Federal Register / Vol. 83, No. 5 / Monday, January 8, 2018 / Notices 897 

64 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3On December 18, 2017, NSCC filed this 

proposed rule change as an advance notice (SR– 

NSCC–2017–806) with the Commission pursuant to 

Section 806(e)(1) of Title VIII of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act 

entitled the Payment, Clearing, and Settlement 

Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and 

Rule 19b–4(n)(1)(i) of the Act, 17 CFR 240.19b– 

4(n)(1)(i). A copy of the advance notice is available 

at http://www.dtcc.com/legal/sec-rule-filings.aspx. 

4Capitalized terms not defined herein are defined 

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

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

5When NSCC restricts a Member’s access to 

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

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

Access to Services) sets out the circumstances 

under which NSCC may cease to act for a Member 

and the types of actions it may take. Supra note 4. 

filings.aspx). All comments received 

will be posted without change. Persons 

submitting comments are cautioned that 

we do not redact or edit personal 

identifying information from comment 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–DTC– 

2017–021 and should be submitted on 

or before January 29, 2018. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.64

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–00080 Filed 1–5–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–82428; File No. SR–NSCC– 

2017–018] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Notice of Filing of a 

Proposed Rule Change To Amend the 

Loss Allocation Rules and Make Other 

Changes 

January 2, 2018. 

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

Securities Exchange Act of 1934 

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

notice is hereby given that on December 

18, 2017, National Securities Clearing 

Corporation (‘‘NSCC’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I, II and III 

below, which Items have been prepared 

by the clearing agency.3 The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Proposed 

Rule Change 

The proposed rule change consists of 

modifications to NSCC’s Rules and 

Procedures (‘‘Rules’’) in order to amend 

provisions in the Rules regarding loss 

allocation as well as make other 

changes, as described in greater detail 

below.4

II. Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

In its filing with the Commission, the 

clearing agency included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

clearing agency has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

(A) Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

1. Purpose 

The primary purpose of this proposed 

rule change is to amend NSCC’s loss 

allocation rules in order to enhance the 

resiliency of NSCC’s loss allocation 

process so that NSCC can take timely 

action to address multiple loss events 

that occur in succession during a short 

period of time (defined and explained in 

detail below). In connection therewith, 

the proposed rule change would (i) align 

the loss allocation rules of the three 

clearing agencies of The Depository 

Trust & Clearing Corporation (‘‘DTCC’’), 

namely The Depository Trust Company 

(‘‘DTC’’), Fixed Income Clearing 

Corporation (‘‘FICC’’) (including the 

Government Securities Division (‘‘FICC/ 

GSD’’) and the Mortgage-Backed 

Securities Division (‘‘FICC/MBSD’’)), 

and NSCC (collectively, the ‘‘DTCC 

Clearing Agencies’’), so as to provide 

consistent treatment, to the extent 

practicable and appropriate, especially 

for firms that are participants of two or 

more DTCC Clearing Agencies, (ii) 

increase transparency and accessibility 

of the loss allocation rules by enhancing 

their readability and clarity, (iii) reduce 

the time within which NSCC is required 

to return a former Member’s Clearing 

Fund deposit, and (iv) make conforming 

and technical changes. 

(i) Background 

Central counterparties (‘‘CCPs’’) play 

a key role in financial markets by 

mitigating counterparty credit risk on 

transactions between market 

participants. CCPs achieve this by 

providing guaranties to participants 

and, as a consequence, are typically 

exposed to credit risks that could lead 

to default losses. In addition, in 

performing its critical functions, a CCP 

could be exposed to non-default losses 

that are otherwise incident to the CCP’s 

clearance and settlement business. 

A CCP’s rulebook should provide a 

complete description of how losses 

would be allocated to participants if the 

size of the losses exceeded the CCP’s 

pre-funded resources. Doing so provides 

for an orderly allocation of losses, and 

potentially allows the CCP to continue 

providing critical services to the market 

and thereby results in significant 

financial stability benefits. In addition, 

a clear description of the loss allocation 

process offers transparency and 

accessibility to the CCP’s participants. 

Current NSCC Loss Allocation Process 

As a CCP, NSCC’s loss allocation 

process is a key component of its risk 

management process. Risk management 

is the foundation of NSCC’s ability to 

guarantee settlement, as well as the 

means by which NSCC protects itself 

and its Members from the risks inherent 

in the clearance and settlement process. 

NSCC’s risk management process must 

account for the fact that, in certain 

extreme circumstances, the collateral 

and other financial resources that secure 

NSCC’s risk exposures may not be 

sufficient to fully cover losses resulting 

from the liquidation of the portfolio of 

a Member for whom NSCC has ceased 

to act.5

The Rules currently provide for a loss 

allocation process through which both 

NSCC (by applying no less than 25% of 

its retained earnings in accordance with 

Addendum E) and its Members would 

share in the allocation of a loss resulting 

from the default of a Member for whom 

NSCC has ceased to act pursuant to the 

Rules. The Rules also recognize that 

NSCC may incur losses outside the 

context of a defaulting Member that are 

otherwise incident to NSCC’s clearance 

and settlement business. 

NSCC’s loss allocation rules currently 

provide that in the event NSCC ceases 

to act for a Member, the amounts on 

deposit to the Clearing Fund from the 

defaulting Member, along with any 

other resources of, or attributable to, the 

defaulting Member that NSCC may 

access under the Rules (e.g., payments 

from Clearing Agency Cross-Guaranty 

Agreements), are the first source of 

funds NSCC would use to cover any 

losses that may result from the closeout 

of the defaulting Member’s guaranteed 


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898 Federal Register / Vol. 83, No. 5 / Monday, January 8, 2018 / Notices 

6NSCC calculates its General Business Risk 

Capital Requirement as the amount equal to the 

greatest of (i) an amount determined based on its 

general business profile, (ii) an amount determined 

based on the time estimated to execute a recovery 

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

and (iii) an amount determined based on an 

analysis of NSCC’s estimated operating expenses for 

a six (6) month period. 

7See Securities Exchange Act Release No. 81105 

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

NSCC–2017–004). 

8 17 CFR 240.17Ad–22(e)(15). 

9The proposed rule change would not require a 

Corporate Contribution with respect to the use of 

the Clearing Fund as a liquidity resource; however, 

if NSCC uses the Clearing Fund as a liquidity 

resource for more than 30 calendar days, as set forth 

in proposed Section 2 of Rule 4, then NSCC would 

have to consider the amount used as a loss to the 

Clearing Fund incurred as a result of a Defaulting 

Member Event and allocate the loss pursuant to 

proposed Section 4 of Rule 4, which would then 

require the application of a Corporate Contribution. 

10Rule 1 defines ‘‘business day’’ as ‘‘any day on 

which the Corporation is open for business. 

However, on any business day that banks or transfer 

agencies in New York State are closed or a 

Qualified Securities Depository is closed, no 

deliveries of securities and no payments of money 

shall be made through the facilities of the 

Corporation.’’ Supra note 4. 

11NSCC believes that two hundred and fifty (250) 

business days would be a reasonable estimate of the 

time frame that NSCC would require to replenish 

the Corporate Contribution by equity in accordance 

with NSCC’s Clearing Agency Policy on Capital 

Requirements, including a conservative additional 

period to account for any potential delays and/or 

unknown exigencies in times of distress. 

12See Resilience of central counterparties (CCPs): 

Further guidance on the PFMI, issued by the 

Committee on Payments and Market Infrastructures 

and the International Organization of Securities 

Commissions, at 42 (July 2017), available at 

www.bis.org/cpmi/publ/d163.pdf. 

positions. If these amounts are not 

sufficient to cover all losses incurred, 

then NSCC will apply the following 

available resources, in the following loss 

allocation waterfall order: 

First, as provided in Addendum E, 

NSCC’s corporate contribution of at 

least 25 percent of NSCC’s retained 

earnings existing at the time of a 

Member impairment, or such greater 

amount as the Board of Directors may 

determine; and 

Second, if a loss still remains, as and 

in the manner provided in Rule 4, the 

required Clearing Fund deposits of 

Members who are non-defaulting 

Members on the date of default. 

Pursuant to current Section 5 of Rule 

4, if, as a result of applying the Clearing 

Fund deposit of a Member, the 

Member’s actual Clearing Fund deposit 

is less than its Required Deposit, it will 

be required to eliminate such deficiency 

in order to satisfy its Required Deposit 

amount. Pursuant to current Section 4 of 

Rule 4, Members can also be assessed 

for non-default losses incident to the 

operation of the clearance and 

settlement business of NSCC. Pursuant 

to current Section 8 of Rule 4, Members 

may withdraw from membership within 

specified timeframes after a loss 

allocation charge to limit their 

obligation for future assessments. 

Overview of the Proposed Rule Changes 

A. Changes To Enhance Resiliency of 

NSCC’s Loss Allocation Process 

In order to enhance the resiliency of 

NSCC’s loss allocation process, NSCC 

proposes to change the manner in which 

each of the aspects of the loss allocation 

waterfall described above would be 

employed. NSCC would retain the 

current core loss allocation process 

following the application of the 

defaulting Member’s resources, i.e., first, 

by applying NSCC’s corporate 

contribution, and second, by pro rata 

allocations to Members. However, NSCC 

would clarify or adjust certain elements 

and introduce certain new loss 

allocation concepts, as further discussed 

below. In addition, the proposed rule 

change would address the loss 

allocation process as it relates to losses 

arising from or relating to multiple 

default or non-default events in a short 

period of time, also as described below. 

Accordingly, NSCC is proposing five 

(5) key changes to enhance NSCC’s loss 

allocation process: 

(1) Changing the Calculation and 

Application of NSCC’s Corporate 

Contribution 

As stated above, Addendum E 

currently provides that NSCC will 

contribute no less than 25% of its 

retained earnings (or such higher 

amount as the Board of Directors shall 

determine) to a loss or liability that is 

not satisfied by the impaired Member’s 

Clearing Fund deposit. Under the 

proposal, NSCC would amend the 

calculation of its corporate contribution 

from a percentage of its retained 

earnings to a mandatory amount equal 

to 50% of the NSCC General Business 

Risk Capital Requirement.6 NSCC’s 

General Business Risk Capital 

Requirement, as defined in NSCC’s 

Clearing Agency Policy on Capital 

Requirements,7 is, at a minimum, equal 

to the regulatory capital that NSCC is 

required to maintain in compliance with 

Rule 17Ad–22(e)(15) under the Act.8

The proposed Corporate Contribution 

(as defined in the proposed rule change) 

would be held in addition to NSCC’s 

General Business Risk Capital 

Requirement. 

Currently, the Rules do not require 

NSCC to contribute its retained earnings 

to losses and liabilities other than those 

from Member impairments. Under the 

proposal, NSCC would apply its 

corporate contribution to non-default 

losses as well. The proposed Corporate 

Contribution would apply to losses 

arising from Defaulting Member Events 

and Declared Non-Default Loss Events 

(as such terms are defined below and in 

the proposed rule change), and would 

be a mandatory contribution by NSCC 

prior to any allocation of the loss among 

NSCC’s Members.9 As proposed, if the 

Corporate Contribution is fully or 

partially used against a loss or liability 

relating to an Event Period (as defined 

below and in the proposed rule change), 

the Corporate Contribution would be 

reduced to the remaining unused 

amount, if any, during the following two 

hundred fifty (250) business days 10 in 

order to permit NSCC to replenish the 

Corporate Contribution.11 To ensure 

transparency, Members would receive 

notice of any such reduction to the 

Corporate Contribution. 

