44340 Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 

1 12 U.S.C. 5465(e)(1). 

2 17 CFR 240.19b–4(n)(1)(i). 

3On December 18, 2017, NSCC filed the advance 

notice as proposed rule change SR–NSCC–2017– 

017 with the Commission pursuant to Section 

19(b)(1) of the Act and Rule 19b–4 thereunder 

(‘‘Proposed Rule Change’’). 15 U.S.C. 78s(b)(1) and 

17 CFR 240.19b–4, respectively. The Proposed Rule 

Change was published in the Federal Register on 

January 8, 2018. Securities Exchange Act Release 

No. 82430 (January 2, 2018), 83 FR 841 (January 8, 

2018) (SR–NSCC–2017–017). On February 8, 2018, 

the Commission designated a longer period within 

which to approve, disapprove, or institute 

proceedings to determine whether to approve or 

disapprove the Proposed Rule Change. Securities 

Exchange Act Release No. 82669 (February 8, 2018), 

83 FR 6653 (February 14, 2018) (SR–DTC–2017– 

021, SR–FICC–2017–021, SR–NSCC–2017–017). On 

March 20, 2018, the Commission instituted 

proceedings to determine whether to approve or 

disapprove the Proposed Rule Change. Securities 

Exchange Act Release No. 82908 (March 20, 2018), 

83 FR 12986 (March 26, 2018) (SR–NSCC–2017– 

017). On June 25, 2018, the Commission designated 

a longer period for Commission action on the 

proceedings to determine whether to approve or 

disapprove the Proposed Rule Change. Securities 

Exchange Act Release No. 83509 (June 25, 2018), 83 

FR 30785 (June 29, 2018) (SR–DTC–2017–021, SR– 

FICC–2017–021, SR–NSCC–2017–017). On June 28, 

2018, NSCC filed Amendment No. 1 to the 

Proposed Rule Change. Securities Exchange Act 

Release No. 83632 (July 13, 2018), 83 FR 34166 

(July 19, 2018) (SR–NSCC–2017–017). NSCC 

submitted a courtesy copy of Amendment No. 1 to 

the Proposed Rule Change through the 

Commission’s electronic public comment letter 

mechanism. Accordingly, Amendment No. 1 to the 

Proposed Rule Change has been publicly available 

on the Commission’s website at https://

www.sec.gov/rules/sro/nscc.htm since June 29, 

2018. The Commission did not receive any 

comments. The proposal, as set forth in both the 

advance notice and the Proposed Rule Change, each 

as modified by Amendments No. 1, shall not take 

effect until all required regulatory actions are 

completed. 

4Securities Exchange Act Release No. 82581 

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

(SR–NSCC–2017–805) (‘‘Notice’’). 

5Pursuant to Section 806(e)(1)(H) of the Clearing 

Supervision Act, the Commission may extend the 

review period of an advance notice for an 

additional 60 days, if the changes proposed in the 

advance notice raise novel or complex issues, 

subject to the Commission providing the clearing 

agency with prompt written notice of the extension. 

12 U.S.C. 5465(e)(1)(H). The Commission found that 

the advance notice raised novel and complex issues 

and, accordingly, extended the review period of the 

advance notice for an additional 60 days until April 

17, 2018. See Notice, supra note 4. 

6 12 U.S.C. 5465(e)(1)(D). 

7See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii); see 

Memorandum from the Office of Clearance and 

Settlement Supervision, Division of Trading and 

Markets, titled ‘‘Commission’s Request for 

Additional Information,’’ available at https://

www.sec.gov/rules/sro/nscc-an.htm. 

8Securities Exchange Act Release No. 83745 (July 

31, 2018), 83 FR 38329 (August 6, 2018) (SR– 

NSCC–2017–805). NSCC submitted a courtesy copy 

of Amendment No. 1 to the advance notice through 

the Commission’s electronic public comment letter 

mechanism. Accordingly, Amendment No. 1 to the 

advance notice has been publicly available on the 

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

sro/nscc-an.htm since June 29, 2018. 

9 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. 

10Capitalized terms used herein and not 

otherwise defined herein are defined in the Rules. 

of the date of this notice or the date of 

an order by the Commission approving 

proposed rule change SR–FICC–2017– 

022, as modified by Amendment No. 1, 

whichever is later. 

By the Commission. 

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–18865 Filed 8–29–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83955; File No. SR–NSCC– 

2017–805] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Notice of No Objection to 

an Advance Notice, as Modified by 

Amendment No. 1, To Adopt a 

Recovery & Wind-Down Plan and 

Related Rules 

August 27, 2018. 

On December 18, 2017, National 

Securities Clearing Corporation 

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

Exchange Commission (‘‘Commission’’) 

advance notice SR–NSCC–2017–805 

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’’) 1 and Rule 

19b–4(n)(1)(i) under the Securities 

Exchange Act of 1934 (‘‘Act’’) 2 to adopt 

a recovery and wind-down plan (‘‘R&W 

Plan’’) and related rules.3 The advance 

notice was published for comment in 

the Federal Register on January 30, 

2018.4 In that publication, the 

Commission also extended the review 

period of the advance notice for an 

additional 60 days, pursuant to Section 

806(e)(1)(H) of the Clearing Supervision 

Act.5 On April 10, 2018, the 

Commission required additional 

information from NSCC pursuant to 

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

Supervision Act,6 which tolled the 

Commission’s period of review of the 

advance notice until 60 days from the 

date the information required by the 

Commission was received by the 

Commission.7 On June 28, 2018, NSCC 

filed Amendment No. 1 to the advance 

notice to amend and replace in its 

entirety the advance notice as originally 

filed on December 18, 2017.8 On July 6, 

2018, the Commission received a 

response to its request for additional 

information in consideration of the 

advance notice, which, in turn, added a 

further 60-days to the review period 

pursuant to Section 806(e)(1)(E) and (G) 

of the Clearing Supervision Act.9 The 

Commission did not receive any 

comments. This publication serves as 

notice that the Commission does not 

object to the proposed changes set forth 

in the advance notice, as modified by 

Amendment No. 1 (hereinafter, 

‘‘Advance Notice’’). 

I. Description of the Advance Notice 

In the Advance Notice, NSCC 

proposes to (1) adopt an R&W Plan; (2) 

amend NSCC’s Rules & Procedures 

(‘‘Rules’’) 10 to adopt Rule 41 

(Corporation Default), Rule 42 (Winddown of the Corporation), and Rule 60 

(Market Disruption and Force Majeure) 

(each a ‘‘Proposed Rule’’ and, 

collectively, the ‘‘Proposed Rules’’); and 

(3) re-number current Rule 42 (Winddown of a Member, Fund Member or 

Insurance Carrier/Retirement Services 

Member) to Rule 40, which is currently 

reserved for future use. 

