Federal Register / Vol. 83, No. 171 / Tuesday, September 4, 2018 / Notices 44977 

69 17 CFR 240.17Ad–22(e)(15)(i) and (ii). 

70 15 U.S.C. 78q–1. 

71 15 U.S.C. 78s(b)(2). 

72 In approving the Proposed Rule Change, the 

Commission has considered the Proposed Rule 

Change’s impact on efficiency, competition, and 

capital formation. See 15 U.S.C. 78c(f). 

73 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3On December 18, 2017, NSCC filed the proposed 

rule change as advance notice SR–NSCC–2017–806 

with the Commission pursuant to Section 806(e)(1) 

of Title VIII of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act entitled the Payment, 

Clearing, and Settlement Supervision Act of 2010 

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

4(n)(1)(i) of the Act (‘‘Advance Notice’’). 12 U.S.C. 

5465(e)(1) and 17 CFR 240.19b–4(n)(1)(i), 

respectively. The Advance Notice was published for 

comment in the Federal Register on January 30, 

2018. In that publication, the Commission also 

extended the review period of the Advance Notice 

for an additional 60 days, pursuant to Section 

806(e)(1)(H) of the Clearing Supervision Act. 12 

U.S.C. 5465(e)(1)(H); Securities Exchange Act 

Release No. 82584 (January 24, 2018), 83 FR 4377 

(January 30, 2018) (SR–NSCC–2017–806). On April 

10, 2018, the Commission required additional 

information from NSCC pursuant to Section 

806(e)(1)(D) of the Clearing Supervision Act, which 

tolled the Commission’s period of review of the 

Advance Notice until 60 days from the date the 

information required by the Commission was 

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

5465(e)(1)(D); see 12 U.S.C. 5465(e)(1)(E)(ii) and 

(G)(ii); see Memorandum from the Office of 

Clearance and Settlement Supervision, Division of 

Trading and Markets, titled ‘‘Commission’s Request 

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

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

2018, NSCC filed Amendment No. 1 to the Advance 

Notice to amend and replace in its entirety the 

Advance Notice as originally filed on December 18, 

2017, which was published in the Federal Register 

on August 6, 2018. Securities Exchange Act Release 

No. 83748 (July 31, 2018), 83 FR 38375 (August 6, 

2018) (SR–NSCC–2017–806). NSCC submitted a 

courtesy copy of Amendment No. 1 to the Advance 

Notice through the Commission’s electronic public 

comment letter mechanism. Accordingly, 

Amendment No. 1 to the Advance Notice has been 

publicly available on the Commission’s website at 

https://www.sec.gov/rules/sro/nscc-an.htm since 

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

received a response to its request for additional 

information in consideration of the Advance Notice, 

which, in turn, added a further 60 days to the 

review period pursuant to Section 806(e)(1)(E) and 

(G) of the Clearing Supervision Act. 12 U.S.C. 

5465(e)(1)(E) and (G); see Memorandum from the 

Office of Clearance and Settlement Supervision, 

Division of Trading and Markets, titled ‘‘Response 

to the Commission’s Request for Additional 

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

rules/sro/nscc-an.htm. The Commission did not 

receive any comments. The proposal, as set forth in 

both the Advance Notice and the proposed rule 

change, each as modified by Amendments No. 1, 

shall not take effect until all required regulatory 

actions are completed. 

4Securities Exchange Act Release No. 82428 

(January 2, 2018), 83 FR 897 (January 8, 2018) (SR– 

NSCC–2017–018). 

5Securities Exchange Act Release No. 82670 

(February 8, 2018), 83 FR 6626 (February 14, 2018) 

(SR–DTC–2017–022, SR–FICC–2017–022, SR– 

NSCC–2017–018). 

6Securities Exchange Act Release No. 82910 

(March 20, 2018), 83 FR 12968 (March 26, 2018) 

(SR–NSCC–2017–018). 

7Securities Exchange Act Release No. 83510 

(June 25, 2018), 83 FR 30791 (June 29, 2018) (SR– 

DTC–2017–022, SR–FICC–2017–022, SR–NSCC– 

2017–018). 

8Securities Exchange Act Release No. 83633 (July 

13, 2018), 83 FR 34227 (July 19, 2018) (SR–NSCC– 

2017–018) (‘‘Notice of Amendment No. 1’’). NSCC 

submitted a courtesy copy of Amendment No. 1 to 

the proposed rule change through the Commission’s 

electronic public comment letter mechanism. 

Accordingly, Amendment No. 1 to the proposed 

rule change has been publicly available on the 

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

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

9Each capitalized term not otherwise defined 

herein has its respective meaning as set forth in the 

Rules, available at http://www.dtcc.com/∼/media/ 

Files/Downloads/legal/rules/nscc_rules.pdf. 

10 DTCC is a user-owned and user-governed 

holding company and is the parent company of 

DTC, FICC, and NSCC. DTCC operates on a shared 

services model with respect to the DTCC Clearing 

Agencies. Most corporate functions are established 

and managed on an enterprise-wide basis pursuant 

to intercompany agreements under which it is 

generally DTCC that provides a relevant service to 

a DTCC Clearing Agency. 

which is this Recovery/Wind-down 

Capital Requirement. Therefore, the 

Commission finds that the R&W Plan is 

consistent with Rules 17Ad–22(e)(15)(i) 

and (ii) under the Act.69

III. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposal is 

consistent with the requirements of the 

Act and in particular with the 

requirements of Section 17A of the 

Act 70 and the rules and regulations 

thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,71 that 

proposed rule change SR–DTC–2017– 

021, as modified by Amendment No. 1, 

be, and it hereby is, approved 72 as of 

the date of this order or the date of a 

notice by the Commission authorizing 

DTC to implement advance notice SR– 

DTC–2017–803, as modified by 

Amendment No. 1, whichever is later. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.73

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–19054 Filed 8–31–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83971; File No. SR–NSCC– 

2017–018] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Order Approving a 

Proposed Rule Change, as Modified by 

Amendment No. 1, To Amend the Loss 

Allocation Rules and Make Other 

Changes 

August 28, 2018. 

On December 18, 2017, National 

Securities Clearing Corporation 

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

Exchange Commission (‘‘Commission’’) 

proposed rule change SR–NSCC–2017– 

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

Securities Exchange Act of 1934 

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

amend its loss allocation rules and make 

other conforming and technical 

changes.3 The proposed rule change was 

published for comment in the Federal 

Register on January 8, 2018.4 On 

February 8, 2018, the Commission 

designated a longer period within which 

to approve, disapprove, or institute 

proceedings to determine whether to 

approve or disapprove the proposed 

rule change.5 On March 20, 2018, the 

Commission instituted proceedings to 

determine whether to approve or 

disapprove the proposed rule change.6

On June 25, 2018, the Commission 

designated a longer period for 

Commission action on the proceedings 

to determine whether to approve or 

disapprove the proposed rule change.7

On June 28, 2018, NSCC filed 

Amendment No. 1 to the proposed rule 

change to amend and replace in its 

entirety the proposed rule change as 

originally filed on December 18, 2017.8

The Commission did not receive any 

comments. This order approves the 

proposed rule change, as modified by 

Amendment No. 1 (hereinafter, 

‘‘Proposed Rule Change’’). 