As compared to the current approach 

of applying ‘‘no less than’’ a percentage 

of retained earnings to defaulting 

Member losses, the proposed Corporate 

Contribution would be a fixed 

percentage of NSCC’s General Business 

Risk Capital Requirement, which would 

provide greater transparency and 

accessibility to Members. The proposed 

Corporate Contribution would apply not 

only towards losses and liabilities 

arising out of or relating to Defaulting 

Member Events but also those arising 

out of or relating to Declared NonDefault Loss Events, which is consistent 

with the current industry guidance that 

‘‘a CCP should identify the amount of its 

own resources to be applied towards 

losses arising from custody and 

investment risk, to bolster confidence 

that participants’ assets are prudently 

safeguarded.’’ 12

Under the current Addendum E, 

NSCC has the discretion to contribute 

amounts higher than the specified 

percentage of retained earnings, as 

determined by the Board of Directors, to 

any loss or liability incurred by NSCC 

as result of a Member’s impairment. 

This option would be retained and 

expanded under the proposal so that it 

would be clear that NSCC can 

voluntarily apply amounts greater than 

the Corporate Contribution against any 

loss or liability (including non-default 

losses) of NSCC, if the Board of 

Directors, in its sole discretion, believes 

such to be appropriate under the factual 

situation existing at the time. 

The proposed rule changes relating to 

the calculation and application of the 

Corporate Contribution are set forth in 

proposed Sections 4 and 5 of Rule 4, as 

further described below. 


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13NSCC believes that having a ten (10) business 

day Event Period would provide a reasonable 

period of time to encompass potential sequential 

Defaulting Member Events or Declared Non-Default 

Loss Events that are likely to be closely linked to 

an initial event and/or a severe market dislocation 

episode, while still providing appropriate certainty 

for Members concerning their maximum exposure 

to mutualized losses with respect to such events. 

14Supra note 5. 

15Pursuant to the current Section 8 of Rule 4, the 

time period for a participant to give notice of its 

election to terminate its business with NSCC in 

respect of a pro rata charge is ten (10) business days 

after receiving notice of a pro rata charge. Supra 

note 4. 

NSCC believes that it is appropriate to shorten 

such time period from ten (10) business days to five 

(5) business days because NSCC needs timely notice 

of which Members would remain in its membership 

for purposes of calculating the loss allocation for 

any subsequent round. NSCC believes that five (5) 

business days would provide Members with 

sufficient time to decide whether to cap their loss 

allocation obligations by withdrawing from their 

membership in NSCC. 

(2) Introducing an Event Period 

In order to clearly define the 

obligations of NSCC and its Members 

regarding loss allocation and to balance 

the need to manage the risk of 

sequential loss events against Members’ 

need for certainty concerning their 

maximum loss allocation exposures, 

NSCC is proposing to introduce the 

concept of an ‘‘Event Period’’ to the 

Rules to address the losses and 

liabilities that may arise from or relate 

to multiple Defaulting Member Events 

and/or Declared Non-Default Loss 

Events that arise in quick succession. 

Specifically, the proposal would group 

Defaulting Member Events and Declared 

Non-Default Loss Events occurring in a 

period of ten (10) business days (‘‘Event 

Period’’) for purposes of allocating 

losses to Members in one or more 

rounds (as described below), subject to 

the limitations of loss allocation set 

forth in the proposed rule change and as 

explained below.13 In the case of a loss 

or liability arising from or relating to a 

Defaulting Member Event, an Event 

Period would begin on the day NSCC 

notifies Members that it has ceased to 

act 14 for a Defaulting Member (as 

defined below and in the proposed rule 

change) (or the next business day, if 

such day is not a business day). In the 

case of a loss or liability arising from or 

relating to a Declared Non-Default Loss 

Event, an Event Period would begin on 

the day that NSCC notifies Members of 

the determination by the Board of 

Directors that the applicable loss or 

liability may be a significant and 

substantial loss or liability that may 

materially impair the ability of NSCC to 

provide clearance and settlement 

services in an orderly manner and will 

potentially generate losses to be 

mutualized among Members in order to 

ensure that NSCC may continue to offer 

clearance and settlement services in an 

orderly manner (or the next business 

day, if such day is not a business day). 

If a subsequent Defaulting Member 

Event or Declared Non-Default Loss 

Event occurs during an Event Period, 

any losses or liabilities arising out of or 

relating to any such subsequent event 

would be resolved as losses or liabilities 

that are part of the same Event Period, 

without extending the duration of such 

Event Period. An Event Period may 

include both Defaulting Member Events 

and Declared Non-Default Loss Events, 

and there would not be separate Event 

Periods for Defaulting Member Events or 

Declared Non-Default Loss Events 

occurring during overlapping ten (10) 

business day periods. 

The amount of losses that may be 

allocated by NSCC, subject to the 

required Corporate Contribution, and to 

which a Loss Allocation Cap (as defined 

below and in the proposed rule change) 

would apply for any withdrawing 

Member, would include any and all 

losses from any Defaulting Member 

Events and any Declared Non-Default 

Loss Events during the Event Period, 

regardless of the amount of time, during 

or after the Event Period, required for 

such losses to be crystallized and 

allocated. 

The proposed rule changes relating to 

the implementation of an Event Period 

are set forth in proposed Section 4 of 

Rule 4, as further described below. 

(3) Introducing the Concept of 

‘‘Rounds’’ and Loss Allocation Notice 

Pursuant to the proposed rule change, 

a loss allocation ‘‘round’’ would mean a 

series of loss allocations relating to an 

Event Period, the aggregate amount of 

which is limited by the sum of the Loss 

Allocation Caps of affected Members (a 

‘‘round cap’’). When the aggregate 

amount of losses allocated in a round 

equals the round cap, any additional 

losses relating to the applicable Event 

Period would be allocated in one or 

more subsequent rounds, in each case 

subject to a round cap for that round. 

NSCC may continue the loss allocation 

process in successive rounds until all 

losses from the Event Period are 

allocated among Members that have not 

submitted a Loss Allocation Withdrawal 

Notice in accordance with proposed 

Section 6 of Rule 4. 

Each loss allocation would be 

communicated to Members by the 

issuance of a Loss Allocation Notice (as 

defined below and in the proposed rule 

change). Each Loss Allocation Notice 

would specify the relevant Event Period 

and the round to which it relates. The 

first Loss Allocation Notice in any first, 

second, or subsequent round would 

expressly state that such Loss Allocation 

Notice reflects the beginning of the first, 

second, or subsequent round, as the case 

may be, and that each Member in that 

round has five (5) business days from 

the issuance of such first Loss 

Allocation Notice for the round to notify 

NSCC of its election to withdraw from 

membership with NSCC pursuant to 

proposed Section 6 of Rule 4, and 

thereby benefit from its Loss Allocation 

Cap.15

The amount of any second or 

subsequent round cap may differ from 

the first or preceding round cap because 

there may be fewer Members in a 

second or subsequent round if Members 

elect to withdraw from membership 

with NSCC as provided in proposed 

Section 6 of Rule 4 following the first 

Loss Allocation Notice in any round. 

For example, for illustrative purposes 

only, after the required Corporate 

Contribution, if NSCC has a $5 billion 

loss determined with respect to an 

Event Period and the sum of Loss 

Allocation Caps for all Members subject 

to the loss allocation is $4 billion, the 

first round would begin when NSCC 

issues the first Loss Allocation Notice 

for that Event Period. NSCC could issue 

one or more Loss Allocation Notices for 

the first round until the sum of losses 

allocated equals $4 billion. Once the $4 

billion is allocated, the first round 

would end and NSCC would need a 

second round in order to allocate the 

remaining $1 billion of loss. NSCC 

would then issue a Loss Allocation 

Notice for the $1 billion and this notice 

would be the first Loss Allocation 

Notice for the second round. The 

issuance of the Loss Allocation Notice 

for the $1 billion would begin the 

second round. 

The proposed rule change would link 

the Loss Allocation Cap to a round in 

order to provide Members the option to 

limit their loss allocation exposure at 

the beginning of each round. As 

proposed and as described further 

below, a Member could limit its loss 

allocation exposure to its Loss 

Allocation Cap by providing notice of 

its election to withdraw from 

membership within five (5) business 

days after the issuance of the first Loss 

Allocation Notice in any round. 

The proposed rule changes relating to 

the implementation of ‘‘rounds’’ and 

Loss Allocation Notices are set forth in 

proposed Section 4 of Rule 4, as further 

described below. 


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16NSCC’s current loss allocation rules pre-date 

NSCC’s move to a risk-based margining 

methodology. 

17 If a Member’s Loss Allocation Cap exceeds the 

Member’s then-current Required Fund Deposit, it 

must still cover the excess amount. 

18For the avoidance of doubt, pursuant to Section 

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

Deposits), a Special Activity Supplemental Deposit 

of a Member may not be used to calculate or be 

applied to satisfy any pro rata charge pursuant to 

Section 4 of Rule 4. Supra note 4. 

19NSCC believes that allowing Members two (2) 

business days to satisfy their loss allocation 

obligations would provide Members sufficient 

notice to arrange funding, if necessary, while 

allowing NSCC to address losses in a timely 

manner. 

20Supra note 15. 

21NSCC believes that setting the start date of the 

withdrawal notification period to the date of 

issuance of a notice would provide a single 

withdrawal timeframe that would be consistent 

across the Members. 

(4) Implementing a ‘‘Look-Back’’ Period 

To Calculate a Member’s Loss 

Allocation Pro Rata Share and Its Loss 

Allocation Cap 

Currently, the Rules calculate a 

Member’s pro rata share for purposes of 

loss allocation based on the Member’s 

‘‘allocation for a System,’’ which in turn 

is based on settlement dollar amounts. 

Therefore, a Member’s loss allocation 

obligations are currently based on the 

Member’s activity in each of the various 

services or ‘‘Systems’’ offered by 

NSCC.16 The Rules do not anticipate the 

possibility of more than one Defaulting 

Member Event or Declared Non-Default 

Loss Event in quick succession. 

Given NSCC’s risk-based margining 

methodology, NSCC believes that it 

would be more appropriate to determine 

a Member’s pro rata share of losses and 

liabilities based on the amount of risk 

that the Member brings to NSCC, which 

is represented by the Member’s 

Required Deposit (NSCC is proposing 

that ‘‘Required Deposits’’ be renamed 

‘‘Required Fund Deposits,’’ as described 

below). Accordingly, NSCC is proposing 

to calculate each Member’s pro rata 

share of losses and liabilities to be 

allocated in any round (as described 

below and in the proposed rule change) 

to be equal to (i) the average of a 

Member’s Required Fund Deposit for 

the seventy (70) business days prior to 

the first day of the applicable Event 

Period (or such shorter period of time 

that the Member has been a Member) 

(‘‘Average RFD’’) divided by (ii) the sum 

of Average RFD amounts for all 

Members that are subject to loss 

allocation in such round. 

Additionally, NSCC is proposing that 

each Member’s maximum payment 

obligation with respect to any loss 

allocation round (the Member’s Loss 

Allocation Cap) be equal to the greater 

of (i) its Required Fund Deposit on the 

first day of the applicable Event Period 

or (ii) its Average RFD. 

NSCC believes that employing a 

backward-looking average to calculate a 

Member’s loss allocation pro rata share 

and Loss Allocation Cap would 

disincentivize Member behavior that 

could heighten volatility or reduce 

liquidity in markets in the midst of a 

financial crisis. Specifically, the 

proposed look-back period would 

discourage a Member from reducing its 

settlement activity during a time of 

stress primarily to limit its loss 

allocation pro rata share, which, as 

proposed, would now be based on the 

Member’s average settlement activity 

over the look-back period rather than its 

settlement activity at a point in time 

that the Member may not be able to 

estimate. Similarly, NSCC believes that 

taking a backward-looking average into 

consideration when determining a 

Member’s Loss Allocation Cap would 

also deter a Member from reducing its 

settlement activity during a time of 

stress primarily to limit its Loss 

Allocation Cap. 

NSCC believes that having a look-back 

period of seventy (70) business days is 

appropriate, because it would be long 

enough to enable NSCC to capture a full 

calendar quarter of a Member’s 

activities, including quarterly option 

expirations, and smooth out the impact 

from any abnormalities and/or 

arbitrariness that may have occurred, 

but not too long that the Member’s 

business strategy and outlook could 

have shifted significantly, resulting in 

material changes to the size of its 

portfolios. 