NSCC states that the R&W Plan would 

be used by the Board of Directors of 

NSCC (‘‘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. 

NSCC states that 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. 

A. NSCC R&W Plan 

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 R&W Plan would identify (i) the 

recovery tools available to NSCC to 

address the risks of (a) uncovered losses 


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11 DTCC is a user-owned and user-governed 

holding company and is the parent company of 

NSCC and its affiliates, The Depository Trust 

Company (‘‘DTC’’) and Fixed Income Clearing 

Corporation (‘‘FICC’’, and, together with NSCC and 

DTC, the ‘‘Clearing Agencies’’). The R&W 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. 

12NSCC states that it uses the term ‘‘credit/ 

market’’ risks in the R&W Plan because 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. See infra note 21. 

13See 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). 

14See id. 

15See supra note 10. 

16 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. 

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 winddown 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’’); 11 (ii) an analysis of NSCC’s 

intercompany arrangements and critical 

links to other financial market 

infrastructure (‘‘FMI’’); (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 12 risks 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 

designed to be comprehensive, effective, 

and transparent, how the tools provide 

incentives to Members to, among other 

things, control and monitor the risks 

they may present to NSCC, and how 

NSCC seeks to minimize the negative 

consequences of executing its recovery 

tools; and (ix) the framework and 

approach for the orderly wind-down 

and transfer of NSCC’s business, 

including an estimate of the time and 

costs to effect a recovery or orderly 

wind-down of NSCC. 

Certain recovery tools that would be 

identified in the R&W Plan are based in 

the Rules (including the Proposed 

Rules); therefore, descriptions of those 

tools in the R&W Plan 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 operational support for matters 

described in the R&W Plan, and that 

such documents would be supplemental 

and subordinate to the R&W Plan. 

NSCC states that 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’’),13 (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,14 and (iii) the process for 

the allocation of losses among Members, 

as provided in Rule 4 (Clearing Fund).15

The R&W Plan would provide 

governance around the selection and 

implementation of the recovery tool or 

tools most relevant to mitigate a stress 

scenario and any applicable loss or 

liquidity shortfall. 

The development of the R&W Plan is 

facilitated by the Office of Recovery & 

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

DTCC.16 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. NSCC states 

that the Proposed Rules are designed to 

provide Members and Limited Members 

with transparency and certainty with 

respect to these matters. NSCC also 

states that the Proposed Rules are 

designed to facilitate the 

implementation of the R&W Plan, 

particularly NSCC’s strategy for winding 

down and transferring its business, and 

are designed to provide NSCC with the 

legal basis to implement those aspects of 

the R&W Plan. 

1. 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 R&W 

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 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. NSCC 

states that the overview section would 

provide a context for the R&W Plan by 

describing NSCC’s business, 

organizational structure and critical 

links to other entities. NSCC also states 

that 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 


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17The DTCC, DTC, NSCC, FICC Risk Committee 

Charter is available at http://www.dtcc.com/∼/ 

media/Files/Downloads/legal/policy-andcompliance/DTCC-BOD-Risk-CommitteeCharter.pdf. 

18The R&W 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. 

of the factors that would be addressed 

in implementing the Wind-down Plan. 

The R&W 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. NSCC states that 

this section of the R&W Plan, which 

identifies and briefly describes NSCC’s 

established links, is designed to 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 R&W 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 of the R&W Plan would provide 

an analysis of the potential systemic 

impact from a service disruption, which 

NSCC states is important for evaluating 

how the recovery tools and the winddown 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 (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 the 

availability of market liquidity; and (4) 

whether 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 R&W Plan would then list each of 

those services, functions or activities 

that NSCC has identified as ‘‘critical’’ 

based on the applicability of these four 

criteria. The R&W Plan would also 

include a non-exhaustive list of NSCC 

services that are not deemed critical. 

NSCC states that 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. While NSCC’s Winddown 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 R&W Plan would describe the 

governance structure of both DTCC and 

NSCC. This section of the R&W Plan 

would identify the ownership and 

governance model of these entities at 

both the Board and management levels. 

The R&W Plan would state that the 

stages of escalation required to manage 

recovery under the Recovery Plan or to 

invoke NSCC’s wind-down under the 

Wind-down Plan would range from 

relevant business line managers up to 

the Board through NSCC’s governance 

structure. The R&W Plan would then 

identify the parties responsible for 

certain activities under both the 

Recovery Plan and the Wind-down Plan, 

and would describe their respective 

roles. The R&W 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 as well as oversight 

of NSCC’s efforts to mitigate systemic 

risks that could impact those markets 

and the broader financial system.17 The 

R&W Plan would identify the DTCC 

Management Risk Committee 

(‘‘Management Risk Committee’’) as 

primarily responsible for general, dayto-day risk management through 

delegated authority from the Board Risk 

Committee. The R&W Plan would state 

that the Management Risk Committee 

has delegated specific day-to-day risk 

management, including management of 

risks addressed through margining 

systems and related activities, to the 

DTCC Group Chief Risk Office 

(‘‘GCRO’’), which works with staff 

within the DTCC Financial Risk 

Management group. Finally, the R&W 

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 R&W 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 

R&W Plan would state that the 

Management Risk Committee provides 

oversight of actions relating to the 

default of a Member, which would be 

reported and escalated to it through the 

GCRO, and the Management Committee 

provides oversight of actions relating to 

non-default events that could result in 

a loss, which would be reported and 

escalated to it from the DTCC Chief 

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

Treasury group that reports to the CFO, 

and from other relevant subject matter 

experts based on the nature and 

circumstances of the non-default 

event.18 More generally, the R&W 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. 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 R&W 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. 

2. NSCC Recovery Plan 

NSCC states that 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. NSCC also states 

that as each event that could lead to a 

financial loss could be unique in its 

circumstances, NSCC proposes that 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. In all cases, NSCC states 


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19The R&W Plan would define an Affiliated 

Family of Members as a number of affiliated entities 

that are all Members of NSCC. 20See Rule 46 (Restrictions on Access to 

Services), supra note 10. 

21See Rule 4 (Clearing Fund) and Procedure XV 

(Clearing Fund Formula and Other Matters), supra 

note 10. NSCC states that because it 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 Rule 4 (Clearing Fund). Therefore, NSCC 

states that its 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 17 CFR 240.17Ad–22(e)(4). 

22NSCC’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 No. 82377 

(December 21, 2017), 82 FR 61617 (December 28, 

2017) (SR–DTC–2017–004, SR–FICC–2017–008, 

SR–NSCC–2017–005). 

23NSCC’s stress testing practices are described in 

the Clearing Agency Stress Testing Framework 

(Market Risk). See Securities Exchange Act Release 

No. 82638 (December 19, 2017), 82 FR 61082 

(December 26, 2017) (SR–DTC–2017–005, SR– 

FICC–2017–009, SR–NSCC–2017–006). 