I. Description 

The Proposed Rule Change consists of 

proposed changes to NSCC’s Rules and 

Procedures (‘‘Rules’’) 9 in order to (1) 

modify the loss allocation process; (2) 

align NSCC’s loss allocation rule among 

the three clearing agencies of The 

Depository Trust & Clearing Corporation 

(‘‘DTCC’’)—The Depository Trust 

Company (‘‘DTC’’), Fixed Income 

Clearing Corporation (‘‘FICC’’) 

(including the Government Securities 

Division (‘‘FICC/GSD’’) and the 

Mortgage-Backed Securities Division 

(‘‘FICC/MBSD’’)), and NSCC 

(collectively, the ‘‘DTCC Clearing 

Agencies’’); 10 (3) reduce the time within 

which NSCC is required to return a 

former Member’s Clearing Fund deposit; 

and (4) make conforming and technical 

changes. Each of these proposed 

changes is described below. A detailed 

description of the specific rule text 

changes proposed in this Advance 


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44978 Federal Register / Vol. 83, No. 171 / Tuesday, September 4, 2018 / Notices 

11See Notice of Amendment No. 1, supra note 8. 12When NSCC restricts a Member’s access to 

services generally, NSCC is said to have ‘‘ceased to 

act’’ for the Member. Rule 46 (Restrictions on 

Access to Services) sets out the circumstances 

under which NSCC may cease to act for a Member, 

and Rule 18 (Procedures for When the Corporation 

Declines or Ceases to Act) sets out the types of 

actions NSCC may take when it ceases to act for a 

Member. Supra note 9. 

13NSCC calculates its General Business Risk 

Capital Requirement as the amount equal to the 

greatest of (1) an amount determined based on its 

general business profile, (2) an amount determined 

based on the time estimated to execute a recovery 

or orderly wind-down of NSCC’s critical operations, 

and (3) an amount determined based on an analysis 

of NSCC’s estimated operating expenses for a six 

month period. 

14See Securities Exchange Act Release No. 81105 

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

DTC–2017–003, SR–NSCC–2017–004, SR–FICC– 

2017–007). 

15 17 CFR 240.17Ad–22(e)(15). 

16NSCC does not propose to apply the Corporate 

Contribution if the Clearing Fund is used as a 

liquidity resource; however, if NSCC uses the 

Clearing Fund as a liquidity resource for more than 

30 calendar days, as set forth in proposed Section 

2 of Rule 4, then NSCC would have to consider the 

amount used as a loss to the Clearing Fund incurred 

as a result of a Defaulting Member Event and 

allocate the loss pursuant to proposed Section 4 of 

Rule 4, which would then require the application 

of a Corporate Contribution. 

17NSCC states that 250 business days would be 

a reasonable estimate of the time frame that NSCC 

would be required to replenish the Corporate 

Contribution by equity in accordance with NSCC’s 

Clearing Agency Policy on Capital Requirements, 

including a conservative additional period to 

account for any potential delays and/or unknown 

exigencies in times of distress. 

Notice can be found in the Notice of 

Amendment No. 1.11

A. Changes to the Loss Allocation 

Process 

NSCC’s loss allocation rules currently 

provide that in the event NSCC ceases 

to act 12 for a Member, the amount on 

deposit to the Clearing Fund from the 

defaulting Member, along with any 

other resources of, or attributable to, the 

defaulting Member that NSCC may 

access under the Rules, are the first 

source of funds NSCC would use to 

cover any losses that may result from 

the closeout of the defaulting Member’s 

guaranteed positions. If these amounts 

are not sufficient to cover all losses 

incurred, then NSCC will apply the 

following available resources, in the 

following order: (1) As provided in 

Addendum E of the Rules, NSCC’s 

corporate contribution of at least 25 

percent of NSCC’s retained earnings 

existing at the time of a Member 

impairment, or such greater amount as 

the Board of Directors may determine; 

and (2) if a loss still remains, as 

provided in Rule 4, the required 

Clearing Fund deposits of nondefaulting Members on the date of 

default. 

Pursuant to current Section 5 of Rule 

4, if, as a result of applying the Clearing 

Fund deposit of a Member, the 

Member’s actual Clearing Fund deposit 

is less than its Required Deposit, it will 

be required to eliminate such deficiency 

in order to satisfy its Required Deposit 

amount. Pursuant to current Section 4 of 

Rule 4, Members can also be assessed 

for non-default losses incident to the 

operation of the clearance and 

settlement business of NSCC. Pursuant 

to current Section 8 of Rule 4, Members 

may withdraw from membership within 

specified timeframes after a loss 

allocation charge to limit their 

obligation for future assessments. 

NSCC proposes to change the manner 

in which each of the aspects of the loss 

allocation process described above 

would be employed. The proposal 

would clarify or adjust certain elements 

and introduce certain new loss 

allocation concepts, as further discussed 

below. In addition, the proposal would 

address the loss allocation process as it 

relates to losses arising from or relating 

to multiple default or non-default events 

in a short period of time, also as 

described below. 

NSCC proposes six key changes to 

enhance NSCC’s loss allocation process. 

Specifically, NSCC proposes to make 

changes regarding (1) the Corporate 

Contribution, (2) the Event Period, (3) 

the loss allocation round and notice, (4) 

the look-back period, (5) the loss 

allocation withdrawal notice and cap, 

and (6) the governance around nondefault losses, each of which is 

discussed below. 

(1) Corporate Contribution 

Addendum E of the Rules currently 

provides that NSCC will contribute no 

less than 25 percent of its retained 

earnings (or such higher amount as the 

Board of Directors shall determine) to a 

loss or liability that is not satisfied by 

the impaired Member’s Clearing Fund 

deposit. Under the proposal, NSCC 

would amend the calculation of its 

corporate contribution from a 

percentage of its retained earnings to a 

mandatory amount equal to 50 percent 

of the NSCC General Business Risk 

Capital Requirement.13

NSCC’s General Business Risk Capital 

Requirement, as defined in NSCC’s 

Clearing Agency Policy on Capital 

Requirements,14 is, at a minimum, equal 

to the regulatory capital that NSCC is 

required to maintain in compliance with 

Rule 17Ad–22(e)(15) under the Act.15

The proposed Corporate Contribution 

would be held in addition to NSCC’s 

General Business Risk Capital 

Requirement. 

Under the current Addendum E of the 

Rules, NSCC has the discretion to 

contribute amounts higher than the 

specified percentage of retained 

earnings, as determined by the Board of 

Directors, to any loss or liability 

incurred by NSCC as result of a 

Member’s impairment. This option 

would be retained and expanded under 

the proposal so that NSCC can 

voluntarily apply amounts greater than 

the Corporate Contribution against any 

loss or liability (including non-default 

losses) of NSCC, if the Board of 

Directors, in its sole discretion, believes 

such to be appropriate under the factual 

situation existing at the time. 