The proposed rule changes relating to 

the implementation of a look-back 

period are set forth in proposed Section 

4 of Rule 4, as further described below. 

(5) Capping Withdrawing Members’ 

Loss Allocation Exposure and Related 

Changes 

NSCC’s current loss allocation rules 

allow a Member to withdraw if the 

Member notifies NSCC, within ten (10) 

business days after receipt of notice of 

a pro rata charge, of its election to 

terminate its membership and thereby 

avail itself of a cap on loss allocation, 

which is its Required Deposit as fixed 

immediately prior to the time of the pro 

rata charge. As discussed above, the 

proposed rule change would continue 

providing Members the opportunity to 

limit their loss allocation exposure by 

offering withdrawal options; however, 

the cap on loss allocation would be 

calculated differently and the associated 

withdrawal process would also be 

modified as it relates to withdrawals 

associated with the loss allocation 

process. In particular, the proposed rule 

change would shorten the withdrawal 

notification period from ten (10) 

business days to five (5) business days, 

and would also change the beginning of 

such notification period from the receipt 

of the notice of a pro rata charge to the 

issuance of the notice, as further 

described below. 

As proposed, if a Member provides 

notice of its withdrawal from 

membership, the maximum amount of 

losses it would be responsible for would 

be its Loss Allocation Cap,17 provided 

that the Member complies with the 

requirements of the withdrawal process 

in proposed Section 6 of Rule 4.18

Currently, NSCC’s loss allocation 

provisions provide that if a pro rata 

charge is made against a Member’s 

actual Clearing Fund deposit, and as 

result thereof the Member’s deposit is 

less than its Required Deposit, the 

Member will, upon demand by NSCC, 

be required to replenish its deposit to 

eliminate the deficiency within such 

time as NSCC shall require. To increase 

transparency of the timeframe under 

which NSCC would require funds from 

Members to satisfy their loss allocation 

obligations, NSCC is proposing that 

Members would receive two (2) 

business days’ notice of a loss 

allocation, and Members would be 

required to pay the requisite amount no 

later than the second business day 

following issuance of such notice.19

Members would have five (5) business 

days 20 from the issuance of the first 

Loss Allocation Notice in any round of 

an Event Period to decide whether to 

withdraw from membership.21

Each round would allow a Member 

the opportunity to notify NSCC of its 

election to withdraw from membership 

after satisfaction of the losses allocated 

in such round. Multiple Loss Allocation 

Notices may be issued with respect to 

each round to allocate losses up to the 

round cap. 

Specifically, the first round and each 

subsequent round of loss allocation 

would allocate losses up to a round cap 

of the aggregate of all Loss Allocation 

Caps of those Members included in the 

round. If a Member provides notice of 

its election to withdraw from 

membership, it would be subject to loss 

allocation in that round, up to its Loss 

Allocation Cap. If the first round of loss 

allocation does not fully cover NSCC’s 

losses, a second round will be noticed 

to those Members that did not elect to 


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22NSCC believes that having an effective date of 

withdrawal that is not later than ten (10) business 

days following the last day of the Loss Allocation 

Withdrawal Notification Period would provide 

Members with a reasonable period of time to wind 

down their activities at NSCC while minimizing 

any uncertainty typically associated with a longer 

withdrawal period. 

23Non-default losses may arise from events such 

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

custody and investment losses. 

24Section 2(b) of Rule 4 provides that ‘‘the use 

of the Clearing Fund . . . shall be limited to 

satisfaction of losses or liabilities of the Corporation 

incident to the operation of the clearance and 

settlement business of the Corporation other than 

losses and liabilities of a System.’’ Supra note 4. 

withdraw from membership in the 

previous round; however, as noted 

above, the amount of any second or 

subsequent round cap may differ from 

the first or preceding round cap because 

there may be fewer Members in a 

second or subsequent round if Members 

elect to withdraw from membership 

with NSCC as provided in proposed 

Section 6 of Rule 4 following the first 

Loss Allocation Notice in any round. 

Pursuant to the proposed rule change, 

in order to avail itself of its Loss 

Allocation Cap, a Member would need 

to follow the requirements in proposed 

Section 6 of Rule 4, which would 

provide that the Member must: (i) 

Specify in its Loss Allocation 

Withdrawal Notice (as defined below 

and in the proposed rule change) an 

effective date of withdrawal, which date 

shall be no later than ten (10) business 

days following the last day of the 

applicable Loss Allocation Withdrawal 

Notification Period (as defined below 

and in the proposed rule change) (i.e., 

no later than ten (10) business days after 

the 5th business day following the first 

Loss Allocation Notice in that round of 

loss allocation),22 (ii) cease all activity 

that would result in transactions being 

submitted to NSCC for clearance and 

settlement for which such Member 

would be obligated to perform, where 

the scheduled final settlement date 

would be later than the effective date of 

the Member’s withdrawal, and (iii) 

ensure that all clearance and settlement 

activity for which such Member is 

obligated to NSCC is fully and finally 

settled by the effective date of the 

Member’s withdrawal, including, 

without limitation, by resolving by such 

date all fails and buy-in obligations. 

The proposed rule changes are 

designed to enable NSCC to continue 

the loss allocation process in successive 

rounds until all of NSCC’s losses are 

allocated. To the extent that a Member’s 

Loss Allocation Cap exceeds the 

Member’s Required Fund Deposit on the 

first day of the applicable Event Period, 

NSCC may in its discretion retain any 

excess amounts on deposit from the 

Member, up to the Member’s Loss 

Allocation Cap. 

The proposed rule changes relating to 

capping withdrawing Members’ loss 

allocation exposure and related changes 

to the withdrawal process are set forth 

in proposed Sections 4 and 6 of Rule 4, 

as further described below. 

B. Changes To Align Loss Allocation 

Rules 

The proposed rule changes would 

align the loss allocation rules, to the 

extent practicable and appropriate, of 

the three DTCC Clearing Agencies so as 

to provide consistent treatment, 

especially for firms that are participants 

of two or more DTCC Clearing Agencies. 

As proposed, the loss allocation 

waterfall and certain related provisions, 

e.g., returning a former Member’s 

Clearing Fund, would be consistent 

across the DTCC Clearing Agencies to 

the extent practicable and appropriate. 

The proposed rule changes of NSCC that 

would align loss allocation rules of the 

DTCC Clearing Agencies are set forth in 

proposed Sections 1, 2, 7, and 12 of 

Rule 4, as further described below. 

C. Clarifying Changes Relating to Loss 

Allocation 

The proposed rule changes are 

intended to make the provisions in the 

Rules governing loss allocation more 

transparent and accessible to Members. 

In particular, NSCC is proposing the 

following changes relating to loss 

allocation to clarify Members’ 

obligations for Declared Non-Default 

Loss Events. 

Aside from losses that NSCC might 

face as a result of a Defaulting Member 

Event, NSCC could incur non-default 

losses incident to its clearance and 

settlement business.23 The Rules 

currently permit NSCC to apply 

Clearing Fund to non-default losses. 

Specifically, pursuant to Section 2(b) of 

Rule 4,24 NSCC can use the Clearing 

Fund to satisfy losses or liabilities of 

NSCC incident to the operation of the 

clearance and settlement business of 

NSCC. Section II of Addendum K 

provides additional details regarding the 

application of the Clearing Fund to 

losses outside of a System. 

If there is a failure of NSCC following 

a non-default loss, such occurrence 

would affect Members in much the same 

way as a failure of NSCC following a 

Defaulting Member Event. Accordingly, 

NSCC is proposing rule changes to 

enhance the provisions relating to nondefault losses by clarifying Members’ 

obligations for such losses. 

Specifically, NSCC is proposing 

enhancement of the governance around 

non-default losses that would trigger 

loss allocation to Members by specifying 

that the Board of Directors would have 

to determine that there is a non-default 

loss that may be a significant and 

substantial loss or liability that may 

materially impair the ability of NSCC to 

provide clearance and settlement 

services in an orderly manner and will 

potentially generate losses to be 

mutualized among the Members in 

order to ensure that NSCC may continue 

to offer clearance and settlement 

services in an orderly manner. The 

proposed rule change would provide 

that NSCC would then be required to 

promptly notify Members of this 

determination, which is referred to in 

the proposed rule as a Declared NonDefault Loss Event. In addition, NSCC is 

proposing to better align the interests of 

NSCC with those of its Members by 

stipulating a mandatory Corporate 

Contribution apply to a Declared NonDefault Loss Event prior to any 

allocation of the loss among Members, 

as described above. Additionally, NSCC 

is proposing language to clarify 

Members’ obligations for Declared NonDefault Loss Events. 

The proposed rule changes relating to 

Declared Non-Default Loss Events and 

Members’ obligations for such events 

are set forth in proposed Section 4 of 

Rule 4, as further described below. 

D. Reduce the Time Within Which 

NSCC Is Required To Return a Former 

Member’s Clearing Fund Deposit 

The proposed rule change would 

reduce the time period in which NSCC 

may retain a Member’s Clearing Fund 

deposit. Specifically, NSCC proposes 

that if a Member gives notice to NSCC 

of its election to withdraw from 

membership, NSCC will return the 

Member’s Actual Deposit in the form of 

(i) cash or securities within thirty (30) 

calendar days and (ii) Eligible Letters of 

Credit within ninety (90) calendar days, 

after all of the Member’s transactions 

have settled and all matured and 

contingent obligations to NSCC for 

which the Member was responsible 

while a Member have been satisfied, 

except NSCC may retain for up to two 

(2) years the Actual Deposits from 

Members who have Sponsored 

Accounts at DTC. 

NSCC believes that shortening the 

time period for the return of a Member’s 

Clearing Fund deposit would be helpful 

to firms who have exited NSCC so that 

they could have use of the deposits 

sooner than under the current Rules 

while at the same time protecting NSCC 

because such return would only occur if 


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25 In addition to Section 1 of Rule 4, NSCC is 

proposing to delete references to Mutual Fund/ 

Insurance Services Members, Fund Members and 

Insurance Carrier/Retirement Services Members 

from Sections 2, 3, 4, 5, 6, 7, 8, 9, and 12 of Rule 

4. 

26 In addition to Section 1 of Rule 4, NSCC is 

proposing to rename ‘‘Required Deposits’’ to 

‘‘Required Fund Deposits’’ in Sections 2, 3, 4, 8, 9, 

and 11 of Rule 4. 

27FICC/GSD Rulebook (‘‘FICC/GSD Rules’’), 

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

Downloads/legal/rules/ficc_gov_rules.pdf and FICC/ 

MBSD Clearing Rules (‘‘FICC/MBSD Rules’’), 

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

Downloads/legal/rules/ficc_mbsd_rules.pdf. 

28See FICC/GSD Rule 1 (Definitions) and FICC/ 

MBSD Rule 1 (Definitions), supra note 27. 

29 In addition to Section 1 of Rule 4, NSCC is 

proposing to delete references to the Clearing Fund 

being allocated by Systems and services from 

Sections 2, 3, and 4 of Rule 4. 

30See Section 4 of FICC/GSD Rule 4 and Section 

4 of FICC/MBSD Rule 4, supra note 27. 

31 In addition to Section 1 of Rule 4, NSCC is also 

proposing to rename ‘‘Letter of Credit’’ to ‘‘Eligible 

Letter of Credit’’ in Sections 2 and 12 of Rule 4. 

32See FICC/GSD Rule 1 (Definitions) and FICC/ 

MBSD Rule 1 (Definitions), supra note 27. 

all obligations of the terminating 

Member to NSCC have been satisfied, 

which would include both matured as 

well as contingent obligations. 

The proposed rule changes relating to 

the reduced time period in which NSCC 

is required to return the Clearing Fund 

deposit of a former Member are set forth 

in proposed Section 7 of Rule 4, as 

further described below. 