24See supra note 22 (concerning NSCC’s liquidity 

risk management strategy). 

25See Rule 18 (Procedures for When the 

Corporation Declines or Ceases to Act) and Rule 46 

(Restrictions on Access to Services), supra note 10. 

that it 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 to 

best protect NSCC, Members, and the 

markets in which it operates. 

(i) 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 19 (referred to in the R&W Plan 

as the ‘‘Member default phase’’), and (4) 

a recovery phase. In the R&W Plan, the 

term ‘‘cease to act’’ and the events that 

may lead to such decision are used 

within the context of Rule 46 of the 

Rules.20 Further, the R&W Plan would, 

for purposes of the R&W Plan, use the 

following terms: (1) ‘‘Member default’’ 

to refer to the event or events that 

precipitate NSCC ceasing to act for a 

Member or an Affiliated Family; (2) 

‘‘Defaulting Member’’ to refer to a 

Member for which NSCC has ceased to 

act; and (3) ‘‘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 R&W Plan. 

NSCC states that 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. NSCC also states that 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 states 

that it manages these risk exposures 

collectively to limit their overall impact 

on NSCC and its membership. NSCC 

states that 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.21 NSCC states that it 

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.22

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. NSCC 

states that the Recovery Plan is designed 

to 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, 

NSCC states that 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; 23 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.24

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.25 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 


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26Rule 4 (Clearing Fund) defines 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 is 50 

percent of the General Business Risk Capital 

Requirement, which is calculated pursuant to the 

Capital Policy and which NSCC states 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 an 

effort to comply with Rule 17Ad–22(e)(15) under 

the Act. See supra note 13 (concerning the Capital 

Policy); 17 CFR 240.17Ad–22(e)(15). 

27As provided for in Rule 4 (Clearing Fund), the 

‘‘Event Period’’ is the 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. Rule 4 

(Clearing Fund) defines a ‘‘round’’ as a series of loss 

allocations relating to an Event Period, and 

provides 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 of those Members 

included in the round. See Rule 4 (Clearing Fund), 

supra note 10. 

28The Corridor Actions that would be identified 

in the R&W Plan are designed to be 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 R&W Plan for 

the Corridor Indicator to which the action relates. 29See supra note 10. 

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. Management of liquidity risk 

through this phase would involve 

ongoing monitoring of the adequacy of 

NSCC’s liquidity resources, and the 

Recovery Plan would identify certain 

actions NSCC may deploy as it deems 

necessary to mitigate a potential 

liquidity shortfall. 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 (Clearing Fund) 

provides 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 Rule 4 (Clearing 

Fund).26

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 R&W 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.27 The recovery 

phase would describe actions that NSCC 

may take to avoid entering into a wind 

down of its business. 

NSCC states that it expects that 

significant deterioration of liquidity 

resources would cause it to enter the 

Recovery Corridor. Therefore, the R&W 

Plan would describe the actions NSCC 

may take aimed at replenishing those 

resources. 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. 

NSCC states that 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. 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,28 as 

well as management escalations 

required to authorize those steps. NSCC 

states that because NSCC has never 

experienced the default of multiple 

Members, it has not, historically, 

measured the deterioration or 

improvements metrics of the corridor 

indicators. Therefore, NSCC states that 

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. NSCC states that 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. NSCC states that 

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 (Clearing 

Fund).29 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. NSCC 

states that 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. Additional voluntary or 

uncommitted tools to address potential 

liquidity shortfalls, 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. 

The Recovery Plan would state that 

NSCC will have entered the recovery 

phase on the date that it issues the first 


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30NSCC states that the ‘‘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. 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. 

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). 

31See supra note 26. 

32See supra note 26. 

33See supra note 10. 

34See supra note 13 (concerning the Capital 

Policy). 

35See supra note 10. 

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. 

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. 

(ii) 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 R&W 

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 nondefault event. The R&W Plan would first 

identify some of the risks NSCC faces 

that could lead to these losses, which 

include, for example, (1) the business 

and profit/loss risks of unexpected 

declines in revenue or growth of 

expenses; (2) 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 (3) 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.30 The Recovery Plan 

would also describe NSCC’s approach to 

financial risk and capital management. 

The R&W 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 R&W 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,31 (b) the Corporate 

Contribution,32 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 (Clearing Fund).33

The R&W 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.34 Finally the R&W 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 (Clearing 

Fund).35

The R&W Plan would also describe 

proposed Rule 60 (Market Disruption 

and Force Majeure), which NSCC is 

proposing to adopt in the Rules. NSCC 

states that this Proposed Rule is 

designed to 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. 

The R&W 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’’). NSCC states that the 

intent is to make 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 

R&W 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 R&W 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. NSCC states that, 

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. 


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36 11 U.S.C. 101 et seq. 

37The 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 be 

designed to make clear that NSCC cannot predict 

the willingness of Members to do so. 

38See 11 U.S.C. 101 et seq. 

39See 11 U.S.C. 363. 

40The 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, NSCC states that the Transferee would 

have the benefit of any rules-based liquidity 

funding. The Wind-down Plan contemplates that no 

Clearing Fund would be transferred to the 

Transferee, as it is not held in a bankruptcy remote 

manner and it is the primary prefunded liquidity 

resource to be accessed in the recovery phase. 

(iii) 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 

incentives to Members and minimize 

negative impact on Members and the 

financial system. 

3. 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 does not successfully 

return NSCC to financial viability. 

NSCC states that while such event is 

extremely unlikely given the 

comprehensive nature of the recovery 

tools, 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. Bankruptcy 

Code,36 and (3) after effectuating this 

transfer, NSCC liquidating any 

remaining assets in an orderly manner 

in bankruptcy proceedings. NSCC states 

that the proposed transfer approach to a 

wind-down would meet its objectives of 

(1) assuring that NSCC’s critical services 

will be available to the market as long 

as there are Members in good standing, 

and (2) minimizing disruption to the 

operations of Members and financial 

markets generally that might be caused 

by NSCC’s failure. 

In describing the transfer approach to 

NSCC’s Wind-down Plan, the R&W 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. 

Therefore, NSCC states that a business 

reorganization or ‘‘bail-in’’ of debt 

approach would be unlikely to mitigate 

significant losses. Additionally, NSCC 

states that the proposed 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. NSCC states that 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.37 The Wind-down Plan 

would identify some of the indicators 

that NSCC has entered the Runway 

Period. 

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 R&W Plan, NSCC states 

that 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, NSCC states that 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. 

