[Federal Register Volume 89, Number 21 (Wednesday, January 31, 2024)]
[Notices]
[Pages 6140-6153]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-01863]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99432; File No. SR-NSCC-2023-007]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Amendment No. 2 to Proposed Rule 
Change To Modify the Amended and Restated Stock Options and Futures 
Settlement Agreement and Make Certain Revisions to the NSCC Rules

January 25, 2024.
    On August 10, 2023, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-NSCC-2023-007 (``Filing'') 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder.\2\ The 
Filing was published for comment in the Federal Register on August 30, 
2023. On November 8, 2023, NSCC filed Amendment No. 1 to the Filing. 
Notice is hereby given that on January 24, 2024, NSCC filed with the 
Commission Amendment No. 2 to the Filing (``Amendment No. 2'') as 
described in Items I and II below, which Items have been prepared by 
NSCC. This Amendment No. 2 supersedes and replaces the Filing in its 
entirety. The Commission is publishing this notice to solicit comments 
on this Amendment No. 2 from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    Pursuant to the provisions of Section 19(b) of the Exchange Act,\3\ 
and Rule 19b-4 thereunder,\4\ National Securities Clearing Corporation 
(``NSCC'') is filing

[[Page 6141]]

this Amendment No. 2 to proposed rule change SR-NSCC-2023-007 with the 
Commission to (1) modify the Stock Options and Futures Settlement 
Agreement dated August 5, 2017, between NSCC and The Options Clearing 
Corporation (``OCC,'' and together with NSCC, the ``Clearing 
Agencies'') (``Existing Accord'') \5\ to permit OCC to elect to make a 
cash payment to NSCC following the default of a common clearing 
participant that would cause NSCC's central counterparty trade guaranty 
to attach to certain obligations of that participant (``Phase 1''); (2) 
improve information sharing between the Clearing Agencies to facilitate 
the upcoming transition to a T+1 standard securities settlement cycle 
and allow OCC, after the compliance date under amended Exchange Act 
Rule 15c6-1(a), to provide certain assurances to NSCC prior to the 
default of a common clearing participant that would enable NSCC to 
begin processing E&A/Delivery Transactions (defined below) before the 
central counterparty trade guaranty attaches to certain obligations of 
that participant (``Phase 2''); and (3) make certain revisions to the 
NSCC Rules & Procedures (``NSCC Rules'') \6\ in connection with the 
proposed Phase 1 and Phase 2 modifications to the Existing Accord.\7\ 
This Amendment No. 2 would amend and replace the Initial Filing and 
Amendment No. 1 in their entirety.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
    \5\ The Existing Accord was previously approved by the 
Commission. See Securities Exchange Act Release Nos. 81266, 81260 
(Jul. 31, 2017), 82 FR 36484 (Aug. 4, 2017) (File Nos. SR-NSCC-2017-
007; SR-OCC-2017-013).
    \6\ Capitalized terms not defined herein are defined in the NSCC 
Rules. The NSCC Rules are available at www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf.
    \7\ NSCC initially filed a proposed rule change concerning the 
proposed Phase 1 changes on August 10, 2023. See Securities Exchange 
Act Release No. 98213 (Aug. 24, 2023), 88 FR 59968 (Aug. 30, 2023) 
(File No. SR-NSCC-2023-007) (``Initial Filing''). NSCC subsequently 
submitted a partial amendment to clarify the proposed implementation 
plan for the Initial Filing. See Securities Exchange Act Release No. 
98930 (Nov. 14, 2023), 88 FR 80790 (Nov. 20, 2023) (File No. SR-
NSCC-2023-007) (``Amendment No. 1''). OCC also has submitted 
proposed rule change and advance notice filings with the Commission 
in connection with this proposal. See Securities Exchange Act 
Release No. 98215 (Aug. 24, 2023), 88 FR 59976 (Aug. 30, 2023) (File 
No. SR-OCC-2023-007) and Securities Exchange Act Release No. 98214 
(Aug. 24, 2023), 88 FR 59988 (Aug. 30, 2023) (SR-OCC-2023-801). 
(``OCC Filings'').
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    The proposed changes to the NSCC Rules and the Existing Accord are 
included in Exhibits 5A and 5B of Amendment No. 2 to File No. SR-NSCC-
2023-007. Material proposed to be added is underlined and material 
proposed to be deleted is marked in strikethrough text, as described in 
greater detail below.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
Executive Summary
    NSCC is a clearing agency that provides clearing, settlement, risk 
management, and central counterparty services for trades involving 
equity securities. OCC is the sole clearing agency for standardized 
equity options listed on national securities exchanges registered with 
the Commission, including options that contemplate the physical 
delivery of equities cleared by NSCC in exchange for cash 
(``physically-settled'' options).\8\ OCC also clears certain futures 
contracts that, at maturity, require the delivery of equity securities 
cleared by NSCC in exchange for cash. As a result, the exercise/
assignment of certain options or maturation of certain futures cleared 
by OCC effectively results in stock settlement obligations. NSCC and 
OCC maintain a legal agreement, generally referred to by the parties as 
the ``Accord'' agreement, that governs the processing of such 
physically-settled options and futures cleared by OCC that result in 
settlement obligations in underlying equity securities to be cleared by 
NSCC (i.e., the Existing Accord).
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    \8\ The term ``physically-settled'' as used throughout the OCC 
Rules refers to cleared contracts that settle into their underlying 
interest (i.e., options or futures contracts that are not cash-
settled). The OCC By-Laws and OCC Rules are available at 
www.theocc.com/company-information/documents-and-archives/by-laws-and-rules. When a contract settles into its underlying interest, 
shares of stock are sent, i.e., delivered, to contract holders who 
have the right to receive the shares from contract holders who are 
obligated to deliver the shares at the time of exercise/assignment 
in the case of an option and maturity in the case of a future.
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    The Existing Accord establishes terms under which NSCC accepts for 
clearing certain securities transactions that result from the exercise 
and assignment of relevant options contracts and the maturity of 
futures contracts that are cleared and settled by OCC.\9\ It also 
establishes the time when OCC's settlement guaranty in respect of those 
transactions ends and NSCC's settlement guaranty begins.
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    \9\ Under the Existing Accord, such options and futures are 
defined as ``E&A/Delivery Transactions,'' which refers to ``Exercise 
& Assignment Delivery Transactions.''
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    The Existing Accord allows for a scenario in which NSCC could 
choose not to guarantee the settlement of such securities arising out 
of E&A/Delivery Transactions. Specifically, NSCC is not obligated to 
guarantee settlement until its member has met its collateral 
requirements at NSCC. If NSCC chooses not to guarantee settlement, OCC 
would engage in an alternate method of settlement outside of NSCC. This 
scenario presents two primary problems. First, the cash required for 
OCC and its Clearing Members in certain market conditions to facilitate 
settlement outside of NSCC could be significantly more than the amount 
required if NSCC were to guarantee the relevant transactions. This is 
because settlement of the transactions in the underlying equity 
securities outside of NSCC would mean that they would no longer receive 
the benefit of netting through the facilities of NSCC. In such a 
scenario, the additional collateral required from Clearing Members to 
support OCC's continuing settlement guarantee would also have to be 
sufficiently liquid to properly manage the risks associated with those 
transactions being due on the second business day following the option 
exercise or the relevant futures contract maturity date. Based on an 
analysis of scenarios using historical data where it was assumed that 
OCC could not settle transactions through the facilities of NSCC, the 
worst-case outcome resulted in extreme liquidity demands of over $300 
billion for OCC to effect settlement via an alternative method, e.g., 
by way of gross broker-to-broker settlement, as discussed in more 
detail below. OCC Clearing Members, by way of their contributions to 
the OCC Clearing Fund, would bear the brunt of this demand. 
Furthermore, there is no guarantee that OCC Clearing Members could fund 
the entire amount of any similar real-life scenarios. By contrast, 
projected Guaranty Substitution Payments, defined below, identified 
during the study ranged from approximately $419 million to over $6 
billion, also as discussed in more detail below.

[[Page 6142]]