The foregoing changes as well as other 

changes (including a number of 

conforming and technical changes) that 

NSCC is proposing in order to improve 

the transparency and accessibility of the 

Rules are described in detail below. 

(ii) Detailed Description of the Proposed 

Rule Changes Related to Loss Allocation 

A. Proposed Changes to Rule 4 (Clearing 

Fund) 

Overview of Rule 4 (Clearing Fund) 

Rule 4 currently addresses Clearing 

Fund requirements and loss allocation 

obligations. While Procedure XV 

addresses the various Clearing Fund 

calculations, Rule 4 sets forth rights, 

obligations and other aspects associated 

with the Clearing Fund, as well as the 

loss allocation process. Rule 4 is 

currently organized into 12 sections. 

NSCC is proposing changes to each 

section, and consolidating provisions in 

Rule 4 relating to Mutual Fund Services 

and Insurance and Retirement 

Processing Services into new sections, 

as described below. 

Section 1 

Section 1 of Rule 4 currently sets forth 

the requirement that each Member and 

Mutual Fund/Insurance Services 

Member shall, and each Fund Member 

and Insurance Carrier/Retirement 

Services Member may, be required to 

make a deposit to the Clearing Fund. 

Section 1 currently provides that each 

participant’s Required Deposit is based 

on one or more formulas specified by 

NSCC’s Board of Directors. The basis of 

each such formula is participants’ usage 

of NSCC’s facilities. Section 1 also 

currently sets forth the minimum 

amount of each participant category’s 

Required Deposit. 

Current Section 1 allows a portion of 

a participant’s Clearing Fund deposit to 

be evidenced by an open account 

indebtedness secured by Eligible 

Clearing Fund Securities, subject to 

certain limitations set forth in Procedure 

XV, and sets forth the various 

requirements associated with the 

deposit of Eligible Clearing Fund 

Securities. Current Section 1 also 

permits NSCC to require participants to 

post a letter of credit where NSCC 

believes the participants present legal 

risk. 

Current Section 1 also provides that 

NSCC allocate the Clearing Fund by 

types of service (e.g., Mutual Fund 

Services) as well as by Systems (e.g., 

CNS), and divide the Clearing Fund into 

separate ‘‘Allocations’’ for each such 

service and separate ‘‘Funds’’ for each 

such System. 

Under the proposed rule change, 

NSCC is proposing to add a subheading 

of ‘‘Required Fund Deposits’’ to Section 

1 and restructure Section 1 so that it 

applies to Members only and delete 

references to Mutual Fund/Insurance 

Services Members, Fund Members and 

Insurance Carrier/Retirement Services 

Members from Section 1.25 Provisions of 

Rule 4 regarding Mutual Fund/ 

Insurance Services Members and Fund 

Members would be covered in a new 

proposed Section 13 to Rule 4, 

discussed below. Provisions of Rule 4 

regarding Insurance Carrier/Retirement 

Services Members would be covered in 

a new proposed Section 14 to Rule 4, 

discussed below. 

Under the proposed rule change, 

Section 1 would continue to have the 

same provisions as they relate to 

Members except for the following: (i) 

The language throughout the section 

would be reorganized, streamlined and 

clarified, (ii) ‘‘Required Deposits’’ 

would be renamed ‘‘Required Fund 

Deposits,’’ 26 which is a more 

descriptive term to refer to Members’ 

deposits required for the Clearing Fund, 

and would harmonize with the rules of 

FICC/GSD and FICC/MBSD 27 and the 

term used in such rules,28 (iii) a 

sentence would be added regarding 

additional deposits maintained by the 

Members at NSCC, and (iv) the 

provision regarding the Clearing Fund 

being allocated by Systems and services 

would be deleted.29

The proposed sentence regarding 

additional deposits to the Clearing Fund 

would permit Members to post such 

additional deposits at their discretion 

and would make clear that such 

additional deposits would be deemed to 

be part of the Clearing Fund and the 

Member’s Actual Deposit (as discussed 

below and as defined in the proposed 

rule change) but would not be deemed 

to be part of the Member’s Required 

Fund Deposit. 

NSCC proposes to add language in 

Section 1 to make it clear that each 

Member would grant NSCC a first 

priority perfected security interest in its 

right, title and interest in and to any 

Eligible Clearing Fund Securities, funds 

and assets pledged to NSCC to secure 

the Member’s open account 

indebtedness or placed by the Member 

in NSCC’s possession (or its agents 

acting on its behalf) to secure all such 

Member’s obligations to NSCC, and that 

NSCC would be entitled to exercise the 

rights of a pledgee under common law 

and a secured party under Articles 8 

and 9 of the New York Uniform 

Commercial Code with respect to such 

assets. The additional language would 

further harmonize the Rules with 

language used in the FICC/GSD Rules 

and FICC/MBSD Rules,30 thus providing 

consistent treatment of pledged 

resources for firms that are members of 

both NSCC and FICC. 

NSCC proposes to clarify the language 

in footnote 2 of Section 1. In addition, 

NSCC proposes to add ‘‘Eligible Letter 

of Credit’’ as a defined term to refer to 

letters of credit posted by participants if 

required by NSCC,31 which would 

harmonize the term with the term used 

in the FICC/GSD Rules and FICC/MBSD 

Rules,32 thus providing consistent 

terminology for firms that are members 

of both NSCC and FICC. 

Similarly, NSCC proposes to add 

‘‘Actual Deposit’’ as a defined term in 

Section 1 to refer to Eligible Clearing 

Fund Securities, funds and assets 

pledged to NSCC to secure a Member’s 

open account indebtedness or placed by 

a Member in the possession of NSCC (or 

its agents acting on its behalf) and any 

Eligible Letters of Credit issued on 

behalf of a Member in favor of NSCC. 

Instead of requiring participants to 

pledge Eligible Clearing Fund Securities 

to NSCC’s account at a Qualified 

Securities Depository designated by the 

participants, NSCC proposes to clarify 

and streamline Section 1 of proposed 

Rule 4 to provide that Eligible Clearing 


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33See Section 5 of FICC/GSD Rule 4 and Section 

5 of FICC/MBSD Rule 4, supra note 27. 

34See Securities Exchange Act Release No. 79528 

(December 12, 2016), 81 FR 91232 (December 16, 

2016) (SR–NSCC–2016–003). 

Fund Securities pledged to secure a 

Member’s open account indebtedness 

would be delivered to NSCC’s account 

at DTC. 

NSCC would delete the provision 

regarding allocation of the Clearing 

Fund by Systems and services, as this 

provision is no longer relevant under 

the proposed rule change. Provisions 

relating to Mutual Fund Services and 

Insurance and Retirement Processing 

Services in Section 1 (as well as other 

sections in Rule 4) would be 

consolidated in the proposed new 

Sections 13 and 14, entitled ‘‘Mutual 

Fund Deposits’’ and ‘‘Insurance 

Deposits,’’ respectively. 

To consolidate provisions regarding 

the maintenance, investment and 

permitted use of Clearing Fund, NSCC 

would move the last paragraph of 

Section 1 about segregation and 

maintenance of Clearing Fund (again, in 

terms of ‘‘Fund,’’ ‘‘System,’’ and 

‘‘Allocation,’’ as discussed above) to 

Section 2. 

In addition, NSCC proposes to correct 

a typographical error in the reference to 

a footnote in Section 1 of Rule 4. 

Specifically, there is an incorrect 

reference to footnote 22 in the second 

paragraph of Section 1 in current Rule 

4. NSCC is proposing to change this 

reference to reflect the correct footnote, 

which is footnote 2. 

Section 2 

Section 2 of Rule 4 currently covers 

the permitted uses of the Clearing Fund 

(again by ‘‘Fund’’ and ‘‘Allocation,’’ as 

set forth in current Section 1), including 

the investment of Clearing Fund Cash 

and Cash Receipts, as well as 

participants’ rights to any interest 

earned or paid on pledged Eligible 

Clearing Fund Securities or cash 

deposits. 

NSCC is proposing to add a 

subheading of ‘‘Permitted Use, 

Investment, and Maintenance of 

Clearing Fund Assets’’ to Section 2 and 

restructure Section 2 so that it applies 

to Members only. NSCC is also 

proposing to restructure Section 2 so 

that the permitted use of Clearing Fund 

appears first, then the investment of 

Clearing Fund, followed by 

maintenance of Clearing Fund. 

Under the proposed rule change, the 

permitted use of Clearing Fund 

paragraph would continue to have the 

same provisions as they relate to how 

the Clearing Fund can be used by NSCC, 

except the provisions would be 

streamlined and clarified. Specifically, 

in order to be consistent with the 

proposed change in Section 4 (as 

described below) regarding NSCC 

requiring Members to pay their loss 

allocation amounts (leaving their 

Required Fund Deposits intact), NSCC is 

proposing to modify the permitted use 

of Clearing Fund to make it clear that 

the Clearing Fund can be used by NSCC 

to secure each Member’s performance of 

obligations to NSCC, including each 

Member’s obligations with respect to 

any loss allocations as set forth in 

Section 4 of Rule 4. NSCC is also 

proposing to delete the defined term of 

Cash Receipts and related provisions 

from Rule 4 because, unlike the Clearing 

Fund, Cash Receipts are money 

payments received from participants 

and payable to others; therefore, NSCC 

believes that continuing to include Cash 

Receipts in Rule 4 is no longer 

necessary and may cause confusion 

among Members. 

NSCC is proposing to add a paragraph 

that provides that each time NSCC uses 

any part of the Clearing Fund to provide 

liquidity to NSCC to meet its settlement 

obligations, including, without 

limitation, through the direct use of 

cash in the Clearing Fund or through the 

pledge or rehypothecation of pledged 

Eligible Clearing Fund Securities in 

order to secure liquidity for more than 

thirty (30) calendar days, NSCC, at the 

close of business on the 30th calendar 

day (or on the first business day 

thereafter) from the day of such use, 

would consider the amount used but not 

yet repaid as a loss to the Clearing Fund 

incurred as a result of a Defaulting 

Member Event and immediately allocate 

such loss in accordance with proposed 

Section 4 of Rule 4. NSCC believes that 

this proposed change would increase 

transparency and accessibility of the 

Rules for Members by specifying a point 

in time by which NSCC would need to 

replenish the Clearing Fund through 

loss allocation if NSCC uses the Clearing 

Fund to provide or secure liquidity to 

NSCC to meet its settlement obligations. 

NSCC believes that a period of thirty 

(30) calendar days would be appropriate 

because it would provide sufficient time 

for NSCC to determine whether it would 

be able to obtain the necessary funds 

from liquidation of the portfolio of the 

Defaulting Member to repay the used 

Clearing Fund amount. In addition, this 

proposed change would also harmonize 

this section with the comparable section 

in the FICC/GSD Rules and FICC/MBSD 

Rules,33 so as to provide consistent 

treatment for firms that are members of 

both NSCC and FICC. 

Proposed Section 2 would continue to 

have the same provisions concerning 

the investment and maintenance of the 

Clearing Fund, except these provisions 

would also be streamlined and clarified. 

Specifically, NSCC is proposing 

language to make it clear that it may 

invest cash in the Clearing Fund in 

accordance with the Clearing Agency 

Investment Policy adopted by NSCC.34

NSCC would revise the relocated 

sentence from Section 1 which provides 

that NSCC shall not be required to 

segregate any Clearing Fund (again, in 

terms of ‘‘Fund,’’ ‘‘System,’’ and 

‘‘Allocation,’’ as discussed above) in 

order to (i) conform to the proposed 

deletions in Section 1 and use the newly 

defined term of ‘‘Actual Deposit’’ as set 

forth in Section 1 and (ii) make clear 

that NSCC would not be required to 

segregate a Member’s Actual Deposit but 

that NSCC would maintain books and 

records concerning the assets that 

constitute each Member’s Actual 

Deposit. 