Currently, the Rules do not require 

NSCC to contribute its retained earnings 

to losses and liabilities other than those 

from Member impairments. Under the 

proposal, NSCC would apply its 

Corporate Contribution to non-default 

losses as well. The proposed Corporate 

Contribution would apply to losses 

arising from Defaulting Member Events 

and Declared Non-Default Loss Events, 

as defined in the proposed change, and 

would be a mandatory contribution by 

NSCC prior to any allocation of the loss 

among NSCC’s Members.16

As proposed, if the Corporate 

Contribution is fully or partially used 

against a loss or liability relating to an 

Event Period, the Corporate 

Contribution would be reduced to the 

remaining unused amount, if any, 

during the following 250 business days 

in order to permit NSCC to replenish the 

Corporate Contribution.17 Under the 

proposal, Members would receive notice 

of any such reduction to the Corporate 

Contribution. 

(2) Event Period 

NSCC states that in order to clearly 

define the obligations of NSCC and its 

Members regarding loss allocation and 

to balance the need to manage the risk 

of sequential loss events against 

Members’ need for certainty concerning 

their maximum loss allocation 

exposures, NSCC proposes to introduce 

the concept of an Event Period to the 

Rules to address the losses and 

liabilities that may arise from or relate 

to multiple Defaulting Member Events 

and/or Declared Non-Default Loss 

Events that arise in quick succession. 

Specifically, the proposal would group 

Defaulting Member Events and Declared 

Non-Default Loss Events occurring 

within a period of 10 business days 

(‘‘Event Period’’) for purposes of 

allocating losses to Members in one or 


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Federal Register / Vol. 83, No. 171 / Tuesday, September 4, 2018 / Notices 44979 

18NSCC states that having a 10 business day 

Event Period would provide a reasonable period of 

time to encompass potential sequential Defaulting 

Member Events or Declared Non-Default Loss 

Events that are likely to be closely linked to an 

initial event and/or a severe market dislocation 

episode, while still providing appropriate certainty 

for Members concerning their maximum exposure 

to mutualized losses with respect to such events. 

19Under the proposal, each Member that is a 

Member on the first day of an Event Period would 

be obligated to pay its pro rata share of losses and 

liabilities arising out of or relating to each 

Defaulting Member Event (other than a Defaulting 

Member Event with respect to which it is the 

Defaulting Member) and each Declared Non-Default 

Loss Event occurring during the Event Period. 

20Pursuant to current Section 8 of Rule 4, the 

time period for a Member to give notice of its 

election to terminate its business with NSCC in 

respect of a pro rata charge is 10 business days after 

receiving notice of a pro rata charge. Supra note 9. 

NSCC states that it would be appropriate to shorten 

such time period from 10 business days to five 

business days because NSCC needs timely notice of 

which Members would remain in its membership 

for purposes of calculating the loss allocation for 

any subsequent round. NSCC states that five 

business days would provide Members with 

sufficient time to decide whether to cap their loss 

allocation obligations by withdrawing from their 

membership in NSCC. 

21NSCC states that allowing Members two 

business days to satisfy their loss allocation 

obligations would provide Members sufficient 

notice to arrange funding, if necessary, while 

allowing NSCC to address losses in a timely 

manner. 

22NSCC states that its current loss allocation 

rules pre-date NSCC’s move to a risk-based 

margining methodology. 

23NSCC states that having a look-back period of 

70 business days is appropriate because it would be 

long enough to enable NSCC to capture a full 

calendar quarter of a Member’s activities, including 

quarterly option expirations, and smooth out the 

impact from any abnormalities and/or arbitrariness 

that may have occurred, but not too long that the 

Member’s business strategy and outlook could have 

shifted significantly, resulting in material changes 

to the size of its portfolios. 

more rounds, subject to the limitations 

of loss allocation as explained below.18

In the case of a loss or liability arising 

from or relating to a Defaulting Member 

Event, an Event Period would begin on 

the day NSCC notifies Members that it 

has ceased to act for the Defaulting 

Member (or the next business day, if 

such day is not a business day). In the 

case of a loss or liability arising from or 

relating to a Declared Non-Default Loss 

Event, an Event Period would begin on 

the day that NSCC notifies Members of 

the Declared Non-Default Loss Event (or 

the next business day, if such day is not 

a business day). If a subsequent 

Defaulting Member Event or Declared 

Non-Default Loss Event occurs during 

an Event Period, any losses or liabilities 

arising out of or relating to any such 

subsequent event would be resolved as 

losses or liabilities that are part of the 

same Event Period, without extending 

the duration of such Event Period. An 

Event Period may include both 

Defaulting Member Events and Declared 

Non-Default Loss Events, and there 

would not be separate Event Periods for 

Defaulting Member Events or Declared 

Non-Default Loss Events occurring 

during overlapping 10 business day 

periods. 

The amount of losses that may be 

allocated by NSCC, subject to the 

required Corporate Contribution, and to 

which a Loss Allocation Cap would 

apply for any Member that elects to 

withdraw from membership in respect 

of a loss allocation round, would 

include any and all losses from any 

Defaulting Member Events and any 

Declared Non-Default Loss Events 

during the Event Period, regardless of 

the amount of time, during or after the 

Event Period, required for such losses to 

be crystallized and allocated.19

(3) Loss Allocation Round and Loss 

Allocation Notice 

Under the proposal, a loss allocation 

‘‘round’’ would mean a series of loss 

allocations relating to an Event Period, 

the aggregate amount of which is 

limited by the sum of the Loss 

Allocation Caps of affected Members (a 

‘‘round cap’’). When the aggregate 

amount of losses allocated in a round 

equals the round cap, any additional 

losses relating to the applicable Event 

Period would be allocated in one or 

more subsequent rounds, in each case 

subject to a round cap for that round. 

NSCC may continue the loss allocation 

process in successive rounds until all 

losses from the Event Period are 

allocated among Members that have not 

submitted a Loss Allocation Withdrawal 

Notice in accordance with proposed 

Section 6 of Rule 4. 

Each loss allocation would be 

communicated to Members by the 

issuance of a notice that advises each 

Member of the amount being allocated 

to it (‘‘Loss Allocation Notice’’). Each 

Member’s pro rata share of losses and 

liabilities to be allocated in any round 

would be equal to (1) the average of its 

Required Fund Deposit for the 70 

business days preceding the first day of 

the applicable Event Period or such 

shorter period of time that the Member 

has been a Member (each Member’s 

‘‘Average RFD’’), divided by (2) the sum 

of Average RFD amounts of all Members 

subject to loss allocation in such round. 

Each Loss Allocation Notice would 

specify the relevant Event Period and 

the round to which it relates. The first 

Loss Allocation Notice in any first, 

second, or subsequent round would 

expressly state that such Loss Allocation 

Notice reflects the beginning of the first, 

second, or subsequent round, as the case 

may be, and that each Member in that 

round has five business days from the 

issuance of such first Loss Allocation 

Notice for the round to notify NSCC of 

its election to withdraw from 

membership with NSCC pursuant to 

proposed Section 6 of Rule 4, and 

thereby benefit from its Loss Allocation 

Cap.20 In other words, the proposed 

change would link the Loss Allocation 

Cap to a round in order to provide 

Members the option to limit their loss 

allocation exposure at the beginning of 

each round. After a first round of loss 

allocations with respect to an Event 

Period, only Members that have not 

submitted a Loss Allocation Withdrawal 

Notice, in accordance with proposed 

Section 6 of Rule 4, would be subject to 

further loss allocation with respect to 

that Event Period. 

