisfied. Therefore, NSCC could
maintain necessary coverage for possible claims arising in connection
with the NSCC activities of a former Member. Second, the conforming and
technical changes are designed to provide clear and coherent Rules
concerning loss allocation process to NSCC and its Members. The
Commission believes that clear and coherent Rules should help enhance
the ability of NSCC and Members to more effectively plan for, manage,
and address the risks and financial obligations that loss events
present to NSCC and its Members. Accordingly, the Commission believes
that these two changes are designed to protect investors and the public
interest by (1) reducing financial risks for NSCC's former Members, and
(2) providing clear and coherent Rules to NSCC and Members.
For the reasons above, the Commission believes that the Proposed
Rule Change is consistent with Section 17A(b)(3)(F) of the Act.\36\
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(4)(viii)
Rule 17Ad-22(e)(4)(viii) under the Act requires, in part, that a
covered clearing agency \37\ establish, implement, maintain and enforce
written policies and procedures reasonably designed to effectively
identify, measure, monitor, and manage its credit exposures to
participants and those arising from its payment, clearing, and
settlement processes, including by addressing allocation of credit
losses the covered clearing agency may face if its collateral and other
resources are insufficient to fully cover its credit exposures.\38\
---------------------------------------------------------------------------
\37\ A ``covered clearing agency'' means, among other things, a
clearing agency registered with the Commission under Section 17A of
the Exchange Act (15 U.S.C. 78q-1 et seq.) that is designated
systemically important by the Financial Stability Oversight Counsel
(``FSOC'') pursuant to the Clearing Supervision Act (12 U.S.C. 5461
et seq.). See 17 CFR 240.17Ad-22(a)(5) and (6). On July 18, 2012,
FSOC designated NSCC as systemically important. U.S. Department of
the Treasury, ``FSOC Makes First Designations in Effort to Protect
Against Future Financial Crises,'' available at https://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx.
Therefore, NSCC is a covered clearing agency.
\38\ 17 CFR 240.17Ad-22(e)(4)(viii).
---------------------------------------------------------------------------
As described above, the proposal would revise the loss allocation
process to address how NSCC would manage loss events, including
Defaulting Member Events. Under the proposal, if losses arise out of or
relate to a Defaulting Member Event, NSCC would first apply its
Corporate Contribution. If those funds prove insufficient, the proposal
provides for allocating the remaining losses to the remaining Members
through the proposed process. Accordingly, the Commission believes that
the proposal is reasonably designed to manage NSCC's credit exposures
to its Members, by addressing allocation of credit losses.
Therefore, the Commission believes that NSCC's proposal is
consistent with Rule 17Ad-22(e)(4)(viii) under the Act.\39\
---------------------------------------------------------------------------
\39\ Id.
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(e)(13)
Rule 17Ad-22(e)(13) under the Act requires, in part, that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to ensure the covered
clearing agency has the authority to take timely action to contain
losses and liquidity demands and continue to meet its obligations.\40\
---------------------------------------------------------------------------
\40\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------
As described above, the proposal would establish a more detailed
and structured loss allocation process by (1) modifying the calculation
and application of the Corporate Contribution; (2) introducing an Event
Period; (3) introducing a loss allocation round and notice process; (4)
implementing a look-back period to calculate a Member's loss allocation
obligation; (5) modifying the withdrawal process and the cap of
withdrawing Member's loss allocation exposure; and (6) providing the
governance around a non-default loss. The Commission believes that each
of these proposed changes helps establish a more transparent and clear
loss allocation process and authority of NSCC to take certain actions,
such as announcing a Declared Non-Default Loss Event, within the loss
allocation process. Further, having a more transparent and clear loss
allocation process as proposed would provide clear authority to NSCC to
allocate losses from Defaulting Member Events and Declared Non-Default
Loss Events and take timely actions to contain losses, and continue to
meet its clearance and settlement obligations.
Therefore, the Commission believes that NSCC's proposal is
consistent with Rule 17Ad-22(e)(13) under the Act.\41\
---------------------------------------------------------------------------
\41\ Id.
---------------------------------------------------------------------------
D. Consistency With Rule 17Ad-22(e)(23)(i) and (ii)
Rule 17Ad-22(e)(23)(i) under the Act requires that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to publicly disclose all
relevant rules and material procedures, including key aspects of its
default rules and procedures.\42\ Rule 17Ad-22(e)(23)(ii) under the Act
requires that a covered clearing agency establish, implement, maintain
and enforce written policies and procedures reasonably designed to
provide sufficient information to enable participants to identify and
evaluate the risks, fees, and other material costs they incur by
participating in the covered clearing agency.\43\
---------------------------------------------------------------------------
\42\ 17 CFR 240.17Ad-22(e)(23)(i).
\43\ 17 CFR 240.17Ad-22(e)(23)(ii).
---------------------------------------------------------------------------
As described above, the proposal would publicly disclose how NSCC's
Corporate Contribution would be calculated and applied. In addition,
the proposal would establish and publicly disclose a detailed procedure
in the Rules for loss allocation. More specifically, the proposed
changes would establish an Event Period, loss allocation rounds, a
look-back period to calculate each Member's loss allocation obligation,
a withdrawal process followed by a loss allocation process, and a Loss
Allocation Cap that would apply to Members after withdrawal.
Additionally, the proposal would align the loss allocation rules across
the DTCC Clearing Agencies to help provide consistent treatment, and
clarify that non-default losses would trigger loss allocation to
Members. The proposal would also provide for and make known to members
the procedures to trigger a loss allocation procedure, contribute
NSCC's Corporate Contribution, allocate losses, and withdraw and limit
Member's loss exposure. Accordingly, the Commission believes that the
proposal is reasonably designed to (1) publicly disclose all relevant
rules and material procedures concerning key aspects of NSCC's default
rules and procedures, and (2) provide sufficient information to enable
Members to identify and evaluate the risks by participating in NSCC.
Therefore, the Commission believes that NSCC's proposal is
consistent with
[[Page 44984]]
Rules 17Ad-22(e)(23)(i) and (ii) under the Act.\44\
---------------------------------------------------------------------------
\44\ 17 CFR 240.17Ad-22(e)(23)(i) and (ii).
---------------------------------------------------------------------------
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \45\ and the
rules and regulations thereunder.
---------------------------------------------------------------------------
\45\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\46\ that proposed rule change SR-NSCC-2017-018, as modified by
Amendment No. 1, be, and it hereby is, approved \47\ as of the date of
this order or the date of a notice by the Commission authorizing NSCC
to implement advance notice SR-NSCC-2017-806, as modified by Amendment
No. 1, whichever is later.
---------------------------------------------------------------------------
\46\ 15 U.S.C. 78s(b)(2).
\47\ In approving the Proposed Rule Change, the Commission has
considered the Proposed Rule Change's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\48\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-19053 Filed 8-31-18; 8:45 am]
BILLING CODE 8011-01-P