Under the proposed rule change, 

Members would continue to be entitled 

to any interest earned or paid on 

Clearing Fund cash deposits and 

pledged Eligible Clearing Fund 

Securities; however, NSCC is proposing 

additional language to make it clear that 

interest on pledged Eligible Clearing 

Fund Securities that is received by 

NSCC would be credited to a Member’s 

cash deposits to the Clearing Fund, 

except in the event of a default by such 

Member on any obligations to NSCC, in 

which case NSCC may exercise its rights 

under proposed Section 3 of Rule 4. 

Section 3 

Section 3 of Rule 4 currently provides 

that NSCC may apply a participant’s 

actual deposit to any obligation the 

participant has to NSCC that the 

participant has failed to satisfy and to 

any Cross-Guaranty Obligation. 

Participants are required to eliminate 

any resulting deficiencies in their 

Required Deposits within such time as 

NSCC requires. Section 3 also currently 

provides for the manner in which loss 

allocation would apply with respect to 

Off-the-Market Transactions. 

Under the proposed rule change, 

NSCC is proposing to add a subheading 

of ‘‘Application of Clearing Fund 

Deposits and Other Amounts to 

Members’ Obligations’’ and to delete 

provisions that do not apply to Members 

and/or that reference the Clearing Fund 

being allocated into Funds/Allocations 

by Systems and services. Under the 

proposed rule change, NSCC would 

retain the provisions in Section 3 

regarding applying the Member’s Actual 

Deposit to satisfy an obligation to NSCC 


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35Addendum E provides that NSCC ‘‘will apply 

no less than twenty-five percent (25%) of its 

retained earnings, existing at the time of a Member 

impairment which gives rise to a loss or liability not 

satisfied by the impaired Member’s Clearing Fund 

deposit, to such loss or liability.’’ Supra note 4. 36Supra note 13. 

37Supra note 6. 

38Supra note 7. 

39Supra note 8. 

that a Member fails to satisfy and the 

requirement to replenish the Required 

Fund Deposit as necessary, but NSCC 

proposes to add clarifying language that, 

in addition to a Member’s Actual 

Deposit, NSCC will also apply any 

amounts available under a Clearing 

Agency Cross-Guaranty Agreement and 

any proceeds therefrom to satisfy the 

obligation. NSCC also proposes to add 

language making it clear that NSCC may 

take any and all actions with respect to 

the assets and amounts referenced in the 

prior sentence, including assignment, 

transfer, and sale of any Eligible 

Clearing Fund Securities, that NSCC 

determines is appropriate. 

Under the proposed rule change, 

NSCC would move the provision 

regarding allocation of losses from Offthe-Market Transactions to proposed 

Section 4 of Rule 4, which addresses 

allocation of losses to Members. NSCC 

would streamline and clarify the 

remaining provisions for transparency 

and accessibility. 

Section 4 and Section 5 

Current Section 4 of Rule 4 contains 

NSCC’s current loss allocation waterfall, 

which would be initiated if NSCC 

incurs a loss or liability in a System that 

is not satisfied pursuant to current 

Section 3. Section 4 currently provides 

for the following loss allocation 

waterfall: 

(i) Application of NSCC’s existing 

retained earnings or such lesser part 35

of the existing retained earnings unless 

the Board of Directors elects to apply 

the Fund/Allocation for a particular 

System or service. 

(ii) If a loss or liability remains after 

the application of the retained earnings, 

NSCC would apply the Clearing Fund 

(this application is subject to the current 

structure where the Rules provide that 

the Clearing Fund is allocated to 

different Systems/services). 

a. NSCC is required to provide 

participants and the Commission with 5 

business days’ prior notice before 

applying the Clearing Fund. 

b. Participants (other than those 

responsible for causing the loss or 

liability) would be charged pro rata 

based upon their allocation to the 

applicable Fund, less any amounts that 

participants were required to deposit 

pursuant to Rule 15. 

Section 5 of Rule 4 currently states 

that if a pro rata charge is made 

pursuant to Rule 4 against a 

participant’s actual Clearing Fund 

deposit, and as a consequence thereof 

the participant’s remaining deposit is 

less than its Required Deposit, the 

participant would, upon demand by 

NSCC, be required to replenish its 

deposit to eliminate the deficiency 

within such time as NSCC shall require. 

Current Section 5 further provides that 

if the participant does not take this 

required action, NSCC may take 

disciplinary action against the 

participant, and any disciplinary action 

taken against the participant or the 

voluntary or involuntary termination of 

the participant’s membership will not 

affect the obligations of the participant 

to NSCC or any remedy to which NSCC 

may be entitled under applicable law. 

Under the proposed rule change, 

NSCC is proposing to add a subheading 

of ‘‘Loss Allocation Waterfall, Off-theMarket Transactions’’ to Section 4 and 

delete provisions that do not apply to 

Members and/or that reference the 

Clearing Fund being allocated into 

Funds/Allocations by System or service. 

In addition, NSCC is proposing to 

restructure its loss allocation waterfall 

as described below. 

Under the proposal, Section 4 would 

make clear that the loss allocation 

waterfall applies to losses and liabilities 

(i) relating to or arising out of a default 

of a Member for whom NSCC has ceased 

to act pursuant to Rule 46 (such Member 

being referred to as a ‘‘Defaulting 

Member’’) that is not satisfied pursuant 

to proposed Sections 3, 13 or 14 of Rule 

4 (a ‘‘Defaulting Member Event’’ or (ii) 

otherwise incident to the clearance and 

settlement business of NSCC, as 

determined below (a ‘‘Declared NonDefault Loss Event’’). 

Proposed Section 4 would establish 

the concept of an ‘‘Event Period’’ to 

provide for a clear and transparent way 

of handling multiple loss events 

occurring in a period of ten (10) 

business days, which would be grouped 

into an Event Period.36 As stated above, 

both Defaulting Member Events or 

Declared Non-Default Loss Events could 

occur within the same Event Period. 

Under the proposal, an Event Period 

with respect to a Defaulting Member 

Event would begin on the day NSCC 

notifies participants that it has ceased to 

act for a Defaulting Member (or the next 

business day, if such day is not a 

business day). In the case of a Declared 

Non-Default Loss Event, an Event Period 

would begin on the day that NSCC 

notifies Members of the determination 

by the Board of Directors that the 

applicable loss or liability incident to 

the clearance and settlement business of 

NSCC may be a significant and 

substantial loss or liability that may 

materially impair the ability of NSCC to 

provide clearance and settlement 

services in an orderly manner and will 

potentially generate losses to be 

mutualized among Members in order to 

ensure that NSCC may continue to offer 

clearance and settlement services in an 

orderly manner (or the next business 

day, if such day is not a business day). 

If a subsequent Defaulting Member 

Event or Declared Non-Default Loss 

Event occurs during an Event Period, 

any losses or liabilities arising out of or 

relating to any such subsequent event 

would be resolved as losses or liabilities 

that are part of the same Event Period, 

without extending the duration of such 

Event Period. 

Under proposed Section 4, the loss 

allocation waterfall would begin with a 

corporate contribution from NSCC 

(‘‘Corporate Contribution’’), as is the 

case under the current Rules, but in a 

different form than under the current 

Section 4 of Rule 4. Today, pursuant to 

Addendum E, in the event of a Member 

impairment, NSCC is required to apply 

at least 25% of its retained earnings 

existing at the time of a Member 

impairment; however, no corporate 

contribution from NSCC is currently 

required for losses resulting other than 

those from Member impairments. Under 

the proposal, NSCC would amend 

Section 5 to add a subheading of 

‘‘Corporate Contribution’’ and define 

NSCC’s Corporate Contribution with 

respect to any loss allocation pursuant 

to proposed Section 4 of Rule 4, 

whether arising out of or relating to a 

Defaulting Member Event or a Declared 

Non-Default Loss Event, as an amount 

that is equal to fifty (50) percent of the 

amount calculated by NSCC in respect 

of its General Business Risk Capital 

Requirement as of the end of the 

calendar quarter immediately preceding 

the Event Period.37 The proposed rule 

change would specify that NSCC’s 

General Business Risk Capital 

Requirement, as defined in NSCC’s 

Clearing Agency Policy on Capital 

Requirements,38 is, at a minimum, equal 

to the regulatory capital that NSCC is 

required to maintain in compliance with 

Rule 17Ad–22(e)(15) under the Act.39

As proposed, if NSCC applies the 

Corporate Contribution to a loss or 

liability arising out of or relating to one 

or more Defaulting Member Events or 

Declared Non-Default Loss Events 

relating to an Event Period, then for any 

subsequent Event Periods that occur 


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40Supra note 11. 41Supra note 15. 

42NSCC believes that shifting from the two-step 

methodology of applying the Clearing Fund and 

then requiring Members to immediately replenish it 

to requiring direct payment would increase 

efficiency, while preserving the right to charge the 

Member’s Clearing Fund deposits in the event the 

Member does not timely pay. Such a failure to pay 

would trigger recourse to the Clearing Fund 

deposits of the Member under proposed Section 3 

of Rule 4. In addition, this change would provide 

greater stability for NSCC in times of stress by 

allowing NSCC to retain the Clearing Fund, its 

critical pre-funded resource, while charging loss 

allocations. 

43Supra note 19. 

during the two hundred fifty (250) 

business days thereafter,40 the Corporate 

Contribution would be reduced to the 

remaining unused portion of the 

Corporate Contribution amount that was 

applied for the first Event Period. 

Proposed Section 5 would require NSCC 

to notify Members of any such reduction 

to the Corporate Contribution. 

Currently, the Rules do not require 

NSCC to contribute its retained earnings 

to losses and liabilities other than from 

Member impairments. Under the 

proposal, NSCC would expand the 

application of its corporate contribution 

beyond losses and liabilities from 

Member impairments. The proposed 

Corporate Contribution would apply to 

losses or liabilities relating to or arising 

out of Defaulting Member Events and 

Declared Non-Default Loss Events, and 

would be a mandatory loss contribution 

by NSCC prior to any allocation of the 

loss among Members. 

Addendum E currently provides 

NSCC the option to contribute amounts 

higher than the specified percentage of 

retained earnings, as determined by the 

Board of Directors, to any loss or 

liability incurred by NSCC as the result 

of a Member’s impairment. This option 

would be retained and expanded under 

the proposal to also cover non-default 

losses. Proposed Section 5 would 

provide that nothing in the Rules would 

prevent NSCC from voluntarily applying 

amounts greater than the Corporate 

Contribution against any NSCC loss or 

liability, whether a Defaulting Member 

Event or a Declared Non-Default Loss 

Event, if the Board of Directors, in its 

sole discretion, believes such to be 

appropriate under the factual situation 

existing at the time. 

Proposed Section 4 of Rule 4 would 

provide that NSCC shall apply the 

Corporate Contribution to losses and 

liabilities that arise out of or relate to 

one or more Defaulting Member Events 

and/or Declared Non-Default Loss 

Events that occur within an Event 

Period. The proposed rule change also 

provides that if losses and liabilities 

with respect to such Event Period 

remain unsatisfied following 

application of the Corporate 

Contribution, NSCC would allocate such 

losses and liabilities to Members, as 

described below. 

The proposed rule change to Section 

4 of Rule 4 would clarify that all 

Members would be subject to loss 

allocation for losses and liabilities 

relating to or arising out of a Declared 

Non-Default Loss Event; however, in the 

case of losses and liabilities relating to 

or arising out of a Defaulting Member 

Event, only non-defaulting Members 

would be subject to loss allocation. In 

addition, NSCC is proposing to clarify 

that after a first round of loss allocations 

with respect to an Event Period, only 

Members that have not submitted a Loss 

Allocation Withdrawal Notice in 

accordance with proposed Section 6 of 

Rule 4 would be subject to further loss 

allocations with respect to that Event 

Period. NSCC is also proposing that 

NSCC would notify Members subject to 

loss allocation of the amounts being 

allocated to them (‘‘Loss Allocation 

Notice’’) in successive rounds of loss 

allocations. 