Bankruptcy Code.38 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. Bankruptcy Code, 

and pursuant to a bankruptcy court 

order under Section 363 of the 

Bankruptcy Code, with the intent that 

the transfer be free and clear of claims 

against, and interests in, NSCC, except 

to the extent expressly provided in the 

court’s order.39

NSCC states that in order to effect a 

timely transfer of its services and 

minimize the market and operational 

disruption of such transfer, NSCC 

would expect to transfer all of its critical 

services and any non-critical services 

that are ancillary and beneficial to a 

critical service, or that otherwise have 

substantial user demand from the 

continuing membership. Following the 

transfer, the Wind-down Plan would 

anticipate that the Transferee and its 

continuing membership would 

determine whether to continue to 

provide any transferred non-critical 

service on an ongoing basis, or 

terminate the non-critical service 

following some transition period. 

NSCC’s Wind-down Plan would 

anticipate that the Transferee would 

enter into a transition services 

agreement with DTCC so that DTCC 

would continue to provide the shared 

services it currently provides to NSCC, 

including staffing, infrastructure and 

operational support. The Wind-down 

Plan would also anticipate the 

assignment of NSCC’s link 

arrangements, including those with 

DTC, CDS and OCC, described above, to 

the Transferee.40 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 


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41See supra note 13. 

42See supra note 13. 

43See Rule 11 (CNS System) and Procedure VII 

(CNS Accounting Operation), supra note 10. 

44 12 U.S.C. 5381 et seq. 

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. 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 R&W 

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 winddown 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.41 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.42

NSCC states that 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, as discussed 

below. 

B. Proposed Rules 

In connection with the adoption of 

the R&W Plan, NSCC proposes to adopt 

the Proposed Rules, each of which is 

described below. NSCC states that the 

Proposed Rules are designed to facilitate 

the execution of the R&W Plan and are 

designed to provide Members and 

Limited Members with transparency as 

to critical aspects of the R&W Plan, 

particularly as they relate to the rights 

and responsibilities of both NSCC and 

Members. NSCC also states that the 

Proposed Rules are designed to provide 

a legal basis to these aspects of the R&W 

Plan. 

1. Rule 41 (Corporation Default) 

The proposed Rule 41 (‘‘Corporation 

Default Rule’’) would provide a 

mechanism for the termination, 

valuation and netting of unsettled, 

guaranteed Continuous Net Settlement 

(‘‘CNS’’) system 43 transactions in the 

event NSCC is unable to perform its 

obligations or otherwise suffers a 

defined event of default, such as 

entering insolvency proceedings. NSCC 

states that the proposed Corporation 

Default Rule is designed to provide 

Members with transparency and 

certainty regarding what would happen 

if NSCC were to fail (defined in the 

proposed Rule as a Corporation Default). 

The proposed rule would define the 

events that would constitute a 

Corporation Default, which would 

generally include (1) the failure of NSCC 

to make any undisputed payment or 

delivery to a Member if such failure is 

not remedied within seven days after 

notice of such failure is given to NSCC; 

(2) NSCC is dissolved; (3) NSCC 

institutes a proceeding seeking a 

judgment of insolvency or bankruptcy, 

or a proceeding is instituted against it 

seeking a judgment of bankruptcy or 

insolvency and such judgment is 

entered; or (4) NSCC seeks or becomes 

subject to the appointment of a receiver, 

trustee or similar official pursuant to the 

federal securities laws or Title II of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act 44 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 45 days 

from the date on which the event that 

constitutes a Corporation Default 

occurred (‘‘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. NSCC states that 

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 


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45 12 U.S.C. 1811 et seq. 

(i) contract price for such net position 

that, as of the Default Date, has not yet 

passed the Settlement Date, and (ii) the 

Current Market Price in the CNS System 

on the Default Date for its fail positions. 

To determine each Member’s CNS 

Close-out Value, (i) the Net Contract 

Value for each CUSIP would be 

subtracted from the CNS Market Value 

for such CUSIP, and (ii) the resulting 

difference for all CUSIPs in which the 

Member had a net long or short position 

would be summed, and would be netted 

and offset against any other amounts 

that may be due to or owing from the 

Member under the Rules. The proposed 

Corporation Default Rule would provide 

for notification to each Member of its 

CNS Close-out Value, and would also 

address interpretation of the Rules in 

relation to certain terms that are defined 

in the Federal Deposit Insurance 

Corporation Improvement Act of 1991 

(‘‘FDICIA’’).45

NSCC states that 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. 

2. Rule 42 (Wind-Down of the 

Corporation) 

NSCC states that the proposed Rule 42 

(‘‘Wind-down Rule’’) is designed to 

facilitate the execution of the Winddown 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. NSCC 

states that the Wind-down Rule is 

designed to make clear that a winddown 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. NSCC 

states that, 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 Winddown 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. 

(i) Wind-Down Trigger 

First, NSCC states that the Proposed 

Rule is designed to 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 Winddown 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. 

(ii) Identification of Critical Services; 

Designation of Dates and Times for 

Specific Actions 

The Proposed Rule would provide 

that, upon making a determination to 

initiate the Wind-down Plan, the Board 

would identify the critical and noncritical services that would be 

transferred to the Transferee at the 

Transfer Time (as defined below and in 

the Proposed Rule), as well as any noncritical 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’’). 

(iii) Treatment of Pending Transactions 

The Wind-down Rule would 

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. 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. NSCC states that 

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. 

NSCC states that the Proposed Rule is 

designed to 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. 

(iv) Notice Provisions 

The proposed Wind-down Rule 

would provide that, upon a decision to 

implement the Wind-down Plan, NSCC 

would provide Members and Limited 

Members and its regulators with a 

notice that includes material 

information relating to the Wind-down 

Plan and the anticipated transfer of 

NSCC’s membership and business, 

including, for example, (1) a brief 

statement of the reasons for the decision 

to implement the Wind-down Plan; (2) 

identification of the Transferee and 

information regarding the transaction by 

which the transfer of NSCC’s business 

would be effected; (3) the Transfer 

Time, Last Transaction Acceptance 

Date, and Last Settlement Date; and (4) 

identification of Eligible Members and 

Eligible Limited Members, and the 

critical and non-critical services that 

would be transferred to the Transferee at 

the Transfer Time, as well as those NonEligible 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. 

(v) 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, 


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46The 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. 

47Nothing 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. 

(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, NSCC states that 

the proposed Wind-down Rule is 

designed to make clear that it would not 

prohibit (1) Members and Limited 

Members that are not transferred by 

operation of the Wind-down Rule from 

applying for membership with the 

Transferee, or (2) Members, Limited 

Members, and Settling Banks that would 

be transferred to the Transferee from 

withdrawing from membership with the 

Transferee.46

(vi) Comparability Period 

NSCC states that 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. 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. NSCC 

states that the purpose of these 

provisions and the intended effect of the 

proposed Wind-down Rule is to 

facilitate a smooth transition of NSCC’s 

business to a Transferee and to provide 

that, for at least the Comparability 

Period, the Transferee (1) would operate 

the transferred business in a manner 

that is comparable in substance and 

effect to the manner in which the 

business was operated by NSCC, and (2) 

would not require sudden and 

disruptive changes in the systems, 

operations and business practices of the 

new members of the Transferee. 

