Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Recovery & Wind-Down Plan, 17440-17448 [2021-06770]
Download as PDF
<![CDATA[
17440
Federal Register / Vol. 86, No. 62 / Friday, April 2, 2021 / Notices
continued access to FICC’s critical
services and to minimize market impact
of the transfer. By establishing the
framework and strategy for the
execution of the transfer and winddown of FICC in order to facilitate
continuous access to its critical services,
the Wind-down Plan establishes a plan
for the orderly wind-down of FICC.
As described above, the proposed rule
change would update the R&W Plan to
(i) reflect business and product
developments, (ii) make certain
clarifications, (iii) remove provisions
covering certain ‘‘business-as-usual’’
actions, and (iv) make certain technical
corrections. By ensuring that material
provisions of the Plan are current, clear,
and technically correct, FICC believes
that the proposed amendments are
designed to support the maintenance of
the Plan for the recovery and orderly
wind-down of the covered clearing
agency necessitated by credit losses,
liquidity shortfalls, losses from general
business risk, or any other losses, and,
as such, meets the requirements of Rule
17Ad–22(e)(3)(ii) under the Act.46
Therefore, the proposed changes would
help FICC to maintain the Plan in a way
that continues to be consistent with the
requirements of Rule 17Ad–22(e)(3)(ii).
jbell on DSKJLSW7X2PROD with NOTICES
(B) Clearing Agency’s Statement on
Burden on Competition
FICC does not believe that the
proposed rule change would have any
impact, or impose any burden, on
competition. FICC does not anticipate
that the proposal would affect its dayto-day operations under normal
circumstances, or in the management of
a typical Member default scenario or
non-default event. The R&W Plan was
developed and documented in order to
satisfy applicable regulatory
requirements, as discussed above. The
proposal is intended to enhance and
update the Plan to ensure it is clear and
remains current in the event it is ever
necessary to be implemented. The
proposed revisions would not effect any
changes to the overall structure or
operation of the Plan or FICC’s recovery
and wind-down strategy as set forth
under the current Plan. As such, FICC
believes the proposal would not have
any impact, or impose any burden, on
competition.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants, or Others
FICC has not received or solicited any
written comments relating to this
proposal. FICC will notify the
Commission of any written comments
received by FICC.
III. Date of Effectiveness of the
Proposed Rule Change, and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A) 47 of the Act and paragraph
(f) 48 of Rule 19b–4 thereunder. At any
time within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form
(https://www.sec.gov/rules/sro.shtml);
or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FICC–2021–002 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549.
All submissions should refer to File
Number SR–FICC–2021–002. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
47 15
46 Id.
VerDate Sep<11>2014
48 17
23:04 Apr 01, 2021
Jkt 253001
PO 00000
U.S.C 78s(b)(3)(A).
CFR 240.19b–4(f).
Frm 00092
Fmt 4703
Sfmt 4703
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of FICC and on DTCC’s website
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FICC–
2021–002 and should be submitted on
or before April 23, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.49
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–06774 Filed 4–1–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91428; File No. SR–NSCC–
2021–004]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the Recovery
& Wind-Down Plan
March 29, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 23,
2021, National Securities Clearing
Corporation (‘‘NSCC’’) 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 clearing agency. NSCC filed the
proposed rule change pursuant to
Section 19(b)(3)(A) 3 of the Act and Rule
19b–4(f)(4) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
49 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(4).
1 15
E:\FR\FM\02APN1.SGM
02APN1
Federal Register / Vol. 86, No. 62 / Friday, April 2, 2021 / Notices
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change 5 consists of
amendments to the R&W Plan to (i)
reflect business and product
developments, (ii) make certain changes
to improve the clarity of the Plan, (iii)
remove provisions covering certain
‘‘business-as-usual’’ actions, and (iv)
make certain technical corrections, as
described in greater detail below.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency 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 these
statements may be examined at the
places specified in Item IV below. The
clearing agency has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
The proposed rule change would
amend the R&W Plan to (i) reflect
business and product developments, (ii)
make certain changes to improve the
clarity of the Plan, (iii) remove
provisions covering certain ‘‘businessas-usual’’ actions, and (iv) make certain
technical corrections. Each of the
proposed revisions is further described
below.
jbell on DSKJLSW7X2PROD with NOTICES
Background
The R&W Plan was adopted in August
2018 6 and is maintained by NSCC for
compliance with Rule 17Ad–22(e)(3)(ii)
under the Act.7 The R&W Plan sets forth
the plan to be used by the Board and
NSCC management in the event NSCC
encounters scenarios that could
potentially prevent it from being able to
provide its critical services as a going
concern. The R&W Plan is structured as
5 Capitalized terms not defined herein are defined
in the Rules and Procedures of NSCC (the ‘‘Rules’’),
available at https://dtcc.com/∼/media/Files/
Downloads/legal/rules/nscc_rules.pdf, or in the
Recovery & Wind-down Plan of NSCC (the ‘‘R&W
Plan’’ or ‘‘Plan’’).
6 See Securities Exchange Act Release Nos. 83974
(August 28, 2018), 83 FR 44988 (September 4,
2018), (SR–NSCC–2017–017); and 83955 (August
27, 2018), 83 FR 44340 (August 30, 2018) (SR–
NSCC–2017–805).
7 17 CFR 240.17Ad–22(e)(3)(ii). NSCC is a
‘‘covered clearing agency’’ as defined in Rule
17Ad–22(a)(5) under the Act and must comply with
paragraph (e) of Rule 17Ad–22.
VerDate Sep<11>2014
23:04 Apr 01, 2021
Jkt 253001
a roadmap that defines the strategy and
identifies the tools available to NSCC to
either (i) recover, in the event it
experiences losses that exceed its
prefunded resources (such strategies
and tools referred to herein as the
‘‘Recovery Plan’’) or (ii) wind-down its
business in a manner designed to permit
the continuation of NSCC’s critical
services in the event that such recovery
efforts are not successful (such strategies
and tools referred to herein as the
‘‘Wind-down Plan’’). The recovery tools
available to NSCC are intended to
address the risks of (a) uncovered losses
or liquidity shortfalls resulting from the
default of one or more of its Members,
and (b) losses arising from non-default
events, such as damage to NSCC’s
physical assets, a cyber-attack, or
custody and investment losses, and the
strategy for implementation of such
tools. The R&W Plan also describes the
strategy and framework for the orderly
wind-down of NSCC and the transfer of
its business in the event the
implementation of the available
recovery tools does not successfully
return NSCC to financial viability.
The R&W Plan is managed and
developed by NSCC’s parent company,
the Depository Trust & Clearing
Corporation (‘‘DTCC’’),8 and is managed
by the Office of Recovery & Resolution
Planning (referred to in the Plan as the
‘‘R&R Team’’) on behalf of NSCC, with
review and oversight by the DTCC
Management Committee and the Board.
Proposed Amendments to the R&W Plan
The Board, or such committees as
may be delegated authority by the Board
from time to time pursuant to its
charter, is required to review and
approve the R&W Plan biennially.9 In
connection with the first biennial
review of the Plan, NSCC is proposing
the revisions described in greater detail
below. The proposed rule change is
designed to update and enhance the
clarity of the Plan to ensure it is current
in the event it is ever necessary to be
implemented. None of the proposed
changes modify NSCC’s general
objectives and approach with respect to
its recovery and wind-down strategy as
set forth under the current Plan.
8 DTCC operates on a shared service model with
respect to NSCC and its other affiliated clearing
agencies, The Depository Trust Company{ XE
‘‘NSCC’’ } (‘‘DTC’’) and Fixed Income Clearing
Corporation (‘‘FICC’’). Most corporate functions are
established and managed on an enterprise-wide
basis pursuant to intercompany agreements under
which it is generally DTCC that provides relevant
services to NSCC, DTC{ XE ‘‘NSCC’’ } and FICC
(collectively, the ‘‘Clearing Agencies’’).
9 Supra note 6.
PO 00000
Frm 00093
Fmt 4703
Sfmt 4703
17441
A. Proposed Changes To Reflect
Business or Product Developments
1. Updates to DTCC Business Profile,
Intercompany Arrangements, FMI Links
and Governance
NSCC is proposing the following
changes to the DTCC Business Profile,
Intercompany Arrangements, FMI Links
and Governance sections of the Plan
based upon business updates that have
occurred since the time the Plan was
adopted.
Section 2.1 (DTCC Business Profile) of
the Plan describes that DTCC is a userowned and user-governed holding
company for a group of direct and
indirect subsidiaries and joint ventures.
This section includes a brief summary
of each of the three subsidiaries (DTC,
FICC and NSCC) that have been
designated as systemically important
financial market utilities (‘‘SIFMUs’’) by
the Financial Stability Oversight
Council. The proposed rule change
would revise the introductory paragraph
of this section to remove reference to
joint ventures because DTCC currently
has no joint ventures.
Section 2.4 (Intercompany
Arrangements) of the Plan currently
describes how corporate support
services are provided to NSCC from
DTCC, and to DTCC’s other subsidiaries
through intercompany agreements
under a shared services model. NSCC is
proposing to update Table 2–A (SIFMU
Legal Entity Structure and
Intercompany Agreements), which
delineates NSCC’s affiliates, to reflect
the name change of Omgeo Pte Ltd by
removing ‘‘Omgeo Pte Ltd’’ and
replacing it with the new name of this
entity, ‘‘DTCC Singapore Pte. Ltd.’’ A
related footnote would also be added to
make clear that the services provided by
DTCC Singapore Pte. Ltd. are performed
through its branch office in Manila,
DTCC Manila. Additionally, this section
includes a separate table, Table 2–B,
that lists each of the DTCC facilities
utilized by the Clearing Agencies and
indicates whether the facility is owned
or leased by DTCC. NSCC proposes to
update this table to add Boston,
Massachusetts as an additional location
of a DTCC facility and to indicate that
this facility is leased by DTCC.
Currently, Section 2.5 (FMI Links) of
the Plan describes some, but not all, of
the key financial market infrastructures
(‘‘FMIs’’), both domestic and foreign,
that NSCC has identified as critical
‘‘links.’’ 10 In order to better align with
10 As defined in Rule 17Ad–22(a)(8) under the
Act, a link ‘‘means, for purposes of paragraph
(e)(20) of [Rule 17Ad–22], a set of contractual and
operational arrangements between two or more
E:\FR\FM\02APN1.SGM
Continued
02APN1
17442
Federal Register / Vol. 86, No. 62 / Friday, April 2, 2021 / Notices
jbell on DSKJLSW7X2PROD with NOTICES
the structure of DTCC’s inventory of
links maintained by DTCC’s Systemic
Risk Office (‘‘SRO’’), which includes all
of NSCC’s link relationships, the
proposed rule change would delete the
current ‘‘FMI Links’’ section of the R&W
Plan and replace it with a revised
version of Section 2.5 that would
include an overview of NSCC’s link
arrangements, a related footnote to the
definition of a ‘‘link’’ under Rule 17Ad–
22(a)(8) under the Act, and a table
(Table 2–C: Links) listing all of NSCC’s
FMI link arrangements. The table would
list the link, the link category (i.e.,
whether the link is a central
counterparty, settlement interface, or
matching utility), and a brief
description. The proposed rule change
would also add a table (Table 2–D:
Schedule A Relationships) that would
identify certain critical external service
providers that, as determined by NSCC’s
management, do not meet the specified
criteria of ‘‘link’’ but nevertheless are
subject to the same review process as is
conducted for links, referred to within
NSCC as ‘‘Schedule A Relationships,’’
and a related footnote. This change
would align with the structure of SRO’s
inventory of Schedule A Relationships.
Section 4.3 (Recovery and Winddown Program Governance) of the Plan
currently contains a paragraph that
identifies DTCC’s ‘‘R&R Steering Group’’
as the internal group responsible for
ensuring that each of the Clearing
Agencies observes recovery planning
requirements, and that recovery
planning is integrated into the Clearing
Agencies’ overall governance processes
including the preparation, review, and
filing of the Clearing Agencies’ R&W
Plans. Pursuant to the proposed rule
change, NSCC would revise Section 4.3
to reflect an internal organizational
name change. The proposal would
change the name of the R&R Steering
Group to the ‘‘Recovery and Wind-down
Planning Council’’ to reflect its role as
an advisory body.11 This name change
would not change the composition, role
or responsibilities of this internal group,
which includes selected members of
DTCC’s Management Committee and
clearing agencies, financial market utilities, or
trading markets that connect them directly or
indirectly for the purposes of participating in
settlement, cross margining, expanding their
services to additional instruments or participants,
or for any other purposes material to their
business.’’ 17 CFR 240.17Ad–22(a)(8).
11 In accordance with DTCC’s Policy on
Governance of Internal Committees and Councils, a
‘‘council’’ is defined as an advisory body that has
no decision-making authority. A council may be
formed by any committee or a Managing Director.
Councils will share information, discuss topics, and
make recommendations to its initiating committee
or Managing Director. Councils report up to their
initiating committee or Managing Director.
VerDate Sep<11>2014
23:04 Apr 01, 2021
Jkt 253001
members of DTCC’s financial and
operational risk management, product
management, legal, and treasury/finance
teams that are responsible for providing
strategic guidance and direction for the
recovery and wind-down program 12
and the Plan. Additionally, for purposes
of clarification, the proposal would add
the words ‘‘, where necessary,’’ to refer
to when the council would engage with
internal working groups.