Under the proposed rule change, a 

loss allocation ‘‘round’’ would mean a 

series of loss allocations relating to an 

Event Period, the aggregate amount of 

which is limited by the round cap. 

When the aggregate amount of losses 

allocated in a round equals the round 

cap, any additional losses relating to the 

applicable Event Period would be 

allocated in one or more subsequent 

rounds, in each case subject to a round 

cap for that round. NSCC may continue 

the loss allocation process in successive 

rounds until all losses from the Event 

Period are allocated among Members 

that have not submitted a Loss 

Allocation Withdrawal Notice in 

accordance with proposed Section 6 of 

Rule 4. 

As proposed, each loss allocation 

would be communicated to Members by 

the issuance of a Loss Allocation Notice. 

Each Loss Allocation Notice would 

specify the relevant Event Period and 

the round to which it relates. The first 

Loss Allocation Notice in any first, 

second, or subsequent round would 

expressly state that such Loss Allocation 

Notice reflects the beginning of the first, 

second, or subsequent round, as the case 

may be, and that each Member in that 

round has five (5) business days from 

the issuance of such first Loss 

Allocation Notice for the round (such 

period, a ‘‘Loss Allocation Withdrawal 

Notification Period’’) to notify NSCC of 

its election to withdraw from 

membership with NSCC pursuant to 

proposed Section 6 of Rule 4, and 

thereby benefit from its Loss Allocation 

Cap.41

Proposed Section 4 of Rule 4 would 

also retain the requirement of loss 

allocation among Members if a loss or 

liability remains after the application of 

the Corporate Contribution, as described 

above. In contrast to the current Section 

4 where NSCC would apply Members’ 

Required Deposits to the mutualized 

loss allocation amounts, under the 

proposal, NSCC would require Members 

to pay their loss allocation amounts 

(leaving their Required Fund Deposits 

intact).42 Loss allocation obligations 

would continue to be calculated based 

upon a Member’s pro rata share of losses 

and liabilities (although the pro rata 

share would be calculated differently 

than it is today), and Members would 

still retain the ability to voluntarily 

withdraw from membership and cap 

their loss allocation obligation (although 

the loss allocation obligation would also 

be calculated differently than it is 

today). 

As proposed, each Member’s pro rata 

share of losses and liabilities to be 

allocated in any round would be equal 

to (i) the Member’s Average RFD, 

divided by (ii) the sum of the Average 

RFD amounts of all Members subject to 

loss allocation in such round. Each 

Member would have a maximum 

payment obligation with respect to any 

loss allocation round that would be 

equal to the greater of (x) its Required 

Fund Deposit on the first day of the 

applicable Event Period or (y) its 

Average RFD (such amount would be 

each Member’s ‘‘Loss Allocation Cap’’). 

Therefore, the sum of the Loss 

Allocation Caps of the Members subject 

to loss allocation would constitute the 

maximum amount that NSCC would be 

permitted to allocate in each round. 

As proposed, Members would have 

two (2) business days after NSCC issues 

a first round Loss Allocation Notice to 

pay the amount specified in any such 

notice.43 On a subsequent round (i.e., if 

the first round did not cover the entire 

loss of the Event Period because NSCC 

was only able to allocate up to the 

round cap), Members would also have 

two (2) business days after notice by 

NSCC to pay their loss allocation 

amounts (again subject to their Loss 

Allocation Caps), unless Members have 

notified (or will timely notify) NSCC of 

their election to withdraw from 

membership with respect to a prior loss 

allocation round pursuant to proposed 

Section 6 of Rule 4. 

As proposed, Section 4 would also 

provide that, to the extent that a 

Member’s Loss Allocation Cap exceeds 


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44See Securities Exchange Act Release No. 79598 

(December 19, 2016), 81 FR 94462 (December 23, 

2016) (SR–NSCC–2016–005), at 94465, and 

Securities Exchange Act Release No. 79592 

(December 19, 2016), 81 FR 94448 (December 23, 

2016) (SR–NSCC–2016–803), at 94452. 

45Supra note 15. 

46Supra note 22. 

the Member’s Required Fund Deposit on 

the first day of the applicable Event 

Period, NSCC may in its discretion 

retain any excess amounts on deposit 

from the Member, up to the Member’s 

Loss Allocation Cap. 

Under the proposal, if a Member fails 

to make its required payment in respect 

of a Loss Allocation Notice by the time 

such payment is due, NSCC would have 

the right to proceed against such 

Member as a Member that has failed to 

satisfy an obligation in accordance with 

proposed Section 3 of Rule 4 described 

above. Members who wish to withdraw 

would be required to comply with the 

requirements in proposed Section 6 of 

Rule 4, described further below. 

Specifically, proposed Section 4 of Rule 

4 would provide that if, after notifying 

NSCC of its election to withdraw from 

membership pursuant to proposed 

Section 6 of Rule 4, the Member fails to 

comply with the provisions of proposed 

Section 6 of Rule 4, its notice of 

withdrawal would be deemed void and 

any further losses resulting from the 

applicable Event Period may be 

allocated against it as if it had not given 

such notice. 

Under the proposal, NSCC would 

delete the provision in current Section 

4 of Rule 4 that requires NSCC to 

provide Members and the Commission 

with 5 business days’ prior notice before 

applying the Clearing Fund to a loss or 

liability because such requirement 

would no longer be relevant under the 

proposed rule change. Under the 

proposed rule change, NSCC would 

notify Members subject to loss 

allocation of the amounts being 

allocated to them in one or more Loss 

Allocation Notices. As proposed, 

instead of applying the Clearing Fund, 

NSCC would require Members to pay 

their loss allocation amounts (leaving 

their Clearing Fund deposits intact). In 

order to conform to these proposed rule 

changes, NSCC is proposing to eliminate 

the required notification to Members 

regarding the application of Clearing 

Fund in current Section 4 of Rule 4. 

NSCC is also proposing to delete the 

required notification to the Commission 

regarding the application of Clearing 

Fund in the same section. While as a 

practical matter, NSCC would notify the 

Commission of a decision to loss 

allocate, NSCC does not believe such 

notification needs to be specified in the 

Rules. 

Under the proposed rule change, 

NSCC would move the provision related 

to Off-the-Market Transactions from 

current Section 3 of Rule 4 to proposed 

Section 4 of Rule 4 and clarify that (i) 

a loss or liability of NSCC in connection 

with the close-out or liquidation of an 

Off-the-Market Transaction would be 

allocated to the Member that was the 

counterparty to such transaction and (ii) 

no allocation would be made if the 

Defaulting Member satisfied all 

applicable intraday mark-to-market 

margin charges assessed by NSCC with 

respect to the Off-the-Market 

Transaction prior to its default.44

Section 6 

Proposed Section 6 of Rule 4 would 

include the provisions regarding 

withdrawal from membership currently 

covered by Section 8 of Rule 4. NSCC 

believes that relocating the provisions 

on withdrawal from membership as it 

pertains to loss allocation, so that it 

comes right after the section on the loss 

allocation waterfall, would provide for 

the better organization of Rule 4. As 

proposed, the subheading for Section 6 

would read ‘‘Withdrawal Following 

Loss Allocation.’’ 

Currently, Section 8 of Rule 4 

provides that participants may notify 

NSCC within ten (10) business days 

after receipt of notice of a pro rata 

charge that they have elected to 

terminate their membership and thereby 

avail themselves of a cap on loss 

allocation, which is currently their 

Required Deposit as fixed immediately 

prior to the time of the pro rata charge. 

As stated above, under the proposed 

rule change, a Member who wishes to 

withdraw from membership in respect 

of a loss allocation must provide notice 

of its election to withdraw (‘‘Loss 

Allocation Withdrawal Notice’’) within 

five (5) business days from the issuance 

of the first Loss Allocation Notice in any 

round.45 In order to avail itself of its 

Loss Allocation Cap, the Member would 

need to follow the requirements in 

proposed Section 6 of Rule 4, which 

would provide that the Member must: 

(i) Specify in its Loss Allocation 

Withdrawal Notice an effective date for 

withdrawal from membership, which 

date shall not be later than ten (10) 

business days following the last day of 

the Loss Allocation Withdrawal 

Notification Period (i.e., no later than 

ten (10) business days after the 5th 

business day following the first Loss 

Allocation Notice in that round of loss 

allocation),46 (ii) cease all activity that 

would result in transactions being 

submitted to NSCC for clearance and 

settlement for which such Member 

would be obligated to perform, where 

the scheduled final settlement date 

would be later than the effective date of 

the Member’s withdrawal, and (iii) 

ensure that all clearance and settlement 

activity for which such Member is 

obligated to NSCC is fully and finally 

settled by the effective date of the 

Member’s withdrawal, including, 

without limitation, by resolving by such 

date all fails and buy-in obligations. 

NSCC is proposing to include a 

sentence in proposed Section 6 of Rule 

4 to make it clear that if the Member 

fails to comply with the requirements 

set forth in that section, its Loss 

Allocation Withdrawal Notice will be 

deemed void, and the Member will 

remain subject to further loss allocations 

pursuant to proposed Section 4 of Rule 

4 as if it had not given such notice. 

Currently, Section 8 also contains 

provisions regarding additional pro rata 

charges that may be made by NSCC for 

the same loss or liability under the 

existing loss allocation process and the 

applicable caps that participants 

wishing to voluntarily terminate their 

membership after such additional pro 

rata charges are noticed may avail 

themselves of. These provisions would 

be replaced by the loss allocation 

process contained in proposed Section 4 

described above. 

Section 7 

As proposed, Section 7 would cover 

the provisions on the return of a 

Member’s Clearing Fund deposit that 

are currently covered by Section 6 of 

Rule 4. Proposed Section 7’s subheading 

would be ‘‘Return of Members’ Clearing 

Fund Deposits’’ and would apply only 

to Members. 

Currently, with respect to the return 

of Clearing Fund deposits, Section 6 of 

Rule 4 states that NSCC will return a 

participant’s Clearing Fund deposit 90 

days after 3 conditions are met: (i) The 

participant ceases to be a participant, 

(ii) all transactions open at the time the 

participant ceases to be a participant 

which could result in a charge to the 

Clearing Fund have been closed, and 

(iii) all obligations of the participant to 

NSCC have been satisfied or have been 

deducted from the participant’s Clearing 

Fund deposit by NSCC, provided that 

the participant has provided NSCC with 

satisfactory indemnities or guarantees or 

another participant has been substituted 

on all transactions and obligations of the 

participant. 

Current Section 6 provides further 

that in the absence of an acceptable 

guarantee, indemnity or substitution, 

NSCC will retain the entire Clearing 

Fund deposit of a participant if such 

deposit is less than $100,000 for two (2) 


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47Section 10 of FICC/GSD Rule 4, in relevant 

part, states that ‘‘If a Netting Member gives notice 

to the Corporation pursuant to Rule 3 of its election 

to terminate its membership in the Netting System, 

the Member’s deposits to the Clearing Fund in the 

form of cash or securities shall be returned to it 

within 30 calendar days thereafter . . . provided 

that all amounts owing to the Corporation by the 

Member have been paid to the Corporation prior to 

such return and the Member has no remaining open 

Net Settlement Position, Fail Net Settlement 

Position, or Forward Net Settlement Position.’’ 

Supra note 27. 

48On December 18, 2017, DTC submitted a 

proposed rule change and an advance notice to 

enhance its rules regarding allocation of losses. See 

SR–DTC–2017–022 and SR–DTC–2017–804, which 

were filed with the Commission and the Board of 

Governors of the Federal Reserve System, 

respectively, but have not yet been published in the 

Federal Register. Copies of the proposed rule 

change and the advance notice are available at 

http://www.dtcc.com/legal/sec-rule-filings.aspx. 

