34166 Federal Register / Vol. 83, No. 139 / Thursday, July 19, 2018 / Notices 

1 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b–4, 

respectively. On December 18, 2017, NSCC filed the 

Proposed Rule Change as advance notice SR– 

NSCC–2017–805 (‘‘Advance Notice’’) with the 

Commission pursuant to Section 806(e)(1) of Title 

VIII of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act entitled the Payment, 

Clearing, and Settlement Supervision Act of 2010 

(‘‘Clearing Supervision Act’’) and Rule 19b– 

4(n)(1)(i) of the Act. (12 U.S.C. 5465(e)(1) and 17 

CFR 240.19b–4(n)(1)(i), respectively.) On January 

30, 2018, the Commission published in the Federal 

Register notice of filing of the Advance Notice. The 

notice also extended the review period for the 

Advance Notice pursuant to Section 806(e)(1)(H) of 

the Clearing Supervision Act. (12 U.S.C. 

5465(e)(1)(H).) See Securities Exchange Act Release 

No. 82581 (January 24, 2018), 83 FR 4327 (January 

30, 2018) (SR–NSCC–2017–805). On April 10, 2018, 

the Commission required additional information for 

consideration of the Advance Notice, pursuant to 

Section 806(e)(1)(D) of the Clearing Supervision 

Act, which provided the Commission with an 

additional 60-days in the review period beginning 

on the date that the information requested is 

received by the Commission. (12 U.S.C. 

5465(e)(1)(D).) See Memorandum from the Office of 

Clearance and Settlement Supervision, Division of 

Trading and Markets, titled ‘‘Commission’s Request 

for Additional Information,’’ available at https://

www.sec.gov/rules/sro/nscc-an.htm. On June 28, 

2018, NSCC filed Amendment No. 1 to the Advance 

Notice. To promote the public availability and 

transparency of its post-notice amendment, NSCC 

submitted a copy of Amendment No. 1 through the 

Commission’s electronic public comment letter 

mechanism. Accordingly, Amendment No. 1 to the 

Advance Notice has been posted on the 

Commission’s website at https://www.sec.gov/rules/ 

sro/nscc-an.htm and thus been publicly available 

since June 29, 2018. On July 6, 2018, the 

Commission received the information requested, 

which added an additional 60-days to the review 

period pursuant to Sections 806(e)(1)(E) and (G) of 

the Clearing Supervision Act. (12 U.S.C. 

5465(e)(1)(E) and (G).) See Memorandum from the 

Office of Clearance and Settlement Supervision, 

Division of Trading and Markets, titled ‘‘Response 

to the Commission’s Request for Additional 

Information,’’ available at https://www.sec.gov/ 

rules/sro/nscc-an.htm. The proposal, as set forth in 

both the Advance Notice and the Proposed Rule 

Change, shall not take effect until all required 

regulatory actions are completed. 

2Securities Exchange Act Release No. 82430 

(January 2, 2018), 83 FR 841 (January 8, 2018) (SR– 

NSCC–2017–017). 3Securities Exchange Act Release No. 82669 

(February 8, 2018), 83 FR 6653 (February 14, 2018) 

(SR–DTC–2017–021; SR–FICC–2017–021; SR– 

NSCC–2017–017). 4Securities Exchange Act Release No. 82908 

(March 20, 2018), 83 FR 12986 (March 26, 2018) 

(SR–NSCC–2017–017). 5Securities Exchange Act Release No. 83509 

(June 25, 2018), 83 FR 30785 (June 29, 2018) (SR– 

DTC–2017–021; SR–FICC–2017–021; SR–NSCC– 

2017–017). 

6To promote the public availability and 

transparency of its post-notice amendment, NSCC 

submitted a copy of Amendment No. 1 through the 

Commission’s electronic public comment letter 

mechanism. Accordingly, Amendment No. 1 to the 

Proposed Rule Change has been posted on the 

Commission’s website at https://www.sec.gov/rules/ 

sro/nscc.htm and thus been publicly available since 

June 29, 2018. 

7Capitalized terms used herein and not otherwise 

defined herein are defined in the Rules, available 

at www.dtcc.com/∼/media/Files/Downloads/legal/ 

rules/nscc_rules.pdf. 

8 17 CFR 240.17Ad–22(e)(3)(ii). 

9See Securities Exchange Act Release No. 82581 

(January 24, 2018), 83 FR 4327 (January 30, 2018) 

(SR–NSCC–2017–805). 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83632; File No. SR–NSCC– 

2017–017] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Notice of Filing of 

Amendment No. 1 to a Proposed Rule 

Change To Adopt a Recovery and 

Wind-Down Plan and Related Rules 

July 13, 2018. 

On December 18, 2017, National 

Securities Clearing Corporation 

(‘‘NSCC’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’), 

pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (‘‘Act’’) 

and Rule 19b–4 thereunder, proposed 

rule change SR–NSCC–2017–017 

(‘‘Proposed Rule Change’’) to adopt a 

recovery and wind-down plan and 

related rules.1 The Proposed Rule 

Change was published for comment in 

the Federal Register on January 8, 

2018.2 On February 8, 2018, the 

Commission designated a longer period 

within which to approve, disapprove, or 

institute proceedings to determine 

whether to approve or disapprove the 

Proposed Rule Change.3 On March 20, 

2018, the Commission instituted 

proceedings to determine whether to 

approve or disapprove the Proposed 

Rule Change.4 On June 25, 2018, the 

Commission designated a longer period 

for Commission action on the 

proceedings to determine whether to 

approve or disapprove the Proposed 

Rule Change.5 On June 28, 2018, NSCC 

filed Amendment No. 1 to the Proposed 

Rule Change to amend and replace in its 

entirety the Proposed Rule Change as 

originally submitted on December 18, 

2017.6 As of the date of this release, the 

Commission has not received any 

comments on the Proposed Rule 

Change. 

The Proposed Rule Change, as 

amended by Amendment No. 1, is 

described in Items I and II below, which 

Items have been prepared by NSCC. The 

Commission is publishing this notice to 

solicit comments on the Proposed Rule 

Change, as amended by Amendment No. 

1, from interested persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Proposed 

Rule Change 

The Proposed Rule Change proposes 

to (1) adopt the Recovery & Wind-down 

Plan of NSCC (‘‘R&W Plan’’ or ‘‘Plan’’); 

and (2) amend NSCC’s Rules & 

Procedures (‘‘Rules’’) 7 in order to adopt 

Rule 41 (Corporation Default), Rule 42 

(Wind-down of the Corporation), and 

Rule 60 (Market Disruption and Force 

Majeure) (each a ‘‘Proposed Rule’’ and, 

collectively, the ‘‘Proposed Rules’’). The 

Proposed Rule Change would also 

propose to re-number the current Rule 

42 (Wind-down of a Member, Fund 

Member or Insurance Carrier/Retirement 

Services Member) to Rule 40, which is 

currently reserved for future use. 

The R&W Plan would be maintained 

by NSCC in compliance with Rule 

17Ad–22(e)(3)(ii) under the Act, by 

providing plans for the recovery and 

orderly wind-down of NSCC 

necessitated by credit losses, liquidity 

shortfalls, losses from general business 

risk, or any other losses, as described 

below.8 The Proposed Rules are 

designed to (1) facilitate the 

implementation of the R&W Plan when 

necessary and, in particular, allow 

NSCC to effectuate its strategy for 

winding down and transferring its 

business; (2) provide Members and 

Limited Members with transparency 

around critical provisions of the R&W 

Plan that relate to their rights, 

responsibilities and obligations; and (3) 

provide NSCC with the legal basis to 

implement those provisions of the R&W 

Plan when necessary, as described 

below. 

II. Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

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 III 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 

Description of Amendment No. 1 

This filing constitutes Amendment 

No. 1 (‘‘Amendment’’) to the Proposed 

Rule Change (also referred to below as 

the ‘‘Original Filing’’) previously filed 

by NSCC.9 NSCC is amending the 

proposed R&W Plan and the Original 

Filing in order to clarify certain matters 

and make minor technical and 

conforming changes to the R&W Plan, as 

described below and as marked on 

Exhibit 4 hereto. To the extent such 

changes to the Plan require changes to 


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10See Securities Exchange Act Release No. 81105 

(July 7, 2017), 82 FR 32399 (July 13, 2017) (SR– 

DTC–2017–003, SR–FICC–2017–007, SR–NSCC– 

2017–004). 

11See id. 

12See Rule 4 (Clearing Fund), supra note 7. NSCC 

is proposing changes to Rule 4 and other related 

rules regarding allocation of losses in a separate 

filing submitted simultaneously with the Original 

Filing. See Securities Exchange Act Release Nos. 

82430 (January 2, 2018), 83 FR 841 (January 8, 

2018) (SR–NSCC–2017–017) and 82581 (January 24, 

2018), 83 FR 4327 (January 30, 2018) (SR–NSCC– 

2017–805) (collectively referred to herein as the 

‘‘Loss Allocation Filing’’). NSCC has submitted an 

amendment to the Loss Allocation Filing. A copy 

of the amendment to the Loss Allocation Filing is 

available at http://www.dtcc.com/legal/sec-rulefilings.aspx. NSCC expects the Commission to 

review both proposals, as amended, together, and, 

as such, the proposal described in this filing 

Continued 

the Original Filing, the information 

provided under ‘‘Description of 

Proposed Changes’’ in the Original 

Filing has been amended and is restated 

in its entirety below. Other sections of 

the Original Filing are unchanged and 

are restated in their entity for 

convenience. 

First, this Amendment would clarify 

the meaning of the terms ‘‘cease to act,’’ 

‘‘Member default,’’ ‘‘Defaulting 

Member,’’ and ‘‘Member Default Losses’’ 

as such terms are used in the Plan. This 

Amendment would also make 

conforming changes as necessary to 

reflect the use of these terms. 

Second, this Amendment would 

clarify that actions and tools described 

in the Plan that are available in one 

phase of the Crisis Continuum may be 

used in subsequent phases of the Crisis 

Continuum when appropriate to address 

the applicable situation. This 

Amendment would also clarify that the 

allocation of losses resulting from a 

Member default would be applied when 

provided for, and in accordance with, 

Rule 4 of the Rules. 

Third, this Amendment would clarify 

that the Recovery Corridor (as defined 

therein) is not a ‘‘sub-phase’’ of the 

recovery phase. Rather, the Recovery 

Corridor is a period of time that would 

occur toward the end of the Member 

default phase, when indicators are that 

NSCC may transition into the recovery 

phase. Thus, the Recovery Corridor 

precedes the recovery phase within the 

Crisis Continuum. 

Fourth, this Amendment would make 

revisions to address the allocation of 

losses resulting from a Member default 

in order to more closely conform such 

statements to the changes proposed by 

the Loss Allocation Filing, as defined 

below. 

Fifth, this Amendment would clarify 

the notifications that NSCC would be 

required to make under the Proposed 

Rule 60 (Market Disruption and Force 

Majeure). 

Finally, this Amendment would make 

minor, technical and conforming 

revisions to correct typographical errors 

and to simplify descriptions. For 

example, such revisions would use 

lower case for terms that are not defined 

therein, and would use upper case for 

terms that are defined. The Amendment 

would also simplify certain descriptions 

by removing extraneous words and 

statements that are repetitive. These 

minor, technical revisions would not 

alter the substance of the proposal. 

Description of Proposed Changes 

NSCC is proposing to adopt the R&W 

Plan to be used by the Board and 

management of NSCC in the event 

NSCC encounters scenarios that could 

potentially prevent it from being able to 

provide its critical services as a going 

concern. The R&W Plan would identify 

(i) the recovery tools available to NSCC 

to address the risks of (a) uncovered 

losses or liquidity shortfalls resulting 

from the default of one or more 

Members, and (b) losses arising from 

non-default events, such as damage to 

its physical assets, a cyber-attack, or 

custody and investment losses, and (ii) 

the strategy for implementation of such 

tools. The R&W Plan would also 

establish the strategy and framework for 

the orderly wind-down of NSCC and the 

transfer of its business in the remote 

event the implementation of the 

available recovery tools does not 

successfully return NSCC to financial 

viability. 