2. Liquidity Shortfalls
Section 5.3 (Liquidity Shortfalls) of
the Plan identifies tools that may be
used to address foreseeable shortfalls of
NSCC’s liquidity resources following a
Member default. The goal in managing
NSCC’s qualified liquidity resources is
to maximize resource availability in an
evolving stress situation, to maintain
flexibility in the order and use of
sources of liquidity, and to repay any
third-party lenders of liquidity in a
timely manner. This section includes a
table (Table 5–C) that lists NSCC
liquidity tools and resources.13 The
proposed rule change would update this
section to include a reference to cash
proceeds from outstanding term debt
issuance in addition to the other
examples of NSCC’s qualifying liquid
resources. A footnote would also be
added providing the citation to NSCC’s
advance notice filing covering the term
debt issuance.14
B. Proposal To Make Certain
Clarifications to the R&W Plan
1. Critical Services and Indicative NonCritical Services
Section 3 (Critical Services) of the
Plan defines the criteria for classifying
certain of NSCC’s services as
‘‘critical,’’ 15 and identifies such critical
12 In 2013, DTCC launched its Recovery &
Resolution Planning Program for DTC, NSCC, and
FICC as part of its continued commitment to
enhancing risk management. The Office of Recovery
& Resolution Planning was established to manage
the program and the development of the recovery
and wind-down plans for the Clearing Agencies.
13 Table 5–C lists the following NSCC liquidity
tools: Utilize short-settling liquidating trades,
Increase the speed of portfolio asset sales, Credit
Facility, Unissued Commercial Paper, NonQualifying Liquid Resources, and Uncommitted
stock loan and equity repos.
14 See Securities Exchange Act Release No. 87912
(January 8, 2020), 85 FR 2187 (January 14, 2020)
(SR–NSCC–2019–802).
15 The criteria that is used to identify an NSCC
service or function as critical includes
consideration as to whether (1) there is a lack of
alternative providers or products; (2) failure of the
service could impact NSCC’s ability to perform its
central counterparty services; (3) failure of the
service could impact NSCC’s ability to perform its
netting services, and, as such, the availability of
market liquidity; and (4) the service is
interconnected with other participants and
processes within the U.S. financial system (for
PO 00000
Frm 00094
Fmt 4703
Sfmt 4703
services and the rationale for their
classification. The identification of
NSCC’s critical services is important for
evaluating how the recovery tools and
the wind-down strategy would facilitate
and provide for the continuation of
NSCC’s critical services to the markets
it serves. This section also includes a
list of indicative non-critical services.
This section includes a table (Table
3–B: NSCC Critical Services) that lists
each of the services, functions or
activities that NSCC has identified as
‘‘critical’’ based on the applicability of
the criteria. As more fully described
below, the proposed rule change would
clarify in Table 3–B the description of
some of the critical services and update
the table to include an additional
critical service. While the clarifying
changes do not change the classification
of the relevant service (as being either
‘‘critical’’ or ‘‘indicative non-critical’’),
nor impact the existing classification of
other services, NSCC believes these
revisions would enhance the clarity of
the descriptions of them.
First, the proposed rule change would
revise the entries for ‘‘3. Obligation
Warehouse’’ and ‘‘10. CNS/Prime Broker
Interface’’ to delete the check mark
denoting the lack of alternative
providers and products as one of the
determinants for its classification as a
critical service. Second, the proposed
rule change would replace the name of
the service identified in the current plan
as exchange-traded fund ‘‘5. ETF’’ to
exchange-traded products ‘‘5. ETPs’’ in
order to more accurately align with the
scope of what is covered by these
services. Third, currently the critical
service ‘‘6. ACATS’’ 16 is described as
‘‘A service under which Members can
transfer their customers’ assets from one
brokerage account and/or bank to
another, while processing through
CNS.’’ The proposed rule change would
add at the end of this description the
phrase ‘‘, DTC, Obligation Warehouse,
OCC and others,’’ in order to include a
more comprehensive description of this
service. Fourth, in the description of
‘‘11. Balance Order Netting,’’ the
proposed rule change would delete the
phrase ‘‘balance order transactions’’ and
replace it with ‘‘Balance Order
Contracts’’ because it is a defined term
under the Rules.17
example, with other FMIs, settlement banks, brokerdealers, and exchanges).
16 ‘‘ACATS’’ refers to NSCC’s Automated
Customer Accounts Transfer Service.
17 Pursuant to Rule 5, supra note 5, ‘‘Balance
Order Contracts’’ is defined as Compared Contracts
for Balance Order Securities and other transactions
in respect of Balance Order Securities submitted to
NSCC under the Rules.
E:\FR\FM\02APN1.SGM
02APN1
Federal Register / Vol. 86, No. 62 / Friday, April 2, 2021 / Notices
Also, the proposed rule change would
update Table 3–B (NSCC Critical
Services) to add ‘‘Account Information
Transmission’’ (‘‘AIT’’). This new entry
would include in the description of
AIT 18 that it is being enhanced in
support of the bulk transfer initiative,
which is an industry effort designed to
prepare carrying broker-dealers for an
emergency mass transfer of large
quantities of customer accounts and
assets from a distressed broker to a
financially secure broker.19 In the
column that delineates the determinant
for its classification as a critical service,
this new entry would have a check mark
that denotes this is because of a lack of
alternative providers and products.
jbell on DSKJLSW7X2PROD with NOTICES
2. Member Default Losses Through the
Crisis Continuum
Section 5 (Member Default Losses
through the Crisis Continuum) of the
Plan is comprised of multiple
subsections that identify the risk
management surveillance, tools, and
governance that NSCC may employ
across an increasing stress environment,
referred to as the ‘‘Crisis Continuum.’’ 20
This section currently identifies, among
other things, the tools that can be
employed by NSCC to mitigate losses,
and mitigate or minimize liquidity
needs, as the market environment
becomes increasingly stressed. As more
fully described below, the proposed rule
change would clarify certain language.
Section 5.2.1 (Stable Market Phase)
describes NSCC’s risk management
activities in the normal course of
business. These activities include (i) the
routine monitoring of margin adequacy
through daily evaluation of backtesting
and stress testing results that review the
adequacy of NSCC’s margin
calculations, and escalation of those
results to internal and Board committees
and (ii) routine monitoring of liquidity
adequacy through review of daily
liquidity studies that measure
sufficiency of available liquidity
resources to meet cash settlement
obligations of the Member that would
generate the largest aggregate payment
obligation. Further, under the heading
‘‘Market Risk Monitoring and Stable
Market Indicators,’’ this section states
18 As set forth in Table 3–B of the Plan, the ‘‘AIT’’
service is described as a secure data transport
facility that allows NSCC Members to perform a
single movement of many customer brokerage
accounts.
19 See https://www.sifma.org/resources/general/
bulk-transfer-playbook.
20 As set forth in the Recovery Plan, the phases
of the ‘‘Crisis Continuum’’ include (1) a stable
market phase, (2) a stressed market phase, (3) a
phase commencing with NSCC’s decision to cease
to act for a Member or Affiliated Family, and (4) a
recovery phase.
VerDate Sep<11>2014
23:04 Apr 01, 2021
Jkt 253001
that the amount of Clearing Fund
required from each Member is
determined principally by Value-at-Risk
(‘‘VaR’’) calculations,21 and that in order
to ensure the VaR model accurately
reflects market conditions and provides
adequate protection against market risk,
NSCC evaluates several factors on an
ongoing basis.
The proposed rule change would
remove the following factor as one of
those evaluated, because it is no longer
part of NSCC’s model calculation,
‘‘Implied volatility to assess whether a
potential increase in market price
volatility may not be fully incorporated
in the historical price moves.’’ 22 The
elimination of the language regarding
implied volatility provides a more
accurate representation of the risk
model calculation. Consistent with the
above, NSCC would also remove the
paragraph in this section that states that
implied market price volatility as
measured by benchmarks such as the
VIX index does not indicate material
changes in market price volatility are
expected.
Section 5.2.4 (Recovery Corridor and
Recovery Phase) outlines the early
warning indicators to be used by NSCC
to evaluate its options and potentially
prepare to enter the ‘‘Recovery Phase,’’
which phase refers to the actions to be
taken by NSCC to restore its financial
resources and avoid a wind-down of its
business. Included in this section are
descriptions of potential stress events
that could lead to recovery, and several
early warning indicators and metrics
that NSCC has established to evaluate
its options and potentially prepare to
enter the Recovery Phase. These
indicators, which are referred to in the
Recovery Plan as recovery corridor
indicators (‘‘Corridor Indicators’’),23 are
calibrated against NSCC’s financial
resources and are designed to give
NSCC the ability to replenish financial
21 As described in the Plan, Value-at-Risk (‘‘VaR’’)
calculations are based on the potential price-change
volatility of unsettled positions according to
NSCC’s risk-based margin model.
22 The remaining factors set forth in the Plan that
NSCC evaluates to ensure that the VaR model
accurately reflects market conditions and provides
adequate protection against market risk are: (i)
Backtesting and other model performance
monitoring to assess the robustness of the Clearing
Fund requirements, and (ii) stress testing based on
real historical and hypothetical scenarios to assess
the margin adequacy under extreme but plausible
market conditions. The Clearing Fund Formula is
described in Procedure XV (Clearing Fund Formula
and Other Matters), supra note 5.
23 The majority of the Corridor Indicators, as
identified in the Recovery Plan, relate directly to
conditions that may require NSCC to adjust its
strategy for hedging and liquidating a defaulting
Member’s portfolio, and any such changes would
include an assessment of the status of the Corridor
Indicators.
PO 00000
Frm 00095
Fmt 4703
Sfmt 4703
17443
resources, typically through business as
usual (‘‘BAU’’) tools applied prior to
entering the Recovery Phase.
Included in this section is a table
(Table 5–A: Corridor Indicators) that for
each Corridor Indicator identifies the (i)
measures of the indicator, (ii)
evaluations of the status of the
indicator, (iii) metrics for determining
the status of the deterioration or
improvement of the indicator, and (iv)
‘‘Corridor Actions,’’ which are steps that
may be taken to improve the status of
the indicator,24 as well as management
escalations required to authorize those
steps. For the entry in the table for
‘‘Hedge Effectiveness,’’ the proposed
rule change would revise the text for
clarity by adding to the existing
description of measures of this indicator
that hedge effectiveness is most relevant
prior to commencing the hedging and
liquidation strategy but is updated as
necessary with changes in market prices
and/or position liquidations. Also, the
text that identifies Financial Risk
Management as the internal group
responsible for measuring the metrics
for determining the status of the
deterioration or improvement of the
‘‘Hedge Effectiveness’’ indicator would
be revised to add that this is done with
input from NSCC’s investment advisor.
Section 5.2.4 also includes language
that requires NSCC management to
review the Corridor Indicators and the
related metrics at least annually and
modify these metrics as necessary in
light of observations from simulation of
Member defaults and other analyses. In
order to more closely align with the
biennial cycle of DTCC’s multi-member
closeout simulation exercise, the
proposed rule change would shift the
timing of management’s review of the
Corridor Indicators and related metrics
from annually to biennially. NSCC
believes this change is necessary for
consistency with the cycle of the multimember closeout simulation, in which
the Corridor Indicators and metrics are
assessed as part of the simulation
exercise.
There is an additional table in Section
5.2.4, (Table 5–B: Loss Waterfall Tools)
that delineates the tools that comprise
NSCC’s loss allocation waterfall as set
forth under the Rules.25 This table has
four columns (‘‘Order,’’ ‘‘Tool,’’
‘‘Relevant Rules/Documents,’’ and
24 In this regard, the Corridor Actions that would
be identified in the Plan are indicative but not
prescriptive; therefore, if NSCC needs to consider
alternative actions due to the applicable facts and
circumstances, the escalation of those alternative
actions would follow the same escalation protocol
identified in the Plan for the Corridor Indicator to
which the action relates.
25 Rule 4, supra note 5.
E:\FR\FM\02APN1.SGM
02APN1
17444
Federal Register / Vol. 86, No. 62 / Friday, April 2, 2021 / Notices
‘‘Responsible Body/Personnel’’) and is
organized by the order in which the
liquidity resources are to be applied by
NSCC. Within Table 5–B, Corporate
Contribution is the first entry under the
column labeled ‘‘Tool.’’ Currently, the
narrative for this entry includes a
description of Corporate Contribution
and delineates that in the event of a
cease to act, before applying the
Clearing Fund deposits of Members
(other than the defaulting Member) to
cover any resulting loss, NSCC will
apply the Corporate Contribution.26 For
purposes of clarity, this language would
be revised to remove the words
‘‘applying the Clearing Fund Deposits
of’’ and replace them with ‘‘charging the
Members on a pro rata basis.’’
Within this same entry in Table 5–B,
the proposed rule change would also
revise the current text of the definition
of Corporate Contribution, in order to
more closely align with how this term
is defined under Rule 4. Specifically,
pursuant to the proposed rule change
the definition of Corporate Contribution
would be revised to state that, ‘‘The
Corporate Contribution is an amount
that is equal to 50% of the amount
calculated by NSCC in respect of its
General Business Risk Capital
Requirement for losses that occur over
any rolling 12 month period.’’ 27
Additionally, with respect to the
second entry in Table 5–B, ‘‘Loss
Allocation,’’ the descriptive text in the
‘‘Responsible Body/Personnel’’ column
would be revised to more closely align
with the same language contained in
Rule 4. The revised text would state,
‘‘Members will be obligated to pay the
loss allocation on the second business
day after the Corporation issues any
such notice and to continue to fully
fund their Clearing Fund required
deposits to the extent of any shortfalls.’’