49Pursuant to Section 4 of Rule 2B, a Member 

could be placed on the Watch List either based on 

its credit rating of 5, 6 or 7, which can either be 

generated by the Credit Risk Rating Matrix or from 

a manual downgrade, or when NSCC deems such 

placement as necessary to protect NSCC and its 

Members. Supra note 4. 

50Rule 15 permits NSCC to require a Member, 

Limited Member or any applicant to become either 

to furnish NSCC adequate assurances of the entity’s 

financial responsibility and operational capability 

as NSCC may deem necessary. Supra note 4. 

51See Section 9 of FICC/GSD Rule 4 (Clearing 

Fund and Loss Allocation) and Section 9 of FICC/ 

MBSD Rule 4 (Clearing Fund and Loss Allocation). 

Supra note 27. 

years (or four (4) years for Members who 

have Sponsored Accounts at a Qualified 

Securities Depository) after conditions 

described in (i), (ii) and (iii) of the 

paragraph above have occurred. If the 

participant’s Clearing Fund deposit is 

equal to or greater than $100,000, NSCC 

will retain the greater of twenty-five (25) 

percent of a participant’s average 

Clearing Fund requirement over the 

twelve (12) months immediately prior to 

the date the participant ceased to be a 

participant, or $100,000 for two (2) 

years (or four (4) years for Members who 

have Sponsored Accounts at a Qualified 

Securities Depository) after conditions 

described in (i), (ii) and (iii) of the 

paragraph above have occurred. 

Current Section 6 states that if a 

participant made a deposit with respect 

to the Mutual Fund Services or 

Insurance and Retirement Processing 

Services, the participant will be entitled 

to the return of this deposit ninety (90) 

days after all associated transactions in 

these services have been satisfied. 

Finally, Section 6 currently provides 

that any obligation of a participant to 

NSCC unsatisfied at the time the 

participant ceases to be a participant 

will not be affected by such cessation of 

membership. 

Proposed Section 7 would reduce the 

period in which NSCC may retain a 

Member’s Clearing Fund deposit. 

Specifically, NSCC proposes that if a 

Member gives notice to NSCC of its 

election to withdraw from membership, 

NSCC will return the Member’s Actual 

Deposit in the form of (i) cash or 

securities within thirty (30) calendar 

days and (ii) Eligible Letters of Credit 

within ninety (90) calendar days, after 

all of the Member’s transactions have 

settled and all matured and contingent 

obligations to NSCC for which the 

Member was responsible while a 

Member have been satisfied, except 

NSCC may retain for up to two (2) years 

the Actual Deposits from Members who 

have Sponsored Accounts at DTC. NSCC 

believes that shortening the time 

periods for the return of a Member’s 

Clearing Fund deposit would be helpful 

to firms who have exited NSCC so that 

they could have use of the deposits 

sooner than under the current Rules, 

while at the same time protecting NSCC 

because such return would only occur if 

all obligations of the terminating 

Member to NSCC have been satisfied. 

Proposed Section 7 would also 

harmonize the retention period for a 

Member’s deposits to the Clearing Fund 

with the FICC/GSD Rules,47 thus 

providing consistent treatment for firms 

that are members of both NSCC and 

FICC. Similarly, the Clearing Fund 

deposit retention for Members who have 

Sponsored Accounts at DTC would be 

reduced in order to stay consistent with 

the proposed retention period in the 

rules of DTC.48 In addition, NSCC 

proposes to make it clear that a 

Member’s obligations to NSCC would 

include both matured as well as 

contingent obligations. 

Section 8 

Proposed Section 8 of Rule 4 would 

cover the subject matter currently 

covered in Section 7 of Rule 4. Proposed 

Section 8’s subheading would be 

‘‘Changes in Members’ Required Fund 

Deposits’’ and would apply only to 

Members. 

Currently, Section 7 of Rule 4 requires 

participants to satisfy any increase in 

their Required Deposit within such time 

as NSCC requires. At the time the 

increase becomes effective, the 

participant’s obligations to NSCC will 

be determined in accordance with the 

increased Required Deposit whether or 

not the Member has so increased its 

deposit. NSCC is not proposing any 

substantive changes to this provision, 

which will be renumbered as Section 8 

of Rule 4 under the proposed rule 

change, except for streamlining the 

provision and limiting its application to 

Members as stated above. 

Section 9 

Currently, Section 9 of Rule 4 

addresses situations where a participant 

has excess deposits in the Clearing Fund 

(i.e., amounts above its Required 

Deposit). The current provision 

provides that NSCC will, on any day 

that NSCC has determined and provided 

notification that an excess deposit exists 

with respect to a participant, return an 

excess amount requested by a 

participant that follows the formats and 

timeframe established by NSCC for such 

request. The current provision makes 

clear that NSCC will not return the 

requested excess amount (i) until any 

amount required to be charged against 

the participant’s Required Deposit is 

paid by the participant to NSCC and/or 

(ii) if NSCC determines that the 

participant’s current month’s use of one 

or more services is materially different 

than the previous month’s use upon 

which such excess is based. Section 9 

currently makes clear that, 

notwithstanding any of the foregoing, 

NSCC may, in its discretion, withhold 

any or all of a participant’s excess 

deposit if the participant has been 

placed on the Watch List.49 Current 

Section 9 also makes clear that nothing 

in this section limits NSCC’s rights 

under Rule 15.50

Proposed Section 9 would add a 

subheading ‘‘Excess Clearing Fund 

Deposits’’ and would apply only to 

Members. NSCC is not proposing any 

substantive changes to this provision, 

except for streamlining the provisions in 

this section and eliminating the 

condition described in clause (i) of the 

paragraph above that limits participants’ 

ability to request the return of excess 

amounts on deposit in the Clearing 

Fund and replacing clause (ii) of the 

paragraph above with a clause that 

provides NSCC may, in its discretion, 

withhold any or all of a participant’s 

excess deposit if NSCC determines that 

the Member’s anticipated activities in 

NSCC in the near future may reasonably 

be expected to be materially different 

than its activities of the recent past. 

NSCC believes that the proposed 

additional clause would protect NSCC 

and its participants because the clause 

would allow NSCC to retain excess 

deposits to cover an expected near-term 

increase in a Member’s Required Fund 

Deposit amount due to the anticipated 

change in the Member’s activities. The 

proposed additional clause would also 

align NSCC’s Rules with that of FICC/ 

GSD and FICC/MBSD,51 thus providing 

consistent treatment for firms that are 

members of both NSCC and FICC. 


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Section 10 

Current Section 10 of Rule 4 provides 

for crediting persons against whom 

losses are charged pursuant to Rule 4 if 

there is a subsequent recovery of such 

losses by NSCC. NSCC is not proposing 

any changes to this section other than 

adding a subheading ‘‘Subsequent 

Recovery Against Loss Amounts’’ and 

replacing ‘‘persons’’ with ‘‘Persons,’’ 

which is currently defined in Rule 1 

(Definitions and Descriptions) to mean 

‘‘a partnership, corporation, limited 

liability corporation or other 

organization, entity or an individual.’’ 

Given that NSCC is a corporation, NSCC 

believes that the term ‘‘Person’’ already 

includes NSCC; however, for increased 

clarity, NSCC is proposing to add 

‘‘including the Corporation’’ to make it 

clear to Members that if there is a 

subsequent recovery of losses charged 

pursuant to Rule 4, the net amount of 

the recovery would be credited to 

Persons, including NSCC, against whom 

the loss was charged in proportion to 

the amounts charged against them. 

Section 11 

Current Section 11 of Rule 4 provides 

that a participant may withdraw Eligible 

Clearing Fund Securities from pledge, 

provided that the participant has 

deposited cash with, or pledged 

additional Eligible Clearing Fund 

Securities to, NSCC that, in the 

aggregate, secure the open account 

indebtedness of the participant and/or 

satisfy the participant’s Required 

Deposit. Proposed Section 11 would add 

a subheading ‘‘Substitution or 

Withdrawal of Pledged Securities’’ and 

would apply only to Members. NSCC is 

not proposing any substantive changes 

to this provision, except for changes to 

improve the transparency and 

accessibility of this section. 

Section 12 

Current Section 12 of Rule 4 makes it 

clear that NSCC has certain rights with 

respect to the Clearing Fund. Proposed 

Section 12 would add a subheading 

‘‘Authority of Corporation’’ and would 

apply only to Members. NSCC is not 

proposing any substantive changes to 

this provision, except to clarify that a 

reference to 30 days in current Section 

12 would mean 30 calendar days. 

Section 13 

NSCC is proposing to add a new 

Section 13 to Rule 4 that would be 

entitled ‘‘Mutual Fund Deposits.’’ Under 

the proposal, NSCC would consolidate 

provisions from various sections in the 

current Rule 4 concerning Mutual Fund/ 

Insurance Services Members and Fund 

Members and group them into proposed 

Section 13. Aside from the 

consolidation, NSCC is not proposing 

any substantive changes to these 

provisions, except for changes to (i) 

reduce NSCC’s retention period of 

Mutual Fund Deposits when a Mutual 

Fund Participant (as defined below and 

in the proposed rule change) elects to 

withdraw from membership, in order to 

harmonize it with the proposed change 

in Section 7, as described above, and (ii) 

improve the transparency and 

accessibility of the provisions. 

Proposed Section 13 would provide 

that each Member that uses the Mutual 

Fund Services to submit mutual fund 

purchases, redemptions, or exchanges to 

any Fund Member or another Member 

and each Mutual Fund/Insurance 

Services Member would, and each Fund 

Member (collectively with such 

Members and Mutual Fund/Insurance 

Services Members, ‘‘Mutual Fund 

Participants’’) may, be required to make 

a cash deposit to the Clearing Fund in 

the amounts determined in accordance 

with Procedure XV and other applicable 

Rules (its ‘‘Mutual Fund Deposit’’ and, 

unless specified otherwise, for the 

purposes of the Rules, Required Fund 

Deposits shall include Mutual Fund 

Deposits). In the case of a Member, its 

Mutual Fund Deposit would be a 

separate and additional component of 

such Member’s deposit to the Clearing 

Fund but not part of the Member’s 

Required Fund Deposit for purposes of 

calculating pro rata loss allocations 

pursuant to proposed Section 4 of Rule 

4. 

As in the current Rules, proposed 

Section 13 would also provide that if 

any Mutual Fund Participant fails to 

satisfy any obligation to NSCC relating 

to Mutual Fund Services, 

notwithstanding NSCC’s right to reverse 

in whole or in part any credit previously 

given to the contra side to any 

outstanding Mutual Fund Services 

transaction of the Mutual Fund/ 

Insurance Services Member, NSCC 

would first apply such Mutual Fund 

Participant’s Mutual Fund Deposit. If 

after such application any loss or 

liability remains and if such Mutual 

Fund Participant is a Member that is not 

otherwise obligated to NSCC, NSCC 

would apply such Member’s Actual 

Deposit in accordance with proposed 

Section 3 of Rule 4. NSCC would next 

allocate any further remaining loss or 

liability to the other Mutual Fund 

Participants in successive rounds of loss 

allocations in each case up to the 

aggregate of Mutual Fund Deposits from 

non-defaulting Mutual Fund 

Participants, and after the first such 

round, Mutual Fund Participants that 

have not submitted a Loss Allocation 

Withdrawal Notice in accordance with 

proposed Section 6 of Rule 4, following 

the procedures and timeframes set forth 

in proposed Sections 4 and 6 of Rule 4 

as if such Mutual Fund Participants are 

Members. If any loss or liability remains 

thereafter and there are no continuing 

Mutual Fund Participants, NSCC would 

proceed with loss allocations to 

Members for a Defaulting Member Event 

in accordance with proposed Section 4 

of Rule 4. 

As proposed, Section 13 would 

reduce NSCC’s retention period of 

Mutual Fund Deposits from ninety (90) 

days under the current Section 6 of Rule 

4 to thirty (30) calendar days. 