    The second primary problem relates to the significant operational 
complexities if settlement occurs outside of NSCC. More specifically, 
netting through NSCC reduces the volume and value of settlement 
obligations. For example, in 2022 it is estimated that netting through 
NSCC's continuous net settlement (``CNS'') accounting system \10\ 
reduced the value of CNS settlement obligations by approximately 98% or 
$510 trillion from $519 trillion to $9 trillion. If settlement occurred 
outside of NSCC, on a broker-to-broker basis between OCC Clearing 
Members, for example, shares would not be netted, and Clearing Members 
would have to coordinate directly with each other to settle the 
relevant transactions. The operational complexities and uncertainty 
associated with alternate means of settlement would impact every market 
participant involved in a settlement of OCC-related transactions.
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    \10\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting 
Operation) of the NSCC Rules, supra note 6.
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    To address these problems, the Clearing Agencies are proposing 
certain changes as part of Phase 1 to amend and restate the Existing 
Accord and make related changes to their respective rules that would 
allow OCC to elect to make a cash payment (the ``Guaranty Substitution 
Payment'' or ``GSP'') to NSCC following the default of a Common Member 
\11\ that would cause NSCC to guarantee settlement of that Common 
Member's transactions and, therefore, cause those transactions to be 
settled through processing by NSCC. In connection with this proposal, 
OCC also would enhance its daily liquidity stress testing processes and 
procedures to account for the possibility of OCC making such a payment 
to NSCC in the event of a Common Member default. By making these 
enhancements to its stress testing, OCC could include the liquid 
resources necessary to make the payment in its resource planning. The 
Clearing Agencies believe that by NSCC accepting such a payment from 
OCC, the operational efficiencies and reduced costs related to the 
settlement of transactions through NSCC would limit market disruption 
following a Common Member default because settlement through NSCC 
following such a default would be less operationally complex and would 
be expected to require less liquidity and other collateral from market 
participants than the processes available to OCC for closing out 
positions. Additionally, proposed enhancements by OCC to its liquidity 
stress testing would add assurances that OCC could make such a payment 
in the event of a Common Member default. The Clearing Agencies believe 
that their respective clearing members and all other participants in 
the markets for which OCC provides clearance and settlement would 
benefit from OCC's ability to choose to make a cash payment to effect 
settlement through the facilities of NSCC. This change would provide 
more certainty around certain default scenarios and would blunt the 
financial and operational burdens market participants could experience 
in the case of most clearing member defaults.\12\
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    \11\ A firm that is both an OCC Clearing Member and an NSCC 
Member or is an OCC Clearing Member that has designated an NSCC 
Member to act on its behalf is referred to herein as a ``Common 
Member.'' The term ``Clearing Member'' as used herein has the 
meaning provided in OCC's By-Laws. See OCC By-Laws, supra, note 6. 
The term ``Member'' as used herein has the meaning provided in the 
NSCC Rules. See NSCC Rules, supra note 6.
    \12\ OCC provided its analysis of the financial impact of 
alternate means of settlement as an exhibit to the OCC Filings.
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    Finally, the Clearing Agencies are also proposing certain changes 
as part of Phase 2 that, if approved, would not be implemented until 
after the Commission shortens the standardized settlement cycle under 
Exchange Act Rule 15c6-1(a) from two days after the traded date 
(``T+2'') to one day after the trade date (``T+1''), which currently is 
set for May 28, 2024. The Phase 2 changes would address the operational 
realities concerning the Accord that will result from the Commission's 
adoption and implementation of a new standard settlement cycle of T+1 
pursuant to Rule 15c6-1(a) under the Act. The Phase 2 changes generally 
are designed to allow OCC to provide certain assurances with respect to 
OCC's ability to make a GSP in the event of a Common Member default to 
NSCC that would permit NSCC to begin processing Common Members' E&A/
Delivery Transactions in a shortened settlement cycle prior to guaranty 
substitution occurring by introducing new or amended terms and setting 
out the processes associated therewith.
Background
    OCC acts as a central counterparty clearing agency for U.S.-listed 
options and futures on a number of underlying financial assets 
including common stocks, currencies, and stock indices. In connection 
with these services, OCC provides the OCC Guaranty pursuant to its By-
Laws and Rules. NSCC acts as a central counterparty clearing agency for 
certain equity securities, corporate and municipal debt, exchange 
traded funds and unit investment trusts that are eligible for its 
services. Eligible trading activity may be processed through NSCC's CNS 
system \13\ or through its Balance Order Accounting system,\14\ where 
all eligible compared and recorded transactions for a particular 
settlement date are netted by issue into one net long (buy), net short 
(sell) or flat position. As a result, for each day with activity, each 
Member has a single deliver or receive obligation for each issue in 
which it has activity at NSCC. In connection with these services, NSCC 
also provides the NSCC Guaranty pursuant to Addendum K of the NSCC 
Rules.
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    \13\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting 
Operation) of the NSCC Rules, supra note 6.
    \14\ See Rule 8 (Balance Order and Foreign Security Systems) and 
Procedure V (Balance Order Accounting Operation) of the NSCC Rules, 
supra note 6.
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    OCC's Rules provide that delivery of, and payment for, securities 
underlying certain exercised stock options and matured single stock 
futures that are physically settled are generally effected through the 
facilities of NSCC and are not settled through OCC's facilities.\15\ 
OCC and NSCC executed the Existing Accord to facilitate, via NSCC's 
systems, the physical settlement of securities arising out of options 
and futures cleared by OCC. OCC Clearing Members that clear and settle 
physically-settled options and futures transactions through OCC also 
are required under OCC's Rules \16\ to be Members of NSCC or to have 
appointed or nominated a Member of NSCC to act on its behalf. As noted 
above, these firms are referred to as ``Common Members'' in the 
Existing Accord.
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    \15\ See Chapter IX of OCC's Rules (Delivery of Underlying 
Securities and Payment), supra note 8.
    \16\ See OCC Rule 901, supra note 8.
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Summary of the Existing Accord
    The Existing Accord governs the transfer between OCC and NSCC of 
responsibility for settlement obligations that involve a delivery and 
receipt of stock in the settlement of physically-settled options and 
futures that are cleared and settled by OCC and for which the 
underlying securities are eligible for clearing through the facilities 
of NSCC (``E&A/Delivery Transactions''). It also establishes the time 
when OCC's settlement guarantee (the ``OCC Guaranty'') ends and NSCC's 
settlement guarantee (the ``NSCC Guaranty'') \17\ begins with respect 
to E&A/Delivery Transactions. However, in

[[Page 6143]]

the case of a Common Member default \18\ NSCC can reject these 
settlement obligations, in which case the settlement guaranty would not 
transfer from OCC to NSCC and OCC would not have a right to settle the 
transactions through the facilities of NSCC. Instead, OCC would have to 
engage in alternative methods of settlement that have the potential to 
create significant liquidity and collateral requirements for both OCC 
and its non-defaulting Clearing Members.\19\ More specifically, this 
could involve broker-to-broker settlement between OCC Clearing 
Members.\20\ This settlement method is operationally complex because it 
requires bilateral coordination directly between numerous Clearing 
Members rather than relying on NSCC to facilitate multilateral netting 
to settle the relevant settlement obligations. As described above, it 
also potentially could result in significant liquidity and collateral 
requirements for both OCC and its non-defaulting Clearing Members 
because the transactions would not be netted through the facilities of 
NSCC. Alternatively, where NSCC accepts the E&A/Delivery Transactions 
from OCC, the OCC Guaranty ends and the NSCC Guaranty takes effect. The 
transactions are then netted through NSCC's systems, which allows 
settlement obligations for the same settlement date to be netted into a 
single deliver or receive obligation. This netting reduces the costs 
associated with securities transfers by reducing the number of 
securities movements required for settlement and further reduces 
operational and market risk. The benefits of such netting by NSCC may 
be significant with respect to the large volumes of E&A/Delivery 
Transactions processed during monthly options expiry periods.
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    \17\ See Addendum K and Procedure III of the NSCC Rules, supra 
note 6.
    \18\ A Common Member that has been suspended by OCC or for which 
NSCC has ceased to act is referred to as a ``Mutually Suspended 
Member.''
    \19\ For example, OCC evaluated certain Clearing Member default 
scenarios in which OCC assumed that NSCC would not accept the 
settlement obligations under the Existing Accord, including the 
default of a large Clearing Member coinciding with a monthly options 
expiration. OCC has estimated that in such a Clearing Member default 
scenario, the aggregate liquidity burden on OCC in connection with 
obligations having to be settled on a gross broker-to-broker basis 
could reach a significantly high level. For example, in January 
2022, the largest gross broker-to-broker settlement amount in the 
case of a larger Clearing Member default would have resulted in 
liquidity needs of approximately $384,635,833,942. OCC provided the 
data and analysis as an exhibit to the OCC Filings.
    \20\ In broker-to-broker settlement, Clearing Member parties are 
responsible for coordinating settlement--delivery and payment--among 
themselves on a transaction-by-transaction basis. Once transactions 
settle, the parties also have an obligation to affirmatively notify 
OCC so that OCC can close out the transactions. If either one of or 
both of the parties do not notify OCC, the transaction would remain 
open on OCC's books indefinitely until the time both parties have 
provided notice of settlement to OCC.
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    Pursuant to the Existing Accord, on each trading day NSCC delivers 
to OCC a file that identifies the securities, including stocks, 
exchange-traded funds and exchange-traded notes, that are eligible (1) 
to settle through NSCC and (2) to be delivered in settlement of (i) 
exercises and assignments of stock options cleared and settled by OCC 
or (ii) delivery obligations from maturing stock futures cleared and 
settled by OCC. OCC, in turn, delivers to NSCC a file identifying 
securities to be delivered, or received, for physical settlement in 
connection with OCC transactions.\21\
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    \21\ Each day that both OCC and NSCC are open for accepting 
trades for clearing is referred to as an ``Activity Date'' in the 
Existing Accord. Securities eligible for settlement at NSCC are 
referred to collectively as ``Eligible Securities'' in the Existing 
Accord. Eligible securities are settled at NSCC through NSCC's CNS 
Accounting Operation or NSCC's Balance Order Accounting Operation.
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    After NSCC receives the list of eligible transactions from OCC and 
NSCC has received all required deposits to the NSCC Clearing Fund from 
all Common Members taking into consideration amounts required to 
physically settle the OCC transactions, the OCC Guaranty would end and 
the NSCC Guaranty would begin with respect to physical settlement of 
the eligible OCC-related transactions.\22\ At this point, NSCC is 
solely responsible for settling the transactions.\23\
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    \22\ The term ``NSCC Clearing Fund'' as used herein has the same 
meaning as the term ``Clearing Fund'' as provided in the NSCC Rules. 
Procedure XV of the NSCC Rules provides that all NSCC Clearing Fund 
requirements and other deposits must be made within one hour of 
demand, unless NSCC determines otherwise, supra note 6.
    \23\ This is referred to in the Existing Accord as the 
``Guaranty Substitution Time,'' and the process of the substitution 
of the NSCC Guaranty for the OCC Guaranty with respect to E&A/
Delivery Transactions is referred to as ``Guaranty Substitution.''
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    Each day, NSCC is required to promptly notify OCC at the time the 
NSCC Guaranty takes effect. If NSCC rejects OCC's transactions due to 
an improper submission \24\ or if NSCC ``ceases to act'' for a Common 
Member,\25\ NSCC's Guaranty would not take effect for the affected 
transactions pursuant to the NSCC Rules.
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    \24\ Guaranty Substitution by NSCC (discussed further below) 
does not occur with respect to an E&A/Delivery Transaction that is 
not submitted to NSCC in the proper format or that involves a 
security that is not identified as an Eligible Security on the then-
current NSCC Eligibility Master File.
    \25\ Under NSCC's Rules, a default would generally be referred 
to as a ``cease to act'' and could encompass a number of 
circumstances, such as an NSCC Member's failure to make a Required 
Fund Deposit in a timely fashion. See NSCC Rule 46 (Restrictions on 
Access to Services), supra note 6. An NSCC Member for which it has 
ceased to act is referred to in the Existing Accord as a 
``Defaulting NSCC Member.'' Transactions associated with a 
Defaulting NSCC Member are referred to as ``Defaulted NSCC Member 
Transactions'' in the Existing Accord.
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    NSCC is required to promptly notify OCC if it ceases to act for a 
Common Member. Upon receiving such a notice, OCC would not continue to 
submit to NSCC any further unsettled transactions that involve such 
Common Member, unless authorized representatives of both OCC and NSCC 
otherwise consent. OCC would, however, deliver to NSCC a reversal file 
containing a list of all transactions that OCC already submitted to 
NSCC and that involve such Common Member. The NSCC Guaranty ordinarily 
would not take effect with respect to transactions for a Common Member 
for which NSCC has ceased to act, unless both Clearing Agencies agree 
otherwise. As such, NSCC does not have any existing contractual 
obligation to guarantee such Common Member's transactions. To the 
extent the NSCC Guaranty does not take effect, OCC's Guaranty would 
continue to apply, and, as described above, OCC would remain 
responsible for effecting the settlement of such Common Member's 
transactions pursuant to OCC's By-Laws and Rules.
    As noted above, the Existing Accord does provide that the Clearing 
Agencies may agree to permit additional transactions for a Common 
Member default (``Defaulted NSCC Member Transactions'') to be processed 
by NSCC while subject to the NSCC Guaranty. This optional feature, 
however, creates uncertainty for the Clearing Agencies and market 
participants about how Defaulted NSCC Member Transactions may be 
processed following a Common Member default, and also does not provide 
NSCC with the ability to collect collateral from OCC that it may need 
to close out these additional transactions. While the optional feature 
would remain in the agreement as part of this proposal, the proposed 
changes to the Existing Accord, as described below, could significantly 
reduce the likelihood that it would be utilized.
Proposed Phase 1 Changes
    The proposed changes to the Existing Accord would permit OCC to 
make a cash payment, referred to as the ``Guaranty Substitution 
Payment'' or ``GSP,'' to NSCC. This cash payment could occur on either 
or both of the day that the Common Member becomes a Mutually Suspended 
Member and on the next business day. Upon NSCC's receipt of the 
Guaranty Substitution Payment from OCC, the NSCC Guaranty