3. Non-Default Losses
Section 6 (Non-Default Losses) of the
Plan outlines how NSCC would address
losses that result other than from a
Member default. This section provides a
roadmap to other documents that
describe these events in greater detail
and outlines NSCC’s approach to
monitoring losses that could result from
jbell on DSKJLSW7X2PROD with NOTICES
26 Id.
27 Pursuant to Rule 4, supra note 5, for any loss
allocation pursuant to Section 4 of Rule 4, whether
arising out of or relating to a Defaulting Member
Event or a Declared Non-Default Loss Event,
NSCC’s corporate contribution to losses or
liabilities that are incurred by NSCC with respect
to an Event Period (‘‘Corporate Contribution’’) shall
be an amount that is equal to fifty (50) percent of
the amount calculated by NSCC in respect of its
General Business Risk Capital Requirement as of the
end of the calendar quarter immediately preceding
the Event Period.
VerDate Sep<11>2014
23:04 Apr 01, 2021
Jkt 253001
a non-default event. This section also
includes a description of Rule 60
(Market Disruption and Force Majeure),
referred to in the Plan as the ‘‘Force
Majeure Rule,’’ 28 which pertains to how
NSCC addresses extraordinary events
that occur outside the control of NSCC
and its Members. As more fully
described below, the proposed rule
change would clarify certain language.
Section 6.4 (Resources to Cover NonDefault Losses) provides that NSCC
maintains two categories of financial
resources to cover losses and expenses
arising from non-default risks or events:
(i) Liquid Net Assets Funded by Equity
(‘‘LNA’’), including, pursuant to Rule 4,
the required Corporate Contribution,29
and (ii) loss-allocation charges to
Members in accordance with the
provisions of Rule 4.30 Following an
overview of the four buckets of LNA
which can be applied towards nondefault losses,31 there is a paragraph
under the heading ‘‘Loss Allocation to
Members, backed by the Clearing Fund’’
that provides that non-default losses
could be allocated among Members as
provided in Rule 4. There is sentence
that describes the timeframe in which
such losses charged to Members are
required to be paid. Currently, this
sentence states that losses are to be paid
by Members ‘‘within 2 business days of
the date of receipt of a notice of a loss
allocation charge . . . .’’ However, this
is not the same language used to
describe this timing in Rule 4. In order
to be consistent with the language
formulation set out in Rule 4, the
proposed rule change would revise this
sentence to state, ‘‘Losses charged to
Members are required to be paid by
Members on the second business day
after the Corporation issues any such
notice of a loss allocation charge and, if
not timely paid by any Member, the
28 Supra
note 6.
Securities Exchange Act Release Nos.
84428 (October 15, 2018), 83 FR 53128 (October 19,
2018) (SR–NSCC–2018–008); and 89360 (July 21,
2020), 85 FR 45280 (July 27, 2020) (SR–NSCC–
2020–014) (filings amending the Clearing Agency
Policy on Capital Requirements (the ‘‘Capital
Policy’’) and the Clearing Agency Capital
Replenishment Plan (the ‘‘Capital Plan’’)). The
initial Capital Policy and Capital Plan were
approved by the Commission in 2017—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).
30 Rule 4, supra note 5.
31 As set forth in the Plan, NSCC maintains the
following four buckets of LNA, which can be
applied towards a non-default loss: (i) General
Business Risk Capital as determined in the Capital
Policy, supra note 29, (ii) the Corporate
Contribution, (iii) a ‘‘Buffer,’’ as described in the
Capital Policy, and (iv) excess LNA, which refers
to any available LNA held at NSCC above the
required amounts for General Business Risk Capital,
the Corporate Contribution, and Buffer.
29 See
PO 00000
Frm 00096
Fmt 4703
Sfmt 4703
Corporation may treat that Member as
having failed to satisfy its obligation and
apply the Clearing Fund deposit of that
Member to satisfy its loss allocation
obligation.’’ 32
Section 6.6 (Market Disruption and
Force Majeure Rule) describes the Force
Majeure Rule. The Force Majeure Rule
was adopted at the same time as the
Plan 33 and provides an additional
resiliency tool designed to mitigate the
risks caused by market disruption
events and thereby minimize the risk of
financial loss that may result from such
events. The proposed rule change would
remove the following phrase after the
reference to the Force Majeure Rule in
the first paragraph of this section, ‘‘,
adopted in conjunction with this Plan,’’
because it is not necessary as both the
Plan and the Force Majeure Rule are no
longer newly adopted. In addition, to
remain consistent with the usage of
‘‘Force Majeure’’ and ‘‘Market
Disruption Event’’ throughout this
section, NSCC would conform all
references to the defined terms ‘‘Force
Majeure’’ and ‘‘Market Disruption
Event,’’ so that they appear as
capitalized terms.
The proposed rule change would also
make revisions to the second paragraph
of Section 6.6. First, for purposes of
clarity and readability, the following
text would be removed from the
beginning of the second sentence: ‘‘Most
FMIs have rules designed to deal with
force majeure or market disruption
events, and.’’ Second, the reference to
‘‘Superstorm Sandy’’ would be removed
from the last sentence of this paragraph
along with the related footnote that
references Superstorm Sandy as an
example of circumstances in which
NSCC needed to fashion a work-around
necessitated by a force majeure event.
NSCC believes inclusion of references to
Superstorm Sandy are outdated and no
longer necessary to be included in the
Plan.
C. Remove Provisions Covering Certain
‘‘Business-as-Usual’’ Actions
Section 8.6 (Actions and Preparation)
of the Plan sets forth the legal
framework and strategy for the orderly
wind-down of NSCC if the use of the
recovery tools described in the Recovery
Plan do not successfully return NSCC to
financial viability. This section includes
an overview of the actions and
preparations to be taken by NSCC and
DTCC in connection with executing the
wind-down portions of the Plan. Section
8.6.1 (Business-as-Usual Actions)
describes those actions that NSCC or
32 Rule
4, supra note 5.
note 6.
33 Supra
E:\FR\FM\02APN1.SGM
02APN1
Federal Register / Vol. 86, No. 62 / Friday, April 2, 2021 / Notices
jbell on DSKJLSW7X2PROD with NOTICES
DTCC may take to prepare for winddown in the period before NSCC
experiences financial distress.
Under the current plan, the Businessas-Usual Actions are (i) educating the
Board to keep them informed of the Plan
and the actions the Board would need
to take to implement it, (ii) engaging in
discussions with key linked FMIs as to
the key elements of NSCC’s wind-down
strategy and the expected actions of the
respective link parties should a winddown be implemented, (iii) developing
and maintaining an index of internal
data that includes the critical, ancillary,
and non-critical services that NSCC
provides to its membership, the support
NSCC receives from DTCC and from its
other affiliates, key third-party vendors,
key personnel, NSCC assets and
liabilities, and agreements and
arrangements NSCC has with liquidity
providers and with other FMIs, (iv)
developing administrative wind-down
guidance that identifies key Board and
management actions that would be
taken during the Recovery Phase and
‘‘Runway Period’’ 34 prior to NSCC’s
failure, and in connection with its
Chapter 11 proceedings, and (v)
preparing constituent documents for the
Failover Entity 35 and evaluating
capitalization options.
Pursuant to the proposed rule change,
NSCC would remove the Business-asUsual Actions section (currently Section
8.6.1) in its entirety because each of the
actions outlined have either been
completed or would be addressed in
NSCC’s internal procedures going
forward. This includes certain
documents necessary to effect the winddown aspects of the Plan that were in
the process of being finalized when the
Plan was adopted and have since been
completed. Since adoption of the Plan,36
NSCC has completed all necessary
internal documentation, including
DTCC’s internal wind-down guidance,
the constituent documentation for the
Failover Entity, and the evaluation of
NSCC’s capitalization options. Further,
the other actions included in this
section (e.g., maintaining an index of
non-critical services, educating the
34 The Wind-down Plan identifies the time period
leading up to a decision to wind-down NSCC as the
‘‘Runway Period.’’
35 As set forth in Section 8.4.1 (General Objectives
and Approach) of the Plan, in the event that no
viable or preferable third-party transferee timely
commits to acquire the business and services of
NSCC, the transfer will be effectuated to a failover
entity created for that purpose (referred to as the
‘‘Failover Entity’’), that would be owned by a trust
held, to the extent of the value of the Failover Entity
attributed to NSCC’s transferred business and
services, for the benefit of NSCC’s bankruptcy
estate.
36 Supra note 6.
VerDate Sep<11>2014
23:04 Apr 01, 2021
Jkt 253001
Board on the Plans) would be
addressed, going forward, in DTCC’s
Recovery & Resolution Planning
Procedures maintained by the R&R
Team.37 As a result of this proposed
change, current Section 8.6.2 (Recovery
and Runway Period Actions) would be
renumbered as Section 8.6.1. Also,
consistent with the proposed removal of
Business-as-Usual Actions that have
been completed, the proposed rule
change would remove from the first
sentence of proposed Section 8.6.1
(current Section 8.6.2) the words
‘‘Among other things, the guidance
would provide’’ and replace them with
‘‘The DTCC Clearing Agency Winddown Guidance developed in
connection with this Plan provides.’’
D. Technical Revisions
The proposal would also make several
technical changes and corrections to the
Plan. NSCC believes that these proposed
changes would not substantively alter
the meaning of the applicable sections
and would improve the overall
readability and clarity of the Plan.
Specifically, NSCC is proposing to make
the following changes and corrections:
1. In Section 1.3 (Summary), in the
list of topics covered under the Plan, in
the seventh bullet point, add ‘‘Recovery
Corridor and’’ prior to the words
‘‘Recovery Phase’’ to correctly state the
full name of this section of the Plan.
2. In Section 1.4 (Conventions), in the
third paragraph, delete the words
‘‘conjunction with’’ and replace them
with ‘‘support of,’’ and delete the words
‘‘also adopted’’ and replace them with
‘‘maintains.’’ Accordingly, under the
proposed rule change this paragraph
would state, ‘‘In support of this Plan,
NSCC maintains (i) a Market Disruption
and Force Majeure Rule (the ‘‘Force
Majeure Rule’’), (ii) a ‘‘Corporation
Default Rule’’ and (iii) a Wind-down of
the Corporation Rule (the ‘‘Wind-down
Rule’’), each as described herein.’’
3. In Section 2.1 (DTCC Business
Profile), under the heading ‘‘DTCC
SIFMU Subsidiaries’’:
• In the description of NSCC, add ‘‘,
netting,’’ after the word ‘‘clearing’’; and
after the words ‘‘exchange-traded,’’
delete ‘‘fund (‘‘ETF’’)’’ and replace it
with ‘‘products (‘‘ETPs’’).’’
37 The R&R Team is responsible for maintaining
the DTCC ‘‘Office of Recovery & Resolution
Planning Procedures’’ document. The purpose of
these procedures is to communicate roles and
responsibilities, and procedures for the
documentation of the R&W Plans covering each of
the Clearing Agencies, in compliance with
applicable rules and regulations. These procedures
also describe the biennial closeout simulation
exercise whereby the Plans for each clearing agency
are tested through the simulation of a multi-member
default.
PO 00000
Frm 00097
Fmt 4703
Sfmt 4703
17445
• In the description of NSCC’s
affiliated clearing agency, FICC, with
respect to the Government Securities
Division (‘‘GSD’’), add the word
‘‘netting,’’ after ‘‘clearing.’’
• In the description of the MortgageBacked Securities Division (‘‘MBSD’’) of
FICC, delete the modifier ‘‘To-BeAnnounced’’ before the phrase ‘‘passthrough mortgage-backed securities
issued by Ginnie Mae, Freddie Mac and
Fannie Mae.’’
• In the sentence that describes
FICC’s publication of the GCF Repo®
Index, add the parenthetical ‘‘(‘‘GCF
Repos®’’)’’ after the words ‘‘general
collateral finance repurchase
transactions.’’
4. In Section 2.2 (NSCC Guaranteed
Services Summary), in the first sentence
of the third paragraph, replace ‘‘CNS
positions’’ with ‘‘CNS Fails Positions’’
because CNS Fails Position is a defined
term under the Rules. Also, in the first
sentence of the fourth paragraph, add
the word ‘‘guaranteed’’ prior to
‘‘Balance Order System.’’
5. In Section 2.3 (NSCC NonGuaranteed Services Summary), under
the heading, ‘‘Wealth Management
Services,’’ in the second sentence,
replace the word ‘‘procession’’ with
‘‘processing’’ to correct a typographical
error.
6. In Section 3.2 (Criteria Used to
Determine Criticality), in the second
sentence that currently states, ‘‘Each
service was assessed for criticality to
determine the potential systemic impact
from a service disruption,’’ add the
word ‘‘resulting’’ after the word
‘‘impact.’’
7. In Section 4.1 (DTCC and SIFMU
Governance Structure), in the third
paragraph, which lists each of the Board
committees, delete ‘‘Board’’ before the
words ‘‘Risk Committee.’’ Additionally,
in the footnote in this section that
provides the citation of a previous
proposed rule change covering the
Clearing Agency Risk Management
Framework, add a reference to NSCC’s
amended filing published July 9, 2020.