As discussed in greater detail below, 

the R&W Plan would provide, among 

other matters, (i) an overview of the 

business of NSCC and its parent, The 

Depository Trust & Clearing Corporation 

(‘‘DTCC’’); (ii) an analysis of NSCC’s 

intercompany arrangements and critical 

links to other financial market 

infrastructures (‘‘FMIs’’); (iii) a 

description of NSCC’s services, and the 

criteria used to determine which 

services are considered critical; (iv) a 

description of the NSCC and DTCC 

governance structure; (v) a description 

of the governance around the overall 

recovery and wind-down program; (vi) a 

discussion of tools available to NSCC to 

mitigate credit/market and liquidity 

risks, including recovery indicators and 

triggers, and the governance around 

management of a stress event along a 

‘‘Crisis Continuum’’ timeline; (vii) a 

discussion of potential non-default 

losses and the resources available to 

NSCC to address such losses, including 

recovery triggers and tools to mitigate 

such losses; (viii) an analysis of the 

recovery tools’ characteristics, including 

how they are comprehensive, effective, 

and transparent, how the tools provide 

appropriate incentives to Members to, 

among other things, control and monitor 

the risks they may present to NSCC, and 

how NSCC seeks to minimize the 

negative consequences of executing its 

recovery tools; and (ix) the framework 

and approach for the orderly winddown and transfer of NSCC’s business, 

including an estimate of the time and 

costs to effect a recovery or orderly 

wind-down of NSCC. 

The R&W Plan would be structured as 

a roadmap, and would identify and 

describe the tools that NSCC may use to 

effect a recovery from the events and 

scenarios described therein. Certain 

recovery tools that would be identified 

in the R&W Plan are based in the Rules 

(including the Proposed Rules) and, as 

such, descriptions of those tools would 

include descriptions of, and reference 

to, the applicable Rules and any related 

internal policies and procedures. Other 

recovery tools that would be identified 

in the R&W Plan are based in 

contractual arrangements to which 

NSCC is a party, including, for example, 

existing committed or pre-arranged 

liquidity arrangements. Further, the 

R&W Plan would state that NSCC may 

develop further supporting internal 

guidelines and materials that may 

provide operationally for matters 

described in the Plan, and that such 

documents would be supplemental and 

subordinate to the Plan. 

Key factors considered in developing 

the R&W Plan and the types of tools 

available to NSCC were its governance 

structure and the nature of the markets 

within which NSCC operates. As a 

result of these considerations, many of 

the tools available to NSCC that would 

be described in the R&W Plan are 

NSCC’s existing, business-as-usual risk 

management and Member default 

management tools, which would 

continue to be applied in scenarios of 

increasing stress. In addition to these 

existing, business-as-usual tools, the 

R&W Plan would describe NSCC’s other 

principal recovery tools, which include, 

for example, (i) identifying, monitoring 

and managing general business risk and 

holding sufficient liquid net assets 

funded by equity (‘‘LNA’’) to cover 

potential general business losses 

pursuant to the Clearing Agency Policy 

on Capital Requirements (‘‘Capital 

Policy’’),10 (ii) maintaining the Clearing 

Agency Capital Replenishment Plan 

(‘‘Replenishment Plan’’) as a viable plan 

for the replenishment of capital should 

NSCC’s equity fall close to or below the 

amount being held pursuant to the 

Capital Policy,11 and (iii) the process for 

the allocation of losses among Members, 

as provided in Rule 4.12 The R&W Plan 


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anticipates the approval and implementation of 

those proposed changes to the Rules. 

13 DTCC operates on a shared services model with 

respect to NSCC and its other subsidiaries. Most 

corporate functions are established and managed on 

an enterprise-wide basis pursuant to intercompany 

agreements under which it is generally DTCC that 

provides a relevant service to a subsidiary, 

including NSCC. 14 17 CFR 240.17Ad–22(e)(3)(ii). 

15See Securities Exchange Act Release Nos. 

81266 (July 31, 2017), 82 FR 36484 (August 4, 2017) 

(SR–NSCC–2017–007, SR–OCC–2017–013); 81260 

(July 31, 2017), 82 FR 36476 (August 4, 2017) (SR– 

NSCC–2017–803, SR–OCC–2017–804); Procedure 

III (Trade Recording Service (Interface with 

Qualified Clearing Agencies)), supra note 7. 

16See Rule 61 (International Links), supra note 7. 

17See Rule 11 (CNS System) and Procedure VII 

(CNS Accounting Operation), supra note 7. 

would provide governance around the 

selection and implementation of the 

recovery tool or tools most relevant to 

mitigate a stress scenario and any 

applicable loss or liquidity shortfall. 

The development of the R&W Plan is 

facilitated by the Office of Recovery & 

Resolution Planning (‘‘R&R Team’’) of 

DTCC.13 The R&R Team reports to the 

DTCC Management Committee 

(‘‘Management Committee’’) and is 

responsible for maintaining the R&W 

Plan and for the development and 

ongoing maintenance of the overall 

recovery and wind-down planning 

process. The Board, or such committees 

as may be delegated authority by the 

Board from time to time pursuant to its 

charter, would review and approve the 

R&W Plan biennially, and would also 

review and approve any changes that 

are proposed to the R&W Plan outside 

of the biennial review. 

As discussed in greater detail below, 

the Proposed Rules would define the 

procedures that may be employed in the 

event of NSCC’s default and its winddown, and would provide for NSCC’s 

authority to take certain actions on the 

occurrence of a ‘‘Market Disruption 

Event,’’ as defined therein. 

Significantly, the Proposed Rules would 

provide Members and Limited Members 

with transparency and certainty with 

respect to these matters. The Proposed 

Rules would facilitate the 

implementation of the R&W Plan, 

particularly NSCC’s strategy for winding 

down and transferring its business, and 

would provide NSCC with the legal 

basis to implement those aspects of the 

R&W Plan. 

NSCC R&W Plan 

The R&W Plan is intended to be used 

by the Board and NSCC’s management 

in the event NSCC encounters scenarios 

that could potentially prevent it from 

being able to provide its critical services 

as a going concern. The R&W Plan 

would be structured to provide a 

roadmap, define the strategy, and 

identify the tools available to NSCC to 

either (i) recover in the event it 

experiences losses that exceed its 

prefunded resources (such strategies 

and tools referred to herein as the 

‘‘Recovery Plan’’) or (ii) wind-down its 

business in a manner designed to permit 

the continuation of its critical services 

in the event that such recovery efforts 

are not successful (such strategies and 

tools referred to herein as the ‘‘Winddown Plan’’). The description of the 

R&W Plan below is intended to 

highlight the purpose and expected 

effects of the material aspects of the 

R&W Plan, and to provide Members and 

Limited Members with appropriate 

transparency into these features. 

Business Overview, Critical Services, 

and Governance 

The introduction to the R&W Plan 

would identify the document’s purpose 

and its regulatory background, and 

would outline a summary of the Plan. 

The stated purpose of the R&W Plan is 

that it is to be used by the Board and 

NSCC management in the event NSCC 

encounters scenarios that could 

potentially prevent it from being able to 

provide its critical services as a going 

concern. The R&W Plan would be 

maintained by NSCC in compliance 

with Rule 17Ad–22(e)(3)(ii) under the 

Act 14 by providing plans for the 

recovery and orderly wind-down of 

NSCC. 

The R&W Plan would describe 

DTCC’s business profile, provide a 

summary of NSCC’s services, and 

identify the intercompany arrangements 

and links between NSCC and other 

entities, including other FMIs. This 

overview section would provide a 

context for the R&W Plan by describing 

NSCC’s business, organizational 

structure and critical links to other 

entities. By providing this context, this 

section would facilitate the analysis of 

the potential impact of utilizing the 

recovery tools set forth in later sections 

of the Recovery Plan, and the analysis 

of the factors that would be addressed 

in implementing the Wind-down Plan. 

DTCC is a user-owned and usergoverned holding company and is the 

parent company of NSCC and its 

affiliates, The Depository Trust 

Company (‘‘DTC’’) and Fixed Income 

Clearing Corporation (‘‘FICC’’, and, 

together with NSCC and DTC, the 

‘‘Clearing Agencies’’). The Plan would 

describe how corporate support services 

are provided to NSCC from DTCC and 

DTCC’s other subsidiaries through 

intercompany agreements under a 

shared services model. 

The Plan would provide a description 

of established links between NSCC and 

other FMIs, including The Options 

Clearing Corporation (‘‘OCC’’), CDS 

Clearing and Depository Services Inc. 

(‘‘CDS’’), and DTC. For example, the 

arrangement between NSCC and OCC 

governs the process by which OCC 

submits transactions to NSCC for 

settlement, and sets the time when the 

settlement obligations and the central 

counterparty trade guaranty shifts from 

OCC to NSCC with respect to these 

transactions.15 The arrangement with 

CDS enables participants of CDS to clear 

and settle OTC trades with U.S. brokerdealers through subaccounts maintained 

by CDS through its own membership 

with NSCC.16 The interface between 

DTC and NSCC permits transactions to 

flow between DTC’s system and NSCC’s 

Continuous Net Settlement (‘‘CNS’’) 

system in a collateralized 

environment.17 NSCC’s CNS relies on 

this interface with DTC for the bookentry movement of securities to settle 

transactions. This section of the Plan, 

identifying and briefly describing 

NSCC’s established links, would 

provide a mapping of critical 

connections and dependencies that may 

need to be relied on or otherwise 

addressed in connection with the 

implementation of either the Recovery 

Plan or the Wind-down Plan. 

The Plan would define the criteria for 

classifying certain of NSCC’s services as 

‘‘critical,’’ and would identify those 

critical services and the rationale for 

their classification. This section would 

provide an analysis of the potential 

systemic impact from a service 

disruption, and is important for 

evaluating how the recovery tools and 

the wind-down strategy would facilitate 

and provide for the continuation of 

NSCC’s critical services to the markets 

it serves. The criteria that would be 

used to identify an NSCC service or 

function as critical would include 

consideration as to (1) whether there is 

a lack of alternative providers or 

products; (2) whether failure of the 

service could impact NSCC’s ability to 

perform its central counterparty 

services; (3) whether failure of the 

service could impact NSCC’s ability to 

perform its netting services, and, as 

such, the availability of market 

liquidity; and (4) the service is 

interconnected with other participants 

and processes within the U.S. financial 

system, for example, with other FMIs, 

settlement banks, broker-dealers, and 

exchanges. The Plan would then list 

each of those services, functions or 

activities that NSCC has identified as 


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18See Rule 7 (Comparison and Trade Recording 

Operation) and Procedure II (Trade Comparison and 

Recording Service), supra note 7. 

19See Procedure IV (Special Representative 

Service), supra note 7. 

20See Rule 11 (CNS System) and Procedure VII 

(CNS Accounting Operation), supra note 7. 

21See Rule 8 (Balance Order and Foreign Security 

Systems) and Procedure V (Balance Order 

Accounting Operation), supra note 7. 

22See Rule 52 (Mutual Funds Services), supra 

note 7. 

23See Rule 12 (Settlement) and Procedure VIII 

(Money Settlement Service), supra note 7. 

24The charter of the Board Risk Committee is 

available at http://www.dtcc.com/∼/media/Files/ 

Downloads/legal/policy-and-compliance/DTCCBOD-Risk-Committee-Charter.pdf. 

25The Plan would state that these groups would 

be involved to address how to mitigate the financial 

impact of non-default losses, and in recommending 

mitigating actions, the Management Committee 

would consider information and recommendations 

from relevant subject matter experts based on the 

nature and circumstances of the non-default event. 

Any necessary operational response to these events, 

however, would be managed in accordance with 

applicable incident response/business continuity 

process; for example, processes established by the 

DTCC Technology Risk Management group would 

be followed in response to a cyber event. 