(vii) Subordination of Claims Provisions 

and Miscellaneous Matters 

The proposed Wind-down Rule 

would 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., firms 

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). NSCC states that this 

provision is designed to incentivize 

Members to participate in NSCC’s 

recovery efforts.47

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. 

NSCC states that the purpose of the 

limitation of liability is to facilitate and 

protect NSCC’s ability to act 

expeditiously in response to 

extraordinary events. Such limitation of 

liability would be available only 

following triggering of the Wind-down 

Plan. In addition, and as a separate 

matter, NSCC states that the limitation 

of liability provides Members with 

transparency for the unlikely situation 

when those extraordinary events could 

occur, as well as supporting the legal 

framework within which NSCC would 

take such actions. NSCC states that 

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. 

3. 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. NSCC states that the 

Proposed Rule is designed to clarify 

NSCC’s ability to take actions to address 

extraordinary events outside of the 

control of NSCC and of its membership, 

and to mitigate the effect of such events 

by facilitating the continuity of services 

(or, if deemed necessary, the temporary 

suspension of services). To that end, 

under the proposed Force Majeure Rule, 

NSCC would be entitled, during the 

pendency of a Market Disruption Event, 

to (1) suspend the provision of any or 

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

taking, or require Members and Limited 

Members to take, or refrain from taking, 

any actions it considers appropriate to 

address, alleviate, or mitigate the event 

and facilitate the continuation of 

NSCC’s services as may be practicable. 

The proposed Force Majeure Rule 

would identify the events or 

circumstances that would be considered 

a Market Disruption Event. 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 


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48See 12 U.S.C. 5461(b). 

49 12 U.S.C. 5464(a)(2). 

50 12 U.S.C. 5464(b). 

51 12 U.S.C. 5464(a)(2). 

52 15 U.S.C. 78q–1. 

53See 17 CFR 240.17Ad–22. 

54 Id. 

55 12 U.S.C. 5464(b). 

56See 17 CFR 240.17Ad–22. 

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. NSCC states that 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. 

4. 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 proposes 

to re-number the current Rule 42 (Winddown of a Member, Fund Member or 

Insurance Carrier/Retirement Services 

Member) to Rule 40, which is currently 

reserved for future use. 

II. Discussion and Commission 

Findings 

Although the Clearing Supervision 

Act does not specify a standard of 

review for an advance notice, its stated 

purpose is instructive: To mitigate 

systemic risk in the financial system 

and promote financial stability by, 

among other things, promoting uniform 

risk management standards for 

systemically important financial market 

utilities and strengthening the liquidity 

of systemically important financial 

market utilities.48

Section 805(a)(2) of the Clearing 

Supervision Act 49 authorizes the 

Commission to prescribe risk 

management standards for the payment, 

clearing and settlement activities of 

designated clearing entities engaged in 

designated activities for which the 

Commission is the supervisory agency. 

Section 805(b) of the Clearing 

Supervision Act 50 provides the 

following objectives and principles for 

the Commission’s risk management 

standards prescribed under Section 

805(a): 

• To promote robust risk 

management; 

• to promote safety and soundness; 

• to reduce systemic risks; and 

• to support the stability of the 

broader financial system. 

The Commission has adopted risk 

management standards under Section 

805(a)(2) of the Clearing Supervision 

Act 51 and Section 17A of the Act 52

(‘‘Rule 17Ad–22’’).53 Rule 17Ad–22 

requires registered clearing agencies to 

establish, implement, maintain, and 

enforce written policies and procedures 

that are reasonably designed to meet 

certain minimum requirements for their 

operations and risk management 

practices on an ongoing basis.54

Therefore, it is appropriate for the 

Commission to review proposed 

changes in advance notices against the 

objectives and principles of these risk 

management standards as described in 

Section 805(b) of the Clearing 

Supervision Act 55 and against Rule 

17Ad–22.56

A. Consistency With Section 805(b) of 

the Clearing Supervision Act 

The Commission believes that the 

proposed changes in the Advance 

Notice are designed to help NSCC 

promote robust risk management, 

promote safety and soundness, reduce 

systemic risks, and support the stability 

of the broader financial system. As 

described above, the R&W Plan, 

generally, would help NSCC promote 

robust risk management and reduce 

systemic risks by providing NSCC with 

a roadmap for actions it may employ to 

monitor and manage its risks, and, as 

needed, to stabilize its financial 

condition in the event those risks 

materialize. Specifically, the Recovery 

Plan would provide a roadmap that 

would identify a number of triggers for 

the potential application of a number of 

available recovery tools. Identifying 

triggers for the potential application of 

recovery tools would help promote 

robust risk management and reduce 

systemic risks by better enabling NSCC 

to more promptly determine when and 

how it may need to manage a significant 

stress event, and, as needed, stabilize its 

financial condition. 

Similarly, the Force Majeure Rule is 

designed to provide a roadmap to 

address extraordinary events that may 

occur outside of NSCC’s control. 

Specifically, the Force Majeure Rule 

would define a Market Disruption Event 

and provide governance around 

determining when such an event has 

occurred. The Force Majeure Rule also 

would 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 

NSCC’s services, if practicable. By 

defining a Market Disruption Event and 

providing such governance and 

authority, the Commission believes that 

the Force Majeure Rule also would help 

promote robust risk management and 

reduce systemic risks by improving 

NSCC’s ability to identify and manage a 

force majeure event, and, as needed, to 

stabilize its financial condition so that 

NSCC can continue to operate and act 

as a source of stability for the financial 

markets it serves. 

The Commission believes that the 

Recovery Plan and the Force Majeure 

Rule reflect an approach designed to 

allow for a more considered and 

comprehensive evaluation by NSCC of a 

stressed market situation and the ways 

in which NSCC could apply available 

recovery tools in a manner intended to 

minimize the potential negative effects 

of the stress situation for NSCC, its 

Members, and the broader financial 

system. Therefore, the Commission 

believes that the Recovery Plan and the 

Force Majeure Rule would help promote 

robust risk management at NSCC and, 

thus, reduce systemic risks by 

establishing a means for NSCC to best 

determine the most appropriate way to 

address such stress situations in an 

effective manner. 