8. In Section 5.1 (Introduction), in the
fourth paragraph, capitalize the word
‘‘board.’’ Under the heading ‘‘Market
Risk Management,’’ in the last sentence
of the first paragraph, remove the
capitalization of the words ‘‘Clearing
Agency Cross-Guaranty Agreements’’
because this is not a defined term in the
Plan. For purposes of clarity and
readability, the proposed rule change
would also shift to Section 4.1 the
footnote currently included in Section
5.1 regarding the Rules covering a
‘‘cease to act,’’ insolvency of a Member,
E:\FR\FM\02APN1.SGM
02APN1
jbell on DSKJLSW7X2PROD with NOTICES
17446
Federal Register / Vol. 86, No. 62 / Friday, April 2, 2021 / Notices
and associated actions.38 Additionally,
in the footnote included in this section
that provides the citation to a previous
proposed rule change covering the
Clearing Agency Liquidity Risk
Management Framework, add a
reference to NSCC’s amended filing
published December 11, 2020.
9. In Section 5.2.3 (Member Default
Phase), under the heading ‘‘Market Risk
Monitoring’’:
• In the second sentence of the
second paragraph, remove the
capitalization from the first instance of
the word ‘‘Monitoring.’’
• In the first sentence of the fourth
paragraph, (i) delete the word ‘‘closeout’’ and replace it with ‘‘liquidation,’’
and (ii) after the phrase ‘‘of the
Defaulting Member’s portfolio,’’ add the
parenthetical ‘‘(referred to as a
‘‘closeout’’).’’
10. In Section 5.2.4 (Recovery
Corridor and Recovery Phase):
• In the first sentence of the first
paragraph, add quotation marks and
make bold the words ‘‘Recovery
Corridor.’’
• Under the heading ‘‘Recovery
Corridor,’’ (a) in the second sentence of
the second paragraph, in the current
parenthetical that states ‘‘(i.e., as market
stress increases, NSCC would expect the
length of the Recovery Corridor to
shorten),’’ replace the word ‘‘shorten,’’
with ‘‘be shorter,’’ and (b) in the second
sentence of the last paragraph, after the
word ‘‘closeout,’’ add an ‘‘s’’ to the end
of the word ‘‘simulation.’’
11. In Section 5.3 (Liquidity
Shortfalls), in Table 5–C, which lists the
tools that can be used to address
liquidity shortfalls, in the entry for
‘‘Credit Facility,’’ in the column titled
‘‘Relevant Rules/Documents,’’ (a) delete
‘‘Currently, Section 2.03A(h) of the
Credit Facility,’’ because reference to a
specific section of the credit facility
documentation is not necessary, (b)
replace the words ‘‘facility terms’’ with
‘‘terms of the Credit Facility,’’ and (c)
after the word ‘‘lenders,’’ delete the
word ‘‘to’’ and replace it with ‘‘that.’’
12. In Section 6.3 (Risk Mitigation), in
the footnote that includes the citation to
a previous proposed rule change
covering the Clearing Agency
Operational Risk Management
Framework, add a reference to NSCC’s
amended filing published December 16,
2020.
13. In Section 6.4 (Resources to Cover
Non-Default Losses), in the footnote that
includes the citation to a previous
proposed rule change covering the
Capital Policy and Capital Plan, add a
38 See Rule 46 (Restrictions on Access to Services)
and Rule 20 (Insolvency), supra note 5.
VerDate Sep<11>2014
23:04 Apr 01, 2021
Jkt 253001
reference to NSCC’s amended filings
published July 27, 2020 with respect to
the Capital Policy, and October 19, 2018
with respect to the Capital Plan.
14. In Section 6.6 (Market Disruption
and Force Majeure Rule):
• In the second bullet point of the
third paragraph remove the quotation
marks from the words ‘‘Market
Disruption Event’’ and delete the
parenthetical ‘‘(as defined in the Force
Majeure Rule)’’ because Market
Disruption Event was defined earlier in
this section.
• In the second sentence of the fourth
paragraph, for purposes of reflecting
present tense, delete the word ‘‘would’’
before the word ‘‘operate,’’ and pluralize
‘‘operate.’’
• In the first sentence of the second
paragraph:
Æ For purposes of reflecting present
tense and to improve readability, (a)
remove the word ‘‘currently’’ prior to
‘‘the Force Majeure Rule’’ and (b)
remove the words ‘‘is designed to
clarify,’’ and replace them with
‘‘clarifies,’’ and
Æ in order to correct a typographical
error, insert the word ‘‘and’’ in between
‘‘its Participants’’ and ‘‘to mitigate.’’
15. In Section 7.1
(Comprehensiveness), remove the
capitalization from the words ‘‘Critical
Services.’’
16. In Section 7.2 (Effectiveness),
under the heading ‘‘Reliability,’’ for the
purpose of correcting typographical
errors, (a) move the second footnote,
currently at the end of the last sentence,
to the end of the last sentence of the
introductory paragraph of Section 7.2
and (b) in the text of the other footnote
that currently reads, ‘‘See, for example,
DTCC Whitepaper, CCP Resiliency and
Resources, pg. 2, section 2 (June 2015),’’
remove ‘‘, section 2.’’
17. In Section 8.2.1 (Potential
Scenarios), in the second sentence of the
third paragraph, replace ‘‘enhancements
to the loss allocation process are’’ with
‘‘the loss allocation process is.’’
Accordingly, under the proposed rule
change this sentence would state, ‘‘As
noted above, the loss allocation process
is designed to ensure that the full
Clearing Fund can be applied to losses
arising from successive Member defaults
that occur during an ‘‘Event Period’’,
and there can be successive rounds of
loss allocations to address losses arising
with respect to a given Event Period.’’
18. In Section 8.2.2 (Wind-down
Indicators), in the fourth bullet point of
the third paragraph, in the sentence that
currently states, ‘‘If a Defaulting
Member also defaults in provision of
other services to NSCC—to the extent
that a Member were to default both in
PO 00000
Frm 00098
Fmt 4703
Sfmt 4703
its membership obligations, and
additionally in its capacity as either an
investment counterparty holding
material Clearing Fund cash or other
corporate funds, or as a Settling Bank,
this would reduce NSCC’s prefunded
resources and add additional financial
strain on Members,’’ add the words ‘‘a
lender under the Credit Facility,’’ after
the words ‘‘as either.’’
19. In Section 8.4.1 (General
Objectives and Approach), in the second
paragraph, delete the words ‘‘have been
amended to’’ after the words ‘‘the
Rules’’ in order to more clearly reflect
the fact that the Wind-down of the
Corporation Rule 39 was adopted.
20. In Section 8.4.4 (Rules Adopted in
Connection with the Wind-down Plan),
in the subsection, ‘‘The Wind-down
Trigger,’’ in the parenthetical, ‘‘(Trigger
for Implementing Wind-down),’’
pluralize the word ‘‘Trigger.’’
21. In Section 8.4.5 (Wind-down and
Liquidation of NSCC Following
Transfer), in the third sentence of the
first paragraph, delete the words
‘‘adoption of the,’’ before the words
‘‘Corporation Default Rule.’’
22. In proposed Section 8.6.1
(currently section 8.6.2) (Recovery and
Runway Period Actions), capitalize the
word ‘‘chapter’’ in two places where
‘‘chapter 11’’ is not capitalized.
23. In Section 8.7 (Costs and Time to
Effectuate Plan), (a) in the second
sentence of the fifth paragraph, delete
the word ‘‘of’’ between the words
‘‘detailed’’ and ‘‘analysis’’ and (b) at the
end of the last sentence of this section,
delete the phrase ‘‘, as provided in the
Capital Requirements Policy.’’ As a
result, under the proposed rule change,
this sentence would state, ‘‘The
estimated wind-down costs amount will
be reviewed and approved by the Board
annually.’’ Also, in the footnote in this
section that refers to Section 5 of the
Plan, correct the title of that section to
state, ‘‘Member Default Losses through
the Crisis Continuum.’’
24. In Appendix 1 (Defined Terms),
add each of the new defined terms
based on the addition of such terms to
the Plan, and delete the defined terms
that were removed based on the deletion
of these terms from the Plan.
2. Statutory Basis
NSCC believes that the proposal is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a registered
clearing agency. In particular, NSCC
believes that the amendments to the
R&W Plan are consistent with Section
39 Supra
E:\FR\FM\02APN1.SGM
note 6.
02APN1
jbell on DSKJLSW7X2PROD with NOTICES
Federal Register / Vol. 86, No. 62 / Friday, April 2, 2021 / Notices
17A(b)(3)(F) of the Act 40 and Rule
17Ad–22(e)(3)(ii) under the Act,41 for
the reasons described below.
Section 17A(b)(3)(F) of the Act
requires, in part, that the rules of NSCC
be designed to promote the prompt and
accurate clearance and settlement of
securities transactions.42 The Recovery
Plan serves to promote the prompt and
accurate clearance and settlement of
securities transactions by providing
NSCC with a roadmap for actions it may
employ to mitigate losses, and monitor
and, as needed, stabilize NSCC’s
financial condition, which would allow
it to continue its critical clearance and
settlement services in stress situations.
The Recovery Plan is designed to
identify the actions and tools NSCC may
use to address and minimize losses to
both NSCC and its membership and
provide NSCC’s management and the
Board with guidance in this regard by
identifying the indicators and
governance around the use and
application of such tools to enable them
to address stress situations in a manner
most appropriate for the circumstances.
Further, the Wind-down Plan
establishes a framework for the transfer
and orderly wind-down of NSCC’s
business. It establishes clear
mechanisms for the transfer of NSCC’s
critical services and membership, and
for the treatment of open, guaranteed
CNS transactions in the event of NSCC’s
default. By doing so, the Wind-down
Plan is designed to facilitate the
continuity of NSCC’s critical services
and enable Members and Limited
Members to maintain access to NSCC’s
services through the transfer of its
membership in the event NSCC defaults
or the Wind-down Plan is triggered by
the Board.
As described above, the proposed rule
change would update the R&W Plan to
(i) reflect business and product
developments, (ii) make certain
clarifications, (iii) remove provisions
covering certain ‘‘business-as-usual’’
actions, and (iv) make certain technical
corrections. By helping to ensure that
the R&W Plan reflects current business
and product developments, and
providing additional clarity regarding
the framework for the transfer and
orderly wind-down of NSCC’s business,
NSCC believes that the proposed rule
change would help it continue to
maintain the Plan in a manner that
supports the continuity of NSCC’s
critical services and enables its
Members and Limited Members to
maintain access to NSCC’s services
40 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(3)(ii).
42 15 U.S.C. 78q–1(b)(3)(F).
through the transfer of its membership
in the event NSCC defaults or the Winddown Plan is ever triggered by the
Board. Further, by facilitating the
continuity of its critical clearance and
settlement services, NSCC believes the
Plan and the proposed rule change
would continue to promote the prompt
and accurate clearance and settlement of
securities transactions. Therefore, NSCC
believes the proposed amendments to
the R&W Plan are consistent with the
requirements of Section 17A(b)(3)(F) of
the Act.
Rule 17Ad–22(e)(3)(ii) under the Act
requires NSCC to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
maintain a sound risk management
framework for comprehensively
managing legal, credit, liquidity,
operational, general business,
investment, custody, and other risks
that arise in or are borne by the covered
clearing agency, which includes plans
for the recovery and orderly wind-down
of the covered clearing agency
necessitated by credit losses, liquidity
shortfalls, losses from general business
risk, or any other losses.43 The R&W
Plan is designed to comply with Rule
17Ad–22(e)(3)(ii) and is consistent with
the Act because it provides plans for the
recovery and orderly wind-down of
NSCC necessitated by credit losses,
liquidity shortfalls, losses from general
business risk, or any other losses.
Specifically, the Recovery Plan
defines the risk management activities,
stress conditions and indicators, and
tools that NSCC may use to address
stress scenarios that could eventually
prevent it from being able to provide its
critical services as a going concern.
Through the framework of the Crisis
Continuum, the Recovery Plan
addresses measures that NSCC may take
to address risks of credit losses and
liquidity shortfalls, and other losses that
could arise from a Member default. The
Recovery Plan also addresses the
management of general business risks
and other non-default risks that could
lead to losses. The Wind-down Plan
would be triggered by a determination
by the Board that recovery efforts have
not been, or are unlikely to be,
successful in returning NSCC to
viability as a going concern. Once
triggered, the Wind-down Plan sets forth
clear mechanisms for the transfer of
NSCC’s membership and business, and
is designed to facilitate continued
access to NSCC’s critical services and to
minimize market impact of the transfer.
By establishing the framework and
strategy for the execution of the transfer
and wind-down of NSCC in order to
facilitate continuous access to its critical
services, the Wind-down Plan
establishes a plan for the orderly winddown of NSCC.
As described above, the proposed rule
change would update the R&W Plan to
(i) reflect business and product
developments, (ii) make certain
clarifications, (iii) remove provisions
covering certain ‘‘business-as-usual’’
actions, and (iv) make certain technical
corrections. By ensuring that material
provisions of the Plan are current, clear,
and technically correct, NSCC believes
that the proposed amendments are
designed to support the maintenance of
the Plan for the recovery and orderly
wind-down of the covered clearing
agency necessitated by credit losses,
liquidity shortfalls, losses from general
business risk, or any other losses, and,
as such, meets the requirements of Rule
17Ad–22(e)(3)(ii) under the Act.44
Therefore, the proposed changes would
help NSCC to maintain the Plan in a
way that continues to be consistent with
the requirements of Rule 17Ad–
22(e)(3)(ii).