NSCC’s current loss allocation 

provisions provide that if a charge is 

made against a Member’s actual 

Clearing Fund deposit, and as result 

thereof the Member’s deposit is less 

than its Required Deposit, the Member 

will, upon demand by NSCC, be 

required to replenish its deposit to 

eliminate the deficiency within such 

time as NSCC shall require. Under the 

proposal, Members would receive two 

business days’ notice of a loss 

allocation, and be required to pay the 

requisite amount no later than the 

second business day following the 

issuance of such notice.21

(4) Look-Back Period 

Currently, the Rules calculate a 

Member’s pro rata share for purposes of 

loss allocation based on the Member’s 

activity in each of the various services 

or Systems offered by NSCC.22 NSCC 

states that it would be more appropriate 

to determine a Member’s pro rata share 

of losses and liabilities based on the 

amount of risk that the Member brings 

to NSCC, which is represented by the 

Member’s Required Deposit (NSCC 

proposes that ‘‘Required Deposits’’ be 

renamed ‘‘Required Fund Deposits,’’ as 

described below). Accordingly, NSCC 

proposes to calculate each Member’s pro 

rata share of losses and liabilities to be 

allocated in any round (as described 

above) to be equal to (1) the Member’s 

Average RFD divided by (2) the sum of 

Average RFD amounts for all Members 

that are subject to loss allocation in such 

round. The proposed rule would define 

a Member’s Average RFD as the average 

of the Member’s Required Fund Deposit 

for the 70 business days 23 preceding the 

first day of the applicable Event Period 

or such shorter period of time that the 

Member has been a Member. 

Additionally, if a Member withdraws 

from membership pursuant to proposed 


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24NSCC states that setting the start date of the 

withdrawal notification period to the date of 

issuance of a notice would provide a single 

withdrawal timeframe that would be consistent 

across the Members. 

25NSCC states that having an effective date of 

withdrawal that is not later than 10 business days 

following the last day of the Loss Allocation 

Withdrawal Notification Period would provide 

Members with a reasonable period of time to wind 

down their activities at NSCC while minimizing 

any uncertainty typically associated with a longer 

withdrawal period. 

26For the avoidance of doubt, pursuant to Section 

13(d) of Rule 4(A) (Supplemental Liquidity 

Deposits), a Special Activity Supplemental Deposit 

of a Member may not be used to calculate or be 

applied to satisfy any pro rata charge pursuant to 

Section 4 of Rule 4. Supra note 9. 

27 If a Member’s Loss Allocation Cap exceeds the 

Member’s then-current Required Fund Deposit, it 

must still cover the excess amount. 

28Non-default losses may arise from events such 

as damage to physical assets, a cyber-attack, or 

custody and investment losses. 

29Current Section 2(b) of Rule 4 provides that 

‘‘the use of the Clearing Fund . . . shall be limited 

to satisfaction of losses or liabilities of the 

Corporation incident to the operation of the 

clearance and settlement business of the 

Corporation other than losses and liabilities of a 

System.’’ Supra note 9. 

Section 6 of Rule 4, NSCC proposes that 

the Member’s Loss Allocation Cap be 

equal to the greater of (1) its Required 

Fund Deposit on the first day of the 

applicable Event Period or (2) its 

Average RFD. 

NSCC states that employing a 

backward-looking average to calculate a 

Member’s loss allocation pro rata share 

and Loss Allocation Cap would 

disincentivize Member behavior that 

could heighten volatility or reduce 

liquidity in markets in the midst of a 

financial crisis. Specifically, NSCC 

states that the proposed look-back 

period would discourage a Member 

from reducing its settlement activity 

during a time of stress primarily to limit 

its loss allocation pro rata share, which, 

as proposed, would now be based on the 

Member’s average settlement activity 

over the look-back period rather than its 

settlement activity at a point in time 

that the Member may not be able to 

estimate. Similarly, NSCC states that 

taking a backward-looking average into 

consideration when determining a 

Member’s Loss Allocation Cap would 

also deter a Member from reducing its 

settlement activity during a time of 

stress primarily to limit its Loss 

Allocation Cap. 

(5) Loss Allocation Withdrawal Notice 

and Loss Allocation Cap 

NSCC’s current loss allocation rules 

allow a Member to withdraw if the 

Member notifies NSCC, within 10 

business days after receipt of notice of 

a pro rata charge, of its election to 

terminate its membership and thereby 

avail itself of a cap on loss allocation. 

The proposed change would shorten the 

withdrawal notification period from 10 

business days to five business days, and 

would also change the beginning of 

such notification period from the receipt 

of the notice of a pro rata charge to the 

issuance of the notice.24 Each round 

would allow a Member the opportunity 

to notify NSCC of its election to 

withdraw from membership after 

satisfaction of the losses allocated in 

such round. Multiple Loss Allocation 

Notices may be issued with respect to 

each round to allocate losses up to the 

round cap. 

Pursuant to the proposed change, in 

order to avail itself of its Loss Allocation 

Cap, a Member would be able to elect 

to withdraw from membership by 

following the requirements in proposed 

Section 6 of Rule 4: (1) Specify in its 

Loss Allocation Withdrawal Notice (as 

defined below) an effective date of 

withdrawal, which date shall be no later 

than 10 business days following the last 

day of the applicable Loss Allocation 

Withdrawal Notification Period (as 

defined below) (i.e., no later than 10 

business days after the fifth business 

day following the first Loss Allocation 

Notice in that round of loss 

allocation); 25 (2) cease all activity that 

would result in transactions being 

submitted to NSCC for clearance and 

settlement for which such Member 

would be obligated to perform, where 

the scheduled final settlement date 

would be later than the effective date of 

the Member’s withdrawal; and (3) 

ensure that all clearance and settlement 

activity for which such Member is 

obligated to NSCC is fully and finally 

settled by the effective date of the 

Member’s withdrawal, including, 

without limitation, by resolving by such 

date all fails and buy-in obligations. 

Under the current Rules, a Member’s 

cap on loss allocation is its Required 

Deposit as fixed immediately prior to 

the time of the pro rata charge. Under 

the proposal, the first round and each 

subsequent round of loss allocation 

would allocate losses up to a round cap 

of the aggregate of all Loss Allocation 

Caps of those Members included in the 

round. In addition, a Member that 

withdraws in compliance with proposed 

Section 6 of Rule 4 would remain 

obligated for its pro rata share of losses 

and liabilities with respect to any Event 

Period for which it is otherwise 

obligated under Rule 4; 26 however, its 

aggregate obligation would be limited to 

the amount of its Loss Allocation Cap as 

fixed in the round for which it 

withdrew.27 If the first round of loss 

allocation does not fully cover NSCC’s 

losses, a second round would be noticed 

to those Members that did not elect to 

withdraw from membership in the 

previous round; however, the amount of 

any second or subsequent round cap 

may differ from the first or preceding 

round cap because there may be fewer 

Members in a second or subsequent 

round if Members elect to withdraw 

from membership with NSCC as 

provided in proposed Section 6 of Rule 

4 following the first Loss Allocation 

Notice in any round. To the extent that 

a Member’s Loss Allocation Cap exceeds 

the Member’s Required Fund Deposit on 

the first day of the applicable Event 

Period, NSCC may in its discretion 

retain any excess amounts on deposit 

from the Member, up to the Member’s 

Loss Allocation Cap. 