‘‘critical’’ based on the applicability of 

these four criteria. Such critical services 

would include, for example, trade 

capture and recording through the 

Universal Trade Capture system,18

services supporting Correspondent 

Clearing relationships,19 the CNS 

system,20 the Balance Order Netting 

system,21 Mutual Funds Services,22 and 

the settlement of money payments with 

respect to transactions processed by 

NSCC.23 The R&W Plan would also 

include a non-exhaustive list of NSCC 

services that are not deemed critical. 

The evaluation of which services 

provided by NSCC are deemed critical 

is important for purposes of determining 

how the R&W Plan would facilitate the 

continuity of those services. As 

discussed further below, while NSCC’s 

Wind-down Plan would provide for the 

transfer of all critical services to a 

transferee in the event NSCC’s winddown is implemented, it would 

anticipate that any non-critical services 

that are ancillary and beneficial to a 

critical service, or that otherwise have 

substantial user demand from the 

continuing membership, would also be 

transferred. 

The Plan would describe the 

governance structure of both DTCC and 

NSCC. This section of the Plan would 

identify the ownership and governance 

model of these entities at both the Board 

of Directors and management levels. 

The Plan would state that the stages of 

escalation required to manage recovery 

under the Recovery Plan or to invoke 

NSCC’s wind-down under the Winddown Plan would range from relevant 

business line managers up to the Board 

through NSCC’s governance structure. 

The Plan would then identify the parties 

responsible for certain activities under 

both the Recovery Plan and the Winddown Plan, and would describe their 

respective roles. The Plan would 

identify the Risk Committee of the 

Board (‘‘Board Risk Committee’’) as 

being responsible for oversight of risk 

management activities at NSCC, which 

include focusing on both oversight of 

risk management systems and processes 

designed to identify and manage various 

risks faced by NSCC, and, due to 

NSCC’s critical role in the markets in 

which it operates, oversight of NSCC’s 

efforts to mitigate systemic risks that 

could impact those markets and the 

broader financial system.24 The Plan 

would identify the DTCC Management 

Risk Committee (‘‘Management Risk 

Committee’’) as primarily responsible 

for general, day-to-day risk management 

through delegated authority from the 

Board Risk Committee. The Plan would 

state that the Management Risk 

Committee has delegated specific dayto-day risk management, including 

management of risks addressed through 

margining systems and related 

activities, to the DTCC Group Chief Risk 

Office (‘‘GCRO’’), which works with 

staff within the DTCC Financial Risk 

Management group. Finally, the Plan 

would describe the role of the 

Management Committee, which 

provides overall direction for all aspects 

of NSCC’s business, technology, and 

operations and the functional areas that 

support these activities. 

The Plan would describe the 

governance of recovery efforts in 

response to both default losses and nondefault losses under the Recovery Plan, 

identifying the groups responsible for 

those recovery efforts. Specifically, the 

Plan would state that the Management 

Risk Committee provides oversight of 

actions relating to the default of a 

Member, which would be reported and 

escalated to it through the GCRO, and 

the Management Committee provides 

oversight of actions relating to nondefault events that could result in a loss, 

which would be reported and escalated 

to it from the DTCC Chief Financial 

Officer (‘‘CFO’’) and the DTCC Treasury 

group that reports to the CFO, and from 

other relevant subject matter experts 

based on the nature and circumstances 

of the non-default event.25 More 

generally, the Plan would state that the 

type of loss and the nature and 

circumstances of the events that lead to 

the loss would dictate the components 

of governance to address that loss, 

including the escalation path to 

authorize those actions. As described 

further below, both the Recovery Plan 

and the Wind-down Plan would 

describe the governance of escalations, 

decisions, and actions under each of 

those plans. 

Finally, the Plan would describe the 

role of the R&R Team in managing the 

overall recovery and wind-down 

program and plans for each of the 

Clearing Agencies. 

NSCC Recovery Plan 

The Recovery Plan is intended to be 

a roadmap of those actions that NSCC 

may employ to monitor and, as needed, 

stabilize its financial condition. As each 

event that could lead to a financial loss 

could be unique in its circumstances, 

the Recovery Plan would not be 

prescriptive and would permit NSCC to 

maintain flexibility in its use of 

identified tools and in the sequence in 

which such tools are used, subject to 

any conditions in the Rules or the 

contractual arrangement on which such 

tool is based. NSCC’s Recovery Plan 

would consist of (1) a description of the 

risk management surveillance, tools, 

and governance that NSCC would 

employ across evolving stress scenarios 

that it may face as it transitions through 

a ‘‘Crisis Continuum,’’ described below; 

(2) a description of NSCC’s risk of losses 

that may result from non-default events, 

and the financial resources and recovery 

tools available to NSCC to manage those 

risks and any resulting losses; and (3) an 

evaluation of the characteristics of the 

recovery tools that may be used in 

response to either default losses or nondefault losses, as described in greater 

detail below. In all cases, NSCC would 

act in accordance with the Rules, within 

the governance structure described in 

the R&W Plan, and in accordance with 

applicable regulatory oversight to 

address each situation in order to best 

protect NSCC, Members, and the 

markets in which it operates. 

Managing Member Default Losses and 

Liquidity Needs Through the Crisis 

Continuum. The Recovery Plan would 

describe the risk management 

surveillance, tools, and governance that 

NSCC may employ across an increasing 

stress environment, which is referred to 

as the ‘‘Crisis Continuum.’’ This 

description would identify those tools 

that can be employed to mitigate losses, 

and mitigate or minimize liquidity 

needs, as the market environment 

becomes increasingly stressed. The 

phases of the Crisis Continuum would 

include (1) a stable market phase, (2) a 

stress market phase, (3) a phase 

commencing with NSCC’s decision to 

cease to act for a Member or Affiliated 

Family of Members (referred to in the 


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26The Plan would define an ‘‘Affiliated Family’’ 

of Members as a number of affiliated entities that 

are all Members of NSCC. 

27See Rule 46 (Restrictions on Access to 

Services), supra note 7. 

28 Id. 

29See Rule 4 (Clearing Fund) and Procedure XV 

(Clearing Fund Formula and Other Matters), supra 

note 7. Because NSCC does not maintain a guaranty 

fund separate and apart from the Clearing Fund it 

collects from Members, NSCC monitors its credit 

exposure to its Members by managing the market 

risks of each Member’s unsettled portfolio through 

the collection of the Clearing Fund. The aggregate 

of all Members’ Required Fund Deposits comprises 

the Clearing Fund that represents NSCC’s 

prefunded resources to address uncovered loss 

exposures, as provided for in proposed Rule 4. 

Therefore, NSCC’s market risk management strategy 

is designed to comply with Rule 17Ad–22(e)(4) 

under the Act, where these risks are referred to as 

‘‘credit risks.’’ See also 17 CFR 240.17Ad–22(e)(4). 

30NSCC’s liquidity risk management strategy, 

including the manner in which NSCC utilizes its 

liquidity tools, is described in the Clearing Agency 

Liquidity Risk Management Framework. See 

Securities Exchange Act Release Nos. 80489 (April 

19, 2017), 82 FR 19120 (April 25, 2017) (SR–DTC– 

2017–004, SR–NSCC–2017–005, SR–FICC–2017– 

008); 81194 (July 24, 2017), 82 FR 35241 (July 28, 

2017) (SR–DTC–2017–004, SR–NSCC–2017–005, 

SR–FICC–2017–008). 

31NSCC’s stress testing practices are described in 

the Clearing Agency Stress Testing Framework 

(Market Risk). See Securities Exchange Act Release 

Nos. 80485 (April 19, 2017), 82 FR 19131 (April 25, 

2017) (SR–DTC–2017–005, SR–FICC–2017–009, 

SR–NSCC–2017–006); 81192 (July 24, 2017), 82 FR 

35245 (July 28, 2017) (SR–DTC–2017–005, SR– 

FICC–2017–009, SR–NSCC–2017–006). 

32See supra note 30. 

33See Rule 18 (Procedures for When the 

Corporation Declines or Ceases to Act) and Rule 46 

(Restrictions on Access to Services), supra note 7. 

Plan as the ’’ Member default phase’’),26

and (4) a recovery phase. This section of 

the Recovery Plan would address 

conditions and circumstances relating to 

NSCC’s decision to cease to act for a 

Member pursuant to the Rules.27 In the 

Plan, ‘‘cease to act’’ and the events that 

may lead to such decision, are used 

within the context of Rule 46 of the 

Rules.28 Further, for ease of reference, 

the R&W Plan would, for purposes of 

the Plan, use the term ‘‘Member default’’ 

to refer to the event or events that 

precipitate NSCC ceasing to act for a 

Member or an Affiliated Family, would 

use the term ‘‘Defaulting Member’’ to 

refer to a Member for which NSCC has 

ceased to act, and would use the term 

‘‘Member Default Losses’’ to refer to 

losses that arise out of or relate to the 

Member default (including any losses 

that arise from liquidation of that 

Member’s portfolio), and to distinguish 

such losses from those that arise out of 

the business or other events not related 

to a Member default, which are 

separately addressed in the Plan. 

The Recovery Plan would provide 

context to its roadmap through this 

Crisis Continuum by describing NSCC’s 

ongoing management of credit, market 

and liquidity risk, and its existing 

process for measuring and reporting its 

risks as they align with established 

thresholds for its tolerance of those 

risks. The Recovery Plan would discuss 

the management of credit/market risk 

and liquidity exposures together, 

because the tools that address these 

risks can be deployed either separately 

or in a coordinated approach in order to 

address both exposures. NSCC manages 

these risk exposures collectively to limit 

their overall impact on NSCC and its 

membership. As part of its market risk 

management strategy, NSCC manages its 

credit exposure to Members by 

determining the appropriate Required 

Deposits to the Clearing Fund and 

monitoring its sufficiency, as provided 

for in the Rules.29 NSCC manages its 

liquidity risks with an objective of 

maintaining sufficient resources to be 

able to fulfill obligations that have been 

guaranteed by NSCC in the event of a 

Member default that presents the largest 

aggregate liquidity exposure to NSCC 

over the settlement cycle.30

The Recovery Plan would outline the 

metrics and indicators that NSCC has 

developed to evaluate a stress situation 

against established risk tolerance 

thresholds. Each risk mitigation tool 

identified in the Recovery Plan would 

include a description of the escalation 

thresholds that allow for effective and 

timely reporting to the appropriate 

internal management staff and 

committees, or to the Board. The 

Recovery Plan would make clear that 

these tools and escalation protocols 

would be calibrated across each phase 

of the Crisis Continuum. The Recovery 

Plan would also establish that NSCC 

would retain the flexibility to deploy 

such tools either separately or in a 

coordinated approach, and to use other 

alternatives to these actions and tools as 

necessitated by the circumstances of a 

particular Member default, in 

accordance with the Rules. Therefore, 

the Recovery Plan would both provide 

NSCC with a roadmap to follow within 

each phase of the Crisis Continuum, and 

would permit it to adjust its risk 

management measures to address the 

unique circumstances of each event. 

The Recovery Plan would describe the 

conditions that mark each phase of the 

Crisis Continuum, and would identify 

actions that NSCC could take as it 

transitions through each phase in order 

to both prevent losses from 

materializing through active risk 

management, and to restore the 

financial health of NSCC during a 

period of stress. 

The stable market phase of the Crisis 

Continuum would describe active risk 

management activities in the normal 

course of business. These activities 

would include (1) routine monitoring of 

margin adequacy through daily review 

of back testing and stress testing results 

that review the adequacy of NSCC’s 

margin calculations, and escalation of 

those results to internal and Board 

committees; 31 and (2) routine 

monitoring of liquidity adequacy 

through review of daily liquidity studies 

that measure sufficiency of available 

liquidity resources to meet cash 

settlement obligations of the Member 

that would generate the largest aggregate 

payment obligation.32

The Recovery Plan would describe 

some of the indicators of the stress 

market phase of the Crisis Continuum, 

which would include, for example, 

volatility in market prices of certain 

assets where there is increased 

uncertainty among market participants 

about the fundamental value of those 

assets. This phase would involve 

general market stresses, when no 

Member default would be imminent. 

Within the description of this phase, the 

Recovery Plan would provide that NSCC 

may take targeted, routine risk 

management measures as necessary and 

as permitted by the Rules. 