(B) Clearing Agency’s Statement on
Burden on Competition
NSCC does not believe that the
proposed rule change would have any
impact, or impose any burden, on
competition. NSCC does not anticipate
that the proposal would affect its dayto-day operations under normal
circumstances, or in the management of
a typical Member default scenario or
non-default event. The R&W Plan was
developed and documented in order to
satisfy applicable regulatory
requirements, as discussed above. The
proposal is intended to enhance and
update the Plan to ensure it is clear and
remains current in the event it is ever
necessary to be implemented. The
proposed revisions would not effect any
changes to the overall structure or
operation of the Plan or NSCC’s
recovery and wind-down strategy as set
forth under the current Plan. As such,
NSCC believes the proposal would not
have any impact, or impose any burden,
on competition.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants, or Others
NSCC has not received or solicited
any written comments relating to this
proposal. NSCC will notify the
Commission of any written comments
received by NSCC.
41 17
VerDate Sep<11>2014
23:04 Apr 01, 2021
43 17
Jkt 253001
PO 00000
CFR 240.17Ad–22(e)(3)(ii).
Frm 00099
Fmt 4703
Sfmt 4703
17447
44 Id.
E:\FR\FM\02APN1.SGM
02APN1
17448
Federal Register / Vol. 86, No. 62 / Friday, April 2, 2021 / Notices
III. Date of Effectiveness of the
Proposed Rule Change, and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A) 45 of the Act and paragraph
(f) 46 of Rule 19b–4 thereunder. At any
time within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
jbell on DSKJLSW7X2PROD with NOTICES
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NSCC–2021–004 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549.
All submissions should refer to File
Number SR–NSCC–2021–004. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
45 15
46 17
U.S.C 78s(b)(3)(A).
CFR 240.19b–4(f).
VerDate Sep<11>2014
23:04 Apr 01, 2021
filing also will be available for
inspection and copying at the principal
office of NSCC and on DTCC’s website
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–NSCC–
2021–004 and should be submitted on
or before April 23, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.47
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–06770 Filed 4–1–21; 8:45 am]
Small Business Administration.
Thomas G. Morris,
Acting Associate Administrator, Director,
Office of SBIC Liquidation, Office of
Investment and Innovation.
[FR Doc. 2021–06812 Filed 4–1–21; 8:45 am]
BILLING CODE 8026–03–P
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration #16253 and #16254;
PUERTO RICO Disaster Number PR–00034]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
Presidential Declaration Amendment of
a Major Disaster for the
Commonwealth of Puerto Rico
[License No. 05/05–0303]
AGENCY:
CapX Fund IV, L.P.; Surrender of
License of Small Business Investment
Company
SUMMARY:
Pursuant to the authority granted to
the United States Small Business
Administration under the Small
Business Investment Act of 1958, as
amended, under Section 309 of the Act
and Section 107.1900 of the Small
Business Administration Rules and
Regulations (13 CFR 107.1900) to
function as a small business investment
company under the Small Business
Investment Company License No. 05/
05–0303 issued to CapX Fund IV, L.P.,
said license is hereby declared null and
void.
Small Business Administration.
Thomas G. Morris,
Acting Associate Administrator, Director,
Office of SBIC Liquidation, Office of
Investment and Innovation.
[FR Doc. 2021–06811 Filed 4–1–21; 8:45 am]
BILLING CODE P
SMALL BUSINESS ADMINISTRATION
[License No. 05/05–0292]
Vogen Funding, L.P.; Surrender of
License of Small Business Investment
Company
Pursuant to the authority granted to
the United States Small Business
Administration under the Small
Business Investment Act of 1958, as
amended, under Section 309 of the Act
47 17
Jkt 253001
and Section 107.1900 of the Small
Business Administration Rules and
Regulations (13 CFR 107.1900) to
function as a small business investment
company under the Small Business
Investment Company License No. 05/
05–0292 issued to Vogen Funding, LP,
said license is hereby declared null and
void.
PO 00000
CFR 200.30–3(a)(12).
Frm 00100
Fmt 4703
Sfmt 4703
U.S. Small Business
Administration.
ACTION: Amendment 11.
This is an amendment of the
Presidential declaration of a major
disaster for the Commonwealth of
Puerto Rico (FEMA–4473–DR), dated
01/16/2020.
Incident: Earthquakes.
Incident Period: 12/28/2019 through
07/03/2020.
DATES: Issued on 03/25/2021.
Physical Loan Application Deadline
Date: Filing Period for the Municipality
of Rincon ends 05/24/2021.
Economic Injury (EIDL) Loan
Application Deadline Date: Filing
Period for the Municipality of Rincon
ends 12/27/2021.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street SW, Suite 6050,
Washington, DC 20416, (202) 205–6734.
SUPPLEMENTARY INFORMATION: The notice
of the President’s major disaster
declaration for the Commonwealth of
Puerto Rico, dated 01/16/2020, is hereby
amended to include the Municipality of
Rincon. Please contact the SBA disaster
assistance customer service center by
email at disastercustomerservice@
sba.gov or by phone at 1–800–659- 2955
to request an application. Applications
for physical damages may be filed until
05/24/2021 and applications for
E:\FR\FM\02APN1.SGM
02APN1
]]>Agencies
[Federal Register Volume 86, Number 62 (Friday, April 2, 2021)]
[Notices]
[Pages 17440-17448]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-06770]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-91428; File No. SR-NSCC-2021-004]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing and Immediate Effectiveness of a Proposed
Rule Change To Amend the Recovery & Wind-Down Plan
March 29, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 23, 2021, National Securities Clearing Corporation (``NSCC'')
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 clearing agency. NSCC filed the
proposed rule change pursuant to Section 19(b)(3)(A) \3\ of the Act and
Rule 19b-4(f)(4) thereunder.\4\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(4).
---------------------------------------------------------------------------
[[Page 17441]]
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change \5\ consists of amendments to the R&W Plan
to (i) reflect business and product developments, (ii) make certain
changes to improve the clarity of the Plan, (iii) remove provisions
covering certain ``business-as-usual'' actions, and (iv) make certain
technical corrections, as described in greater detail below.
---------------------------------------------------------------------------
\5\ Capitalized terms not defined herein are defined in the
Rules and Procedures of NSCC (the ``Rules''), available at https://
dtcc.com/~/media/Files/Downloads/legal/rules/nscc_rules.pdf, or in
the Recovery & Wind-down Plan of NSCC (the ``R&W Plan'' or
``Plan'').
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency 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 these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The proposed rule change would amend the R&W Plan to (i) reflect
business and product developments, (ii) make certain changes to improve
the clarity of the Plan, (iii) remove provisions covering certain
``business-as-usual'' actions, and (iv) make certain technical
corrections. Each of the proposed revisions is further described below.
Background
The R&W Plan was adopted in August 2018 \6\ and is maintained by
NSCC for compliance with Rule 17Ad-22(e)(3)(ii) under the Act.\7\ The
R&W Plan sets forth the plan to be used by the Board and NSCC
management in the event NSCC encounters scenarios that could
potentially prevent it from being able to provide its critical services
as a going concern. The R&W Plan is structured as a roadmap that
defines the strategy and identifies the tools available to NSCC to
either (i) recover, in the event it experiences losses that exceed its
prefunded resources (such strategies and tools referred to herein as
the ``Recovery Plan'') or (ii) wind-down its business in a manner
designed to permit the continuation of NSCC's critical services in the
event that such recovery efforts are not successful (such strategies
and tools referred to herein as the ``Wind-down Plan''). The recovery
tools available to NSCC are intended to address the risks of (a)
uncovered losses or liquidity shortfalls resulting from the default of
one or more of its Members, and (b) losses arising from non-default
events, such as damage to NSCC's physical assets, a cyber-attack, or
custody and investment losses, and the strategy for implementation of
such tools. The R&W Plan also describes the strategy and framework for
the orderly wind-down of NSCC and the transfer of its business in the
event the implementation of the available recovery tools does not
successfully return NSCC to financial viability.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release Nos. 83974 (August 28,
2018), 83 FR 44988 (September 4, 2018), (SR-NSCC-2017-017); and
83955 (August 27, 2018), 83 FR 44340 (August 30, 2018) (SR-NSCC-
2017-805).
\7\ 17 CFR 240.17Ad-22(e)(3)(ii). NSCC is a ``covered clearing
agency'' as defined in Rule 17Ad-22(a)(5) under the Act and must
comply with paragraph (e) of Rule 17Ad-22.
---------------------------------------------------------------------------
The R&W Plan is managed and developed by NSCC's parent company, the
Depository Trust & Clearing Corporation (``DTCC''),\8\ and is managed
by the Office of Recovery & Resolution Planning (referred to in the
Plan as the ``R&R Team'') on behalf of NSCC, with review and oversight
by the DTCC Management Committee and the Board.
---------------------------------------------------------------------------
\8\ DTCC operates on a shared service model with respect to NSCC
and its other affiliated clearing agencies, The Depository Trust
Company{ XE ``NSCC'' {time} (``DTC'') and Fixed Income Clearing
Corporation (``FICC''). Most corporate functions are established and
managed on an enterprise-wide basis pursuant to intercompany
agreements under which it is generally DTCC that provides relevant
services to NSCC, DTC{ XE ``NSCC'' {time} and FICC (collectively,
the ``Clearing Agencies'').
---------------------------------------------------------------------------
Proposed Amendments to the R&W Plan
The Board, or such committees as may be delegated authority by the
Board from time to time pursuant to its charter, is required to review
and approve the R&W Plan biennially.\9\ In connection with the first
biennial review of the Plan, NSCC is proposing the revisions described
in greater detail below. The proposed rule change is designed to update
and enhance the clarity of the Plan to ensure it is current in the
event it is ever necessary to be implemented. None of the proposed
changes modify NSCC's general objectives and approach with respect to
its recovery and wind-down strategy as set forth under the current
Plan.
---------------------------------------------------------------------------
\9\ Supra note 6.
---------------------------------------------------------------------------
A. Proposed Changes To Reflect Business or Product Developments
1. Updates to DTCC Business Profile, Intercompany Arrangements, FMI
Links and Governance
NSCC is proposing the following changes to the DTCC Business
Profile, Intercompany Arrangements, FMI Links and Governance sections
of the Plan based upon business updates that have occurred since the
time the Plan was adopted.
Section 2.1 (DTCC Business Profile) of the Plan describes that DTCC
is a user-owned and user-governed holding company for a group of direct
and indirect subsidiaries and joint ventures. This section includes a
brief summary of each of the three subsidiaries (DTC, FICC and NSCC)
that have been designated as systemically important financial market
utilities (``SIFMUs'') by the Financial Stability Oversight Council.
The proposed rule change would revise the introductory paragraph of
this section to remove reference to joint ventures because DTCC
currently has no joint ventures.
Section 2.4 (Intercompany Arrangements) of the Plan currently
describes how corporate support services are provided to NSCC from
DTCC, and to DTCC's other subsidiaries through intercompany agreements
under a shared services model. NSCC is proposing to update Table 2-A
(SIFMU Legal Entity Structure and Intercompany Agreements), which
delineates NSCC's affiliates, to reflect the name change of Omgeo Pte
Ltd by removing ``Omgeo Pte Ltd'' and replacing it with the new name of
this entity, ``DTCC Singapore Pte. Ltd.'' A related footnote would also
be added to make clear that the services provided by DTCC Singapore
Pte. Ltd. are performed through its branch office in Manila, DTCC
Manila. Additionally, this section includes a separate table, Table 2-
B, that lists each of the DTCC facilities utilized by the Clearing
Agencies and indicates whether the facility is owned or leased by DTCC.
NSCC proposes to update this table to add Boston, Massachusetts as an
additional location of a DTCC facility and to indicate that this
facility is leased by DTCC.
Currently, Section 2.5 (FMI Links) of the Plan describes some, but
not all, of the key financial market infrastructures (``FMIs''), both
domestic and foreign, that NSCC has identified as critical ``links.''
\10\ In order to better align with
[[Page 17442]]
the structure of DTCC's inventory of links maintained by DTCC's
Systemic Risk Office (``SRO''), which includes all of NSCC's link
relationships, the proposed rule change would delete the current ``FMI
Links'' section of the R&W Plan and replace it with a revised version
of Section 2.5 that would include an overview of NSCC's link
arrangements, a related footnote to the definition of a ``link'' under
Rule 17Ad-22(a)(8) under the Act, and a table (Table 2-C: Links)
listing all of NSCC's FMI link arrangements. The table would list the
link, the link category (i.e., whether the link is a central
counterparty, settlement interface, or matching utility), and a brief
description. The proposed rule change would also add a table (Table 2-
D: Schedule A Relationships) that would identify certain critical
external service providers that, as determined by NSCC's management, do
not meet the specified criteria of ``link'' but nevertheless are
subject to the same review process as is conducted for links, referred
to within NSCC as ``Schedule A Relationships,'' and a related footnote.
This change would align with the structure of SRO's inventory of
Schedule A Relationships.
---------------------------------------------------------------------------
\10\ As defined in Rule 17Ad-22(a)(8) under the Act, a link
``means, for purposes of paragraph (e)(20) of [Rule 17Ad-22], a set
of contractual and operational arrangements between two or more
clearing agencies, financial market utilities, or trading markets
that connect them directly or indirectly for the purposes of
participating in settlement, cross margining, expanding their
services to additional instruments or participants, or for any other
purposes material to their business.'' 17 CFR 240.17Ad-22(a)(8).