(6) Declared Non-Default Loss Event 

Aside from losses that NSCC might 

face as a result of a Defaulting Member 

Event, NSCC could incur non-default 

losses incident to its clearance and 

settlement business.28 The Rules 

currently permit NSCC to apply the 

Clearing Fund to non-default losses. 

Specifically, pursuant to Section 2(b) of 

Rule 4,29 NSCC can use the Clearing 

Fund to satisfy losses or liabilities of 

NSCC incident to the operation of the 

clearance and settlement business of 

NSCC. Section II of Addendum K of the 

Rules provides additional details 

regarding the application of the Clearing 

Fund to losses outside of a System. 

NSCC proposes to enhance the 

governance around non-default losses 

that would trigger loss allocation to 

Members by specifying that the Board of 

Directors would have to determine that 

there is a non-default loss that may be 

a significant and substantial loss or 

liability that may materially impair the 

ability of NSCC to provide clearance 

and settlement services in an orderly 

manner and would potentially generate 

losses to be mutualized among the 

Members in order to ensure that NSCC 

may continue to offer clearance and 

settlement services in an orderly 

manner. The proposed change would 

provide that NSCC would then be 

required to promptly notify Members of 

this determination, which would be 

referred to as a Declared Non-Default 

Loss Event. In addition, NSCC proposes 

to specify that a mandatory Corporate 

Contribution would apply to a Declared 

Non-Default Loss Event prior to any 

allocation of the loss among Members, 

as described above. Additionally, NSCC 

proposes language to clarify Members’ 

obligations for Declared Non-Default 

Loss Events. 


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30 15 U.S.C. 78s(b)(2)(C). 

31 15 U.S.C. 78q–1(b)(3)(F). 

32 17 CFR 240.17Ad–22(e)(4)(viii). 

33 17 CFR 240.17Ad–22(e)(13). 

34 17 CFR 240.17Ad–22(e)(23)(i) and (ii). 

35 15 U.S.C. 78q–1(b)(3)(F). 

B. Changes To Align the Loss Allocation 

Rules 

The proposed changes would align 

the loss allocation rules, to the extent 

practicable and appropriate, of the three 

DTCC Clearing Agencies so as to 

provide consistent treatment for firms 

that are participants of multiple DTCC 

Clearing Agencies. As proposed, the loss 

allocation process and certain related 

provisions would be consistent across 

the DTCC Clearing Agencies to the 

extent practicable and appropriate. 

C. Accelerated Return of Former 

Member’s Clearing Fund Deposit 

NSCC proposes to reduce the time in 

which NSCC may retain a Member’s 

Clearing Fund deposit. Specifically, 

NSCC proposes that if a Member gives 

notice to NSCC of its election to 

withdraw from membership, NSCC 

would return the Member’s Actual 

Deposit in the form of (1) cash or 

securities within 30 calendar days and 

(2) Eligible Letters of Credit within 90 

calendar days, after all of the Member’s 

transactions have settled and all 

matured and contingent obligations to 

NSCC, for which the Member was 

responsible while a Member, have been 

satisfied, except that NSCC may retain 

for up to two years the Actual Deposits 

from Members who have Sponsored 

Accounts at DTC. 

NSCC states that shortening the time 

for the return of a Member’s Clearing 

Fund deposit would be helpful to firms 

that have exited NSCC, so that such 

firms could have use of the deposits 

sooner than under the current Rules. 

However, such return would only occur 

if all obligations of the terminating 

Member to NSCC have been satisfied, 

which would include both matured as 

well as contingent obligations. 

D. Conforming and Technical Changes 

NSCC proposes to make various 

conforming and technical changes 

necessary to harmonize the remaining 

current Rules with the proposed 

changes. The proposed defined terms in 

the loss allocation process would be 

included in Rule 1 (Definitions and 

Descriptions), and obsolete terms would 

be replaced with the proposed terms. In 

addition, the rule numbers appear in the 

remaining current Rules would be 

updated to reflect the changes made by 

the proposal. NSCC further proposes to 

modify its Voluntary Termination 

process to avoid any potential conflicts 

with the loss allocation process. 

II. Discussion and Commission 

Findings 

Section 19(b)(2)(C) of the Act 30

directs the Commission to approve a 

proposed rule change of a selfregulatory organization if it finds that 

the proposed rule change is consistent 

with the requirements of the Act and the 

rules and regulations thereunder 

applicable to such organization. After 

careful review, the Commission finds 

that the Proposed Rule Change is 

consistent with the requirements of the 

Act and the rules and regulations 

thereunder applicable to NSCC. In 

particular, the Commission finds that 

the Proposed Rule Change is consistent 

with Section 17A(b)(3)(F) of the Act,31

Rule 17Ad–22(e)(4)(viii) under the 

Act,32 Rule 17Ad–22(e)(13) under the 

Act,33 and Rules 17Ad–22(e)(23)(i) and 

(ii) under the Act.34

A. Consistency With Section 

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

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

requires, in part, that a registered 

clearing agency have rules designed to 

assure the safeguarding of securities and 

funds which are in the custody or 

control of the clearing agency, to remove 

impediments to and perfect the 

mechanism of a national system for the 

prompt and accurate clearance and 

settlement of securities transactions, 

and to protect investors and the public 

interest.35

The Commission believes that the 

proposal to change the loss allocation 

process is designed to assure the 

safeguarding of securities and funds 

which are in the custody or control of 

the clearing agency. As described above, 

NSCC proposes to make a number of 

changes to its loss allocation process as 

described above. First, NSCC would 

modify the calculation of its Corporate 

Contribution to apply a mandatory fixed 

percentage of its General Business Risk 

Capital Requirement as compared to the 

current Rules that provide for a ‘‘no less 

than’’ percentage of retained earnings. 

The proposed changes also would 

clarify that the proposed Corporate 

Contribution would apply to Declared 

Non-Default Loss Events, as well as 

Defaulting Member Events, on a 

mandatory basis. Moreover, the 

proposal specifies that if the Corporate 

Contribution is applied to a loss or 

liability relating to an Event Period, 

then for any subsequent Event Periods 

that occur during the 250 business days 

thereafter, the Corporate Contribution 

would be reduced to the remaining, 

unused portion of the Corporate 

Contribution. The Commission believes 

that these changes set clear expectations 

about how and when NSCC’s Corporate 

Contribution would be applied to help 

address a loss, and allow NSCC to better 

anticipate and prepare for potential risk 

exposures that may arise during an 

Event Period. 