Within the Member default phase of 

the Crisis Continuum, the Recovery Plan 

would provide a roadmap for the 

existing procedures that NSCC would 

follow in the event of a Member default 

and any decision by NSCC to cease to 

act for that Member.33 The Recovery 

Plan would provide that the objectives 

of NSCC’s actions upon a Member or 

Affiliated Family default are to (1) 

minimize losses and market exposure of 

the affected Members and NSCC’s nonDefaulting Members; and (2), to the 

extent practicable, minimize 

disturbances to the affected markets. 

The Recovery Plan would describe 

tools, actions, and related governance 

for both market risk monitoring and 

liquidity risk monitoring through this 

phase. For example, in connection with 

managing its market risk during this 

phase, NSCC would, pursuant to the 

Rules, (1) monitor and assess the 

adequacy of Clearing Fund resources; 

(2), when necessary and appropriate 

pursuant to the Rules, assess and collect 

additional margin requirements; and (3) 

follow its operational procedures to 

liquidate the Defaulting Member’s 

portfolio. Management of liquidity risk 

through this phase would involve 

ongoing monitoring of the adequacy of 

NSCC’s liquidity resources, and the 

Recovery Plan would identify certain 


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34See supra note 12. The Loss Allocation Filing 

proposes to amend Rule 4 to define the amount 

NSCC would contribute to address a loss resulting 

from either a Member default or a non-default event 

as the ‘‘Corporate Contribution.’’ This amount 

would be 50 percent (50%) of the ‘‘General 

Business Risk Capital Requirement,’’ which is 

calculated pursuant to the Capital Policy and is an 

amount sufficient to cover potential general 

business losses so that NSCC can continue 

operations and services as a going concern if those 

losses materialize, in compliance with Rule 17Ad– 

22(e)(15) under the Act. See also supra note 10; 17 

CFR 240.17Ad–22(e)(15). 

35The Loss Allocation Filing proposes to amend 

Rule 4 to introduce the concept of an ‘‘Event 

Period’’ as the ten (10) Business Days beginning on 

(i) with respect to a Member default, the day on 

which NSCC notifies Members that it has ceased to 

act for a Member under the Rules, or (ii) with 

respect to a non-default loss, the day that NSCC 

notifies Members of the determination by the Board 

that there is a non-default loss event, as described 

in greater detail in that filing. The proposed Rule 

4 would define a ‘‘round’’ as a series of loss 

allocations relating to an Event Period, and would 

provide that the first Loss Allocation Notice in a 

first, second, or subsequent round shall expressly 

state that such notice reflects the beginning of a 

first, second, or subsequent round. The maximum 

allocable loss amount of a round is equal to the sum 

of the ‘‘Loss Allocation Caps’’ (as defined in the 

proposed Rule 4) of those Members included in the 

round. See supra note 12. 

36The 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. 

37As these matters are described in greater detail 

in the Loss Allocation Filing and in the proposed 

amendments to Rule 4, described therein, reference 

is made to that filing and the details are not 

repeated here. See supra note 12. 

38See Securities Exchange Act Release No. 80605 

(May 5, 2017), 82 FR 21850 (May 10, 2017) (SR– 

DTC–2017–802, SR–NSCC–2017–802). 

actions NSCC may deploy as it deems 

necessary to mitigate a potential 

liquidity shortfall, which would 

include, for example, adjusting its 

strategy for closing out the Defaulting 

Member’s portfolio or seeking 

additional liquidity resources. The 

Recovery Plan would state that, 

throughout this phase, relevant 

information would be escalated and 

reported to both internal management 

committees and the Board Risk 

Committee. 

The Recovery Plan would also 

identify financial resources available to 

NSCC, pursuant to the Rules, to address 

losses arising out of a Member default. 

Specifically, Rule 4, as proposed to be 

amended by the Loss Allocation Filing, 

would provide that losses remaining 

after application of the Defaulting 

Member’s resources be satisfied first by 

applying a ‘‘Corporate Contribution,’’ 

and then, if necessary, by allocating 

remaining losses among the 

membership in accordance with such 

Rule 4.34

In order to provide for an effective 

and timely recovery, the Recovery Plan 

would describe the period of time that 

would occur near the end of the 

Member default phase, during which 

NSCC may experience stress events or 

observe early warning indicators that 

allow it to evaluate its options and 

prepare for the recovery phase (referred 

to in the Plan as the ‘‘Recovery 

Corridor’’). The Recovery Plan would 

then describe the recovery phase of the 

Crisis Continuum, which would begin 

on the date that NSCC issues the first 

Loss Allocation Notice of the second 

loss allocation round with respect to a 

given ‘‘Event Period.’’ 35 The recovery 

phase would describe actions that NSCC 

may take to avoid entering into a wind 

down of its business. 

NSCC expects that significant 

deterioration of liquidity resources 

would cause it to enter the Recovery 

Corridor. As such, the Plan would 

describe the actions NSCC may take 

aimed at replenishing those resources. 

Recovery Corridor indicators may 

include, for example, a rapid and 

material change in market prices or 

substantial intraday activity volume by 

the Member that subsequently defaults, 

neither of which are mitigated by 

intraday margin calls, or subsequent 

defaults by other Members or Affiliated 

Families during a compressed time 

period. Throughout the Recovery 

Corridor, NSCC would monitor the 

adequacy of its resources and the 

expected timing of replenishment of 

those resources, and would do so 

through the monitoring of certain 

corridor indicator metrics. 

The majority of the corridor 

indicators, as identified in the Recovery 

Plan, relate directly to conditions that 

may require NSCC to adjust its strategy 

for hedging and liquidating a Defaulting 

Member’s portfolio, and any such 

changes would include an assessment of 

the status of the corridor indicators. 

Corridor indicators would include, for 

example, effectiveness and speed of 

NSCC’s efforts to close out the portfolio 

of the Defaulting Member, and an 

impediment to the availability of its 

financial resources. For each corridor 

indicator, the Recovery Plan would 

identify (1) measures of the indicator, 

(2) evaluations of the status of the 

indicator, (3) metrics for determining 

the status of the deterioration or 

improvement of the indicator, and (4) 

‘‘Corridor Actions,’’ which are steps that 

may be taken to improve the status of 

the indicator,36 as well as management 

escalations required to authorize those 

steps. Because NSCC has never 

experienced the default of multiple 

Members, it has not, historically, 

measured the deterioration or 

improvements metrics of the corridor 

indicators. As such, these metrics were 

chosen based on the business judgment 

of NSCC management. 

The Recovery Plan would also 

describe the reporting and escalation of 

the status of the corridor indicators 

throughout the Recovery Corridor. 

Significant deterioration of a corridor 

indicator, as measured by the metrics 

set out in the Recovery Plan, would be 

escalated to the Board. NSCC 

management would review the corridor 

indicators and the related metrics at 

least annually, and would modify these 

metrics as necessary in light of 

observations from simulations of 

Member defaults and other analyses. 

Any proposed modifications would be 

reviewed by the Management Risk 

Committee and the Board Risk 

Committee. The Recovery Plan would 

estimate that NSCC may remain in the 

Recovery Corridor between one day and 

two weeks. This estimate is based on 

historical data observed in past Member 

defaults, the results of simulations of 

Member defaults, and periodic liquidity 

analyses conducted by NSCC. The 

actual length of a Recovery Corridor 

would vary based on actual market 

conditions observed at the time, and 

NSCC would expect the Recovery 

Corridor to be shorter in market 

conditions of increased stress. 

The Recovery Plan would outline 

steps by which NSCC may allocate its 

losses, which would occur when and in 

the order provided in Rule 4, as 

amended.37 The Recovery Plan would 

also identify tools that may be used to 

address foreseeable shortfalls of NSCC’s 

liquidity resources following a Member 

default, and would provide that these 

tools may be used as appropriate during 

the Crisis Continuum to address 

liquidity shortfalls if they arise. The 

goal in managing NSCC’s qualified 

liquidity resources is to maximize 

resource availability in an evolving 

stress situation, to maintain flexibility 

in the order and use of sources of 

liquidity, and to repay any third party 

lenders of liquidity in a timely manner. 

These liquidity tools include, for 

example, NSCC’s committed 364-day 

credit facility,38 and the issuance and 

private placement of additional shortterm promissory notes (‘‘commercial 

paper’’) and extendible notes, the cash 

proceeds of which provide NSCC with 


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39See Securities Exchange Act Release No. 75730 

(August 19, 2015), 80 FR 51638 (August 25, 2015) 

(SR–NSCC–2015–802). 

40This ‘‘three lines of defense’’ approach to risk 

management includes (1) a first line of defense 

comprised of the various business lines and 

functional units that support the products and 

services offered by NSCC; (2) a second line of 

defense comprised of control functions that support 

NSCC, including the risk management, legal and 

compliance areas; and (3) a third line of defense, 

which is performed by an internal audit group. The 

Clearing Agency Risk Management Framework 

includes a description of this ‘‘three lines of 

defense’’ approach to risk management, and 

addresses how NSCC comprehensively manages 

various risks, including operational, general 

business, investment, custody, and other risks that 

arise in or are borne by it. See Securities Exchange 

Act Release No. 81635 (September 15, 2017), 82 FR 

44224 (September 21, 2017) (SR–DTC–2017–013, 

SR–FICC–2017–016, SR–NSCC–2017–012). The 

Clearing Agency Operational Risk Management 

Framework describes the manner in which NSCC 

manages operational risks, as defined therein. See 

Securities Exchange Act Release No. 81745 

(September 28, 2017), 82 FR 46332 (October 4, 

2017) (SR–DTC–2017–014, SR–FICC–2017–017, 

SR–NSCC–2017–013). 

41See supra note 34. 

42See supra note 34. 

43See supra note 12. 

44See supra note 10. 

45See supra note 12. 

prefunded liquidity.39 Additional 

voluntary or uncommitted tools to 

address potential liquidity shortfalls, for 

example uncommitted bank loans, 

which may supplement NSCC’s other 

liquid resources described herein, 

would also be identified in the Recovery 

Plan. The Recovery Plan would state 

that, due to the extreme nature of a 

stress event that would cause NSCC to 

consider the use of these liquidity tools, 

the availability and capacity of these 

liquidity tools, and the willingness of 

counterparties to lend, cannot be 

accurately predicted and are dependent 

on the circumstances of the applicable 

stress period, including market price 

volatility, actual or perceived 

disruptions in financial markets, the 

costs to NSCC of utilizing these tools, 

and any potential impact on NSCC’s 

credit rating. 

As stated above, the Recovery Plan 

would state that NSCC will have entered 

the recovery phase on the date that it 

issues the first Loss Allocation Notice of 

the second loss allocation round with 

respect to a given Event Period. The 

Recovery Plan would provide that, 

during the recovery phase, NSCC would 

continue and, as needed, enhance, the 

monitoring and remedial actions already 

described in connection with previous 

phases of the Crisis Continuum, and 

would remain in the recovery phase 

until its financial resources are expected 

to be or are fully replenished, or until 

the Wind-down Plan is triggered, as 

described below. 

The Recovery Plan would describe 

governance for the actions and tools that 

may be employed within each phase of 

the Crisis Continuum, which would be 

dictated by the facts and circumstances 

applicable to the situation being 

addressed. Such facts and 

circumstances would be measured by 

the various indicators and metrics 

applicable to that phase of the Crisis 

Continuum, and would follow the 

relevant escalation protocols that would 

be described in the Recovery Plan. The 

Recovery Plan would also describe the 

governance procedures around a 

decision to cease to act for a Member, 

pursuant to the Rules, and around the 

management and oversight of the 

subsequent liquidation of the Defaulting 

Member’s portfolio. The Recovery Plan 

would state that, overall, NSCC would 

retain flexibility in accordance with the 

Rules, its governance structure, and its 

regulatory oversight, to address a 

particular situation in order to best 

protect NSCC and the Members, and to 

meet the primary objectives, throughout 

the Crisis Continuum, of minimizing 

losses and, where consistent and 

practicable, minimizing disturbance to 

affected markets. 