---------------------------------------------------------------------------
Section 4.3 (Recovery and Wind-down Program Governance) of the Plan
currently contains a paragraph that identifies DTCC's ``R&R Steering
Group'' as the internal group responsible for ensuring that each of the
Clearing Agencies observes recovery planning requirements, and that
recovery planning is integrated into the Clearing Agencies' overall
governance processes including the preparation, review, and filing of
the Clearing Agencies' R&W Plans. Pursuant to the proposed rule change,
NSCC would revise Section 4.3 to reflect an internal organizational
name change. The proposal would change the name of the R&R Steering
Group to the ``Recovery and Wind-down Planning Council'' to reflect its
role as an advisory body.\11\ This name change would not change the
composition, role or responsibilities of this internal group, which
includes selected members of DTCC's Management Committee and members of
DTCC's financial and operational risk management, product management,
legal, and treasury/finance teams that are responsible for providing
strategic guidance and direction for the recovery and wind-down program
\12\ and the Plan. Additionally, for purposes of clarification, the
proposal would add the words ``, where necessary,'' to refer to when
the council would engage with internal working groups.
---------------------------------------------------------------------------
\11\ In accordance with DTCC's Policy on Governance of Internal
Committees and Councils, a ``council'' is defined as an advisory
body that has no decision-making authority. A council may be formed
by any committee or a Managing Director. Councils will share
information, discuss topics, and make recommendations to its
initiating committee or Managing Director. Councils report up to
their initiating committee or Managing Director.
\12\ In 2013, DTCC launched its Recovery & Resolution Planning
Program for DTC, NSCC, and FICC as part of its continued commitment
to enhancing risk management. The Office of Recovery & Resolution
Planning was established to manage the program and the development
of the recovery and wind-down plans for the Clearing Agencies.
---------------------------------------------------------------------------
2. Liquidity Shortfalls
Section 5.3 (Liquidity Shortfalls) of the Plan identifies tools
that may be used to address foreseeable shortfalls of NSCC's liquidity
resources following a Member default. The goal in managing NSCC's
qualified liquidity resources is to maximize resource availability in
an evolving stress situation, to maintain flexibility in the order and
use of sources of liquidity, and to repay any third-party lenders of
liquidity in a timely manner. This section includes a table (Table 5-C)
that lists NSCC liquidity tools and resources.\13\ The proposed rule
change would update this section to include a reference to cash
proceeds from outstanding term debt issuance in addition to the other
examples of NSCC's qualifying liquid resources. A footnote would also
be added providing the citation to NSCC's advance notice filing
covering the term debt issuance.\14\
---------------------------------------------------------------------------
\13\ Table 5-C lists the following NSCC liquidity tools: Utilize
short-settling liquidating trades, Increase the speed of portfolio
asset sales, Credit Facility, Unissued Commercial Paper, Non-
Qualifying Liquid Resources, and Uncommitted stock loan and equity
repos.
\14\ See Securities Exchange Act Release No. 87912 (January 8,
2020), 85 FR 2187 (January 14, 2020) (SR-NSCC-2019-802).
---------------------------------------------------------------------------
B. Proposal To Make Certain Clarifications to the R&W Plan
1. Critical Services and Indicative Non-Critical Services
Section 3 (Critical Services) of the Plan defines the criteria for
classifying certain of NSCC's services as ``critical,'' \15\ and
identifies such critical services and the rationale for their
classification. The identification of NSCC's critical services is
important for evaluating how the recovery tools and the wind-down
strategy would facilitate and provide for the continuation of NSCC's
critical services to the markets it serves. This section also includes
a list of indicative non-critical services.
---------------------------------------------------------------------------
\15\ The criteria that is used to identify an NSCC service or
function as critical includes consideration as to whether (1) there
is a lack of alternative providers or products; (2) failure of the
service could impact NSCC's ability to perform its central
counterparty services; (3) failure of the service could impact
NSCC's ability to perform its netting services, and, as such, the
availability of market liquidity; and (4) the service is
interconnected with other participants and processes within the U.S.
financial system (for example, with other FMIs, settlement banks,
broker-dealers, and exchanges).
---------------------------------------------------------------------------
This section includes a table (Table 3-B: NSCC Critical Services)
that lists each of the services, functions or activities that NSCC has
identified as ``critical'' based on the applicability of the criteria.
As more fully described below, the proposed rule change would clarify
in Table 3-B the description of some of the critical services and
update the table to include an additional critical service. While the
clarifying changes do not change the classification of the relevant
service (as being either ``critical'' or ``indicative non-critical''),
nor impact the existing classification of other services, NSCC believes
these revisions would enhance the clarity of the descriptions of them.
First, the proposed rule change would revise the entries for ``3.
Obligation Warehouse'' and ``10. CNS/Prime Broker Interface'' to delete
the check mark denoting the lack of alternative providers and products
as one of the determinants for its classification as a critical
service. Second, the proposed rule change would replace the name of the
service identified in the current plan as exchange-traded fund ``5.
ETF'' to exchange-traded products ``5. ETPs'' in order to more
accurately align with the scope of what is covered by these services.
Third, currently the critical service ``6. ACATS'' \16\ is described as
``A service under which Members can transfer their customers' assets
from one brokerage account and/or bank to another, while processing
through CNS.'' The proposed rule change would add at the end of this
description the phrase ``, DTC, Obligation Warehouse, OCC and others,''
in order to include a more comprehensive description of this service.
Fourth, in the description of ``11. Balance Order Netting,'' the
proposed rule change would delete the phrase ``balance order
transactions'' and replace it with ``Balance Order Contracts'' because
it is a defined term under the Rules.\17\
---------------------------------------------------------------------------
\16\ ``ACATS'' refers to NSCC's Automated Customer Accounts
Transfer Service.
\17\ Pursuant to Rule 5, supra note 5, ``Balance Order
Contracts'' is defined as Compared Contracts for Balance Order
Securities and other transactions in respect of Balance Order
Securities submitted to NSCC under the Rules.
---------------------------------------------------------------------------
[[Page 17443]]
Also, the proposed rule change would update Table 3-B (NSCC
Critical Services) to add ``Account Information Transmission''
(``AIT''). This new entry would include in the description of AIT \18\
that it is being enhanced in support of the bulk transfer initiative,
which is an industry effort designed to prepare carrying broker-dealers
for an emergency mass transfer of large quantities of customer accounts
and assets from a distressed broker to a financially secure broker.\19\
In the column that delineates the determinant for its classification as
a critical service, this new entry would have a check mark that denotes
this is because of a lack of alternative providers and products.
---------------------------------------------------------------------------
\18\ As set forth in Table 3-B of the Plan, the ``AIT'' service
is described as a secure data transport facility that allows NSCC
Members to perform a single movement of many customer brokerage
accounts.
\19\ See https://www.sifma.org/resources/general/bulk-transfer-playbook.
---------------------------------------------------------------------------
2. Member Default Losses Through the Crisis Continuum
Section 5 (Member Default Losses through the Crisis Continuum) of
the Plan is comprised of multiple subsections that identify the risk
management surveillance, tools, and governance that NSCC may employ
across an increasing stress environment, referred to as the ``Crisis
Continuum.'' \20\ This section currently identifies, among other
things, the tools that can be employed by NSCC to mitigate losses, and
mitigate or minimize liquidity needs, as the market environment becomes
increasingly stressed. As more fully described below, the proposed rule
change would clarify certain language.
---------------------------------------------------------------------------
\20\ As set forth in the Recovery Plan, the phases of the
``Crisis Continuum'' include (1) a stable market phase, (2) a
stressed market phase, (3) a phase commencing with NSCC's decision
to cease to act for a Member or Affiliated Family, and (4) a
recovery phase.
---------------------------------------------------------------------------
Section 5.2.1 (Stable Market Phase) describes NSCC's risk
management activities in the normal course of business. These
activities include (i) the routine monitoring of margin adequacy
through daily evaluation of backtesting and stress testing results that
review the adequacy of NSCC's margin calculations, and escalation of
those results to internal and Board committees and (ii) routine
monitoring of liquidity adequacy through review of daily liquidity
studies that measure sufficiency of available liquidity resources to
meet cash settlement obligations of the Member that would generate the
largest aggregate payment obligation. Further, under the heading
``Market Risk Monitoring and Stable Market Indicators,'' this section
states that the amount of Clearing Fund required from each Member is
determined principally by Value-at-Risk (``VaR'') calculations,\21\ and
that in order to ensure the VaR model accurately reflects market
conditions and provides adequate protection against market risk, NSCC
evaluates several factors on an ongoing basis.
---------------------------------------------------------------------------
\21\ As described in the Plan, Value-at-Risk (``VaR'')
calculations are based on the potential price-change volatility of
unsettled positions according to NSCC's risk-based margin model.
---------------------------------------------------------------------------
The proposed rule change would remove the following factor as one
of those evaluated, because it is no longer part of NSCC's model
calculation, ``Implied volatility to assess whether a potential
increase in market price volatility may not be fully incorporated in
the historical price moves.'' \22\ The elimination of the language
regarding implied volatility provides a more accurate representation of
the risk model calculation. Consistent with the above, NSCC would also
remove the paragraph in this section that states that implied market
price volatility as measured by benchmarks such as the VIX index does
not indicate material changes in market price volatility are expected.
---------------------------------------------------------------------------
\22\ The remaining factors set forth in the Plan that NSCC
evaluates to ensure that the VaR model accurately reflects market
conditions and provides adequate protection against market risk are:
(i) Backtesting and other model performance monitoring to assess the
robustness of the Clearing Fund requirements, and (ii) stress
testing based on real historical and hypothetical scenarios to
assess the margin adequacy under extreme but plausible market
conditions. The Clearing Fund Formula is described in Procedure XV
(Clearing Fund Formula and Other Matters), supra note 5.
---------------------------------------------------------------------------
Section 5.2.4 (Recovery Corridor and Recovery Phase) outlines the
early warning indicators to be used by NSCC to evaluate its options and
potentially prepare to enter the ``Recovery Phase,'' which phase refers
to the actions to be taken by NSCC to restore its financial resources
and avoid a wind-down of its business. Included in this section are
descriptions of potential stress events that could lead to recovery,
and several early warning indicators and metrics that NSCC has
established to evaluate its options and potentially prepare to enter
the Recovery Phase. These indicators, which are referred to in the
Recovery Plan as recovery corridor indicators (``Corridor
Indicators''),\23\ are calibrated against NSCC's financial resources
and are designed to give NSCC the ability to replenish financial
resources, typically through business as usual (``BAU'') tools applied
prior to entering the Recovery Phase.
---------------------------------------------------------------------------
\23\ The majority of the Corridor Indicators, as identified in
the Recovery Plan, relate directly to conditions that may require
NSCC to adjust its strategy for hedging and liquidating a defaulting
Member's portfolio, and any such changes would include an assessment
of the status of the Corridor Indicators.
---------------------------------------------------------------------------
Included in this section is a table (Table 5-A: Corridor
Indicators) that for each Corridor Indicator identifies the (i)
measures of the indicator, (ii) evaluations of the status of the
indicator, (iii) metrics for determining the status of the
deterioration or improvement of the indicator, and (iv) ``Corridor
Actions,'' which are steps that may be taken to improve the status of
the indicator,\24\ as well as management escalations required to
authorize those steps. For the entry in the table for ``Hedge
Effectiveness,'' the proposed rule change would revise the text for
clarity by adding to the existing description of measures of this
indicator that hedge effectiveness is most relevant prior to commencing
the hedging and liquidation strategy but is updated as necessary with
changes in market prices and/or position liquidations. Also, the text
that identifies Financial Risk Management as the internal group
responsible for measuring the metrics for determining the status of the
deterioration or improvement of the ``Hedge Effectiveness'' indicator
would be revised to add that this is done with input from NSCC's
investment advisor.
---------------------------------------------------------------------------
\24\ In this regard, the Corridor Actions that would be
identified in the Plan are indicative but not prescriptive;
therefore, if NSCC needs to consider alternative actions due to the
applicable facts and circumstances, the escalation of those
alternative actions would follow the same escalation protocol
identified in the Plan for the Corridor Indicator to which the
action relates.
---------------------------------------------------------------------------
Section 5.2.4 also includes language that requires NSCC management
to review the Corridor Indicators and the related metrics at least
annually and modify these metrics as necessary in light of observations
from simulation of Member defaults and other analyses. In order to more
closely align with the biennial cycle of DTCC's multi-member closeout
simulation exercise, the proposed rule change would shift the timing of
management's review of the Corridor Indicators and related metrics from
annually to biennially. NSCC believes this change is necessary for
consistency with the cycle of the multi-member closeout simulation, in
which the Corridor Indicators and metrics are assessed as part of the
simulation exercise.
There is an additional table in Section 5.2.4, (Table 5-B: Loss
Waterfall Tools) that delineates the tools that comprise NSCC's loss
allocation waterfall as set forth under the Rules.\25\ This table has
four columns (``Order,'' ``Tool,'' ``Relevant Rules/Documents,'' and
[[Page 17444]]
``Responsible Body/Personnel'') and is organized by the order in which
the liquidity resources are to be applied by NSCC. Within Table 5-B,
Corporate Contribution is the first entry under the column labeled
``Tool.'' Currently, the narrative for this entry includes a
description of Corporate Contribution and delineates that in the event
of a cease to act, before applying the Clearing Fund deposits of
Members (other than the defaulting Member) to cover any resulting loss,
NSCC will apply the Corporate Contribution.\26\ For purposes of
clarity, this language would be revised to remove the words ``applying
the Clearing Fund Deposits of'' and replace them with ``charging the
Members on a pro rata basis.''