Second, as described above, NSCC 

proposes to determine a Member’s loss 

allocation obligation based on the 

average of its Required Fund Deposit 

over a look-back period of 70 business 

days and to determine its Loss 

Allocation Cap based on the greater of 

its Required Fund Deposit or the 

average thereof over a look-back period 

of 70 business days. These proposed 

changes are designed to allow NSCC to 

calculate a Member’s pro rata share of 

losses and liabilities based on the 

amount of risk that the Member brings 

to NSCC. Moreover, using a look-back 

period to determine a Member’s loss 

allocation obligation is designed to deter 

Members from reducing their settlement 

activities during a time of stress 

primarily to limit their Loss Allocation 

Caps. As a result of these changes, the 

Commission believes that NSCC should 

be in a better position to manage its risk 

by curtailing the chance that reduced 

settlement activities contribute to higher 

volatility or lower liquidity during an 

already stressed period. 

Third, as described above, NSCC 

proposes to introduce the concept of an 

Event Period, which would group 

Defaulting Member Events and Declared 

Non-Default Loss Events occurring 

within a period of 10 business days for 

purposes of allocating losses to 

Members in one or more rounds. Under 

the current Rules, every time NSCC 

incurs a loss or liability, NSCC will 

initiate its current loss allocation 

process by applying its retained 

earnings and allocating losses. However, 

the current Rules do not contemplate a 

situation where loss events occur in 

quick succession. Accordingly, even if 

multiple losses occur within a short 

period, the current Rules dictate that 

NSCC start the loss allocation process 

separately for each loss event. Having 

multiple loss allocation calculations and 

notices from NSCC and withdrawal 

notices from Members after multiple 

sequential loss events could cause 

heighten operational complexity and, 

therefore, risk for NSCC, since NSCC 

would have to process and track 

multiple notices while performing its 

other critical operations during a time of 

significant stress. 


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Therefore, the Commission believes 

that the proposed change to introduce 

an Event Period would provide a more 

defined and transparent structure, 

compared to the current loss allocation 

process described immediately above, 

helping to reduce complexity in and the 

resources needed to effectuate the 

process, thus mitigating operational 

risk. Overall, such an improved 

structure should enable both NSCC and 

each Member to more effectively 

manage the risks and potential financial 

obligations presented by sequential 

Defaulting Member Events or Declared 

Non-Default Loss Events that are likely 

to arise in quick succession, and could 

be closely linked to an initial event and/ 

or market dislocation episode. In other 

words, the proposed Event Period 

structure should help clarify and define 

for both NSCC and Members how NSCC 

would initiate a single defined loss 

allocation process to cover all loss 

events within 10 business days. As a 

result, all loss allocation calculation and 

notices from NSCC and potential 

withdrawal notices from Members 

would be tied back to one Event Period 

instead of each individual loss event. 

Fourth, as described above, the 

proposal would improve upon the 

current loss allocation approach laid out 

in NSCC’s Rules by providing for a loss 

allocation round, a Loss Allocation 

Notice process, a Loss Allocation 

Withdrawal Notice process, and a Loss 

Allocation Cap. A loss allocation round 

would be a series of loss allocations 

relating to an Event Period, the 

aggregate amount of which would be 

limited by the round cap. When the 

losses allocated in a round equals the 

round cap, any additional losses relating 

to the Event Period would be allocated 

in subsequent rounds until all losses 

from the Event Period are allocated 

among Members. Each loss allocation 

would be communicated to Members by 

the issuance of a Loss Allocation Notice. 

Each Member in a loss allocation round 

would have five business days from the 

issuance of the first Loss Allocation 

Notice for the round to notify NSCC of 

its election to withdraw from 

membership with NSCC, and thereby 

benefit from its Loss Allocation Cap. 

The Loss Allocation Cap of a Member 

would be equal to the greater of its 

Required Fund Deposit on the first day 

of the applicable Event Period and its 

Average RFD. Members would have two 

business days after NSCC issues a first 

round Loss Allocation Notice to pay the 

amount specified in the notice. 

The Commission believes that the 

changes to (1) establish a specific Event 

Period, (2) continue the loss allocation 

process in successive rounds, (3) clearly 

communicate with its Members 

regarding their loss allocation 

obligations, and (4) effectively identify 

continuing Members for the purpose of 

calculating loss allocation obligations in 

successive rounds, are designed to make 

NSCC’s loss allocation process more 

certain. In addition, the changes are 

designed to provide Members with a 

clear set of procedures that operate 

within the proposed loss allocation 

structure, and provide increased 

predictability and certainty regarding 

Members’ exposures and obligations. 

Furthermore, by grouping all loss events 

within 10 business days, the loss 

allocation process relating to multiple 

loss events can be streamlined. With 

enhanced certainty, predictability, and 

efficiency, NSCC would then be able to 

better manage its risks from loss events 

occurring in quick succession, and 

Members would be able to better 

manage their risks by deciding whether 

and when to withdraw from 

membership and limit their exposures 

to NSCC. Furthermore, the proposed 

changes are designed to reduce liquidity 

risk to Members by providing a two-day 

window to arrange funding to pay for 

loss allocation, while still allowing 

NSCC to address losses in a timely 

manner. 

Fifth, as described above, NSCC 

proposes to clarify the governance 

around Declared Non-Default Loss 

Events by providing that the Board of 

Directors would have to determine that 

there is a non-default loss that may be 

a significant and substantial loss or 

liability that may materially impair the 

ability of NSCC to provide its services 

in an orderly manner. NSCC also 

proposes to provide that NSCC would 

then be required to promptly notify 

Members of this determination and start 

the loss allocation process concerning 

the loss stemming from a Declared NonDefault Loss Event. The Commission 

believes that these changes should 

provide an orderly and transparent 

procedure to allocate a non-default loss 

by requiring the Board of Directors to 

make a definitive decision to announce 

an occurrence of a Declared Non-Default 

Loss Event, and requiring NSCC to 

provide a notice to Members of the 

decision. The Commission further 

believes that an orderly and transparent 

procedure should result in a risk 

management process at NSCC that is 

more robust as a result of enhanced 

governance around NSCC’s response to 

non-default losses. 

Collectively, the Commission believes 

that the proposed changes to NSCC’s 

loss allocation process would provide 

greater transparency, certainty, and 

efficiency to NSCC regarding the 

amount of resources and the instances 

in which NSCC would apply the 

resources to address risks arising from 

Defaulting Member Events and Declared 

Non-Default Loss Events, which could 

occur in quick succession. The 

Commission believes that the 

transparency, certainty, and efficiency 

would afford NSCC better predictability 

regarding its risk exposure, and in turn, 

would allow a risk management process 

at NSCC that is more effectively 

responsive to such events and would 

improve NSCC’s ability to continue to 

operate in a safe and sound manner 

during such events. Therefore, the 

Commission believes that these 

proposed changes would better equip 

NSCC to assure the safeguarding of 

securities and funds which are in the 

custody or control of NSCC. 