Non-Default Losses. The Recovery 

Plan would outline how NSCC may 

address losses that result from events 

other than a Member default. While 

these matters are addressed in greater 

detail in other documents, this section 

of the Plan would provide a roadmap to 

those documents and an outline for 

NSCC’s approach to monitoring and 

managing losses that could result from 

a non-default event. The Plan would 

first identify some of the risks NSCC 

faces that could lead to these losses, 

which include, for example, the 

business and profit/loss risks of 

unexpected declines in revenue or 

growth of expenses; the operational 

risks of disruptions to systems or 

processes that could lead to large losses, 

including those resulting from, for 

example, a cyber-attack; and custody or 

investment risks that could lead to 

financial losses. The Recovery Plan 

would describe NSCC’s overall strategy 

for the management of these risks, 

which includes a ‘‘three lines of 

defense’’ approach to risk management 

that allows for comprehensive 

management of risk across the 

organization.40 The Recovery Plan 

would also describe NSCC’s approach to 

financial risk and capital management. 

The Plan would identify key aspects of 

this approach, including, for example, 

an annual budget process, business line 

performance reviews with management, 

and regular review of capital 

requirements against LNA. These risk 

management strategies are collectively 

intended to allow NSCC to effectively 

identify, monitor, and manage risks of 

non-default losses. 

The Plan would identify the two 

categories of financial resources NSCC 

maintains to cover losses and expenses 

arising from non-default risks or events 

as (1) LNA, maintained, monitored, and 

managed pursuant to the Capital Policy, 

which include (a) amounts held in 

satisfaction of the General Business Risk 

Capital Requirement,41 (b) the Corporate 

Contribution,42 and (c) other amounts 

held in excess of NSCC’s capital 

requirements pursuant to the Capital 

Policy; and (2) resources available 

pursuant to the loss allocation 

provisions of Rule 4.43

The Plan would address the process 

by which the CFO and the DTCC 

Treasury group would determine which 

available LNA resources are most 

appropriate to cover a loss that is caused 

by a non-default event. This 

determination involves an evaluation of 

a number of factors, including the 

current and expected size of the loss, 

the expected time horizon over when 

the loss or additional expenses would 

materialize, the current and projected 

available LNA, and the likelihood LNA 

could be successfully replenished 

pursuant to the Replenishment Plan, if 

triggered.44 Finally the Plan would 

discuss how NSCC would apply its 

resources to address losses resulting 

from a non-default event, including the 

order of resources it would apply if the 

loss or liability exceeds NSCC’s excess 

LNA amounts, or is large relative 

thereto, and the Board has declared the 

event a ‘‘Declared Non-Default Loss 

Event’’ pursuant to Rule 4.45

The Plan would also describe 

proposed Rule 60 (Market Disruption 

and Force Majeure), which NSCC is 

proposing to adopt in the Rules. This 

Proposed Rule would provide 

transparency around how NSCC would 

address extraordinary events that may 

occur outside its control. Specifically, 

the Proposed Rule would define a 

‘‘Market Disruption Event’’ and the 

governance around a determination that 

such an event has occurred. The 

Proposed Rule would also describe 

NSCC’s authority to take actions during 

the pendency of a Market Disruption 

Event that it deems appropriate to 

address such an event and facilitate the 

continuation of its services, if 

practicable, as described in greater 

detail below. 


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46Standards for Covered Clearing Agencies, 

Securities Exchange Act Release No. 78961 

(September 28, 2016), 81 FR 70786 (October 13, 

2016) (S7–03–14). 

47 11 U.S.C. 1101 et seq. 

48The Wind-down Plan would state that, given 

NSCC’s position as a user-governed financial 

market utility, it is possible that Members might 

voluntarily elect to provide additional support 

during the recovery phase leading up to a potential 

trigger of the Wind-down Plan, but would also 

make clear that NSCC cannot predict the 

willingness of Members to do so. 

49See 11 U.S.C. 1101 et seq. 

50See id. at 363. 

The Plan would describe the 

interaction between the Proposed Rule 

and NSCC’s existing processes and 

procedures addressing business 

continuity management and disaster 

recovery (generally, the ‘‘BCM/DR 

procedures’’), making clear that the 

Proposed Rule is designed to support 

those BCM/DR procedures and to 

address circumstances that may be 

exogenous to NSCC and not necessarily 

addressed by the BCM/DR procedures. 

Finally, the Plan would describe that, 

because the operation of the Proposed 

Rule is specific to each applicable 

Market Disruption Event, the Proposed 

Rule does not define a time limit on its 

application. However, the Plan would 

note that actions authorized by the 

Proposed Rule would be limited to the 

pendency of the applicable Market 

Disruption Event, as made clear in the 

Proposed Rule. Overall, the Proposed 

Rule is designed to mitigate risks caused 

by Market Disruption Events and, 

thereby, minimize the risk of financial 

loss that may result from such events. 

Recovery Tool Characteristics. The 

Recovery Plan would describe NSCC’s 

evaluation of the tools identified within 

the Recovery Plan, and its rationale for 

concluding that such tools are 

comprehensive, effective, and 

transparent, and that such tools provide 

appropriate incentives to Members and 

minimize negative impact on Members 

and the financial system, in compliance 

with guidance published by the 

Commission in connection with the 

adoption of Rule 17Ad–22(e)(3)(ii) 

under the Act.46 NSCC’s analysis and 

the conclusions set forth in this section 

of the Recovery Plan are described in 

greater detail in Item 3(b) of this filing, 

below. 

NSCC Wind-Down Plan 

The Wind-down Plan would provide 

the framework and strategy for the 

orderly wind-down of NSCC if the use 

of the recovery tools described in the 

Recovery Plan do not successfully 

return NSCC to financial viability. 

While NSCC believes that, given the 

comprehensive nature of the recovery 

tools, such event is extremely unlikely, 

as described in greater detail below, 

NSCC is proposing a wind-down 

strategy that provides for (1) the transfer 

of NSCC’s business, assets and 

membership to another legal entity, (2) 

such transfer being effected in 

connection with proceedings under 

Chapter 11 of the U.S. Federal 

Bankruptcy Code,47 and (3) after 

effectuating this transfer, NSCC 

liquidating any remaining assets in an 

orderly manner in bankruptcy 

proceedings. NSCC believes that the 

proposed transfer approach to a winddown would meet its objectives of (1) 

assuring that NSCC’s critical services 

will be available to the market as long 

as there are Members in good standing, 

and (2) minimizing disruption to the 

operations of Members and financial 

markets generally that might be caused 

by NSCC’s failure. 

In describing the transfer approach to 

NSCC’s Wind-down Plan, the Plan 

would identify the factors that NSCC 

considered in developing this approach, 

including the fact that NSCC does not 

own material assets that are unrelated to 

its clearance and settlement activities. 

As such, a business reorganization or 

‘‘bail-in’’ of debt approach would be 

unlikely to mitigate significant losses. 

Additionally, NSCC’s approach was 

developed in consideration of its critical 

and unique position in the U.S. markets, 

which precludes any approach that 

would cause NSCC’s critical services to 

no longer be available. 

First, the Wind-down Plan would 

describe the potential scenarios that 

could lead to the wind-down of NSCC, 

and the likelihood of such scenarios. 

The Wind-down Plan would identify 

the time period leading up to a decision 

to wind-down NSCC as the ‘‘Runway 

Period.’’ This period would follow the 

implementation of any recovery tools, as 

it may take a period of time, depending 

on the severity of the market stress at 

that time, for these tools to be effective 

or for NSCC to realize a loss sufficient 

to cause it to be unable to effectuate 

settlements and repay its obligations.48

The Wind-down Plan would identify 

some of the indicators that it has 

entered this Runway Period, which 

would include, for example, successive 

Member defaults, significant Member 

retirements thereafter, and NSCC’s 

inability to replenish its financial 

resources following the liquidation of 

the portfolio of the Defaulting 

Member(s). 

The trigger for implementing the 

Wind-down Plan would be a 

determination by the Board that 

recovery efforts have not been, or are 

unlikely to be, successful in returning 

NSCC to viability as a going concern. As 

described in the Plan, NSCC believes 

this is an appropriate trigger because it 

is both broad and flexible enough to 

cover a variety of scenarios, and would 

align incentives of NSCC and the 

Members to avoid actions that might 

undermine NSCC’s recovery efforts. 

Additionally, this approach takes into 

account the characteristics of NSCC’s 

recovery tools and enables the Board to 

consider (1) the presence of indicators 

of a successful or unsuccessful recovery, 

and (2) potential for knock-on effects of 

continued iterative application of 

NSCC’s recovery tools. 

The Wind-down Plan would describe 

the general objectives of the transfer 

strategy, and would address 

assumptions regarding the transfer of 

NSCC’s critical services, business, assets 

and membership, and the assignment of 

NSCC’s links with other FMIs, to 

another legal entity that is legally, 

financially, and operationally able to 

provide NSCC’s critical services to 

entities that wish to continue their 

membership following the transfer 

(‘‘Transferee’’). The Wind-down Plan 

would provide that the Transferee 

would be either (1) a third party legal 

entity, which may be an existing or 

newly established legal entity or a 

bridge entity formed to operate the 

business on an interim basis to enable 

the business to be transferred 

subsequently (‘‘Third Party 

Transferee’’); or (2) an existing, debt-free 

failover legal entity established ex-ante 

by DTCC (‘‘Failover Transferee’’) to be 

used as an alternative Transferee in the 

event that no viable or preferable Third 

Party Transferee timely commits to 

acquire NSCC’s business. NSCC would 

seek to identify the proposed 

Transferee, and negotiate and enter into 

transfer arrangements during the 

Runway Period and prior to making any 

filings under Chapter 11 of the U.S. 

Federal Bankruptcy Code.49 As stated 

above, the Wind-down Plan would 

anticipate that the transfer to the 

Transferee be effected in connection 

with proceedings under Chapter 11 of 

the U.S. Federal Bankruptcy Code, and 

pursuant to a bankruptcy court order 

under Section 363 of the Bankruptcy 

Code, such that the transfer would be 

free and clear of claims against, and 

interests in, NSCC, except to the extent 

expressly provided in the court’s 

order.50

In order to effect a timely transfer of 

its services and minimize the market 

and operational disruption of such 

transfer, NSCC would expect to transfer 


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51The proposed transfer arrangements outlined in 

the Wind-down Plan do not contemplate the 

transfer of any credit or funding agreements, which 

are generally not assignable by NSCC. However, to 

the extent the Transferee adopts rules substantially 

identical to those NSCC has in effect prior to the 

transfer, it would have the benefit of any rulesbased liquidity funding. The Wind-down Plan 

contemplates that no Clearing Fund would be 

transferred to the Transferee, as it is not held in a 

bankruptcy remote manner and it is the primary 

prefunded liquidity resource to be accessed in the 

recovery phase. 

52See supra note 10. 

53See supra note 10. 

all of its critical services and any noncritical services that are ancillary and 

beneficial to a critical service, or that 

otherwise have substantial user demand 

from the continuing membership. 

Following the transfer, the Wind-down 

Plan would anticipate that the 

Transferee and its continuing 

membership would determine whether 

to continue to provide any transferred 

non-critical service on an ongoing basis, 

or terminate the non-critical service 

following some transition period. 

NSCC’s Wind-down Plan would 

anticipate that the Transferee would 

enter into a transition services 

agreement with DTCC so that DTCC 

would continue to provide the shared 

services it currently provides to NSCC, 

including staffing, infrastructure and 

operational support. The Wind-down 

Plan would also anticipate the 

assignment of NSCC’s link 

arrangements, including those with 

DTC, CDS and OCC, described above, to 

the Transferee.51 The Wind-down Plan 

would provide that Members’ open 

positions existing prior to the effective 

time of the transfer would be addressed 

by the provisions of the proposed Winddown Rule and Corporation Default 

Rule, as defined and described below, 

and that the Transferee would not 

acquire any pending or open 

transactions with the transfer of the 

business. The Wind-down Plan would 

anticipate that the Transferee would 

accept transactions for processing with 

a trade date from and after the effective 

time of the transfer. 