The Commission believes that the 

R&W Plan, generally, would help NSCC 

promote safety and soundness and 

support the stability of the broader 

financial system by providing a 

roadmap to wind-down that is designed 

to ensure the availability of NSCC’s 

critical services to the marketplace, 

while reducing disruption to the 

operations of Members and financial 

markets that might be caused by NSCC’s 

failure. Specifically, as described above, 

the Wind-down Plan, as facilitated by 

the Wind-down Rule and the 

Corporation Default Rule, would 

provide for the wind-down of NSCC’s 

business and transfer of membership 

and critical services if the recovery tools 

do not successfully return NSCC to 

financial viability. Accordingly, critical 

services, such as services that lack 

alternative providers or products, 

services that the failure of which could 

impact the availability of market 


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57 12 U.S.C. 5464(b). 

58A ‘‘covered clearing agency’’ means, among 

other things, a clearing agency registered with the 

Commission under Section 17A of the Exchange 

Act (15 U.S.C. 78q–1 et seq.) that is designated 

systemically important by the Financial Stability 

Oversight Counsel (‘‘FSOC’’) pursuant to the 

Clearing Supervision Act (12 U.S.C. 5461 et seq.). 

See 17 CFR 240.17Ad–22(a)(5)–(6). On July 18, 

2012, FSOC designated NSCC as systemically 

important. U.S. Department of the Treasury, ‘‘FSOC 

Makes First Designations in Effort to Protect Against 

Future Financial Crises,’’ available at https://

www.treasury.gov/press-center/press-releases/ 

Pages/tg1645.aspx. Therefore, NSCC is a covered 

clearing agency. 

59 17 CFR 240.17Ad–22(e)(2)(i). 

60 15 U.S.C. 78q–1. 

61 17 CFR 240.17Ad–22(e)(2)(iii). 

62 17 CFR 240.17Ad–22(e)(2)(v). 

63 15 U.S.C. 78q–1. 

64 17 CFR 240.17Ad–22(e)(2)(i), (iii), and (v). 

65 17 CFR 240.17Ad–22(e)(3)(ii). 

liquidity, and services that are 

interconnected with other participants 

and processes within the U.S. financial 

system would be able to continue in an 

orderly manner while NSCC is seeking 

to wind-down its services. By designing 

the Wind-down Plan and these 

Proposed Rules to enable the continuity 

of NSCC’s critical services and 

membership in an orderly manner while 

NSCC is seeking to wind-down its 

services, the Commission believes these 

proposed changes would help NSCC 

promote safety and soundness and 

support stability in the broader financial 

system in the event the Wind-down 

Plan is implemented. 

As described above, NSCC proposes 

to re-number current Rule 42 (Winddown of a Member, Fund Member or 

Insurance Carrier/Retirement Services 

Member) to Rule 40, which is currently 

reserved for future use, to align the 

order of the Proposed Rules with the 

order of comparable rules in the 

rulebooks of the other Clearing 

Agencies. This proposed change would 

help create ease of reference to and 

heightened transparency of such rules, 

particularly for Members and for other 

clearing agencies and other market 

infrastructure that have links to, or 

reliance upon, the critical services 

offered by NSCC. Enhanced access to 

and transparency of these rules would 

therefore assist such parties in 

understanding, planning for, and 

reacting in an orderly manner to, the 

implementation by NSCC of the R&W 

Plan. Therefore, the Commission 

believes that NSCC’s proposed change 

to the numbering of its Rules would 

help support the stability of the broader 

financial system. 

By better enabling NSCC to promote 

robust risk management, promote safety 

and soundness, reduce systemic risks, 

and support the stability of the broader 

financial system, as described above, the 

Commission believes that the proposed 

changes in the Advance Notice are 

consistent with Section 805(b) of the 

Clearing Supervision Act.57

B. Consistency With Rules 17Ad– 

22(e)(2)(i), (iii), and (v) Under the Act 

Rule 17Ad–22(e)(2)(i) under the Act 

requires a covered clearing agency 58 to 

establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to provide for 

governance arrangements that are clear 

and transparent.59 Rule 17Ad– 

22(e)(2)(iii) under the Act requires a 

covered clearing agency to establish, 

implement, maintain, and enforce 

written policies and procedures 

reasonably designed to provide for 

governance arrangements that support 

the public interest requirements in 

Section 17A of the Act 60 applicable to 

clearing agencies, and the objectives of 

owners and participants.61 Rule 17Ad– 

22(e)(2)(v) under the Act requires a 

covered clearing agency to establish, 

implement, maintain, and enforce 

written policies and procedures 

reasonably designed to provide for 

governance arrangements that specify 

clear and direct lines of responsibility.62

As described above, the R&W Plan is 

designed to identify clear lines of 

responsibility concerning the R&W Plan 

including (1) the ongoing development 

of the R&W Plan; (2) ongoing 

maintenance of the R&W Plan; (3) 

reviews and approval of the R&W Plan; 

and (4) the functioning and 

implementation of the R&W Plan. As 

described above, the R&R Team, which 

reports to the Management Committee, 

is responsible for maintaining the R&W 

Plan and for the development and 

ongoing maintenance of the overall 

recovery and wind-down planning 

process. Meanwhile, 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 also would review and approve any 

changes that are proposed to the R&W 

Plan outside of the biennial review. 

Moreover, the R&W Plan would state the 

stages of escalation required to manage 

recovery under the Recovery Plan or to 

invoke NSCC’s wind-down under the 

Wind-down Plan, which would range 

from relevant business line managers up 

to the Board. The R&W Plan would 

identify the parties responsible for 

certain activities under both the 

Recovery Plan and the Wind-down Plan, 

and would describe their respective 

roles. The R&W Plan also would specify 

the process NSCC would take to receive 

input from various parties at NSCC, 

including management committees and 

the Board. 

In considering the above, the 

Commission believes that the R&W Plan 

would help contribute to establishing, 

implementing, maintaining, and 

enforcing written policies and 

procedures reasonably designed to 

provide for governance arrangements 

that are clear and transparent because it 

would specify lines of control. The 

Commission also believes that the R&W 

Plan would help contribute to 

establishing, implementing, 

maintaining, and enforcing written 

policies and procedures reasonably 

designed to provide for governance 

arrangements that support the public 

interest requirements in Section 17A of 

the Act 63 applicable to clearing 

agencies, and the objectives of owners 

and participants because the R&W Plan 

specifies the process NSCC would take 

to receive input from various NSCC 

stakeholders. In addition, the 

Commission believes that the R&W Plan 

would help contribute to establishing, 

implementing, maintaining, and 

enforcing written policies and 

procedures reasonably designed to 

provide for governance arrangements 

that specify clear and direct lines of 

responsibility because it specifies who 

is responsible for the ongoing 

development, maintenance, reviews, 

approval, functioning, and 

implementation of the R&W Plan. 