[[Page 6144]]

would take effect for the Common Member's transactions, and they would 
be accepted by NSCC for clearance and settlement.\26\ OCC could use all 
Clearing Member contributions to the OCC Clearing Fund \27\ and certain 
Margin Assets \28\ of a defaulted Clearing Member to pay the GSP, as 
described in more detail below.
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    \26\ Acceptance of such transactions by NSCC would be subject to 
NSCC's standard validation criteria for incoming trades. See NSCC 
Rule 7, supra note 6.
    \27\ The term ``OCC Clearing Fund'' as used herein has the same 
meaning as the term ``Clearing Fund'' in OCC's By-Laws, supra note 
8.
    \28\ The term ``Margin Assets'' as used herein has the same 
meaning as provided in OCC's By-Laws, supra note 8.
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    NSCC would calculate the Guaranty Substitution Payment as the sum 
of the Mutually Suspended Member's unpaid required deposit to the NSCC 
Clearing Fund (``Required Fund Deposit'') \29\ and the unpaid 
Supplemental Liquidity Deposit \30\ obligation that is attributable to 
E&A/Delivery Transactions. The proposed changes to the Existing Accord 
define how NSCC would calculate the Guaranty Substitution Payment.
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    \29\ The Required Fund Deposit is calculated pursuant to Rule 4 
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other 
Matters) of the NSCC Rules, see supra note 6.
    \30\ Under the NSCC Rules, NSCC collects additional cash 
deposits from those Members who would generate the largest 
settlement debits in stressed market conditions, referred to as 
``Supplemental Liquidity Deposits'' or ``SLD.'' See Rule 4A of the 
NSCC Rules, supra note 6.
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    More specifically, NSCC would first determine how much of the 
member's unpaid Clearing Fund requirement would be included in the GSP. 
NSCC would look at the day-over-day change in gross market value of the 
Mutually Suspended Member's positions as well as day-over-day change in 
the member's NSCC Clearing Fund requirements. Based on such changes, 
NSCC would identify how much of the change in the Clearing Fund 
requirement was attributable to E&A/Delivery Transactions coming from 
OCC. If 100 percent of the day-over-day change in the NSCC Clearing 
Fund requirement is attributable to activity coming from OCC, then the 
GSP would include 100 percent of the member's NSCC Clearing Fund 
requirement. If less than 100 percent of the change is attributable to 
activity coming from OCC, then the GSP would include that percent of 
the member's unpaid NSCC Clearing Fund requirement attributable to 
activity coming from OCC. NSCC would then determine the portion of the 
member's unpaid SLD obligation that is attributable to E&A/Delivery 
Transactions. As noted above, the GSP would be the sum of these two 
amounts. A member's NSCC Clearing Fund requirement and SLD obligation 
at NSCC are designed to address the credit and liquidity risks that a 
member poses to NSCC. The GSP calculation is intended to assess how 
much of a member's obligations arise out of activity coming from OCC so 
that the amount paid by OCC is commensurate with the risk to NSCC of 
guarantying such activity.
    To permit OCC to anticipate the potential resources it would need 
to pay the GSP for a Mutually Suspended Member, each business day, NSCC 
would provide OCC with (1) Required Fund Deposit and Supplemental 
Liquidity Deposit obligations, as calculated pursuant to the NSCC 
Rules, and (2) the gross market value of the E&A/Delivery Transactions 
and the gross market value of total Net Unsettled Positions (as such 
term is defined in the NSCC Rules). On options expiry days that fall on 
a Friday, NSCC would also provide OCC with information regarding 
liquidity needs and resources, and any intraday SLD requirements of 
Common Members. Such information would be delivered pursuant to the 
ongoing information sharing obligations under the Existing Accord (as 
proposed to be amended) and the Service Level Agreement (``SLA'') to 
which both NSCC and OCC are a party pursuant to Section 2 of the 
Existing Accord.\31\ The SLA addresses specifics regarding the time, 
form, and manner of various required notifications and actions 
described in the Accord and also includes information applicable under 
the Accord.
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    \31\ NSCC provided a draft of the revised SLA for Phase 1 to the 
Commission as confidential Exhibit 3E to this filing.
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    NSCC and OCC believe the proposed calculation of the Required Fund 
Deposit portion of the GSP is appropriate because it is designed to 
provide a reasonable proxy for the impact of the Mutually Suspended 
Member's E&A/Delivery Transactions on its Required Fund Deposit. While 
impact study data did show that the proposed calculation could result 
in a GSP that overestimates or underestimates the Required Fund Deposit 
attributable to the Mutually Suspended Member's E&A/Delivery 
Transactions,\32\ current technology constraints prohibit NSCC from 
performing a precise calculation of the GSP on a daily basis for every 
Common Member.\33\
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    \32\ The impact study was conducted at the Commission's request 
to cover a three-day period and reviewed the ten Common Members with 
the largest Required Fund Deposits attributable to the Mutually 
Suspended Member's E&A/Delivery Transactions. Over the 30 instances 
in the study, approximately 15 instances resulted in an 
underestimate of the Required Fund Deposit by an average of 
approximately $112,900,926, four instances where the proxy 
calculation was the same as the Required Fund Deposit, and eleven 
instances of an overestimate of the Required Fund Deposit by an 
average of approximately $59,654,583. NSCC filed additional detail 
related to the referenced study in confidential Exhibit 3A of this 
filing.
    \33\ OCC and NSCC agreed that performing the necessary 
technology build during Phase 1 would delay the implementation of 
Phase 1 of this proposal. NSCC would incorporate those technology 
updates in connection with Phase 2 of this proposal.
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    Implementing the ability for OCC to make the GSP and cause the E&A/
Delivery Transactions to be cleared and settled through NSCC would 
promote the ability of OCC and NSCC to be efficient and effective in 
meeting the requirements of the markets they serve. This is because 
data demonstrates that the expected size of the GSP would be smaller 
than the amount of cash that would otherwise be needed by OCC and its 
Clearing Members to facilitate settlement outside of NSCC. More 
specifically, based on a historical study of alternate means of 
settlement available to OCC from September 2021 through September 2022, 
in the event that NSCC did not accept E&A/Delivery Transactions, the 
worst-case scenario peak liquidity need OCC identified was 
$384,635,833,942 for settlement to occur on a gross broker-to-broker 
basis. OCC estimates that the corresponding GSP in this scenario would 
have been $863,619,056. OCC also analyzed several other large liquidity 
demand amounts that were identified during the study if OCC effected 
settlement on a gross broker-to-broker basis.\34\ These liquidity 
demand amounts and the largest liquidity demand amount OCC observed of 
$384,635,833,942 substantially exceed the amount of liquid resources 
currently available to OCC.\35\ By contrast, projected GSPs identified 
during the study ranged from $419,297,734 to $6,281,228,428. For each 
of these projected GSP amounts, OCC observed that the Margin Assets and 
OCC Clearing Fund contributions that would have been required of 
Clearing Members in these scenarios would have been sufficient to 
satisfy the amount of the projected GSPs.
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    \34\ OCC filed additional detail related to the referenced study 
as an exhibit to the OCC Filings.
    \35\ As of September 30, 2023, OCC held approximately $12.37 
billion in qualifying liquid resources. See OCC Quantitative 
Disclosure, July-September 2023, available at www.theocc.com/risk-management/pfmi-disclosures.
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    To help address the current technology constraint that prohibits 
NSCC from performing a precise calculation of the GSP on a daily basis

[[Page 6145]]