The Wind-down Plan would provide 

that, following the effectiveness of the 

transfer to the Transferee, the winddown of NSCC would involve 

addressing any residual claims against 

NSCC through the bankruptcy process 

and liquidating the legal entity. As such, 

and as stated above, the Wind-down 

Plan does not contemplate NSCC 

continuing to provide services in any 

capacity following the transfer time, and 

any services not transferred would be 

terminated. 

The Wind-down Plan would also 

identify the key dependencies for the 

effectiveness of the transfer, which 

include regulatory approvals that would 

permit the Transferee to be legally 

qualified to provide the transferred 

services from and after the transfer, and 

approval by the applicable bankruptcy 

court of, among other things, the 

proposed sale, assignments, and 

transfers to the Transferee. 

The Wind-down Plan would address 

governance matters related to the 

execution of the transfer of NSCC’s 

business and its wind-down. The Winddown Plan would address the duties of 

the Board to execute the wind-down of 

NSCC in conformity with (1) the Rules, 

(2) the Board’s fiduciary duties, which 

mandate that it exercise reasonable 

business judgment in performing these 

duties, and (3) NSCC’s regulatory 

obligations under the Act as a registered 

clearing agency. The Wind-down Plan 

would also identify certain factors the 

Board may consider in making these 

decisions, which would include, for 

example, whether NSCC could safely 

stabilize the business and protect its 

value without seeking bankruptcy 

protection, and NSCC’s ability to 

continue to meet its regulatory 

requirements. 

The Wind-down Plan would describe 

(1) actions NSCC or DTCC may take to 

prepare for wind-down in the period 

before NSCC experiences any financial 

distress, (2) actions NSCC would take 

both during the recovery phase and the 

Runway Period to prepare for the 

execution of the Wind-down Plan, and 

(3) actions NSCC would take upon 

commencement of bankruptcy 

proceedings to effectuate the Winddown Plan. 

Finally, the Wind-down Plan would 

include an analysis of the estimated 

time and costs to effectuate the plan, 

and would provide that this estimate be 

reviewed and approved by the Board 

annually. In order to estimate the length 

of time it might take to achieve a 

recovery or orderly wind-down of 

NSCC’s critical operations, as 

contemplated by the R&W Plan, the 

Wind-down Plan would include an 

analysis of the possible sequencing and 

length of time it might take to complete 

an orderly wind-down and transfer of 

critical operations, as described in 

earlier sections of the R&W Plan. The 

Wind-down Plan would also include in 

this analysis consideration of other 

factors, including the time it might take 

to complete any further attempts at 

recovery under the Recovery Plan. The 

Wind-down Plan would then multiply 

this estimated length of time by NSCC’s 

average monthly operating expenses, 

including adjustments to account for 

changes to NSCC’s profit and expense 

profile during these circumstances, over 

the previous twelve months to 

determine the amount of LNA that it 

should hold to achieve a recovery or 

orderly wind-down of NSCC’s critical 

operations. The estimated wind-down 

costs would constitute the ‘‘Recovery/ 

Wind-down Capital Requirement’’ 

under the Capital Policy.52 Under that 

policy, the General Business Risk 

Capital Requirement is calculated as the 

greatest of three estimated amounts, one 

of which is this Recovery/Wind-down 

Capital Requirement.53

The R&W Plan is designed as a 

roadmap, and the types of actions that 

may be taken both leading up to and in 

connection with implementation of the 

Wind-down Plan would be primarily 

addressed in other supporting 

documentation referred to therein. 

The Wind-down Plan would address 

proposed Rule 41 (Corporation Default) 

and proposed Rule 42 (Wind-down of 

the Corporation), which would be 

adopted to facilitate the implementation 

of the Wind-down Plan, and are 

discussed below. 

Proposed Rules 

In connection with the adoption of 

the R&W Plan, NSCC is proposing to 

adopt the Proposed Rules, each 

described below. The Proposed Rules 

would facilitate the execution of the 

R&W Plan and would provide Members 

and Limited Members with 

transparency as to critical aspects of the 

Plan, particularly as they relate to the 

rights and responsibilities of both NSCC 

and Members. The Proposed Rules also 

provide a legal basis to these aspects of 

the Plan. 

Rule 41 (Corporation Default) 

The proposed Rule 41 (‘‘Corporation 

Default Rule’’) would provide a 

mechanism for the termination, 

valuation and netting of unsettled, 

guaranteed CNS transactions in the 

event NSCC is unable to perform its 

obligations or otherwise suffers a 

defined event of default, such as 

entering insolvency proceedings. The 

proposed Corporation Default Rule 

would provide Members with 

transparency and certainty regarding 

what would happen if NSCC were to fail 

(defined in the proposed Rule as a 

‘‘Corporation Default’’). 

The proposed rule would define the 

events that would constitute a 

Corporation Default, which would 

generally include (1) the failure of NSCC 

to make any undisputed payment or 

delivery to a Member if such failure is 

not remedied within seven days after 

notice of such failure is given to NSCC; 


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54 12 U.S.C. 5381–5394. 

55 12 U.S.C. 1811 et seq. 

(2) NSCC is dissolved; (3) NSCC 

institutes a proceeding seeking a 

judgment of insolvency or bankruptcy, 

or a proceeding is instituted against it 

seeking a judgment of bankruptcy or 

insolvency and such judgment is 

entered; or (4) NSCC seeks or becomes 

subject to the appointment of a receiver, 

trustee or similar official pursuant to the 

federal securities laws or Title II of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act 54 for it or for 

all or substantially all of its assets. 

Upon a Corporation Default, the 

proposed Corporation Default Rule 

would provide that all unsettled, 

guaranteed CNS transactions would be 

terminated and, no later than forty-five 

days from the date on which the event 

that constitutes a Corporation Default 

occurred (or ‘‘Default Date’’), the Board 

would determine a single net amount 

owed by or to each Member with respect 

to such transactions pursuant to the 

valuation procedures set forth in the 

Proposed Rule. Essentially, for each 

affected position in a CNS Security, the 

‘‘CNS Market Value’’ would be 

determined by using the Current Market 

Price for that security as determined in 

the CNS System as of the close of 

business on the next Business Day 

following the Default Date. NSCC would 

determine a ‘‘Net Contract Value’’ for 

each Member’s net unsettled long or 

short position in a CNS Security by 

netting the Member’s (i) contract price 

for such net position that, as of the 

Default Date, has not yet passed the 

Settlement Date, and (ii) the Current 

Market Price in the CNS System on the 

Default Date for its fail positions. To 

determine each Member’s ‘‘CNS Closeout Value,’’ (i) the Net Contract Value 

for each CUSIP would be subtracted 

from the CNS Market Value for such 

CUSIP, and (ii) the resulting difference 

for all CUSIPS in which the Member 

had a net long or short position would 

be summed, and would be netted and 

offset against any other amounts that 

may be due to or owing from the 

Member under the Rules. The proposed 

Corporation Default Rule would provide 

for notification to each Member of its 

CNS Close-out Value, and would also 

address interpretation of the Rules in 

relation to certain terms that are defined 

in the Federal Deposit Insurance 

Corporation Improvement Act of 1991 

(‘‘FDICIA’’).55

NSCC believes this valuation 

approach, which is comparable to the 

approach adopted by other central 

counterparties, is appropriate for NSCC 

given the market in which NSCC 

operates and the volumes of 

transactions it processes in CNS, 

because it would provide for a common, 

clear and transparent valuation 

methodology and price per CUSIP 

applicable to all affected Members. 

Rule 42 (Wind-Down of the 

Corporation) 

The proposed Rule 42 (‘‘Wind-down 

Rule’’) would be adopted to facilitate 

the execution of the Wind-down Plan. 

The Wind-down Rule would include a 

proposed set of defined terms that 

would be applicable only to the 

provisions of this Proposed Rule. The 

Wind-down Rule would make clear that 

a wind-down of NSCC’s business would 

occur (1) after a decision is made by the 

Board, and (2) in connection with the 

transfer of NSCC’s services to a 

Transferee, as described therein. 

Generally, the proposed Wind-down 

Rule is designed to create clear 

mechanisms for the transfer of Eligible 

Members, Eligible Limited Members, 

and Settling Banks (as these terms 

would be defined in the Wind-down 

Rule), and NSCC’s business, in order to 

provide for continued access to critical 

services and to minimize disruption to 

the markets in the event the Wind-down 

Plan is initiated. 

Wind-down Trigger. First, the 

Proposed Rule would make clear that 

the Board is responsible for initiating 

the Wind-down Plan, and would 

identify the criteria the Board would 

consider when making this 

determination. As provided for in the 

Wind-down Plan and in the proposed 

Wind-down Rule, the Board would 

initiate the Plan if, in the exercise of its 

business judgment and subject to its 

fiduciary duties, it has determined that 

the execution of the Recovery Plan has 

not or is not likely to restore NSCC to 

viability as a going concern, and the 

implementation of the Wind-down Plan, 

including the transfer of NSCC’s 

business, is in the best interests of 

NSCC, Members and Limited Members, 

its shareholders and creditors, and the 

U.S. financial markets. 

Identification of Critical Services; 

Designation of Dates and Times for 

Specific Actions. The Proposed Rule 

would provide that, upon making a 

determination to initiate the Winddown Plan, the Board would identify 

the critical and non-critical services that 

would be transferred to the Transferee at 

the Transfer Time (as defined below and 

in the Proposed Rule), as well as any 

non-critical services that would not be 

transferred to the Transferee. The 

proposed Wind-down Rule would 

establish that any services transferred to 

the Transferee will only be provided by 

the Transferee as of the Transfer Time, 

and that any non-critical services that 

are not transferred to the Transferee 

would be terminated at the Transfer 

Time. The Proposed Rule would also 

provide that the Board would establish 

(1) an effective time for the transfer of 

NSCC’s business to a Transferee 

(‘‘Transfer Time’’), (2) the last day that 

transactions may be submitted to NSCC 

for processing (‘‘Last Transaction 

Acceptance Date’’), and (3) the last day 

that transactions submitted to NSCC 

will be settled (‘‘Last Settlement Date’’). 

Treatment of Pending Transactions. 

The Wind-down Rule would also 

authorize the Board to provide for the 

settlement of pending transactions prior 

to the Transfer Time, so long as the 

Corporation Default Rule has not been 

triggered. For example, the Proposed 

Rule would provide the Board with the 

ability to, if it deems practicable, based 

on NSCC’s resources at that time, allow 

pending transactions to complete prior 

to the transfer of NSCC’s business to a 

Transferee. The Board would also have 

the ability to allow Members to only 

submit trades that would effectively 

offset pending positions or provide that 

transactions will be processed in 

accordance with special or exception 

processing procedures. The Proposed 

Rule is designed to enable these actions 

in order to facilitate settlement of 

pending transactions and reduce claims 

against NSCC that would have to be 

satisfied after the transfer has been 

effected. If none of these actions are 

deemed practicable (or if the 

Corporation Default Rule has been 

triggered), then the provisions of the 

proposed Corporation Default Rule 

would apply to the treatment of open, 

pending transactions. 

The Proposed Rule would make clear, 

however, that NSCC would not accept 

any transactions for processing after the 

Last Transaction Acceptance Date or 

which are designated to settle after the 

Last Settlement Date. Any transactions 

to be processed and/or settled after the 

Transfer Time would be required to be 

submitted to the Transferee, and would 

not be NSCC’s responsibility. 

Notice Provisions. The proposed 

Wind-down Rule would provide that, 

upon a decision to implement the Winddown Plan, NSCC would provide 

Members and Limited Members and its 

regulators with a notice that includes 

material information relating to the 

Wind-down Plan and the anticipated 

transfer of NSCC’s membership and 

business, including, for example, (1) a 

brief statement of the reasons for the 

decision to implement the Wind-down 

Plan; (2) identification of the Transferee 

and information regarding the 


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56The Members and Limited Members whose 

membership is transferred to the Transferee 

pursuant to the proposed Wind-down Rule would 

submit transactions to be processed and settled 

subject to the rules and procedures of the 

Transferee, including any applicable margin 

charges or other financial obligations. 