Therefore, the Commission believes 

that the R&W Plan is consistent with 

Rules 17Ad–22(e)(2)(i), (iii), and (v) 

under the Act.64

C. Consistency With Rule 17Ad– 

22(e)(3)(ii) Under the Act 

Rule 17Ad–22(e)(3)(ii) under the Act 

requires a covered clearing agency to 

establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to maintain a 

sound risk management framework for 

comprehensively managing legal, credit, 

liquidity, operational, general business, 

investment, custody, and other risks 

that arise in or are borne by the covered 

clearing agency, which includes plans 

for the recovery and orderly wind-down 

of the covered clearing agency 

necessitated by credit losses, liquidity 

shortfalls, losses from general business 

risk, or any other losses.65

As described above, the R&W Plan’s 

Recovery Plan provides a plan for 

NSCC’s recovery necessitated by credit 

losses, liquidity shortfalls, losses from 

general business risk, or any other losses 

by defining the risk management 

activities, stress conditions and 


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66 11 U.S.C. 101 et seq. 

67See, e.g., 11 U.S.C. 363, 726, and 1129(a)(7). 

68See 11 U.S.C. 363(f). 

69The Wind-down Plan would identify certain 

factors the Board may consider in evaluating 

alternatives, 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. 

70 17 CFR 240.17Ad–22(e)(3)(ii). 

71 17 CFR 240.17Ad–22(e)(15)(i). 

72 17 CFR 240.17Ad–22(e)(3)(ii). 

73 17 CFR 240.17Ad–22(e)(15)(ii). 

74Supra note 13. 

75 17 CFR 240.17Ad–22(e)(15)(i) and (ii). 

76 12 U.S.C. 5465(e)(1)(I). 

indicators, and tools that NSCC may use 

to address stress scenarios that could 

eventually prevent NSCC from being 

able to provide its critical services as a 

going concern. More specifically, 

through the framework of the Crisis 

Continuum, which identifies tools that 

can be employed to mitigate losses and 

mitigate or minimize liquidity needs as 

the market environment becomes 

increasingly stressed, the Recovery Plan 

would identify measures that NSCC may 

take to manage risks of credit losses and 

liquidity shortfalls, and other losses that 

could arise from a Member default. The 

Recovery Plan also would address 

NSCC’s management of general business 

risks and other non-default risks that 

could lead to losses by identifying 

potential non-default losses and the 

resources available to NSCC to address 

such losses, including recovery triggers 

and tools to mitigate such losses. 

Therefore, the Commission believes that 

the R&W Plan’s Recovery Plan helps 

NSCC establish, implement, maintain, 

and enforce written policies and 

procedures reasonably designed to 

maintain a sound risk management 

framework for comprehensively 

managing legal, credit, liquidity, 

operational, general business, 

investment, custody, and other risks 

that arise in or are borne by NSCC, 

which includes a recovery plan 

necessitated by credit losses, liquidity 

shortfalls, losses from general business 

risk, or any other losses. 

As described above, the R&W Plan’s 

Wind-down Plan provides a plan for 

orderly wind-down of NSCC, which 

would be triggered by a determination 

by the Board that recovery efforts have 

not been, or are unlikely to be, 

successful in returning NSCC to 

viability as a going concern. Once 

triggered, the Wind-down Plan sets forth 

mechanisms for the transfer of NSCC’s 

membership and business, and it is 

designed to maintain continued access 

to NSCC’s critical services and to 

minimize market impact of the transfer 

while NSCC is seeking to ultimately 

wind-down its services. Specifically, the 

Wind-down Plan would provide for the 

transfer of NSCC’s business, assets, and 

membership to another legal entity with 

such transfer being effected in 

connection with proceedings under 

Chapter 11 of the U.S. Bankruptcy 

Code.66 After effectuating this transfer, 

NSCC would liquidate any remaining 

assets in an orderly manner in 

bankruptcy proceedings. 

Although the Commission is not 

opining on the Wind-down Plan’s 

consistency with the U.S. Bankruptcy 

Code, in reviewing the proposed 

changes, the Commission believes that 

NSCC’s intent to use bankruptcy 

proceedings to achieve an orderly 

liquidation of assets after any transfer of 

NSCC’s business appears reasonable, in 

light of the provisions of the Bankruptcy 

Code that address the liquidation and 

distribution of a debtor’s property 

among creditors and interest holders.67

Under many circumstances, Section 363 

of the Bankruptcy Code provides for the 

sale of property ‘‘free and clear of any 

interest in such property of an entity 

other than the estate[.]’’ 68 The 

Commission believes that NSCC’s 

analysis regarding the applicability of 

these provisions, while not free from 

doubt, presents a reasonable approach 

to liquidation in light of the 

circumstances and the available 

alternatives.69 Therefore, the 

Commission believes that the R&W 

Plan’s Wind-down Plan helps NSCC 

establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to maintain a 

sound risk management framework for 

comprehensively managing legal, credit, 

liquidity, operational, general business, 

investment, custody, and other risks 

that arise in or are borne by NSCC, 

which includes a wind-down plan 

necessitated by credit losses, liquidity 

shortfalls, losses from general business 

risk, or any other losses. 

Therefore, the Commission believes 

that the R&W Plan is consistent with 

Rule 17Ad–22(e)(3)(ii) under the Act.70

D. Consistency With Rules 17Ad– 

22(e)(15)(i)–(ii) Under the Act 

Rule 17Ad–22(e)(15)(i) under the Act 

requires a covered clearing agency to 

establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to identify, 

monitor, and manage its general 

business risk and hold sufficient liquid 

net assets funded by equity to cover 

potential general business losses so that 

the covered clearing agency can 

continue operations and services as a 

going concern if those losses 

materialize, including by determining 

the amount of liquid net assets funded 

by equity based upon its general 

business risk profile and the length of 

time required to achieve a recovery or 

orderly wind-down, as appropriate, of 

its critical operations and services if 

such action is taken.71 Rule 17Ad– 

22(e)(15)(ii) under the Act requires a 

covered clearing agency to establish, 

implement, maintain, and enforce 

written policies and procedures 

reasonably designed to identify, 

monitor, and manage its general 

business risk and hold sufficient liquid 

net assets funded by equity to cover 

potential general business losses so that 

the covered clearing agency can 

continue operations and services as a 

going concern if those losses 

materialize, including by holding liquid 

net assets funded by equity 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, as contemplated by the 

plans established under Rule 17Ad– 

22(e)(3)(ii) under the Act,72 discussed 

above.73

As discussed above, NSCC’s Capital 

Policy is designed to address how NSCC 

holds LNA in compliance with these 

requirements,74 while the Wind-down 

Plan would include an analysis to 

estimate the amount of time and cost to 

achieve a recovery or orderly winddown of NSCC’s critical operations and 

services, and would provide that the 

Board review and approve this analysis 

and estimation annually. The Winddown Plan also would 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 amount of 

LNA that NSCC plans to hold to cover 

potential general business losses so that 

it can continue operations and services 

as a going concern if those losses 

materialize, is calculated as the greatest 

of three estimated amounts, one of 

which is this Recovery/Wind-down 

Capital Requirement. Therefore, the 

Commission believes that the R&W Plan 

is consistent with Rules 17Ad– 

22(e)(15)(i) and (ii) under the Act.75

III. Conclusion 

It is therefore noticed, pursuant to 

Section 806(e)(1)(I) of the Clearing 

Supervision Act,76 that the Commission 

does not object to advance notice SR– 


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1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 83666 (July 

18, 2018), 83 FR 35041 (July 24, 2018) (SR–NSCC– 

2018–004) (‘‘Notice’’). 