In addition, the Commission believes 

that the proposed rule changes to align 

NSCC’s loss allocation rules with the 

loss allocation rules of the other DTCC 

Clearing Agencies, to the extent 

practicable and appropriate, are 

designed to remove impediments to and 

perfect the mechanism of a national 

system for the prompt and accurate 

clearance and settlement of securities 

transactions. As described above, the 

alignment of NSCC’s loss allocation 

rules with the other NSCC Clearing 

Agencies is designed to help provide 

consistent treatment for firms that are 

participants of multiple DTCC Clearing 

Agencies. The Commission believes that 

providing consistent treatment through 

consistent procedures among the DTCC 

Clearing Agencies would help firms that 

participate in multiple DTCC Clearing 

Agencies from encountering 

unnecessary complexities and confusion 

stemming from differences in 

procedures regarding loss allocation 

processes, particularly at times of 

significant stress. Accordingly, by 

removing potential unnecessary 

complexities and confusion due to 

different loss allocation rules of the 

DTCC Clearing Agencies, the 

Commission believes that the proposal 

is designed to remove impediments to 

and perfect the mechanism of a national 

system for the prompt and accurate 

clearance and settlement of securities 

transactions. 

Finally, the Commission believes that 

the proposed rule change to (1) reduce 

the time within which NSCC is required 

to return a former Member’s Clearing 

Fund deposit that is cash or securities 

from 90 days to 30 calendar days, and 

(2) make conforming and technical 

changes necessary to harmonize the 

current Rules with the proposed 

changes are designed to protect 

investors and the public interest. First, 


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36 15 U.S.C. 78q–1(b)(3)(F). 

37A ‘‘covered clearing agency’’ means, among 

other things, a clearing agency registered with the 

Commission under Section 17A of the Exchange 

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

systemically important by the Financial Stability 

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

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

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

2012, FSOC designated NSCC as systemically 

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

Makes First Designations in Effort to Protect Against 

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

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

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

clearing agency. 

38 17 CFR 240.17Ad–22(e)(4)(viii). 

39 Id. 

40 17 CFR 240.17Ad–22(e)(13). 

41 Id. 

42 17 CFR 240.17Ad–22(e)(23)(i). 

43 17 CFR 240.17Ad–22(e)(23)(ii). 

the Commission believes that the 

reduction in time to return the deposits 

would enable firms that have exited 

NSCC to have access to their funds 

sooner than under the current Rules. 

While acknowledging that the reduction 

in time could lesson NSCC’s flexibility 

in liquidity management for the period 

between 31 calendar days and 90 days, 

the Commission believes that NSCC’s 

procedures would continue to protect 

NSCC and its clearance and settlement 

services because a Member’s Clearing 

Fund deposit would only be returned if 

all obligations of the terminating 

Member to NSCC have been satisfied. 

Therefore, NSCC could maintain 

necessary coverage for possible claims 

arising in connection with the NSCC 

activities of a former Member. Second, 

the conforming and technical changes 

are designed to provide clear and 

coherent Rules concerning loss 

allocation process to NSCC and its 

Members. The Commission believes that 

clear and coherent Rules should help 

enhance the ability of NSCC and 

Members to more effectively plan for, 

manage, and address the risks and 

financial obligations that loss events 

present to NSCC and its Members. 

Accordingly, the Commission believes 

that these two changes are designed to 

protect investors and the public interest 

by (1) reducing financial risks for 

NSCC’s former Members, and (2) 

providing clear and coherent Rules to 

NSCC and Members. 

For the reasons above, the 

Commission believes that the Proposed 

Rule Change is consistent with Section 

17A(b)(3)(F) of the Act.36

B. Consistency With Rule 17Ad– 

22(e)(4)(viii) 

Rule 17Ad–22(e)(4)(viii) under the 

Act requires, in part, that a covered 

clearing agency 37 establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

effectively identify, measure, monitor, 

and manage its credit exposures to 

participants and those arising from its 

payment, clearing, and settlement 

processes, including by addressing 

allocation of credit losses the covered 

clearing agency may face if its collateral 

and other resources are insufficient to 

fully cover its credit exposures.38

As described above, the proposal 

would revise the loss allocation process 

to address how NSCC would manage 

loss events, including Defaulting 

Member Events. Under the proposal, if 

losses arise out of or relate to a 

Defaulting Member Event, NSCC would 

first apply its Corporate Contribution. If 

those funds prove insufficient, the 

proposal provides for allocating the 

remaining losses to the remaining 

Members through the proposed process. 

Accordingly, the Commission believes 

that the proposal is reasonably designed 

to manage NSCC’s credit exposures to 

its Members, by addressing allocation of 

credit losses. 

Therefore, the Commission believes 

that NSCC’s proposal is consistent with 

Rule 17Ad–22(e)(4)(viii) under the 

Act.39

C. Consistency With Rule 17Ad– 

22(e)(13) 

Rule 17Ad–22(e)(13) under the Act 

requires, in part, that a covered clearing 

agency establish, implement, maintain 

and enforce written policies and 

procedures reasonably designed to 

ensure the covered clearing agency has 

the authority to take timely action to 

contain losses and liquidity demands 

and continue to meet its obligations.40

As described above, the proposal 

would establish a more detailed and 

structured loss allocation process by (1) 

modifying the calculation and 

application of the Corporate 

Contribution; (2) introducing an Event 

Period; (3) introducing a loss allocation 

round and notice process; (4) 

implementing a look-back period to 

calculate a Member’s loss allocation 

obligation; (5) modifying the withdrawal 

process and the cap of withdrawing 

Member’s loss allocation exposure; and 

(6) providing the governance around a 

non-default loss. The Commission 

believes that each of these proposed 

changes helps establish a more 

transparent and clear loss allocation 

process and authority of NSCC to take 

certain actions, such as announcing a 

Declared Non-Default Loss Event, 

within the loss allocation process. 

Further, having a more transparent and 

clear loss allocation process as proposed 

would provide clear authority to NSCC 

to allocate losses from Defaulting 

Member Events and Declared NonDefault Loss Events and take timely 

actions to contain losses, and continue 

to meet its clearance and settlement 

obligations. 

Therefore, the Commission believes 

that NSCC’s proposal is consistent with 

Rule 17Ad–22(e)(13) under the Act.41

D. Consistency With Rule 17Ad– 

22(e)(23)(i) and (ii) 

Rule 17Ad–22(e)(23)(i) under the Act 

requires that a covered clearing agency 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to publicly disclose 

all relevant rules and material 

procedures, including key aspects of its 

default rules and procedures.42 Rule 

17Ad–22(e)(23)(ii) under the Act 

requires that a covered clearing agency 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to provide 

sufficient information to enable 

participants to identify and evaluate the 

risks, fees, and other material costs they 

incur by participating in the covered 

clearing agency.43

As described above, the proposal 

would publicly disclose how NSCC’s 

Corporate Contribution would be 

calculated and applied. In addition, the 

proposal would establish and publicly 

disclose a detailed procedure in the 

Rules for loss allocation. More 

specifically, the proposed changes 

would establish an Event Period, loss 

allocation rounds, a look-back period to 

calculate each Member’s loss allocation 

obligation, a withdrawal process 

followed by a loss allocation process, 

and a Loss Allocation Cap that would 

apply to Members after withdrawal. 