57Nothing in the proposed Wind-down Rule 

would seek to prevent a Member, Limited Member 

or Settling Bank that retired its membership at 

NSCC from applying for membership with the 

Transferee. Once its NSCC membership is 

terminated, however, such firm would not be able 

to benefit from the membership assignment that 

would be effected by this proposed Wind-down 

Rule, and it would have to apply for membership 

directly with the Transferee, subject to its 

membership application and review process. 

transaction by which the transfer of 

NSCC’s business would be effected; (3) 

the Transfer Time, Last Transaction 

Acceptance Date, and Last Settlement 

Date; and (4) identification of Eligible 

Members and Eligible Limited Members, 

and the critical and non-critical services 

that would be transferred to the 

Transferee at the Transfer Time, as well 

as those Non-Eligible Members and 

Non-Eligible Limited Members (as 

defined in the Proposed Rule), and any 

non-critical services that would not be 

included in the transfer. NSCC would 

also make available the rules and 

procedures and membership agreements 

of the Transferee. 

Transfer of Membership. The 

proposed Wind-down Rule would 

address the expected transfer of NSCC’s 

membership to the Transferee, which 

NSCC would seek to effectuate by 

entering into an arrangement with a 

Failover Transferee, or by using 

commercially reasonable efforts to enter 

into such an arrangement with a Third 

Party Transferee. Therefore, the Winddown Rule would provide Members, 

Limited Members and Settling Banks 

with notice that, in connection with the 

implementation of the Wind-down Plan 

and with no further action required by 

any party, (1) their membership with 

NSCC would transfer to the Transferee, 

(2) they would become party to a 

membership agreement with such 

Transferee, and (3) they would have all 

of the rights and be subject to all of the 

obligations applicable to their 

membership status under the rules of 

the Transferee. These provisions would 

not apply to any Member or Limited 

Member that is either in default of an 

obligation to NSCC or has provided 

notice of its election to withdraw from 

membership. Further, the proposed 

Wind-down Rule would make clear that 

it would not prohibit (1) Members and 

Limited Members that are not 

transferred by operation of the Winddown Rule from applying for 

membership with the Transferee, or (2) 

Members, Limited Members, and 

Settling Banks that would be transferred 

to the Transferee from withdrawing 

from membership with the Transferee.56

Comparability Period. The proposed 

automatic mechanism for the transfer of 

NSCC’s membership is intended to 

provide NSCC’s membership with 

continuous access to critical services in 

the event of NSCC’s wind-down, and to 

facilitate the continued prompt and 

accurate clearance and settlement of 

securities transactions. Further to this 

goal, the proposed Wind-down Rule 

would provide that NSCC would enter 

into arrangements with a Failover 

Transferee, or would use commercially 

reasonable efforts to enter into 

arrangements with a Third Party 

Transferee, providing that, in either 

case, with respect to the critical services 

and any non-critical services that are 

transferred from NSCC to the 

Transferee, for at least a period of time 

to be agreed upon (‘‘Comparability 

Period’’), the business transferred from 

NSCC to the Transferee would be 

operated in a manner that is comparable 

to the manner in which the business 

was previously operated by NSCC. 

Specifically, the proposed Wind-down 

Rule would provide that: (1) The rules 

of the Transferee and terms of 

membership agreements would be 

comparable in substance and effect to 

the analogous Rules and membership 

agreements of NSCC; (2) the rights and 

obligations of any Members, Limited 

Members and Settling Banks that are 

transferred to the Transferee would be 

comparable in substance and effect to 

their rights and obligations as to NSCC; 

and (3) the Transferee would operate the 

transferred business and provide any 

services that are transferred in a 

comparable manner to which such 

services were provided by NSCC. The 

purpose of these provisions and the 

intended effect of the proposed Winddown Rule is to facilitate a smooth 

transition of NSCC’s business to a 

Transferee and to provide that, for at 

least the Comparability Period, the 

Transferee (1) would operate the 

transferred business in a manner that is 

comparable in substance and effect to 

the manner in which the business was 

operated by NSCC, and (2) would not 

require sudden and disruptive changes 

in the systems, operations and business 

practices of the new members of the 

Transferee. 

Subordination of Claims Provisions 

and Miscellaneous Matters. The 

proposed Wind-down Rule would also 

include a provision addressing the 

subordination of unsecured claims 

against NSCC of Members and Limited 

Members who fail to participate in 

NSCC’s recovery efforts (i.e., such firms 

are delinquent in their obligations to 

NSCC or elect to retire from NSCC in 

order to minimize their obligations with 

respect to the allocation of losses, 

pursuant to the Rules). This provision is 

designed to incentivize Members to 

participate in NSCC’s recovery efforts.57

The proposed Wind-down Rule 

would address other ex-ante matters 

including provisions providing that 

Members, Limited Members and 

Settling Banks (1) will assist and 

cooperate with NSCC to effectuate the 

transfer of NSCC’s business to a 

Transferee, (2) consent to the provisions 

of the rule, and (3) grant NSCC power 

of attorney to execute and deliver on 

their behalf documents and instruments 

that may be requested by the Transferee. 

Finally, the Proposed Rule would 

include a limitation of liability for any 

actions taken or omitted to be taken by 

NSCC pursuant to the Proposed Rule. 

The purpose of the limitation of liability 

is to facilitate and protect NSCC’s ability 

to act expeditiously in response to 

extraordinary events. As noted, such 

limitation of liability would be available 

only following triggering of the Winddown Plan. In addition, and as a 

separate matter, the limitation of 

liability provides Members with 

transparency for the unlikely situation 

when those extraordinary events could 

occur, as well supporting the legal 

framework within which NSCC would 

take such actions. These provisions, 

collectively, are designed to enable 

NSCC to take such acts as the Board 

determines necessary to effectuate an 

orderly transfer and wind-down of its 

business should recovery efforts prove 

unsuccessful. 

Rule 60 (Market Disruption and Force 

Majeure) 

The proposed Rule 60 (‘‘Force 

Majeure Rule’’) would address NSCC’s 

authority to take certain actions upon 

the occurrence, and during the 

pendency, of a ‘‘Market Disruption 

Event,’’ as defined therein. The 

Proposed Rule is designed to clarify 

NSCC’s ability to take actions to address 

extraordinary events outside of the 

control of NSCC and of its membership, 

and to mitigate the effect of such events 

by facilitating the continuity of services 

(or, if deemed necessary, the temporary 

suspension of services). To that end, 

under the proposed Force Majeure Rule, 

NSCC would be entitled, during the 

pendency of a Market Disruption Event, 

to (1) suspend the provision of any or 


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58 15 U.S.C. 78q–1(b)(3)(F). 

59 17 CFR 240.17Ad–22(e)(3)(ii). 

60 Id. at 240.17Ad–22(e)(15)(ii). 

61 15 U.S.C. 78q–1(b)(3)(F). 62 Id. 

all services, and (2) take, or refrain from 

taking, or require Members and Limited 

Members to take, or refrain from taking, 

any actions it considers appropriate to 

address, alleviate, or mitigate the event 

and facilitate the continuation of 

NSCC’s services as may be practicable. 

The proposed Force Majeure Rule 

would identify the events or 

circumstances that would be considered 

a ‘‘Market Disruption Event,’’ including, 

for example, events that lead to the 

suspension or limitation of trading or 

banking in the markets in which NSCC 

operates, or the unavailability or failure 

of any material payment, bank transfer, 

wire or securities settlement systems. 

The proposed Force Majeure Rule 

would define the governance 

procedures for how NSCC would 

determine whether, and how, to 

implement the provisions of the rule. A 

determination that a Market Disruption 

Event has occurred would generally be 

made by the Board, but the Proposed 

Rule would provide for limited, interim 

delegation of authority to a specified 

officer or management committee if the 

Board would not be able to take timely 

action. In the event such delegated 

authority is exercised, the proposed 

Force Majeure Rule would require that 

the Board be convened as promptly as 

practicable, no later than five Business 

Days after such determination has been 

made, to ratify, modify, or rescind the 

action. The proposed Force Majeure 

Rule would also provide for prompt 

notification to the Commission, and 

advance consultation with Commission 

staff, when practicable, including 

notification when an event is no longer 

continuing and the relevant actions are 

terminated. The Proposed Rule would 

require Members and Limited Members 

to notify NSCC immediately upon 

becoming aware of a Market Disruption 

Event, and, likewise, would require 

NSCC to notify Members and Limited 

Members if it has triggered the Proposed 

Rule and of actions taken or intended to 

be taken thereunder. 

Finally, the Proposed Rule would 

address other related matters, including 

a limitation of liability for any failure or 

delay in performance, in whole or in 

part, arising out of the Market 

Disruption Event. The purpose of the 

limitation of liability would be similar 

to the purpose of the analogous 

provision in the proposed Wind-down 

Rule, which is to facilitate and protect 

NSCC’s ability to act expeditiously in 

response to extraordinary events. 

Proposed Change to the Rule Numbers 

In order to align the order of the 

Proposed Rules with the order of 

comparable rules in the rulebooks of the 

other Clearing Agencies, NSCC is also 

proposing to re-number the current Rule 

42 (Wind-down of a Member, Fund 

Member or Insurance Carrier/Retirement 

Services Member) to Rule 40, which is 

currently reserved for future use, as 

shown on Exhibit 5b, hereto. 

(a) 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 R&W Plan, each of the 

Proposed Rules, and the proposed 

change to Rule numbers are consistent 

with Section 17A(b)(3)(F) of the Act,58

the R&W Plan and each of the Proposed 

Rules are consistent with Rule 17Ad– 

22(e)(3)(ii) under the Act,59 and the 

R&W Plan is consistent with Rule 

17Ad–22(e)(15)(ii) under the Act,60 for 

the reasons described below. 

Section 17A(b)(3)(F) of the Act 

requires, in part, that the rules of NSCC 

be designed to promote the prompt and 

accurate clearance and settlement of 

securities transactions, and to assure the 

safeguarding of securities and funds 

which are in the custody or control of 

NSCC or for which it is responsible.61

The Recovery Plan and the proposed 

Force Majeure Rule would promote the 

prompt and accurate clearance and 

settlement of securities transactions by 

providing NSCC with a roadmap for 

actions it may employ to mitigate losses, 

and monitor and, as needed, stabilize, 

its financial condition, which would 

allow it to continue its critical clearance 

and settlement services in stress 

situations. Further, as described above, 

the Recovery Plan is designed to 

identify the actions and tools NSCC may 

use to address and minimize losses to 

both NSCC and Members. The Recovery 

Plan and the proposed Force Majeure 

Rule would provide NSCC’s 

management and the Board with 

guidance in this regard by identifying 

the indicators and governance around 

the use and application of such tools to 

enable them to address stress situations 

in a manner most appropriate for the 

circumstances. Therefore, the Recovery 

Plan and the proposed Force Majeure 

Rule would also contribute to the 

safeguarding of securities and funds 

which are in the custody or control of 

NSCC or for which it is responsible by 

enabling actions that would address and 

minimize losses. 

The Wind-down Plan and the 

proposed Corporation Default Rule and 

Wind-down Rule, which would both 

facilitate the implementation of the 

Wind-down Plan, would also promote 

the prompt and accurate clearance and 

settlement of securities transactions and 

assure the safeguarding of securities and 

funds which are in the custody or 

control of NSCC or for which it is 

responsible. The Wind-down Plan and 

the proposed Corporation Default Rule 

and Wind-down Rule would 

collectively establish a framework for 

the transfer and orderly wind-down of 

NSCC’s business. These proposals 

would establish clear mechanisms for 

the transfer of NSCC’s critical services 

and membership, and for the treatment 

of open, guaranteed CNS transactions in 

the event of NSCC’s default. By doing 

so, the Wind-down Plan and these 

Proposed Rules are designed to facilitate 

the continuity of NSCC’s critical 

services and enable Members and 

Limited Members to maintain access to 

NSCC’s services through the transfer of 

its membership in the event NSCC 

defaults or the Wind-down Plan is 

triggered by the Board. Therefore, by 

facilitating the continuity of NSCC’s 

critical clearance and settlement 

services, NSCC believes the proposals 

would promote the prompt and accurate 

clearance and settlement of securities 

transactions. Further, by creating a 

framework for the transfer and orderly 

wind-down of NSCC’s business, NSCC 

believes the proposals would enhance 

the safeguarding of securities and funds 

which are in the custody or control of 

NSCC or for which it is responsible. 