for every Common Member, proposed Section 6(b)(i) of the Existing 
Accord and related Section 7(d) of the SLA would provide that with 
respect to a Mutually Suspended Member, either NSCC or OCC may require 
that the Required Fund Deposit portion of the GSP be re-calculated by 
calculating the Required Fund Deposit for the Mutually Suspended Member 
both before and after the delivery of the E&A/Delivery Transactions and 
utilize the precise amount that is attributable to that activity in the 
final GSP. If such a recalculation is required, the result would 
replace the Required Fund Deposit component of the GSP that was 
initially calculated. The SLD component of the GSP would be unchanged 
by such recalculation.
    As the above demonstrates, the GSP is intended to address the 
significant collateral and liquidity requirements that could be 
required of OCC Clearing Members in the event of a Common Member 
default. Allowing OCC to make a GSP payment also is intended to allow 
for settlement processing to take place through the facilities of NSCC 
to retain operational efficiencies associated with the settlement 
process. Alternative settlement means such as broker-to-broker 
settlement add operational burdens because transactions would need to 
be settled individually on one-off bases. In contrast, NSCC's netting 
reduces the volume and value of settlement obligations that would need 
to be closed out in the market.\36\ Because the clearance and 
settlement of obligations through NSCC's facilities following a Common 
Member default, including netting of E&A/Delivery Transactions with a 
Common Member's positions at NSCC, would avoid these potentially 
significant operational burdens for OCC and its Clearing Members, OCC 
and NSCC believe that the proposed changes would limit market 
disruption relating to a Common Member default. NSCC netting 
significantly reduces the total number of obligations that require the 
exchange of money for settlement. Allowing more activity to be 
processed through NSCC's netting systems would minimize risk associated 
with the close out of those transactions following the default of a 
Common Member.
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    \36\ CNS reduces the value of obligations that require financial 
settlement by approximately 98%, where, for example $519 trillion in 
trades could be netted down to approximately $9 trillion in net 
settlements.
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    Amending the Existing Accord to define the terms and conditions 
under which Guaranty Substitution may occur, at OCC's election, with 
respect to Defaulted NSCC Member Transactions after a Common Member 
becomes a Mutually Suspended Member would also provide more certainty 
to both the Clearing Agencies and market participants generally about 
how a Mutually Suspended Member's Defaulted NSCC Member Transactions 
may be processed.
    NSCC and OCC have agreed it is appropriate to limit the 
availability of the proposed provision to the day of the Common Member 
default and the next business day because, based on historical 
simulations of cease to act events involving Common Members, most 
activity of a Mutually Suspended Member is closed out on those 
days.\37\ Furthermore, the benefits of netting through NSCC's systems 
would be reduced for any activity submitted to NSCC after that time.
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    \37\ OCC filed data regarding simulated events as an exhibit to 
the OCC Filings.
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    To implement the proposed Phase 1 changes to the Existing Accord, 
OCC and NSCC propose to make the following changes.
Section 1--Definitions
    First, new definitions would be added, and existing definitions 
would be amended in Section 1, which is the Definitions section.
    The new defined terms would be as follows.
    <bullet> The term ``Close Out Transaction'' would be defined to 
mean ``the liquidation, termination or acceleration of one or more 
exercised or matured Stock Options \38\ or Stock Futures \39\ 
contracts, securities contracts, commodity contracts, forward 
contracts, repurchase agreements, swap agreements, master netting 
agreements or similar agreements of a Mutually Suspended Member 
pursuant to OCC Rules 901, 1006 and 1101 through 1111 (including but 
not limited to Rules 1104 and 1107) and/or NSCC Rule 18.'' This 
proposed definition would make it clear that the payment of the 
Guaranty Substitution Payment and NSCC's subsequent acceptance of 
Defaulted NSCC Member Transactions for clearance and settlement are 
intended to fall within the ``safe harbors'' provided in the Bankruptcy 
Code,\40\ the Securities Investor Protection Act,\41\ and other similar 
laws.
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    \38\ The term ``Stock Options'' is defined in the Existing 
Accord within the definition of ``Eligible Securities'' and refers 
to options issued by OCC.
    \39\ The term ``Stock Futures'' is defined in the Existing 
Accord within the definition of ``Eligible Securities'' and refers 
to stock futures contracts cleared by OCC.
    \40\ 11 U.S.C. 101 et seq., including Sec. Sec.  362(b)(6), (7), 
(17), (25) and (27) (exceptions to the automatic stay), Sec. Sec.  
546(e)-(g) and (j) (limitations on avoiding powers), and Sec. Sec.  
555-556 and 559-562 (contractual right to liquidate, terminate or 
accelerate certain contracts).
    \41\ 15 U.S.C. 78aaa-lll, including Sec.  78eee(b)(2)(C) 
(exceptions to the stay).
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    <bullet> The term ``Guaranty Substitution Payment'' would be 
defined to mean ``an amount calculated by NSCC in accordance with the 
calculations set forth in Appendix A [to the Existing Accord (as 
proposed to be amended)], to include two components: (i) a portion of 
the Mutually Suspended Member's Required Fund Deposit deficit to NSCC 
at the time of the cease to act; and (ii) a portion of the Mutually 
Suspended Member's unpaid Supplemental Liquidity Deposit obligation at 
the time of the cease to act.''
    <bullet> The term ``Mutually Suspended Member'' would mean ``any 
OCC Participating Member \42\ that has been suspended by OCC that is 
also an NSCC Participating Member \43\ for which NSCC has ceased to 
act.''
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    \42\ The term ``OCC Participating Member'' is defined in the 
Existing Accord to mean ``(i) a Common Member; (ii) an OCC Clearing 
Member that is an `Appointing Clearing Member' (as defined in 
Article I of OCC's By-Laws) and has appointed an Appointed Clearing 
Member that is an NSCC Member to effect settlement of E&A/Delivery 
Transactions through NSCC on the Appointing Clearing Member's 
behalf; (iii) an OCC Clearing Member that is an Appointed Clearing 
Member; or (iv) a Canadian Clearing Member.'' No changes are 
proposed to this definition.
    \43\ The term ``NSCC Participating Member'' is defined in the 
Existing Accord to mean ``(i) a Common Member; (ii) an NSCC Member 
that is an `Appointed Clearing Member' (as defined in Article I of 
OCC's By-Laws); or (iii) [Canadian Depository for Securities Limited 
or ``CDS'']. For the avoidance of doubt, the Clearing Agencies agree 
that CDS is an NSCC Member for purposes of this Agreement.'' No 
changes are proposed to this definition.
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    <bullet> The term ``Required Fund Deposit'' would have the meaning 
``provided in Rule 4 of NSCC's Rules and Procedures (or any replacement 
or substitute rule), the version of which, with respect to any 
transaction or obligation incurred that is the subject of this 
Agreement, is in effect at the time of such transaction or incurrence 
of obligation.''
    <bullet> The term ``Supplemental Liquidity Deposit'' would have the 
meaning ``provided in Rule 4A of NSCC's Rules and Procedures (or any 
replacement or substitute rule), the version of which, with respect to 
any transaction or obligation incurred that is the subject of this 
Agreement, is in effect at the time of such transaction or incurrence 
of obligation.''
    The defined terms that would be amended in Section 1 of the 
Existing Accord are as follows.
    <bullet> The definition for the term ``E&A/Delivery Transaction'' 
generally contemplates a transaction that involves a delivery and 
receipt of stock in the settlement of physically-settled options

[[Page 6146]]

and futures that are cleared and settled by OCC and for which the 
underlying securities are eligible for clearing through the facilities 
of NSCC. The definition would be amended to make clear that it would 
apply in respect of a ``Close Out Transaction'' of a ``Mutually 
Suspended Member'' as those terms are proposed to be defined (described 
above).
    <bullet> The definition for the term ``Eligible Securities'' 
generally contemplates the securities that are eligible to be used for 
physical settlement under the Existing Accord. The term would be 
modified to clarify that this may include, for example, equities, 
exchange-traded funds and exchange-traded notes that are underlying 
securities for options issued by OCC.
Section 6--Default by an NSCC Participating Member or OCC Participating 
Member
    Section 6 of the Existing Accord provides that NSCC is required to 
provide certain notice to OCC in circumstances in which NSCC has ceased 
to act for a Common Member. Currently, Section 6(a)(ii) of the Existing 
Accord also requires NSCC to notify OCC if a Common Member has failed 
to satisfy its Clearing Fund obligations to NSCC, but for which NSCC 
has not yet ceased to act. In practice, this provision would trigger a 
number of obligations (described below) when a Common Member fails to 
satisfy its NSCC Clearing Fund obligations for any reason, including 
those due to an operational delay. Therefore, OCC and NSCC are 
proposing to remove the notification requirement under Section 6(a)(ii) 
from the Existing Accord. Under Section 7(d) of the Existing Accord, 
NSCC and OCC are required to provide each other with general 
surveillance information regarding Common Members, which includes 
information regarding any Common Member that is considered by the other 
party to be in distress. Therefore, if a Common Member has failed to 
satisfy its NSCC Clearing Fund obligations and NSCC believes this 
failure is due to, for example, financial distress and not, for 
example, due to a known operational delay, and NSCC has not yet ceased 
to act for that Common Member, such notification to OCC would still 
occur but would be done pursuant to Section 7(d) of the Existing Accord 
(as proposed to be amended), and not Section 6(a)(ii). Notifications 
under Section 6 of the Existing Accord (as proposed to be amended) 
would be limited to instances when NSCC has actually ceased to act for 
a Common Member pursuant to the NSCC Rules.\44\
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    \44\ See Rule 46 (Restrictions on Access to Services) of the 
NSCC Rules, supra note 6.
---------------------------------------------------------------------------

    Following notice by NSCC that it has ceased to act for a Common 
Member, OCC is obligated in turn to deliver to NSCC a list of all E&A/
Delivery Transactions (excluding certain transactions for which 
Guaranty Substitution does not occur) involving the Common Member.\45\ 
This provision would be amended to clarify that it applies in respect 
of such E&A/Delivery Transactions for the Common Member for which the 
NSCC Guaranty has not yet attached--meaning that Guaranty Substitution 
has not yet occurred.
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    \45\ The section of the Existing Accord that addresses 
circumstances in which NSCC ceases to act and/or an NSCC Member 
defaults is currently part of Section 6(a). It would be re-
designated as Section 6(b) for organizational purposes.
---------------------------------------------------------------------------

    As described above in the summary of the Existing Accord, where 
NSCC has ceased to act for a Common Member, the Existing Accord refers 
to the Common Member as the Defaulting NSCC Member and also refers to 
the relevant E&A/Delivery Transactions in connection with that 
Defaulting NSCC Member for which a Guaranty Substitution has not yet 
occurred as Defaulted NSCC Member Transactions.
    If the Defaulting NSCC Member is also suspended by OCC, it would be 
covered by the proposed definition that is described above for a 
Mutually Suspended Member. For such a Mutually Suspended Member, the 
proposed changes in Section 6(b) would provide that NSCC, by a time 
agreed upon by the parties, would provide OCC with the amount of the 
Guaranty Substitution Payment as calculated by NSCC and related 
documentation regarding the calculation. The Guaranty Substitution 
Payment would be calculated pursuant to NSCC's Rules as that portion of 
the unmet Required Fund Deposit \46\ and Supplemental Liquidity Deposit 
\47\ obligations of the Mutually Suspended Member attributable to the 
Defaulted NSCC Member Transactions. By a time agreed upon by the 
parties,\48\ OCC would then be required to either notify NSCC of its 
intent to make the full amount of the Guaranty Substitution Payment to 
NSCC or notify NSCC that it will not make the Guaranty Substitution 
Payment. If OCC makes the full amount of the Guaranty Substitution 
Payment, NSCC's guaranty would take effect at the time of NSCC's 
receipt of that payment and the OCC Guaranty would end.
---------------------------------------------------------------------------

    \46\ The Required Fund Deposit is calculated pursuant to Rule 4 
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other 
Matters) of the NSCC Rules, see supra note 6.
    \47\ The Supplemental Liquidity Deposit is calculated pursuant 
to Rule 4A (Supplemental Liquidity Deposits) of the NSCC Rules, see 
supra note 6.
    \48\ The time by which OCC would be required to notify NSCC of 
its intent would be defined in the Service Level Agreement. As of 
the time of this filing, the parties intend to set that time as one 
hour after OCC's receipt of the calculated Guaranty Substitution 
Payment from NSCC.
---------------------------------------------------------------------------

    The proposed changes would further provide that if OCC does not 
suspend the Common Member (such that the Common Member would therefore 
not meet the proposed definition of a Mutually Suspended Member) or if 
OCC elects to not make the full amount of the Guaranty Substitution 
Payment to NSCC, then all of the Defaulted NSCC Member Transactions 
would be exited from NSCC's CNS Accounting Operation and/or NSCC's 
Balance Order Accounting Operation, as applicable, and Guaranty 
Substitution would not occur in respect thereof. Therefore, NSCC would 
continue to have no obligation to guarantee or settle the Defaulted 
NSCC Member Transactions, and the OCC Guaranty would continue to apply 
to them pursuant to OCC's By-Laws and Rules.\49\
---------------------------------------------------------------------------

    \49\ Under the current and proposed terms of the Existing 
Accord, NSCC would be permitted to voluntarily guaranty and settle 
the Defaulted NSCC Member Transactions.
---------------------------------------------------------------------------