---------------------------------------------------------------------------
\25\ Rule 4, supra note 5.
\26\ Id.
---------------------------------------------------------------------------
Within this same entry in Table 5-B, the proposed rule change would
also revise the current text of the definition of Corporate
Contribution, in order to more closely align with how this term is
defined under Rule 4. Specifically, pursuant to the proposed rule
change the definition of Corporate Contribution would be revised to
state that, ``The Corporate Contribution is an amount that is equal to
50% of the amount calculated by NSCC in respect of its General Business
Risk Capital Requirement for losses that occur over any rolling 12
month period.'' \27\
---------------------------------------------------------------------------
\27\ Pursuant to Rule 4, supra note 5, for any loss allocation
pursuant to Section 4 of Rule 4, whether arising out of or relating
to a Defaulting Member Event or a Declared Non-Default Loss Event,
NSCC's corporate contribution to losses or liabilities that are
incurred by NSCC with respect to an Event Period (``Corporate
Contribution'') shall be an amount that is equal to fifty (50)
percent of the amount calculated by NSCC in respect of its General
Business Risk Capital Requirement as of the end of the calendar
quarter immediately preceding the Event Period.
---------------------------------------------------------------------------
Additionally, with respect to the second entry in Table 5-B, ``Loss
Allocation,'' the descriptive text in the ``Responsible Body/
Personnel'' column would be revised to more closely align with the same
language contained in Rule 4. The revised text would state, ``Members
will be obligated to pay the loss allocation on the second business day
after the Corporation issues any such notice and to continue to fully
fund their Clearing Fund required deposits to the extent of any
shortfalls.''
3. Non-Default Losses
Section 6 (Non-Default Losses) of the Plan outlines how NSCC would
address losses that result other than from a Member default. This
section provides a roadmap to other documents that describe these
events in greater detail and outlines NSCC's approach to monitoring
losses that could result from a non-default event. This section also
includes a description of Rule 60 (Market Disruption and Force
Majeure), referred to in the Plan as the ``Force Majeure Rule,'' \28\
which pertains to how NSCC addresses extraordinary events that occur
outside the control of NSCC and its Members. As more fully described
below, the proposed rule change would clarify certain language.
---------------------------------------------------------------------------
\28\ Supra note 6.
---------------------------------------------------------------------------
Section 6.4 (Resources to Cover Non-Default Losses) provides that
NSCC maintains two categories of financial resources to cover losses
and expenses arising from non-default risks or events: (i) Liquid Net
Assets Funded by Equity (``LNA''), including, pursuant to Rule 4, the
required Corporate Contribution,\29\ and (ii) loss-allocation charges
to Members in accordance with the provisions of Rule 4.\30\ Following
an overview of the four buckets of LNA which can be applied towards
non-default losses,\31\ there is a paragraph under the heading ``Loss
Allocation to Members, backed by the Clearing Fund'' that provides that
non-default losses could be allocated among Members as provided in Rule
4. There is sentence that describes the timeframe in which such losses
charged to Members are required to be paid. Currently, this sentence
states that losses are to be paid by Members ``within 2 business days
of the date of receipt of a notice of a loss allocation charge . . .
.'' However, this is not the same language used to describe this timing
in Rule 4. In order to be consistent with the language formulation set
out in Rule 4, the proposed rule change would revise this sentence to
state, ``Losses charged to Members are required to be paid by Members
on the second business day after the Corporation issues any such notice
of a loss allocation charge and, if not timely paid by any Member, the
Corporation may treat that Member as having failed to satisfy its
obligation and apply the Clearing Fund deposit of that Member to
satisfy its loss allocation obligation.'' \32\
---------------------------------------------------------------------------
\29\ See Securities Exchange Act Release Nos. 84428 (October 15,
2018), 83 FR 53128 (October 19, 2018) (SR-NSCC-2018-008); and 89360
(July 21, 2020), 85 FR 45280 (July 27, 2020) (SR-NSCC-2020-014)
(filings amending the Clearing Agency Policy on Capital Requirements
(the ``Capital Policy'') and the Clearing Agency Capital
Replenishment Plan (the ``Capital Plan'')). The initial Capital
Policy and Capital Plan were approved by the Commission in 2017--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).
\30\ Rule 4, supra note 5.
\31\ As set forth in the Plan, NSCC maintains the following four
buckets of LNA, which can be applied towards a non-default loss: (i)
General Business Risk Capital as determined in the Capital Policy,
supra note 29, (ii) the Corporate Contribution, (iii) a ``Buffer,''
as described in the Capital Policy, and (iv) excess LNA, which
refers to any available LNA held at NSCC above the required amounts
for General Business Risk Capital, the Corporate Contribution, and
Buffer.
\32\ Rule 4, supra note 5.
---------------------------------------------------------------------------
Section 6.6 (Market Disruption and Force Majeure Rule) describes
the Force Majeure Rule. The Force Majeure Rule was adopted at the same
time as the Plan \33\ and provides an additional resiliency tool
designed to mitigate the risks caused by market disruption events and
thereby minimize the risk of financial loss that may result from such
events. The proposed rule change would remove the following phrase
after the reference to the Force Majeure Rule in the first paragraph of
this section, ``, adopted in conjunction with this Plan,'' because it
is not necessary as both the Plan and the Force Majeure Rule are no
longer newly adopted. In addition, to remain consistent with the usage
of ``Force Majeure'' and ``Market Disruption Event'' throughout this
section, NSCC would conform all references to the defined terms ``Force
Majeure'' and ``Market Disruption Event,'' so that they appear as
capitalized terms.
---------------------------------------------------------------------------
\33\ Supra note 6.
---------------------------------------------------------------------------
The proposed rule change would also make revisions to the second
paragraph of Section 6.6. First, for purposes of clarity and
readability, the following text would be removed from the beginning of
the second sentence: ``Most FMIs have rules designed to deal with force
majeure or market disruption events, and.'' Second, the reference to
``Superstorm Sandy'' would be removed from the last sentence of this
paragraph along with the related footnote that references Superstorm
Sandy as an example of circumstances in which NSCC needed to fashion a
work-around necessitated by a force majeure event. NSCC believes
inclusion of references to Superstorm Sandy are outdated and no longer
necessary to be included in the Plan.
C. Remove Provisions Covering Certain ``Business-as-Usual'' Actions
Section 8.6 (Actions and Preparation) of the Plan sets forth the
legal framework and strategy for the orderly wind-down of NSCC if the
use of the recovery tools described in the Recovery Plan do not
successfully return NSCC to financial viability. This section includes
an overview of the actions and preparations to be taken by NSCC and
DTCC in connection with executing the wind-down portions of the Plan.
Section 8.6.1 (Business-as-Usual Actions) describes those actions that
NSCC or
[[Page 17445]]
DTCC may take to prepare for wind-down in the period before NSCC
experiences financial distress.
Under the current plan, the Business-as-Usual Actions are (i)
educating the Board to keep them informed of the Plan and the actions
the Board would need to take to implement it, (ii) engaging in
discussions with key linked FMIs as to the key elements of NSCC's wind-
down strategy and the expected actions of the respective link parties
should a wind-down be implemented, (iii) developing and maintaining an
index of internal data that includes the critical, ancillary, and non-
critical services that NSCC provides to its membership, the support
NSCC receives from DTCC and from its other affiliates, key third-party
vendors, key personnel, NSCC assets and liabilities, and agreements and
arrangements NSCC has with liquidity providers and with other FMIs,
(iv) developing administrative wind-down guidance that identifies key
Board and management actions that would be taken during the Recovery
Phase and ``Runway Period'' \34\ prior to NSCC's failure, and in
connection with its Chapter 11 proceedings, and (v) preparing
constituent documents for the Failover Entity \35\ and evaluating
capitalization options.
---------------------------------------------------------------------------
\34\ The Wind-down Plan identifies the time period leading up to
a decision to wind-down NSCC as the ``Runway Period.''
\35\ As set forth in Section 8.4.1 (General Objectives and
Approach) of the Plan, in the event that no viable or preferable
third-party transferee timely commits to acquire the business and
services of NSCC, the transfer will be effectuated to a failover
entity created for that purpose (referred to as the ``Failover
Entity''), that would be owned by a trust held, to the extent of the
value of the Failover Entity attributed to NSCC's transferred
business and services, for the benefit of NSCC's bankruptcy estate.
---------------------------------------------------------------------------
Pursuant to the proposed rule change, NSCC would remove the
Business-as-Usual Actions section (currently Section 8.6.1) in its
entirety because each of the actions outlined have either been
completed or would be addressed in NSCC's internal procedures going
forward. This includes certain documents necessary to effect the wind-
down aspects of the Plan that were in the process of being finalized
when the Plan was adopted and have since been completed. Since adoption
of the Plan,\36\ NSCC has completed all necessary internal
documentation, including DTCC's internal wind-down guidance, the
constituent documentation for the Failover Entity, and the evaluation
of NSCC's capitalization options. Further, the other actions included
in this section (e.g., maintaining an index of non-critical services,
educating the Board on the Plans) would be addressed, going forward, in
DTCC's Recovery & Resolution Planning Procedures maintained by the R&R
Team.\37\ As a result of this proposed change, current Section 8.6.2
(Recovery and Runway Period Actions) would be renumbered as Section
8.6.1. Also, consistent with the proposed removal of Business-as-Usual
Actions that have been completed, the proposed rule change would remove
from the first sentence of proposed Section 8.6.1 (current Section
8.6.2) the words ``Among other things, the guidance would provide'' and
replace them with ``The DTCC Clearing Agency Wind-down Guidance
developed in connection with this Plan provides.''
---------------------------------------------------------------------------
\36\ Supra note 6.
\37\ The R&R Team is responsible for maintaining the DTCC
``Office of Recovery & Resolution Planning Procedures'' document.
The purpose of these procedures is to communicate roles and
responsibilities, and procedures for the documentation of the R&W
Plans covering each of the Clearing Agencies, in compliance with
applicable rules and regulations. These procedures also describe the
biennial closeout simulation exercise whereby the Plans for each
clearing agency are tested through the simulation of a multi-member
default.
---------------------------------------------------------------------------
D. Technical Revisions
The proposal would also make several technical changes and
corrections to the Plan. NSCC believes that these proposed changes
would not substantively alter the meaning of the applicable sections
and would improve the overall readability and clarity of the Plan.
Specifically, NSCC is proposing to make the following changes and
corrections:
1. In Section 1.3 (Summary), in the list of topics covered under
the Plan, in the seventh bullet point, add ``Recovery Corridor and''
prior to the words ``Recovery Phase'' to correctly state the full name
of this section of the Plan.
2. In Section 1.4 (Conventions), in the third paragraph, delete the
words ``conjunction with'' and replace them with ``support of,'' and
delete the words ``also adopted'' and replace them with ``maintains.''
Accordingly, under the proposed rule change this paragraph would state,
``In support of this Plan, NSCC maintains (i) a Market Disruption and
Force Majeure Rule (the ``Force Majeure Rule''), (ii) a ``Corporation
Default Rule'' and (iii) a Wind-down of the Corporation Rule (the
``Wind-down Rule''), each as described herein.''
3. In Section 2.1 (DTCC Business Profile), under the heading ``DTCC
SIFMU Subsidiaries'':
In the description of NSCC, add ``, netting,'' after the
word ``clearing''; and after the words ``exchange-traded,'' delete
``fund (``ETF'')'' and replace it with ``products (``ETPs'').''
In the description of NSCC's affiliated clearing agency,
FICC, with respect to the Government Securities Division (``GSD''), add
the word ``netting,'' after ``clearing.''
In the description of the Mortgage-Backed Securities
Division (``MBSD'') of FICC, delete the modifier ``To-Be-Announced''
before the phrase ``pass-through mortgage-backed securities issued by
Ginnie Mae, Freddie Mac and Fannie Mae.''
In the sentence that describes FICC's publication of the
GCF Repo[supreg] Index, add the parenthetical ``(``GCF
Repos[supreg]'')'' after the words ``general collateral finance
repurchase transactions.''
4. In Section 2.2 (NSCC Guaranteed Services Summary), in the first
sentence of the third paragraph, replace ``CNS positions'' with ``CNS
Fails Positions'' because CNS Fails Position is a defined term under
the Rules. Also, in the first sentence of the fourth paragraph, add the
word ``guaranteed'' prior to ``Balance Order System.''
5. In Section 2.3 (NSCC Non-Guaranteed Services Summary), under the
heading, ``Wealth Management Services,'' in the second sentence,
replace the word ``procession'' with ``processing'' to correct a
typographical error.
6. In Section 3.2 (Criteria Used to Determine Criticality), in the
second sentence that currently states, ``Each service was assessed for
criticality to determine the potential systemic impact from a service
disruption,'' add the word ``resulting'' after the word ``impact.''
7. In Section 4.1 (DTCC and SIFMU Governance Structure), in the
third paragraph, which lists each of the Board committees, delete
``Board'' before the words ``Risk Committee.'' Additionally, in the
footnote in this section that provides the citation of a previous
proposed rule change covering the Clearing Agency Risk Management
Framework, add a reference to NSCC's amended filing published July 9,
2020.