4Available at http://www.dtcc.com/legal/rulesand-procedures. 

5Floor brokerage firms are members of the New 

York Stock Exchange (‘‘NYSE’’) and NYSE 

American. Floor brokerage firms execute trades on 

behalf of their clients for a commission. 

6Notice, 83 FR at 35041. 

7 Id. 

8Notice, 83 FR at 35041–42. 

9Notice, 83 FR at 35042. 

10 Id. 

11 Id. 

12 Id. 

13 Id. 

14 15 U.S.C. 78s(b)(2)(C). 

15 15 U.S.C. 78q–1(b)(3)(F); 17 CFR 240.17Ad– 

22(e)(21)(iv). 

16 15 U.S.C. 78q–1(b)(3)(F). 

17 Id. 

18A ‘‘covered clearing agency’’ means, among 

other things, a clearing agency registered with the 

Commission under Section 17A of the Exchange 

Act (15 U.S.C. 78q–1 et seq.) that is designated 

systemically important by the Financial Stability 

Oversight Counsel (‘‘FSOC’’) pursuant to the 

Payment, Clearing, and Settlement Supervision Act 

of 2010 (12 U.S.C. 5461 et seq.). See 17 CFR 

240.17Ad–22(a)(5)–(6). On July 18, 2012, FSOC 

designated NSCC as systemically important. U.S. 

Department of the Treasury, ‘‘FSOC Makes First 

Designations in Effort to Protect Against Future 

Financial Crises,’’ available at https://

www.treasury.gov/press-center/press-releases/ 

Pages/tg1645.asp. Therefore, NSCC is a covered 

clearing agency. 

19 17 CFR 240.17Ad–22(e)(21)(iv). 

NSCC–2017–805, as modified by 

Amendment No. 1, and that NSCC is 

authorized to implement the proposal as 

of the date of this notice or the date of 

an order by the Commission approving 

proposed rule change SR–NSCC–2017– 

017, as modified by Amendment No. 1, 

whichever is later. 

By the Commission. 

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–18869 Filed 8–29–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83937; File No. SR–NSCC– 

2018–004] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Order Approving 

Proposed Rule Change To Terminate 

the Commission Billing Service and 

the Commission Billing Limited 

Membership 

August 24, 2018. 

On July 13, 2018, National Securities 

Clearing Corporation (‘‘NSCC’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’) proposed 

rule change SR–NSCC–2018–004, 

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

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder.2

The proposed rule change was 

published for comment in the Federal 

Register on July 24, 2018.3 The 

Commission did not receive any 

comment letters on the proposed rule 

change. For the reasons discussed 

below, the Commission approves the 

proposed rule change. 

I. Description of the Proposed Rule 

Change 

The proposed rule change would 

amend the Rules and Procedures of 

NSCC (‘‘Rules’’) 4 to terminate the 

Commission Billing service. Currently, 

the Commission Billing service 

facilitates the payment of commissions 

between NSCC’s members (‘‘Members’’) 

and floor brokerage firms 5 that charge 

commissions (‘‘Commission Billing 

Members’’).6 Commission Billing 

Members hold a limited membership at 

NSCC that allows such firms to 

participate in NSCC solely for the 

collection of commissions.7 NSCC 

tabulates all commission payment 

records received on a monthly basis, 

and either sends amounts to The 

Depository Trust Company (‘‘DTC’’) for 

payment (for Members that are also 

Participants of DTC) or processes 

payments through the Automated 

Clearing House.8

NSCC proposes to terminate the 

Commission Billing service and the 

associated membership category.9 NSCC 

states that over the years the volumes of 

trades handled by floor brokerage firms 

have decreased, leading to a significant 

decrease in the use of this service.10

NSCC states that the reduced volumes of 

transactions have caused this service to 

be provided at a financial loss to 

NSCC.11 Additionally, NSCC states that 

due to the use of legacy systems that 

lack automation and support features, 

the service continues to rely on manual 

processes and requires personnel 

involvement, which can lead to errors.12

NSCC would implement the proposed 

changes no later than November 30, 

2018.13

II. Discussion and Commission 

Findings 

Section 19(b)(2)(C) of the Act directs 

the Commission to approve a proposed 

rule change of a self-regulatory 

organization if it finds that such 

proposed rule change is consistent with 

the requirements of the Act and rules 

and regulations thereunder applicable to 

such organization.14 The Commission 

believes the proposal is consistent with 

Act, specifically Section 17A(b)(3)(F) of 

the Act and Rules 17Ad–22(e)(21)(iv) 

under the Act.15

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

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

requires, in part, that the rules of a 

clearing agency, such as NSCC, be 

designed to promote the prompt and 

accurate clearance and settlement of 

securities transactions.16

As described above, the proposed rule 

change would terminate the 

Commission Billing service and the 

associated membership category. The 

proposed change is designed to 

eliminate an underutilized service that 

takes up NSCC resources (through its 

reliance on manual operations and by 

operating at a financial loss) and is no 

longer relied on by Members or the 

industry. As NSCC would no longer 

need to divert resources to the service, 

the proposed rule change would afford 

NSCC the opportunity to redeploy those 

resources in a manner that could better 

support NSCC’s other, more utilized 

clearance and settlement services. 

Accordingly, the Commission finds that 

the proposed rule change is designed to 

promote the prompt and accurate 

clearance and settlement of securities 

transactions, consistent with Section 

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

B. Rule 17Ad–22(e)(21)(iv) Under the 

Act 

Rule 17Ad–22(e)(21)(iv) under the Act 

requires a covered clearing agency 18 to 

establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to be efficient and 

effective in meeting the requirements of 

its participants and the markets it 

serves.19 As described above, use of the 

Commission Billing service has 

significantly decreased, as the industry 

has change and the service no longer 

provides the same value that it had 

historically. As a result, NSCC currently 

operates the service at a financial loss. 

As such, NSCC has determined that it 

would be more efficient and effective in 

meeting the requirements of its 

Members and the market NSCC serves to 

eliminate the service. In doing so, NSCC 

would be able to redirect the resources 

being consumed by the Commission 

Billing service to other, more needed 

services. Therefore, the Commission 

finds that the proposed rule change is 

designed to help ensure that NSCC is 

efficient and effective in meeting the 

requirements of its participants, 


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