    Proposed changes to the Existing Accord would also address the 
application of any Guaranty Substitution Payment by NSCC. Specifically, 
new Section 6(d) would provide that any Guaranty Substitution Payment 
made by OCC may be used by NSCC to satisfy any liability or obligation 
of the Mutually Suspended Clearing Member to NSCC on account of 
transactions involving the Mutually Suspended Clearing Member for which 
the NSCC Guaranty applies and to the extent that any amount of assets 
otherwise held by NSCC for the account of the Mutually Suspended Member 
(including any Required Fund Deposit or Supplemental Liquidity Deposit) 
are insufficient to satisfy its obligations related to transactions for 
which the NSCC Guaranty applies. Proposed changes to Section 6(d) would 
further provide for the return to OCC of any unused portion of the GSP. 
With regard to the portion of the Guaranty Substitution Payment that 
corresponds to a member's Supplemental Liquidity Deposit obligation, 
NSCC must return any unused amount to OCC within fourteen (14) days 
following the conclusion of NSCC's settlement, close-out and/or 
liquidation. With regard to the portion of the Guaranty Substitution 
Payment that corresponds to a Required

[[Page 6147]]

Fund Deposit, NSCC must return any unused amount to OCC under terms 
agreed to by the parties.\50\
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    \50\ Such amounts would be returned to OCC as appropriate and in 
accordance with a Netting Contract and Limited Cross-Guaranty, by 
and among The Depository Trust Company, Fixed Income Clearing 
Corporation, NSCC and OCC, dated as of January 1, 2003, as amended.
---------------------------------------------------------------------------

Other Proposed Changes as Part of Phase 1
    Certain other technical changes are also proposed to the Existing 
Accord to conform it to the proposed changes described above. For 
example, the preamble and the ``whereas'' clauses in the Preliminary 
Statement would be amended to clarify that the agreement is an amended 
and restated agreement and to summarize that the agreement would be 
modified to contemplate the Guaranty Substitution Payment structure. 
Section 1(c), which addresses the terms in the Existing Accord that are 
defined by reference to NSCC's Rules and Procedures and OCC's By-Laws 
and Rules would be modified to state that such terms would have the 
meaning then in effect at the time of any transaction or obligation 
that is covered by the agreement rather than stating that such terms 
have the meaning given to them as of the effective date of the 
agreement. This change is proposed to help ensure that the meaning of 
such terms in the agreement will not become inconsistent with the 
meaning in the NSCC Rules and/or OCC By-Laws and Rules, as they may be 
modified through proposed rule changes with the Commission.
    Technical changes would be made to Sections 3(d) and (e) of the 
Existing Accord to provide that those provisions would not apply in the 
event new Section 6(b) described above, is triggered. Section 3(d) 
generally provides that OCC will no longer submit E&A/Delivery 
Transactions to NSCC involving a suspended OCC Participating 
Member.\51\ Similarly, Section 3(e) generally provides that OCC will no 
longer submit E&A/Delivery Transactions to NSCC involving an NSCC 
Participating Member \52\ for which NSCC has ceased to act. A proposed 
change would also be made to Section 5 of the Existing Accord to modify 
a reference to Section 5 of Article VI of OCC's By-Laws to instead 
provide that the updated cross-reference should be to Chapter IV of 
OCC's Rules.
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    \51\ See supra note 42 defining OCC Participating Member.
    \52\ See supra note 43 defining NSCC Participating Member.
---------------------------------------------------------------------------

    Section 5 would also be amended to clarify that Guaranty 
Substitution occurs when NSCC has received both the Required Fund 
Deposit and Supplemental Liquidity Deposit, as calculated by NSCC in 
its sole discretion, from Common Members. The addition of the 
collection of the Supplemental Liquidity Deposit to the definition of 
the Guaranty Substitution Time in this Section 5 would reflect OCC and 
NSCC's agreement that both amounts are components of the Guaranty 
Substitution Payment (as described above) and would make this 
definition consistent with that agreement.
    In Section 7 of the Existing Accord, proposed changes would be made 
to provide that NSCC would provide to OCC information regarding a 
Common Member's Required Fund Deposit and Supplemental Liquidity 
Deposit obligations, to include the Supplemental Liquidity Deposit 
obligation in this notice requirement, and additionally that NSCC would 
provide OCC with information regarding the potential Guaranty 
Substitution Payment for the Common Member. On an options expiration 
date that is a Friday, NSCC would, by close of business on that day, 
also provide to OCC information regarding the intra-day liquidity 
requirement, intra-day liquidity resources and intra-day calls for a 
Common Member that is subject to a Supplemental Liquidity Deposit at 
NSCC.
    Finally, Section 14 of the Existing Accord would be modernized to 
provide that notices between the parties would be provided by email 
rather than by hand, overnight delivery service or first-class mail.
Proposed Phase 1 Changes to NSCC Rules
    In connection with the proposed changes to the Existing Accord, 
NSCC is also proposing changes to its Rules, described below.
    First, NSCC would amend Rule 18 (Procedures for When the 
Corporation Ceases to Act), which describes the actions NSCC would take 
with respect to the transactions of a Member after NSCC has ceased to 
act for that Member.\53\ The proposed changes would include a new 
Section 9(a) to specify that following a Member default, NSCC may 
continue to act and provide the NSCC Guaranty pursuant to a ``Close-Out 
Agreement'' such as the Existing Accord (as it is proposed to be 
amended); \54\ a new Section 9(b) to specify that any transactions 
undertaken pursuant to a Close-Out Agreement would be treated as having 
been received, provided or undertaken for the account of the Member for 
which NSCC has ceased to act, but that any deposit, payment, financial 
assurance or other accommodation provided to NSCC pursuant to a Close-
Out Agreement shall be returned or released as provided for in the 
agreement; and a new Section 9(c), to provide that NSCC shall have a 
lien upon, and may apply, any property of the defaulting Member in 
satisfaction of any obligation, liability or loss that relates to a 
transaction undertaken or service provided pursuant to a Close-Out 
Agreement.
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    \53\ See supra note 6.
    \54\ The Existing Accord is currently the only agreement that 
would be considered a ``Close-Out Agreement'' under this new Section 
9(b).
---------------------------------------------------------------------------

    NSCC would also propose clarifications to Sections 4, 6(b)(iii)(B) 
and 8 to use more precise references to the legal entity described in 
those sections of this Rule.
    Second, NSCC would amend Section B of Procedure III and Addendum K 
of the NSCC Rules \55\ to provide that the NSCC Guaranty would not 
attach to Defaulted NSCC Member Transactions except as provided for in 
the Existing Accord (as it is proposed to be amended), and that the 
NSCC Guaranty attaches, with respect to obligations arising from the 
exercise or assignment of OCC options settled at NSCC or stock futures 
contracts cleared by OCC, as provided for in the Existing Accord (as it 
is proposed to be amended) or other arrangement with OCC. Finally, the 
proposed changes to Procedure III would clarify that Guaranty 
Substitution occurs when NSCC has received both the Required Fund 
Deposit and Supplemental Liquidity Deposit, consistent with the 
proposed revisions to Section 5 of the Current Accord, described above. 
As noted above, the proposal to include the collection of the 
Supplemental Liquidity Deposit in connection with the Guaranty 
Substitution reflect OCC and NSCC's agreement that both amounts are 
components of the Guaranty Substitution Payment. NSCC also proposes to 
make a number of non-substantive clean up changes to Procedure III, 
such as correcting references to NSCC's ``guaranty.''
---------------------------------------------------------------------------

    \55\ See id.
---------------------------------------------------------------------------

    Collectively, these proposed changes would establish and clarify 
the rights of both NSCC and a Member for which NSCC has ceased to act 
with respect to property held by NSCC and the operation and 
applicability of any Close-Out Agreement, and would make it clear that 
any payments received pursuant to a Close-Out Agreement and NSCC's 
acceptance of a Mutually

[[Page 6148]]

Suspended Member's transactions for clearance and settlement pursuant 
to a Close-Out Agreement are intended to fall within the Bankruptcy 
Code and Securities Investor Protection Act ``safe harbors.''
Proposed Phase 2 Changes
    On February 15, 2023, the Commission adopted amendments to Rule 
15c6-1(a) under the Act \56\ to shorten the standard settlement cycle 
for most broker-dealer transactions in securities from T+2 to T+1. In 
doing so, the Commission stated that a shorter settlement cycle ``can 
promote investor protection, reduce risk, and increase operational and 
capital efficiency.'' \57\ Moreover, the Commission stated that 
delaying the move to a shorter settlement cycle would ``allow undue 
risk to continue to exist in the U.S. clearance and settlement system'' 
\58\ and that it ``believes that the May 28, 2024, compliance date will 
help ensure that market participants have sufficient time to implement 
the changes necessary to reduce risk, such as risks associated with the 
potential for increases in settlement fails.'' \59\ The Phase 2 changes 
proposed herein serve those risk reduction objectives related to 
securities settlements by endeavoring to limit market disruption 
following a Common Member default. The proposed changes would allow OCC 
to provide certain assurances with respect to its ability to make a GSP 
in the event of a Common Member default to NSCC in a shortened 
settlement cycle, which would permit NSCC to begin processing E&A/
Delivery Transactions prior to Guaranty Substitution occurring. This, 
in turn, would promote settlement through NSCC that is less 
operationally complex and would be expected to require less collateral 
and liquidity from market participants than if OCC engaged in the 
alternative settlement processes discussed above.
---------------------------------------------------------------------------