Finally, the proposed change to the 

Rule numbers would align the order of 

the Proposed Rules with the order of 

comparable rules in the rulebooks of the 

other Clearing Agencies. Therefore, 

NSCC believes the proposed change 

would create ease of reference, 

particularly for Members that are also 

participants of the other Clearing 

Agencies, and, as such, would assist in 

promoting the prompt and accurate 

clearance and settlement of securities 

transactions. 

Therefore, NSCC believes the R&W 

Plan, each of the Proposed Rules, and 

the proposed change to Rule numbers 

are consistent with the requirements of 

Section 17A(b)(3)(F) of the Act.62

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, 


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63 17 CFR 240.17Ad–22(e)(3)(ii). 

64 Id. 

65 Id. 

66 Id. 

67 Id. 

68 Id. at 240.19b–4. 

69Supra note 46. 

70 17 CFR 240.17Ad–22(e)(3)(ii). 

71 Id. at 240.17Ad–22(e)(15)(ii). 

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.63 The R&W 

Plan and the Proposed Rules are 

designed to meet the requirements of 

Rule 17Ad–22(e)(3)(ii).64

The R&W Plan would be maintained 

by NSCC in compliance with Rule 

17Ad–22(e)(3)(ii) in that it provides 

plans for the recovery and orderly winddown of NSCC necessitated by credit 

losses, liquidity shortfalls, losses from 

general business risk, or any other 

losses, as described above.65

Specifically, the Recovery Plan would 

define the risk management activities, 

stress conditions and indicators, and 

tools that NSCC may use to address 

stress scenarios that could eventually 

prevent it from being able to provide its 

critical services as a going concern. 

Through the framework of the Crisis 

Continuum, the Recovery Plan would 

address measures that NSCC may take to 

address risks of credit losses and 

liquidity shortfalls, and other losses that 

could arise from a Member default. The 

Recovery Plan would also address the 

management of general business risks 

and other non-default risks that could 

lead to losses. 

The Wind-down Plan would be 

triggered by a determination by the 

Board that recovery efforts have not 

been, or are unlikely to be, successful in 

returning NSCC to viability as a going 

concern. Once triggered, the Winddown Plan would set forth clear 

mechanisms for the transfer of NSCC’s 

membership and business, and would 

be designed to facilitate continued 

access to NSCC’s critical services and to 

minimize market impact of the transfer. 

By establishing the framework and 

strategy for the execution of the transfer 

and wind-down of NSCC in order to 

facilitate continuous access to NSCC’s 

critical services, the Wind-down Plan 

establishes a plan for the orderly winddown of NSCC. Therefore, NSCC 

believes the R&W Plan would provide 

plans for the recovery and orderly winddown of the covered clearing agency 

necessitated by credit losses, liquidity 

shortfalls, losses from general business 

risk, or any other losses, and, as such, 

meets the requirements of Rule 17Ad– 

22(e)(3)(ii).66

As described in greater detail above, 

the Proposed Rules are designed to 

facilitate the execution of the R&W Plan, 

provide Members and Limited Members 

with transparency regarding the 

material provisions of the Plan, and 

provide NSCC with a legal basis for 

implementation of those provisions. As 

such, NSCC also believes the Proposed 

Rules meet the requirements of Rule 

17Ad–22(e)(3)(ii).67

NSCC has evaluated the recovery 

tools that would be identified in the 

Recovery Plan and has determined that 

these tools are comprehensive, effective, 

and transparent, and that such tools 

provide appropriate incentives to 

NSCC’s Members to manage the risks 

they present. The recovery tools, as 

outlined in the Recovery Plan and in the 

proposed Force Majeure Rule, provide 

NSCC with a comprehensive set of 

options to address its material risks and 

support the resiliency of its critical 

services under a range of stress 

scenarios. NSCC also believes the 

recovery tools are effective, as NSCC has 

both legal basis and operational 

capability to execute these tools in a 

timely and reliable manner. Many of the 

recovery tools are provided for in the 

Rules; Members are bound by the Rules 

through their membership agreements 

with NSCC, and the Rules are adopted 

pursuant to a framework established by 

Rule 19b–4 under the Act,68 providing 

a legal basis for the recovery tools found 

therein. Other recovery tools have legal 

basis in contractual arrangements to 

which NSCC is a party, as described 

above. Further, as many of the tools are 

embedded in NSCC’s ongoing risk 

management practices or are embedded 

into its predefined default-management 

procedures, NSCC is able to execute 

these tools, in most cases, when needed 

and without material operational or 

organizational delay. 

The majority of the recovery tools are 

also transparent, as they are, or are 

proposed to be, included in the Rules, 

which are publicly available. NSCC 

believes the recovery tools also provide 

appropriate incentives to the Members, 

as they are designed to control the 

amount of risk they present to NSCC’s 

clearance and settlement system. 

Members’ financial obligations to NSCC, 

particularly their Required Deposits to 

the Clearing Fund, are measured by the 

risk posed by the Members’ activity in 

NSCC’s systems, which incentivizes 

them to manage that risk which would 

correspond to lower financial 

obligations. Finally, NSCC’s Recovery 

Plan provides for a continuous 

evaluation of the systemic consequences 

of executing its recovery tools, with the 

goal of minimizing their negative 

impact. The Recovery Plan would 

outline various indicators over a 

timeline of increasing stress, the Crisis 

Continuum, with escalation triggers to 

NSCC management or the Board, as 

appropriate. This approach would allow 

for timely evaluation of the situation 

and the possible impacts of the use of 

a recovery tool in order to minimize the 

negative effects of the stress scenario. 

Therefore, NSCC believes that the 

recovery tools that would be identified 

and described in its Recovery Plan, 

including the authority provided to it in 

the proposed Force Majeure Rule, 

would meet the criteria identified 

within guidance published by the 

Commission in connection with the 

adoption of Rule 17Ad–22(e)(3)(ii).69

Therefore, NSCC believes the R&W 

Plan and each of the Proposed Rules are 

consistent with Rule 17Ad– 

22(e)(3)(ii).70

Rule 17Ad–22(e)(15)(ii) under the Act 

requires NSCC to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

identify, monitor, and manage its 

general business risk and hold sufficient 

LNA to cover potential general business 

losses so that NSCC can continue 

operations and services as a going 

concern if those losses materialize, 

including by holding LNA equal to the 

greater of either (x) six months of the 

covered clearing agency’s current 

operating expenses, or (y) the amount 

determined by the board of directors to 

be sufficient to ensure a recovery or 

orderly wind-down of critical 

operations and services of the covered 

clearing agency.71 While the Capital 

Policy addresses how NSCC holds LNA 

in compliance with these requirements, 

the Wind-down Plan would include an 

analysis that would estimate the amount 

of time and the costs to achieve a 

recovery or orderly wind-down of 

NSCC’s critical operations and services, 

and would provide that the Board 

review and approve this analysis and 

estimation annually. The Wind-down 

Plan would also provide that the 

estimate would be the ‘‘Recovery/Winddown Capital Requirement’’ under the 

Capital Policy. Under that policy, the 

General Business Risk Capital 

Requirement, which is the sufficient 

amount of LNA that NSCC should hold 

to cover potential general business 

losses so that it can continue operations 

and services as a going concern if those 


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72 Id. 

73 15 U.S.C. 78q–1(b)(3)(I). 74 17 CFR 200.30–3(a)(12). 

losses materialize, is calculated as the 

greatest of three estimated amounts, one 

of which is this Recovery/Wind-down 

Capital Requirement. Therefore, NSCC 

believes the R&W Plan, as it interrelates 

with the Capital Policy, is consistent 

with Rule 17Ad–22(e)(15)(ii).72

(B) Clearing Agency’s Statement on 

Burden on Competition 

NSCC does not believe the proposal 

would have any impact, or impose any 

burden, on competition not necessary or 

appropriate in furtherance of the 

purpose of the Act.73 The proposal 

would apply uniformly to all Members 

and Limited Members. 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. NSCC is not 

proposing to alter the standards or 

requirements for becoming or remaining 

a Member, or otherwise using its 

services. NSCC also does not propose to 

change its methodology for calculation 

of margin or Clearing Fund 

contributions. The proposal is intended 

to (1) address the risk of loss events and 

identify the tools and resources 

available to it to withstand and recover 

from such events, so that it can restore 

normal operations, and (2) provide a 

framework for its orderly wind-down 

and the transfer of its business in the 

event those recovery tools do not restore 

NSCC to financial viability, as described 

herein. 

The R&W Plan and each of the 

Proposed Rules have been developed 

and documented in order to satisfy 

applicable regulatory requirements, as 

discussed above. 

With respect to the Recovery Plan, the 

proposal generally reflects NSCC’s 

existing tools and existing internal 

procedures. Existing tools that would 

have a direct impact on the rights, 

responsibilities or obligations of 

Members are reflected in the existing 

Rules or are proposed to be included in 

the Rules. Accordingly, the Recovery 

Plan and the proposed Force Majeure 

Rule are intended to provide a roadmap, 

define the strategy and identify the tools 

available to NSCC in connection with its 

recovery efforts. By proposing to 

enhance NSCC’s existing internal 

management and its regulatory 

compliance related to its recovery 

efforts, NSCC does not believe the 

Recovery Plan or the proposed Force 

Majeure Rule would have any impact, or 

impose any burden, on competition. 

With respect to the Wind-down Plan, 

the proposed Corporation Default Rule, 

and the proposed Wind-down Rule, 

which facilitate the execution of the 

Wind-down Plan, the proposal would 

operate to effect the transfer of all 

eligible Members and Limited Members 

to the Transferee, and would not 

prohibit any market participant from 

either bidding to become the Transferee 

or from applying for membership with 

the Transferee. The proposal also would 

not prohibit any Member or Limited 

Member from withdrawing from NSCC 

prior to the Transfer Time, as is 

permitted under the Rules today, or 

from applying for membership with the 

Transferee. Therefore, as the proposal 

would treat each similarly situated 

Member identically under the Winddown Plan and under these Proposed 

Rules, NSCC does not believe the Winddown Plan, the proposed Corporation 

Default Rule, or the proposed Winddown Rule would have any impact, or 

impose any burden, on competition. 

NSCC does not believe that the 

proposed change to the Rule numbers 

would have any impact on competition 

because this proposed change is 

technical in nature and would not 

change NSCC’s current practices or the 

rights or obligations of Members 

(C) Clearing Agency’s Statement on 

Comments on the Proposed Rule 

Change Received From Members, 

Participants, or Others 

While NSCC has not solicited or 

received any written comments relating 

to this proposal, NSCC has conducted 

outreach to Members in order to provide 

them with notice of the proposal. NSCC 

will notify the Commission of any 

written comments received by NSCC. 

III. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

NSCC–2017–017 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–NSCC–2017–017. 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 (http://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 

(http://dtcc.com/legal/sec-rulefilings.aspx). All comments received 

will be posted without change. Persons 

submitting comments are cautioned that 

we do not redact or edit personal 

identifying information from comment 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–NSCC– 

2017–017 and should be submitted on 

or before August 3, 2018. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.74

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–15367 Filed 7–18–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

Proposed Collection; Comment 

Request 

Upon Written Request, Copies Available 

From: Securities and Exchange 

Commission, Office of FOIA Services, 

100 F Street NE, Washington, DC 

20549–2736. 

Extension: 

Regulation SCI, Form SCI; SEC File No. 

270–653, OMB Control No. 3235–0703. 

Notice is hereby given that pursuant 

to the Paperwork Reduction Act of 1995 

(‘‘PRA’’) (44 U.S.C. 3501 et seq.), the 

Securities and Exchange Commission 


sradovich on DSK3GMQ082PROD with NOTICES