8. In Section 5.1 (Introduction), in the fourth paragraph,
capitalize the word ``board.'' Under the heading ``Market Risk
Management,'' in the last sentence of the first paragraph, remove the
capitalization of the words ``Clearing Agency Cross-Guaranty
Agreements'' because this is not a defined term in the Plan. For
purposes of clarity and readability, the proposed rule change would
also shift to Section 4.1 the footnote currently included in Section
5.1 regarding the Rules covering a ``cease to act,'' insolvency of a
Member,
[[Page 17446]]
and associated actions.\38\ Additionally, in the footnote included in
this section that provides the citation to a previous proposed rule
change covering the Clearing Agency Liquidity Risk Management
Framework, add a reference to NSCC's amended filing published December
11, 2020.
---------------------------------------------------------------------------
\38\ See Rule 46 (Restrictions on Access to Services) and Rule
20 (Insolvency), supra note 5.
---------------------------------------------------------------------------
9. In Section 5.2.3 (Member Default Phase), under the heading
``Market Risk Monitoring'':
In the second sentence of the second paragraph, remove the
capitalization from the first instance of the word ``Monitoring.''
In the first sentence of the fourth paragraph, (i) delete
the word ``close-out'' and replace it with ``liquidation,'' and (ii)
after the phrase ``of the Defaulting Member's portfolio,'' add the
parenthetical ``(referred to as a ``closeout'').''
10. In Section 5.2.4 (Recovery Corridor and Recovery Phase):
In the first sentence of the first paragraph, add
quotation marks and make bold the words ``Recovery Corridor.''
Under the heading ``Recovery Corridor,'' (a) in the second
sentence of the second paragraph, in the current parenthetical that
states ``(i.e., as market stress increases, NSCC would expect the
length of the Recovery Corridor to shorten),'' replace the word
``shorten,'' with ``be shorter,'' and (b) in the second sentence of the
last paragraph, after the word ``closeout,'' add an ``s'' to the end of
the word ``simulation.''
11. In Section 5.3 (Liquidity Shortfalls), in Table 5-C, which
lists the tools that can be used to address liquidity shortfalls, in
the entry for ``Credit Facility,'' in the column titled ``Relevant
Rules/Documents,'' (a) delete ``Currently, Section 2.03A(h) of the
Credit Facility,'' because reference to a specific section of the
credit facility documentation is not necessary, (b) replace the words
``facility terms'' with ``terms of the Credit Facility,'' and (c) after
the word ``lenders,'' delete the word ``to'' and replace it with
``that.''
12. In Section 6.3 (Risk Mitigation), in the footnote that includes
the citation to a previous proposed rule change covering the Clearing
Agency Operational Risk Management Framework, add a reference to NSCC's
amended filing published December 16, 2020.
13. In Section 6.4 (Resources to Cover Non-Default Losses), in the
footnote that includes the citation to a previous proposed rule change
covering the Capital Policy and Capital Plan, add a reference to NSCC's
amended filings published July 27, 2020 with respect to the Capital
Policy, and October 19, 2018 with respect to the Capital Plan.
14. In Section 6.6 (Market Disruption and Force Majeure Rule):
In the second bullet point of the third paragraph remove
the quotation marks from the words ``Market Disruption Event'' and
delete the parenthetical ``(as defined in the Force Majeure Rule)''
because Market Disruption Event was defined earlier in this section.
In the second sentence of the fourth paragraph, for
purposes of reflecting present tense, delete the word ``would'' before
the word ``operate,'' and pluralize ``operate.''
In the first sentence of the second paragraph:
[cir] For purposes of reflecting present tense and to improve
readability, (a) remove the word ``currently'' prior to ``the Force
Majeure Rule'' and (b) remove the words ``is designed to clarify,'' and
replace them with ``clarifies,'' and
[cir] in order to correct a typographical error, insert the word
``and'' in between ``its Participants'' and ``to mitigate.''
15. In Section 7.1 (Comprehensiveness), remove the capitalization
from the words ``Critical Services.''
16. In Section 7.2 (Effectiveness), under the heading
``Reliability,'' for the purpose of correcting typographical errors,
(a) move the second footnote, currently at the end of the last
sentence, to the end of the last sentence of the introductory paragraph
of Section 7.2 and (b) in the text of the other footnote that currently
reads, ``See, for example, DTCC Whitepaper, CCP Resiliency and
Resources, pg. 2, section 2 (June 2015),'' remove ``, section 2.''
17. In Section 8.2.1 (Potential Scenarios), in the second sentence
of the third paragraph, replace ``enhancements to the loss allocation
process are'' with ``the loss allocation process is.'' Accordingly,
under the proposed rule change this sentence would state, ``As noted
above, the loss allocation process is designed to ensure that the full
Clearing Fund can be applied to losses arising from successive Member
defaults that occur during an ``Event Period'', and there can be
successive rounds of loss allocations to address losses arising with
respect to a given Event Period.''
18. In Section 8.2.2 (Wind-down Indicators), in the fourth bullet
point of the third paragraph, in the sentence that currently states,
``If a Defaulting Member also defaults in provision of other services
to NSCC--to the extent that a Member were to default both in its
membership obligations, and additionally in its capacity as either an
investment counterparty holding material Clearing Fund cash or other
corporate funds, or as a Settling Bank, this would reduce NSCC's
prefunded resources and add additional financial strain on Members,''
add the words ``a lender under the Credit Facility,'' after the words
``as either.''
19. In Section 8.4.1 (General Objectives and Approach), in the
second paragraph, delete the words ``have been amended to'' after the
words ``the Rules'' in order to more clearly reflect the fact that the
Wind-down of the Corporation Rule \39\ was adopted.
---------------------------------------------------------------------------
\39\ Supra note 6.
---------------------------------------------------------------------------
20. In Section 8.4.4 (Rules Adopted in Connection with the Wind-
down Plan), in the subsection, ``The Wind-down Trigger,'' in the
parenthetical, ``(Trigger for Implementing Wind-down),'' pluralize the
word ``Trigger.''
21. In Section 8.4.5 (Wind-down and Liquidation of NSCC Following
Transfer), in the third sentence of the first paragraph, delete the
words ``adoption of the,'' before the words ``Corporation Default
Rule.''
22. In proposed Section 8.6.1 (currently section 8.6.2) (Recovery
and Runway Period Actions), capitalize the word ``chapter'' in two
places where ``chapter 11'' is not capitalized.
23. In Section 8.7 (Costs and Time to Effectuate Plan), (a) in the
second sentence of the fifth paragraph, delete the word ``of'' between
the words ``detailed'' and ``analysis'' and (b) at the end of the last
sentence of this section, delete the phrase ``, as provided in the
Capital Requirements Policy.'' As a result, under the proposed rule
change, this sentence would state, ``The estimated wind-down costs
amount will be reviewed and approved by the Board annually.'' Also, in
the footnote in this section that refers to Section 5 of the Plan,
correct the title of that section to state, ``Member Default Losses
through the Crisis Continuum.''
24. In Appendix 1 (Defined Terms), add each of the new defined
terms based on the addition of such terms to the Plan, and delete the
defined terms that were removed based on the deletion of these terms
from the Plan.
2. Statutory Basis
NSCC believes that the proposal is consistent with the requirements
of the Act and the rules and regulations thereunder applicable to a
registered clearing agency. In particular, NSCC believes that the
amendments to the R&W Plan are consistent with Section
[[Page 17447]]
17A(b)(3)(F) of the Act \40\ and Rule 17Ad-22(e)(3)(ii) under the
Act,\41\ for the reasons described below.
---------------------------------------------------------------------------
\40\ 15 U.S.C. 78q-1(b)(3)(F).
\41\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of NSCC be designed to promote the prompt and accurate clearance and
settlement of securities transactions.\42\ The Recovery Plan serves to
promote the prompt and accurate clearance and settlement of securities
transactions by providing NSCC with a roadmap for actions it may employ
to mitigate losses, and monitor and, as needed, stabilize NSCC's
financial condition, which would allow it to continue its critical
clearance and settlement services in stress situations. The Recovery
Plan is designed to identify the actions and tools NSCC may use to
address and minimize losses to both NSCC and its membership and provide
NSCC's management and the Board with guidance in this regard by
identifying the indicators and governance around the use and
application of such tools to enable them to address stress situations
in a manner most appropriate for the circumstances. Further, the Wind-
down Plan establishes a framework for the transfer and orderly wind-
down of NSCC's business. It establishes clear mechanisms for the
transfer of NSCC's critical services and membership, and for the
treatment of open, guaranteed CNS transactions in the event of NSCC's
default. By doing so, the Wind-down Plan is designed to facilitate the
continuity of NSCC's critical services and enable Members and Limited
Members to maintain access to NSCC's services through the transfer of
its membership in the event NSCC defaults or the Wind-down Plan is
triggered by the Board.
---------------------------------------------------------------------------
\42\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described above, the proposed rule change would update the R&W
Plan to (i) reflect business and product developments, (ii) make
certain clarifications, (iii) remove provisions covering certain
``business-as-usual'' actions, and (iv) make certain technical
corrections. By helping to ensure that the R&W Plan reflects current
business and product developments, and providing additional clarity
regarding the framework for the transfer and orderly wind-down of
NSCC's business, NSCC believes that the proposed rule change would help
it continue to maintain the Plan in a manner that supports the
continuity of NSCC's critical services and enables its Members and
Limited Members to maintain access to NSCC's services through the
transfer of its membership in the event NSCC defaults or the Wind-down
Plan is ever triggered by the Board. Further, by facilitating the
continuity of its critical clearance and settlement services, NSCC
believes the Plan and the proposed rule change would continue to
promote the prompt and accurate clearance and settlement of securities
transactions. Therefore, NSCC believes the proposed amendments to the
R&W Plan are consistent with the requirements of Section 17A(b)(3)(F)
of the Act.
Rule 17Ad-22(e)(3)(ii) under the Act requires NSCC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to maintain a sound risk management framework for
comprehensively managing legal, credit, liquidity, operational, general
business, investment, custody, and other risks that arise in or are
borne by the covered clearing agency, which includes plans for the
recovery and orderly wind-down of the covered clearing agency
necessitated by credit losses, liquidity shortfalls, losses from
general business risk, or any other losses.\43\ The R&W Plan is
designed to comply with Rule 17Ad-22(e)(3)(ii) and is consistent with
the Act because it provides plans for the recovery and orderly wind-
down of NSCC necessitated by credit losses, liquidity shortfalls,
losses from general business risk, or any other losses.
---------------------------------------------------------------------------
\43\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------
Specifically, the Recovery Plan defines the risk management
activities, stress conditions and indicators, and tools that NSCC may
use to address stress scenarios that could eventually prevent it from
being able to provide its critical services as a going concern. Through
the framework of the Crisis Continuum, the Recovery Plan addresses
measures that NSCC may take to address risks of credit losses and
liquidity shortfalls, and other losses that could arise from a Member
default. The Recovery Plan also addresses the management of general
business risks and other non-default risks that could lead to losses.
The Wind-down Plan would be triggered by a determination by the Board
that recovery efforts have not been, or are unlikely to be, successful
in returning NSCC to viability as a going concern. Once triggered, the
Wind-down Plan sets forth clear mechanisms for the transfer of NSCC's
membership and business, and is designed to facilitate continued access
to NSCC's critical services and to minimize market impact of the
transfer. By establishing the framework and strategy for the execution
of the transfer and wind-down of NSCC in order to facilitate continuous
access to its critical services, the Wind-down Plan establishes a plan
for the orderly wind-down of NSCC.
As described above, the proposed rule change would update the R&W
Plan to (i) reflect business and product developments, (ii) make
certain clarifications, (iii) remove provisions covering certain
``business-as-usual'' actions, and (iv) make certain technical
corrections. By ensuring that material provisions of the Plan are
current, clear, and technically correct, NSCC believes that the
proposed amendments are designed to support the maintenance of the Plan
for the recovery and orderly wind-down of the covered clearing agency
necessitated by credit losses, liquidity shortfalls, losses from
general business risk, or any other losses, and, as such, meets the
requirements of Rule 17Ad-22(e)(3)(ii) under the Act.\44\ Therefore,
the proposed changes would help NSCC to maintain the Plan in a way that
continues to be consistent with the requirements of Rule 17Ad-
22(e)(3)(ii).
---------------------------------------------------------------------------
\44\ Id.
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
NSCC does not believe that the proposed rule change would have any
impact, or impose any burden, on competition. NSCC does not anticipate
that the proposal would affect its day-to-day operations under normal
circumstances, or in the management of a typical Member default
scenario or non-default event. The R&W Plan was developed and
documented in order to satisfy applicable regulatory requirements, as
discussed above. The proposal is intended to enhance and update the
Plan to ensure it is clear and remains current in the event it is ever
necessary to be implemented. The proposed revisions would not effect
any changes to the overall structure or operation of the Plan or NSCC's
recovery and wind-down strategy as set forth under the current Plan. As
such, NSCC believes the proposal would not have any impact, or impose
any burden, on competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
NSCC has not received or solicited any written comments relating to
this proposal. NSCC will notify the Commission of any written comments
received by NSCC.
[[Page 17448]]
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) \45\ of the Act and paragraph (f) \46\ of Rule 19b-4
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
---------------------------------------------------------------------------
\45\ 15 U.S.C 78s(b)(3)(A).
\46\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NSCC-2021-004 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-NSCC-2021-004. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of NSCC and on DTCC's website
(https://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NSCC-2021-004 and should be submitted on
or before April 23, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
---------------------------------------------------------------------------
\47\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-06770 Filed 4-1-21; 8:45 am]
BILLING CODE 8011-01-P