    \56\ 17 CFR 240.15c6-1.
    \57\ Securities Exchange Act Release No. 96930 (Feb. 15, 2023), 
88 FR 13872, 13873 (Mar. 6, 2023).
    \58\ Id. at 13881.
    \59\ Id. at 13917.
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    To address the operational realities concerning the Accord that 
will result from the Commission's adoption and implementation of a new 
standard settlement cycle of T+1 pursuant to Rule 15c6-1(a) under the 
Act, OCC and NSCC are proposing Phase 2 changes to further modify the 
Accord after the T+1 settlement cycle becomes effective. As described 
in greater detail below, the Phase 2 changes would allow the GSP and 
other changes that are part of the Phase 1 changes to continue to 
function appropriately and efficiently in the new T+1 settlement 
environment. Because of the phased approach, a separate mark-up is 
provided in confidential Exhibit 4A of the Phase 2 changes against the 
Accord as modified through the Phase 1 changes.
    As described in more detail below, shortening the settlement cycle 
to T+1 will require NSCC to process stock settlement obligations 
arising from E&A/Delivery Transactions one day earlier, i.e., on the 
day after the trade date, than is currently the case. Moving processing 
times ahead by a full day will require processing to occur before the 
guaranty transfers from OCC to NSCC.\60\
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    \60\ Given the reduction in the settlement cycle and existing 
processes that must be completed for settlement, NSCC would not be 
able to safely compress its processing times further to allow 
processing to occur after the guaranty transfers from OCC to NSCC. 
NSCC provided proposed processing timelines in confidential Exhibit 
3D to this filing.
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    In this new T+1 processing environment, the Phase 2 changes would 
limit market disruption following a Common Member default because the 
Phase 2 changes would allow OCC to provide certain assurances with 
respect to its ability to make a GSP in the event of a Common Member 
default to NSCC that would permit NSCC to begin processing the 
defaulting Common Member's E&A/Delivery Transactions prior to Guaranty 
Substitution occurring. This, in turn, would promote settlement through 
NSCC that is less operationally complex and would be expected to 
require less collateral and liquidity from market participants than if 
OCC engaged in alternative settlement processes. The specific changes 
included in Phase 2 are described below. The changes would facilitate 
the continued ability of the GSP to function in an environment with a 
shorter settlement cycle. These changes are generally designed to allow 
OCC to provide certain assurances with respect to its ability to make a 
GSP in the event of a Common Member default to NSCC that would permit 
NSCC to begin processing E&A/Delivery Transactions prior to Guaranty 
Substitution occurring by introducing new or amended terms and setting 
out the processes associated therewith. All of the descriptions below 
explain the changes to the Accord as they would be made after the 
Accord has already been modified through prior implementation of the 
proposed Phase 1 changes.
Section 1--Definitions
    First, new definitions would be added, and existing definitions 
would be amended or removed in Section 1.
    The new defined terms would be as follows.
    <bullet> The term ``GSP Monitoring Data'' would be defined to mean 
a set of margin and liquidity-related data points provided by NSCC on 
each Activity Date prior to the submission of E&A/Delivery Transactions 
by OCC to be used for informational purposes at OCC and NSCC.
    <bullet> The term ``Final Guaranty Substitution Payment'' would be 
defined to mean an amount calculated by NSCC for each Settlement Date 
in accordance with Appendix A to the Accord, to include two components: 
(i) a portion of the NSCC Participating Member's \61\ Required Fund 
Deposit deficit to NSCC calculated as a difference between the Required 
Fund Deposit deficit calculated on the NSCC Participating Member's 
entire portfolio and the Required Fund Deposit deficit calculated on 
the NSCC Participating Member's portfolio prior to submission of the 
E&A/Delivery Transactions; and (ii) the portion of the NSCC 
Participating Member's unpaid Supplemental Liquidity Deposit obligation 
attributable to the additional activity to be guaranteed.
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    \61\ See supra note 43.
---------------------------------------------------------------------------

    <bullet> The term ``Historical Peak Guaranty Substitution Payment'' 
would be defined to mean the largest Final Guaranty Substitution 
Payment for an NSCC Participating Member and its affiliates that are 
also NSCC Participating Members over the 12 months immediately 
preceding the Activity Date, to include two components: (i) the 
Required Fund Deposit deficits associated with E&A/Delivery 
Transactions based on peak historical observations of the largest NSCC 
Participating Member and its affiliates that are also NSCC 
Participating Members; and (ii) the Supplemental Liquidity Deposit 
obligations associated with E&A/Delivery Transactions based on peak 
historical observations as calculated in accordance with applicable 
NSCC or OCC Rules and procedures.
    <bullet> The term ``Qualifying Liquid Resources'' would be defined 
to have the meaning provided by Rule 17Ad-22(a)(14) of the Exchange 
Act, 17 CFR 240.17Ad-22(a)(14), or any successor Rule under the 
Exchange Act.
    <bullet> The term ``Settlement Date'' would be defined to mean the 
date on which an E&A/Delivery Transaction is designated to be settled 
through payment for, and delivery of, the Eligible Securities 
underlying the

[[Page 6149]]

exercised Stock Option \62\ or matured Stock Future,\63\ as the case 
may be.
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    \62\ See supra note 38.
    \63\ See supra note 39.
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    <bullet> The term ``Weekday Expiration'' would be defined to mean 
any expiration for which the options expiration date occurs on a date 
other than a Friday or for which the Settlement Date is any date other 
than the first business date following a weekend.
    <bullet> The term ``Weekend Expiration'' would be defined to mean 
any expiration for which the options expiration date occurs on a Friday 
or for which the Settlement Date is the first business date following a 
weekend.
    The defined term that would be removed in Section 1 is as follows.
    <bullet> ``Guaranty Substitution Payment,'' which would be replaced 
by the new defined terms ``Final Guaranty Substitution Payment'' and 
``Historical Peak Guaranty Substitution Payment.''
    The defined terms that would be amended in Section 1 are as 
follows.
    <bullet> The definition for the term ``Eligible Securities'' 
generally contemplates the securities that are eligible to be used for 
physical settlement under the Existing Accord. In Phase 2, the term 
would be modified to exclude any transactions settled through NSCC's 
Balance Order System and any security undergoing a voluntary corporate 
action that is being supported by NSCC's CNS system. This is because 
the processing of E&A/Delivery Transactions and potential reversals of 
such transactions under the Phase 2 changes would not be feasible under 
the anticipated operation of NSCC's CNS and Balance Order Accounting 
Operations under the shortened T+1 settlement cycle.
Section 3--Historical Peak Guaranty Substitution Payment
    A new Section 3 would be added to describe the process by which OCC 
would send to NSCC evidence of sufficient funds to cover the Historical 
Peak Guaranty Substitution Payment. In particular, Section 3(a) would 
provide that on each Activity Date, at or before a time agreed upon by 
the Clearing Agencies (which may be modified on any given Activity Date 
with the consent of an authorized representative of OCC), NSCC will 
communicate to OCC the amount of the Historical Peak Guaranty 
Substitution Payment amount and the GSP Monitoring Data, which are to 
be used by OCC for informational purposes. The Historical Peak Guaranty 
Substitution Payment would reflect the largest GSP of the NSCC 
Participating Member and its affiliates over the prior twelve months 
and would be calculated based on the sum of the Required Fund Deposit 
deficits and Supplemental Liquidity Deposit associated with E&A/
Delivery Transactions. Section 3(b) would provide that OCC would then 
submit to NSCC an acknowledgement of the Historical Peak Guaranty 
Substitution Payment amount and evidence that OCC has sufficient cash 
resources in the OCC Clearing Fund to cover the Historical Peak 
Guaranty Substitution Payment. Section 3(c) would provide that if OCC 
does not provide NSCC with evidence within the designated time period 
that it has sufficient cash resources in the OCC Clearing Fund to cover 
the Historical Peak Guaranty Substitution Payment on the Activity Date, 
OCC will immediately contact NSCC to escalate discussions to discuss 
potential exposures and determine, among other things, whether OCC has 
other qualifying liquidity resources available to satisfy such amount.
    As described above, the Historical Peak Guaranty Substitution 
Payment is designed to serve as a reasonable proxy for the largest 
potential Final Guaranty Substitution Payment. Its purpose is to allow 
OCC to provide evidence that it likely will be able to satisfy the 
Final Guaranty Substitution Payment in the event of a Common Member 
default, which will provide NSCC with reasonable assurances such that 
NSCC can begin processing E&A/Delivery Transactions upon receipt and 
prior to the Guaranty Substitution occurring, which will minimize the 
probability of reversals in a default event in light of the shortened 
settlement cycle. The Historical Peak Guaranty Substitution Payment 
amount also will provide OCC with information that will allow OCC to 
include the amount of a potential GSP in its liquidity resource 
planning.
Section 6--Final Guaranty Substitution Payment; OCC's Commitment
    A new Section 6 would be added to provide the process by which NSCC 
would communicate the amount of, and OCC would commit to pay, the Final 
Guaranty Substitution Payment. In particular, Section 6(a) would 
provide that on each Settlement Date (or each Saturday for Weekend 
Expirations), by no later than the time(s) agreed upon by NSCC and OCC, 
NSCC will communicate to OCC the Final Guaranty Substitution Payment 
for each Common Member calculated by NSCC. NSCC would make such 
calculation according to a calculation methodology described in a new 
Appendix A to the Accord. This calculation would represent the sum of 
the Required Fund Deposit \64\ and the Supplemental Liquidity Deposit 
\65\ for the Common Member. As with the Phase 1 Accord, payment of the 
Final Guaranty Substitution Payment would be contingent on the mutual 
suspension of the Common Member and payment of the Final Guaranty 
Substitution Payment would continue to be the means by which Guaranty 
Substitution may occur.
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    \64\ The Required Fund Deposit is the portion of the defaulted 
Common Member's Required Fund Deposit deficit to NSCC, calculated as 
a difference between the Required Fund Deposit deficit calculated on 
the entire portfolio and the Required Fund Deposit deficit 
calculated on the Common Member's portfolio prior to the submission 
of E&A/Delivery Transactions. The Phase 2 changes would refine the 
existing calculation methodology for the Required Fund Deposit in 
order to provide for a more accurate amount.
    \65\ If NSCC calculates a liquidity shortfall with respect to a 
defaulted Common Member, the Supplemental Liquidity Deposit is the 
portion of that shortfall that is attributable to the additional 
activity to be guaranteed.
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    Section 6(b) would provide that, following NSCC's communication of 
the Final Guaranty Substitution Payment for each Common Member to OCC, 
and by no later than the agreed upon time, OCC must either (i) commit 
to NSCC that it will pay the Final Guaranty Substitution Payment in the 
event of a mutual suspension of a Common Member,\66\ or (ii) notify 
NSCC that it will not have sufficient cash resources to pay the largest 
Final Guaranty Substitution Payment calculated for every Common Member. 
Section 6(b)(i) would further provide that for Weekday Expirations, 
OCC's submission of E&A/Delivery Transactions to NSCC would constitute 
OCC's commitment to pay the Final Guaranty Substitution Payment on the 
Settlement Date in the event of a mutual suspension of a Common Member.
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    \66\ If OCC does not have sufficient cash to pay the Final GSP, 
then it must confirm for NSCC the availability of other qualifying 
liquid resources and the expecting timeline for converting such 
resources to cash.
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    Section 6(c) would provide that if OCC notifies NSCC that it will 
not have sufficient cash resources to pay the Final Guaranty 
Substitution Payment, NSCC may, in its sole discretion (i) reject or 
reverse all E&A/Delivery Transactions, or (ii) voluntarily accept E&A/
Delivery Transactions subject to certain terms and conditions mutually 
agreed upon by NSCC and OCC.\67\

[[Page 6150]]