Additionally, the proposal would align 

the loss allocation rules across the 

DTCC Clearing Agencies to help provide 

consistent treatment, and clarify that 

non-default losses would trigger loss 

allocation to Members. The proposal 

would also provide for and make known 

to members the procedures to trigger a 

loss allocation procedure, contribute 

NSCC’s Corporate Contribution, allocate 

losses, and withdraw and limit 

Member’s loss exposure. Accordingly, 

the Commission believes that the 

proposal is reasonably designed to (1) 

publicly disclose all relevant rules and 

material procedures concerning key 

aspects of NSCC’s default rules and 

procedures, and (2) provide sufficient 

information to enable Members to 

identify and evaluate the risks by 

participating in NSCC. 

Therefore, the Commission believes 

that NSCC’s proposal is consistent with 


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44 17 CFR 240.17Ad–22(e)(23)(i) and (ii). 

45 15 U.S.C. 78q–1. 

46 15 U.S.C. 78s(b)(2). 

47 In approving the Proposed Rule Change, the 

Commission has considered the Proposed Rule 

Change’s impact on efficiency, competition, and 

capital formation. See 15 U.S.C. 78c(f). 

48 17 CFR 200.30–3(a)(12). 

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

2 15 U.S.C. 78a. 

3 17 CFR 240.19b–4. 

4The terms ‘‘Priority 2—Display Orders’’ and 

‘‘Priority 3—Non-Display Orders’’ are defined in 

Rule 7.36–E(e). 

5See Securities Exchange Act Release No. 83768 

(August 3, 2018), 83 FR 39488 (August 9, 2018) 

(SR–NYSE–2018–26) (Approval Order). 

6See Cboe BZX Exchange, Inc. (‘‘BZX’’) Rule 

11.9(c)(1); Nasdaq Stock Market LLC (‘‘Nasdaq’’) 

Rule 7503(h). 

Rules 17Ad–22(e)(23)(i) and (ii) under 

the Act.44

III. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposal is 

consistent with the requirements of the 

Act and in particular with the 

requirements of Section 17A of the 

Act 45 and the rules and regulations 

thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,46 that 

proposed rule change SR–NSCC–2017– 

018, as modified by Amendment No. 1, 

be, and it hereby is, approved 47 as of 

the date of this order or the date of a 

notice by the Commission authorizing 

NSCC to implement advance notice SR– 

NSCC–2017–806, as modified by 

Amendment No. 1, whichever is later. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.48

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–19053 Filed 8–31–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83967; File No. SR– 

NYSEARCA–2018–61] 

Self-Regulatory Organizations; NYSE 

Arca, Inc.; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change To Amend Rule 7.31–E 

Relating To Reserve Orders, To ReName Two Order Types, and To Delete 

Inoperative Rule Text 

August 28, 2018. 

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

Securities Exchange Act of 1934 

(‘‘Act’’) 2 and Rule 19b–4 thereunder,3

notice is hereby given that, on August 

15, 2018, NYSE Arca, Inc. (‘‘Exchange’’ 

or ‘‘NYSE Arca’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by the self-regulatory 

organization. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes amend Rule 

7.31–E relating to Reserve Orders, to rename two order types, and to delete 

inoperative rule text. The proposed rule 

change is available on the Exchange’s 

website at www.nyse.com, at the 

principal office of the Exchange, and at 

the Commission’s Public Reference 

Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

self-regulatory organization included 

statements concerning the purpose of, 

and basis for, the proposed rule change 

and discussed any comments it received 

on the proposed rule change. The text 

of those statements may be examined at 

the places specified in Item IV below. 

The Exchange has prepared summaries, 

set forth in sections A, B, and C below, 

of the most significant parts of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange proposes to amend 

Rule 7.31–E relating to Reserve Orders, 

to re-name two order types, and to 

delete inoperative rule text. 

Background 

Rule 7.31–E(d)(1) defines a Reserve 

Order as a Limit or Inside Limit Order 

with a quantity of the size displayed 

and with a reserve quantity of the size 

(‘‘reserve interest’’) that is not 

displayed. The displayed quantity of a 

Reserve Order is ranked Priority 2— 

Display Orders and the reserve interest 

is ranked Priority 3—Non-Display 

Orders.4 Rule 7.31–E(d)(1)(A) provides 

that on entry, the display quantity of a 

Reserve Order must be entered in round 

lots and the displayed portion of a 

Reserve Order will be replenished 

following any execution. That rule 

further provides that the Exchange will 

display the full size of the Reserve 

Order when the unfilled quantity is less 

than the minimum display size for the 

order. Rule 7.31–E(d)(1)(B) provides that 

each time a Reserve Order is 

replenished from reserve interest, a new 

working time is assigned to the 

replenished quantity of the Reserve 

Order, while the reserve interest retains 

the working time of original order entry. 

Pursuant to Rule 7.31–E(d)(1)(C), a 

Reserve Order must be designated Day 

and may be combined with an Arca 

Only Order or a Primary Pegged Order. 

Rule 7.31–E(d)(2) defines a ‘‘Limit 

Non-Displayed Order,’’ which is a Limit 

Order that is not displayed and does not 

route. Rule 7.31–E(e)(1) defines an 

‘‘Arca Only Order,’’ which is a Limit 

Order that does not route. 

Proposed Rule Change Relating to Order 

Type Names 

The Exchange proposes nonsubstantive amendments to Rules 7.31– 

E and 7.46–E to re-name the ‘‘Arca Only 

Order’’ as the ‘‘Non-Routable Limit 

Order.’’ This proposed rule change is 

based on the term used by the 

Exchange’s affiliate, NYSE American 

LLC (‘‘NYSE American’’) for the same 

order type. 

The Exchange also proposes nonsubstantive amendments to Rules 7.31– 

E and 7.46–E to re-name the ‘‘Limit 

Non-Displayed Order’’ as the ‘‘NonDisplayed Limit Order.’’ The Exchange 

believes that this proposed rule change 

would conform the style of this order 

type with the name ‘‘Non-Routable 

Limit Order.’’ The Exchange therefore 

believes that this proposed rule change 

would promote clarity and consistency 

in its rules. 

Proposed Rule Change Relating to 

Reserve Orders 

The Exchange proposes to amend 

Rule 7.31–E(d)(1) to change the manner 

by which the display portion of a 

Reserve Order would be replenished. As 

proposed, rather than replenishing the 

display quantity following any 

execution, the Exchange proposes to 

replenish the Reserve Order when the 

display quantity is decremented to 

below a round lot. The changes that the 

Exchange is proposing to Rule 7.31 

relating to Reserve Orders (and Primary 

Pegged Orders) are identical to changes 

that were recently approved for the 

Exchange’s affiliate, New York Stock 

Exchange LLC (‘‘NYSE’’).5 In addition, 

the proposed changes to how Reserve 

Orders would be replenished are 

consistent with how Reserve Orders are 

replenished on other equity exchanges.6


sradovich on DSK3GMQ082PROD with NOTICES