Section 6(c) would also provide that any necessary reversals of E&A/
Delivery Transactions shall be delivered by NSCC to OCC at such time 
and in such form as the Clearing Agencies agree.
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    \67\ Such terms and conditions may include, but would not be 
limited to, OCC's agreement to (i) pay NSCC available cash resources 
in partial satisfaction of the Final Guaranty Substitution Payment; 
(ii) collect or otherwise source additional resources that would 
constitute NSCC Qualifying Liquid Resources to pay the full Final 
Guaranty Substitution Payment amount; and/or (iii) reimburse NSCC 
for any losses associated with closing out such E&A/Delivery 
Transactions.
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    Section 6(d) would provide that if, at any time after OCC has 
acknowledged the Historical Peak Guaranty Substitution Payment in 
accordance with proposed Section 3(b) of the Accord or committed to pay 
the Final Guaranty Substitution Payment in accordance with proposed 
Section 6(b) of the Accord, OCC has a reasonable basis to believe it 
will be unable to pay the Final Guaranty Substitution Payment, OCC will 
immediately notify NSCC.
Section 8--Default by an NSCC Participating Member or OCC Participating 
Member
    Section 6(b)(i), which would be renumbered as Section 8(b)(i), 
would be amended to reflect the modified use of the Final Guaranty 
Substitution Payment in the event of a mutual suspension of a Common 
Member. Section 8(b)(i) would also be revised to remove the ability for 
OCC or NSCC to require that the Guaranty Substitution Payment be re-
calculated in accordance with an alternative methodology. This would 
not be necessary under the calculation methodology used in the Phase 2 
changes because the proposed methodology would result in a more 
accurate calculation. Section 8(b)(i) would further amend the Accord by 
providing NSCC with discretion to voluntarily accept Defaulted NSCC 
Member Transactions and assume the guaranty for such transactions, 
subject to certain terms and conditions mutually agreed upon by NSCC 
and OCC. The only remaining change to the Guaranty Substitution process 
from its operation under the Accord would be the shortened time 
duration under which OCC would elect (by way of its commitment) to make 
the Final Guaranty Substitution Payment and the timing under which the 
Guaranty Substitution would be processed in order to function in a T+1 
environment.
    In particular, Section 8(b)(i) would provide that, with respect to 
a Mutually Suspended Member, if OCC has committed to make the Final 
Guaranty Substitution Payment, it will make such cash payment in full 
by no later than the agreed upon time(s). Upon NSCC's receipt of the 
full amount of the Final Guaranty Substitution Payment, NSCC's Guaranty 
would attach (and OCC's Guaranty will no longer apply) to the Defaulted 
NSCC Member Transactions. NSCC would have no obligation to accept a 
Final Guaranty Substitution Payment and attach the NSCC Guaranty to any 
Defaulted NSCC Member Transactions for more than the Activity Date on 
which it has ceased to act for that Mutually Suspended Member and one 
subsequent Activity Date. If NSCC does not receive the full amount of 
the Final Guaranty Substitution Payment in cash by the agreed upon 
time, the Guaranty Substitution Time would not occur with respect to 
the Defaulted NSCC Member Transactions and Section 8(b)(ii), described 
below, would apply. NSCC would, however, have discretion to voluntarily 
accept Defaulted NSCC Member Transactions and assume the guaranty for 
such transactions, subject to certain terms and conditions mutually 
agreed upon by NSCC and OCC.
    Section 6(b)(ii), which would be renumbered as Section 8(b)(ii), 
would also be amended to reflect the modified use of the Final Guaranty 
Substitution Payment in the event OCC continues to perform or does not 
make the Final Guaranty Substitution Payment. In particular, Section 
8(b)(ii) would add an additional criterion of OCC not satisfying any 
alternative agreed upon terms for Guaranty Substitution to reflect this 
as an additional option under the Phase 2 changes. As amended, Section 
8(b)(ii) would provide that if OCC does not suspend an OCC 
Participating Member for which NSCC has ceased to act, OCC does not 
commit to make the Final Guaranty Substitution Payment, NSCC does not 
receive the full amount of the Final Guaranty Substitution Payment in 
cash by the agreed upon time, or OCC does not satisfy any alternative 
agreed upon terms for Guaranty Substitution, Guaranty Substitution with 
respect to all Defaulted NSCC Member Transactions for that Activity 
Date will not occur, all Defaulted NSCC Member Transactions for that 
Activity Date will be reversed and exited from NSCC's CNS accounting 
system, and NSCC will have no obligation to guaranty or settle such 
Defaulted NSCC Member Transactions. NSCC may, however, exercise its 
discretion to voluntarily accept the Defaulted NSCC Member 
Transactions, and assume the guaranty for such transactions, subject to 
certain agreed upon terms and conditions.
    Section 8(b) would also be modified to provide for escalated 
discussion between the Clearing Agencies in the event of an intraday 
NSCC Cease to Act and/or NSCC Participating Member Default, 
particularly to confirm that OCC has sufficient qualifying liquid 
resources to pay the projected Final Guaranty Substitution Payment for 
the Defaulting NSCC Member's projected E&A/Delivery Transactions based 
on information provided in GSP Monitoring Data for such Defaulting NSCC 
Member.
    Conforming changes would also be made to Section 8(d) to reflect 
the use of the new defined term ``Final Guaranty Substitution 
Payment.''
Other Proposed Changes as Part of Phase 2
    Certain other technical changes are also proposed as part of the 
Phase 2 changes, including to conform the Accord to the proposed 
changes described above. For example, Section 9(c) would be revised 
regarding information sharing to reflect the introduction of the 
Historical Peak and Final Guaranty Substitution Payments and the GSP 
Monitoring Data; Section 4(c)(ix) would be conformed to reflect the 
addition of ``Settlement Date'' as a defined term in Section 1; various 
sections would be renumbered and internal cross-references would be 
adjusted to reflect the addition of new sections proposed herein; 
correct current references throughout the Accord to ``NSCC Rules and 
Procedures'' would be changed to simply read ``the NSCC Rules;'' and 
various non-substantive textual changes would be made to increase 
clarity.
    Section 4(a) would also be modified to reflect that the Eligibility 
Master Files referenced in that paragraph, which identify Eligible 
Securities to OCC, are described in the SLA between OCC and NSCC. 
Section 9(b) would be modified to include OCC's available liquidity 
resources, including Clearing Fund cash balances in the information OCC 
provides to NSCC and to specify that information will be provided on 
each Activity Date at an agreed upon time and in an agreed upon form by 
the Clearing Agencies. Finally, Section 16(b) would be modified to 
provide the correct current delivery address information for NSCC.
    The Phase 2 changes would also include an Appendix A that would 
describe in detail the calculation methodology for the Guaranty 
Substitution Payment. This would provide the detailed technical 
calculation to determine each of the Mutually Suspended Member's 
Required Fund Deposit deficit and liquidity shortfall to NSCC. The full 
text of Appendix A is filed confidentially with the Commission in 
Exhibit 5B to this filing.
Phase 2 Guaranty Substitution Process Changes
    As described above, the Phase 2 changes would modify the Guaranty

[[Page 6151]]

Substitution process to reflect the shortened time duration under which 
the Guaranty Substitution will be processed in order to function in a 
T+1 environment. Below is a description of how that process would 
operate. The actual process would be implemented pursuant to a modified 
SLA between the Clearing Agencies.\68\ All times provided below are in 
Eastern Time and represent the latest time by which the specified 
action must occur unless otherwise agreed by the Clearing Agencies.
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    \68\ NSCC provided a draft of the revised Phase 2 SLA 
illustrating such changes to the Commission in confidential Exhibit 
3F to this filing.
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    Weekend Expirations: On Friday (the Activity Date), NSCC would 
provide OCC with the Historical Peak GSP amount by 8:00 a.m. By 5:00 
p.m. on Friday, OCC must acknowledge the Historical Peak GSP and 
provide evidence of OCC's Clearing Fund cash resources sufficient to 
cover that amount, following which NSCC would provide the Eligibility 
Master File by 5:45 p.m. By 1:00 a.m. on Saturday, OCC would then 
provide NSCC with the E&A/Delivery Transactions file and by 8:00 a.m. 
NSCC would provide OCC with the Final GSP, which OCC must commit to pay 
by 9:00 a.m. in the event of a mutual suspension of a Common 
Member.\69\ By 8:00 a.m. Monday (the Settlement Date) if a cease to act 
is declared over the weekend (or the later of 10:00 a.m. or one hour 
after the cease to act is declared if declared on Monday), OCC must pay 
the Final GSP if there has been a mutual suspension of a Common Member. 
Finally, by 1:00 p.m. on Monday, OCC must provide reversals for the 
defaulted member's E&A/Delivery Transactions if OCC has not satisfied 
(or will not satisfy) the Final GSP.
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    \69\ If OCC does not have sufficient cash resources to pay the 
Final GSP and the Clearing Agencies are unable to reach an agreement 
on additional terms for NSCC to accept E&A/Delivery Transactions, 
OCC must submit a reversal file by 12:30 a.m. on Monday so that NSCC 
can remove the E&A/Delivery Transactions from CNS prior to the start 
of NSCC's overnight processing. NSCC has included additional details 
on action deadlines and processing times in confidential Exhibit 3D 
of this filing.
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    Weekday Expirations: On the Activity Date, NSCC would provide OCC 
with the Historical Peak GSP amount by 8:00 a.m. By 5:00 p.m. on the 
Activity Date, OCC must acknowledge the Historical Peak GSP and provide 
evidence of its cash resources in the OCC Clearing Fund sufficient to 
cover that amount, following which NSCC would provide the Eligibility 
Master File by 5:45 p.m. By 1:00 a.m. on the Settlement Date (the day 
after the Activity Date in the T+1 environment), OCC would then provide 
NSCC with the E&A/Delivery Transactions file, which also constitutes 
OCC's commitment to pay the Final GSP. By 8:00 a.m. NSCC would provide 
OCC with the Final GSP. By the later of 10:00 a.m. on the Settlement 
Date or one hour after a cease to act is declared, OCC must pay the 
Final GSP if there has been a mutual suspension of a Common Member. 
Finally, by 1:00 p.m. on the Settlement Date, OCC must provide 
reversals for the defaulted member's E&A/Delivery Transactions if OCC 
has not satisfied (or will not satisfy) the Final GSP.
    For both Weekend Expirations and Weekday Expirations, Guaranty 
Substitution will take place only after the Common Members meet their 
start of day margin funding requirements at NSCC, if any. In a Common 
Member default event, the Guaranty Substitution will take place when 
OCC pays the Final GSP to NSCC.
    The Clearing Agencies note that the Phase 2 changes described above 
are designed to change the process by which the GSP is implemented such 
that the use of the GSP as a mechanism to facilitate the acceptance of 
settlement obligations by NSCC can continue to operate within the 
condensed timing for clearance and settlement in a T+1 environment. 
However, the ultimate use of the GSP, its purpose, and its substantive 
import would remain consistent with the Phase 1 changes.
Phase 2 Changes to NSCC Rules
    In connection with the proposed changes to the Accord, NSCC is also 
proposing changes to its Rules, described below.
    First, NSCC would amend Section B of Procedure III of the NSCC 
Rules to make conforming changes to align with the Phase 2 Accord. NSCC 
proposes to remove references to Balance Order Securities and the 
Balance Order Accounting Operation in Procedure III to align with the 
removal of Balance Order transactions from the types of Eligible 
Securities under the Phase 2 Accord. NSCC would also update a reference 
to the Settlement Date for OCC E&A/Delivery Transactions to reflect 
that it would be one business day (rather than two business days) after 
exercise/assignment under the forthcoming T+1 settlement cycle. In 
addition, NSCC would add new language to Procedure III to clarify that 
E&A/Delivery Transactions that are indicated in a report or 
Consolidated Trade Summary shall have no force and effect with respect 
to the NSCC's guaranty or a Member's ultimate obligation to deliver or 
pay for the receipt of such securities unless and until such 
transactions have satisfied all requirements for the NSCC's guaranty 
under Addendum K and the new Accord (unless NSCC notifies Members to 
the contrary). NSCC would also clarify that E&A/Delivery Transactions 
indicated in a report or Consolidated Trade Summary for which the 
NSCC's guaranty does become effective shall be canceled and thereafter 
shall be null and void and such cancelation shall be reflected in the 
next available report or Consolidated Trade Summary. The proposed rule 
change is intended to reflect the timing of the receipt and processing 
of E&A/Delivery Transactions under the T+1 settlement cycle and the 
ultimate Guaranty Substitution and Guaranty Substitution Time under the 
Phase 2 Accord.
Implementation Timeframe
    The proposed Phase 1 and Phase 2 changes will be implemented as 
follows:
    <bullet> Phase 1: Within 120 days after the date OCC and NSCC 
receive all necessary regulatory approvals for these proposed changes 
to the Accord, NSCC will implement all Phase 1 changes. NSCC would 
announce the implementation date by an Important Notice posted to its 
public website at least seven days prior to implementation.
    <bullet> Phase 2: On the compliance date with respect to the final 
T+1 amendments to Exchange Act Rule 15c6-1(a) established by the 
Commission, NSCC will implement all Phase 2 changes, keep in place any 
applicable Phase 1 changes that carry over to Phase 2, and decommission 
all Phase 1 changes that do not apply to Phase 2.\70\
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    \70\ If, due to the timing of regulatory approval, the 
implementation dates for Phase 1 and Phase 2 overlap, NSCC would 
implement only the Phase 2 changes and Phase 1 changes that carry 
over to Phase 2.
---------------------------------------------------------------------------

2. Statutory Basis
    NSCC believes the proposed changes to the Existing Accord and the 
NSCC Rules are consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to a registered 
clearing agency. In particular, NSCC believes the proposed change is 
consistent with Section 17A(b)(3)(F) of the Act \71\ and Rules 17Ad-
22(e)(7) and (20), each promulgated under the Act,\72\ for the reasons 
described below.
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    \71\ 15 U.S.C. 78q-1(b)(3)(F).
    \72\ 17 CFR 240.17Ad-22(e)(7), (20).
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    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that the rules of a clearing agency be designed to promote the 
prompt and

[[Page 6152]]

accurate clearance and settlement of securities transactions, and in 
general, protect investors and the public interest.\73\ In addition, 
Rule 17Ad-22(e)(7) requires NSCC, in relevant part, to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to effectively measure, monitor and manage the 
liquidity risk that arises in or is borne by NSCC and to, among other 
things, address foreseeable liquidity shortfalls that would not be 
covered by NSCC's liquid resources.\74\ Rule 17Ad-22(e)(20) further 
requires NSCC to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to identify, monitor and 
manage risks related to any link that NSCC establishes with one or more 
other clearing agencies, financial market utilities, or trading 
markets.\75\
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    \73\ 15 U.S.C. 78q-1(b)(3)(F).
    \74\ 17 CFR 240.17Ad-22(e)(7).
    \75\ 17 CFR 240.17Ad-22(e)(20).
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Proposed Phase 1 Changes
    As described above, NSCC believes that providing OCC with the 
ability to make a Guaranty Substitution Payment to it with respect to 
any unmet obligations of a Mutually Suspended Member would promote 
prompt and accurate clearance and settlement because it would allow 
relevant securities settlement obligations to be accepted by NSCC for 
clearance and settlement, which would reduce the size of the related 
settlement obligations for both the Mutually Suspended Member and its 
assigned delivery counterparties through netting through NSCC's CNS 
Accounting Operation and/or NSCC's Balance Order Accounting Operation. 
Further, this proposal would reduce the circumstances in which OCC's 
Guaranty would continue to apply to these settlement obligations, to be 
settled on a broker-to-broker basis between OCC Clearing Members, which 
could result in substantial collateral and liquidity requirements for 
OCC Clearing Members and that, in turn, could also increase a risk of 
default by the affected OCC Clearing Members at a time when a Common 
Member has already been suspended. For these reasons, NSCC believes 
that the proposed changes would be beneficial to and protective of OCC, 
NSCC, their participants, and the markets that they serve. NSCC 
believes the proposed Phase 1 changes are therefore designed to promote 
the prompt and accurate clearance and settlement of securities 
transactions and, in general, protect investors and the public 
interest.
    NSCC also believes the proposal is consistent the requirements of 
Rule 17Ad-22(e)(7) because any increase to NSCC's liquidity needs that 
may be created by applying the NSCC Guaranty to Defaulted Member 
Transactions would occur with a simultaneous increase to its liquidity 
resources in the form of the Guaranty Substitution Payment. Therefore, 
NSCC believes it would continue to adhere to the requirements of Rule 
17Ad-22(e)(7) under the proposal.
    The Existing Accord between OCC and NSCC is a clearing agency link 
as contemplated by Rule 17Ad-22(e)(20). As described above, NSCC 
believes that implementation of the proposal would help manage the 
risks presented by the settlement link because, when the proposed 
provision is triggered by OCC, NSCC would receive the Guaranty 
Substitution Payment with respect to the relevant securities settlement 
obligations thereby ensuring that NSCC accepts those obligations for 
clearance and settlement and thereby reducing the size of the related 
settlement obligations for both the Mutually Suspended Member and its 
assigned delivery counterparties.
Proposed Phase 2 Changes
    As described above, the Phase 2 changes to the Existing Accord 
would enable OCC to provide certain assurances that would permit NSCC 
to begin processing E&A/Delivery Transactions prior to Guaranty 
Substitution occurring--thereby promoting the continued effectiveness 
of the Guaranty Substitution process contemplated by the Existing 
Accord and the Phase 1 changes discussed above. By effecting these 
changes, the Phase 2 Accord would facilitate the continued ability of 
the GSP model to function in an environment with a shorter settlement 
cycle. For these reasons, NSCC believes the proposed rule change would 
promote the prompt and accurate clearance and settlement of securities 
transactions and protect investors and the public interest. The 
proposed changes would facilitate implementation of the new settlement 
cycle and support the Commission's stated goal of implementing 
necessary risk reducing changes in connection with the move to a T+1 
settlement by the May 28, 2024, compliance date designated by the 
Commission. NSCC therefore believes that the proposed changes would be 
beneficial to and protective of NSCC, OCC, their participants, and the 
markets that they serve. As a result, NSCC believes the proposed rule 
change is consistent with Section 17A(b)(3)(F) of the Act.
    NSCC believes the Phase 2 changes are also consistent the 
requirements of Rule 17Ad-22(e)(7) because any increase to NSCC's 
liquidity needs that may be created by applying the NSCC Guaranty to 
Defaulted Member Transactions would continue to occur with a 
simultaneous increase to NSCC's liquidity resources in the form of the 
Guaranty Substitution Payment. Therefore, NSCC believes it would 
continue to adhere to the requirements of Rule 17Ad-22(e)(7) under the 
proposal.
    Finally, NSCC believe the proposed Phase 2 changes are consistent 
with the requirements of Rule 17Ad-22(e)(20). NSCC believes that the 
continued ability in the T+1 environment for OCC to make a Guaranty 
Substitution Payment to NSCC in the relevant circumstances involving a 
Mutually Suspended Member would help manage the risks presented to OCC, 
NSCC and their collective clearing members because the Guaranty 
Substitution Payment would ensure that the relevant securities 
settlement obligations would be accepted by NSCC, and therefore, the 
size of the related settlement obligations could be decreased from 
netting through NSCC's CNS Accounting Operation. Furthermore, the Phase 
2 changes would require OCC to provide certain assurances to NSCC that 
would permit NSCC to begin processing E&A/Delivery Transactions prior 
to Guaranty Substitution occurring--particularly, OCC's acknowledgement 
of the Historical Peak GSP, demonstration of sufficient cash resources 
in its Clearing Fund to cover the Historical Peak GSP prior to 
submitting E&A/Delivery Transactions to NSCC, and OCC's commitment to 
pay the Final GSP prior to NSCC processing such E&A/Delivery 
Transactions, further mitigating the risks presented by this link.

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \76\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. NSCC does not 
believe that the proposal would impose any burden on competition. As 
described above, the proposed Phase 1 changes would amend the Existing 
Accord to permit OCC in certain circumstances to make a Guaranty 
Substitution Payment to NSCC so that the NSCC Guaranty would take 
effect for the Defaulted NSCC Member Transactions, and the OCC Guaranty

[[Page 6153]]

would end. The proposed Phase 2 changes would further allow OCC to 
provide certain assurances to NSCC prior to the default of a Common 
Member that would enable NSCC to begin processing E&A/Delivery 
Transactions before the NSCC central counterparty trade guaranty 
attaches. The proposed changes would not inhibit access to NSCC's 
services in any way, apply to all Members and do not disadvantage or 
favor any particular user in relationship to another user. Accordingly, 
NSCC does not believe that the proposed rule change would have any 
impact or impose a burden on competition.
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    \76\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    NSCC has not received or solicited any written comments relating to 
this proposal. If any written comments are received, they will be 
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to 
Section IV (Solicitation of Comments) of the Exhibit 1A in the General 
Instructions to Form 19b-4, the Commission does not edit personal 
identifying information from comment submissions. Commenters should 
submit only information that they wish to make available publicly, 
including their name, email address, and any other identifying 
information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at www.sec.gov/regulatory-actions/how-to-submit-comments. General questions regarding 
the rule filing process or logistical questions regarding this filing 
should be directed to the Main Office of the Commission's Division of 
Trading and Markets at <a href="/cdn-cgi/l/email-protection#a0d4d2c1c4c9cec7c1cec4cdc1d2cbc5d4d3e0d3c5c38ec7cfd6"><span class="__cf_email__" data-cfemail="62161003060b0c05030c060f031009071611221107014c050d14">[email protected]</span></a> or 202-551-5777.
    NSCC reserves the right to not respond to any comments received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of the notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#afdddac3ca82ccc0c2c2cac1dbdcefdccacc81c8c0d9"><span class="__cf_email__" data-cfemail="6012150c054d030f0d0d050e1413201305034e070f16">[email protected]</span></a>. Please include 
file number SR-NSCC-2023-007 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to file number SR-NSCC-2023-007. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549 on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of NSCC and on DTCC's 
website (https://dtcc.com/legal/sec-rule-filings.aspx). Do not include 
personal identifiable information in submissions; you should submit 
only information that you wish to make available publicly. We may 
redact in part or withhold entirely from publication submitted material 
that is obscene or subject to copyright protection. All submissions 
should refer to file number SR-NSCC-2023-007 and should be submitted on 
or before February 15, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\77\
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    \77\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-01863 Filed 1-30-24; 8:45 am]
BILLING CODE 8011-01-P


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