Specifically, NSCC is proposing that a 

Mutual Fund Participant that elects to 

withdraw from membership would be 

entitled to the return of its Mutual Fund 

Deposit no later than thirty (30) 

calendar days after all of its transactions 

have settled and it has satisfied all of its 

matured and contingent obligations to 

NSCC for which such Mutual Fund 

Participant was responsible while a 

Mutual Fund Participant. NSCC is 

proposing this change in order to 

harmonize the retention period of 

Mutual Fund Deposit with the proposed 

Clearing Fund retention period in 

proposed Section 7 of Rule 4, as 

described above. 

As proposed, Section 13 would make 

it clear that NSCC’s rights, authority and 

obligations with respect to deposits to 

the Clearing Fund as set forth in Rule 4 

would apply to Mutual Fund Deposits. 

Section 14 

NSCC is proposing to add a new 

Section 14 to Rule 4 that would be 

entitled ‘‘Insurance Deposits.’’ Under 

the proposal, NSCC would consolidate 

provisions from various sections in 

current Rule 4 concerning Insurance 

Carrier/Retirement Services Members 

and group them into proposed Section 

14. Aside from the consolidation, NSCC 

is not proposing any substantive 

changes to these provisions, except for 

changes to (i) reduce NSCC’s retention 

period of Insurance Deposits when an 

Insurance Participant (as defined below 

and in the proposed rule change) elects 

to withdraw from membership, in order 

to harmonize it with proposed Section 

7, as described above, and (ii) improve 

the transparency and accessibility of the 

provisions. 

As in the current Rules, proposed 

Section 14 would provide that each 

Mutual Fund/Insurance Services 

Member that uses the Insurance and 

Retirement Processing Services and 

each Insurance Carrier/Retirement 

Services Member (collectively, 

‘‘Insurance Participants’’) may be 


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required to make a cash deposit to the 

Clearing Fund in the amounts 

determined in accordance with 

Procedure XV and other applicable 

Rules (its ‘‘Insurance Deposit’’ and, 

unless specified otherwise, for the 

purposes of the Rules, Required Fund 

Deposits shall include Insurance 

Deposits). Proposed Section 14 would 

also provide that if any Insurance 

Participant fails to satisfy any obligation 

to NSCC relating to the Insurance and 

Retirement Processing Services, NSCC 

would first apply such Insurance 

Participant’s Insurance Deposit. If after 

such application any loss or liability 

remains, NSCC would allocate the 

remaining loss or liability to the other 

Insurance Participants in successive 

rounds of loss allocations in each case 

up to the aggregate of Insurance 

Deposits from non-defaulting Insurance 

Participants, and after the first such 

round, Insurance Participants that have 

not submitted a Loss Allocation 

Withdrawal Notice in accordance with 

proposed Section 6 of Rule 4, following 

the procedures and timeframes set forth 

in proposed Sections 4 and 6 of Rule 4 

as if such Insurance Participants are 

Members. If any loss or liability remains 

thereafter and there are no continuing 

Insurance Participants, NSCC would 

proceed with loss allocations to 

Members for a Defaulting Member Event 

in accordance with proposed Section 4 

of Rule 4. 

As proposed, Section 14 would 

reduce NSCC’s retention period of 

Insurance Deposits from ninety (90) 

days under the current Section 6 of Rule 

4 to thirty (30) calendar days. 

Specifically, NSCC is proposing that an 

Insurance Participant that elects to 

withdraw from membership would be 

entitled to the return of its Insurance 

Deposit no later than thirty (30) 

calendar days after all of its transactions 

have settled and it has satisfied all of its 

matured and contingent obligations to 

NSCC for which such Insurance 

Participant was responsible while an 

Insurance Participant. NSCC is 

proposing this change in order to 

harmonize the retention period of 

Insurance Deposit with the proposed 

Clearing Fund retention period in 

proposed Section 7 of Rule 4, as 

described above. 

As proposed, Section 14 would make 

it clear that NSCC’s rights, authority and 

obligations with respect to deposits to 

the Clearing Fund as set forth in Rule 4 

would apply to Insurance Deposits. 

B. Proposed Changes to Addendum E 

(Statement of Policy—Application of 

Retained Earnings—Member 

Impairments) and Addendum K 

(Interpretation of the Board of 

Directors—Application of Clearing 

Fund) 

Addendum E is a statement of policy 

that currently provides that NSCC will 

apply no less than twenty-five (25) 

percent of its retained earnings to cover 

losses or liabilities from a Member’s 

impairment that is not otherwise 

satisfied by the impaired Member’s 

Clearing Fund deposit. NSCC is 

proposing to delete Addendum E in its 

entirety because it would no longer be 

relevant given the proposed rule change 

relating to the Corporate Contribution 

discussed above. 

NSCC is proposing to modify 

Addendum K to delete all provisions 

associated with loss allocation and 

application of the Clearing Fund in 

connection with a loss or liability 

incurred by NSCC, including modifying 

the title of Addendum K. These 

provisions would no longer be 

necessary under the proposed rule 

change because the loss allocation 

process in its entirety would be 

governed by Rule 4. In addition, the 

current language in Addendum K 

regarding allocation by System would 

no longer be applicable under the 

proposed rule change as described 

above. NSCC would retain the 

provisions in Addendum K that pertain 

to NSCC’s guaranty and rename 

Addendum K ‘‘The Corporation’s 

Guaranty.’’ 

(iii) Other Proposed Rule Changes 

NSCC is proposing changes to Rule 1 

(Definitions and Descriptions), Rule 2B 

(Ongoing Membership Requirements 

and Monitoring), Rule 4(A) 

(Supplemental Liquidity Deposits), Rule 

13 (Exception Processing), Rule 15 

(Assurances of Financial Responsibility 

and Operational Capability), Rule 42 

(Wind-Down of a Member, Fund 

Member or Insurance Carrier/Retirement 

Services Member), Procedure III (Trade 

Recording Service (Interface with 

Qualified Clearing Agencies)), 

Procedure XV (Clearing Fund Formula 

and Other Matters), and Addendum O 

(Admission of Non-US Entities as Direct 

NSCC Members). NSCC is proposing 

changes to these Rules in order to 

conform them with the proposed 

changes to Rule 4 as well as to make 

certain technical changes to these Rules. 

Specifically, NSCC is proposing to 

add the following defined terms to Rule 

1, in alphabetical order: Actual Deposit, 

Average RFD, Clearing Fund Cash, 

Corporate Contribution, Declared NonDefault Loss Event, Defaulting Member, 

Defaulting Member Event, Eligible 

Letter of Credit, Event Period, Insurance 

Deposit, Insurance Participant, Issuer, 

Lender, Loss Allocation Cap, Loss 

Allocation Notice, Loss Allocation 

Withdrawal Notice, Loss Allocation 

Withdrawal Notification Period, Mutual 

Fund Deposit, Mutual Fund Participant, 

Required Fund Deposit, Termination 

Date, and Voluntary Termination 

Notice. 

NSCC is proposing to delete the 

defined term ‘‘The Corporation’’ in Rule 

1 and replace it with ‘‘Corporation’’ in 

Rule 1. NSCC is proposing to replace 

‘‘Required Deposits’’ with ‘‘Required 

Fund Deposits’’ in Rule 2B, Rule 4(A), 

Rule 15, Rule 42, Procedure III, and 

Procedure XV. NSCC is also proposing 

to replace ‘‘Letter of Credit’’ with 

‘‘Eligible Letter of Credit’’ in Rule 42 

and Addendum O. 

In addition, in Section 5 of Rule 2B, 

NSCC proposes to change the reference 

to Section 8 of Rule 4 to reflect the 

updated section number, which would 

be to Section 4 of Rule 4. NSCC is also 

proposing conforming changes to this 

section to ensure that termination 

provisions in the Rules, whether 

voluntary or in response to a loss 

allocation, are consistent with one 

another to the extent appropriate. 

Currently, Section 5 of Rule 2B 

provides that participants may elect to 

voluntarily retire their membership by 

providing NSCC with written notice of 

such termination. Such termination will 

not be effective until accepted by NSCC, 

which shall be evidenced by a notice to 

NSCC’s participants announcing the 

participant’s retirement and the 

effective date of the retirement. This 

section also provides that a participant’s 

voluntary termination of membership 

shall not affect its obligations to NSCC. 

Where appropriate, NSCC is 

proposing changes to align Section 5 of 

Rule 2B with the proposed new Section 

6 of Rule 4, both of which address 

termination of membership. 

Specifically, NSCC is proposing to 

rename the subheading of Section 5 of 

Rule 2B to ‘‘Voluntary Termination’’ 

and to provide that when a participant 

elects to voluntarily terminate its 

membership by providing NSCC a 

written notice of such termination 

(‘‘Voluntary Termination Notice’’), the 

participant must specify in its Voluntary 

Termination Notice an effective date for 

its withdrawal (‘‘Termination Date’’), 

provided such Termination Date shall 

not be prior to the scheduled final 

settlement date of any remaining 

obligation owed by the participant to 

NSCC as of the time such Voluntary 


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52 15 U.S.C. 78q–1(b)(3)(F). 

53 17 CFR 240.17Ad–22(e)(13) and (e)(23)(i). 

54 15 U.S.C. 78q–1(b)(3)(F). 

Termination Notice is submitted to 

NSCC, unless otherwise approved by 

NSCC. In addition, NSCC would make 

it clear that the acceptance by NSCC of 

a participant’s Voluntary Termination 

Notice shall be no later than ten (10) 

business days after the receipt of such 

notice from the participant. NSCC is 

also proposing to clarify that as of the 

Termination Date, a participant that 

terminates its membership shall no 

longer be eligible or required to submit 

transactions to NSCC for clearance and 

settlement, unless the Board of Directors 

determines otherwise in order to ensure 

an orderly liquidation of the 

participant’s open obligations. If any 

transaction is submitted to NSCC by 

such participant that is scheduled to 

settle on or after the Termination Date, 

the participant’s Voluntary Termination 

Notice would be deemed void and the 

participant would remain subject to the 

Rules as if it had not given such notice. 

Furthermore, NSCC is proposing to add 

a sentence to Section 5 of Rule 2B to 

refer participants to Sections 7, 13 and 

14 of Rule 4, as applicable, regarding 

provisions on the return of a 

participant’s Clearing Fund deposit and 

to specify that if an Event Period were 

to occur after a participant has 

submitted its Voluntary Termination 

Notice but prior to the Termination 

Date, in order for such participant to 

benefit from its Loss Allocation Cap 

pursuant to Section 4 of Rule 4, the 

participant would need to comply with 

the provisions of Section 6 of Rule 4 and 

submit a Loss Allocation Withdrawal 

Notice, which notice, upon submission, 

would supersede and void any pending 

Voluntary Termination Notice 

previously submitted by the participant. 

In Rule 4(A), NSCC proposes to 

amend Section 11 to update a crossreference to the time period for the 

refund of deposits to the Clearing Fund 

when a Member ceases to be a 

participant in order to align it with 

proposed Section 7 of Rule 4, which 

would reduce the time period from 90 

days to 30 calendar days. NSCC is also 

proposing to add a reference to Section 

13 of Rule 4 in clause (c) of Section 13 

of Rule 4(A) in order to specify that a 

Special Activity Supplemental Deposit 

of a Member may be used to satisfy a 

loss or liability as provided in such new 

proposed Section 13. NSCC is also 

proposing technical changes in Sections 

2 and 13 of Rule 4(A) to reflect new 

proposed defined terms in the Rules. 

In Rule 13, NSCC would replace 

‘‘System’’ with ‘‘system’’ to reflect the 

proposed deletion of ‘‘System’’ as a 

defined term from Rule 4 and 

Addendum K. In Procedure XV, NSCC 

would replace ‘‘Qualified Securities 

Depository’’ with ‘‘DTC’’ to be 

consistent with the proposed change in 

Section 1 of Rule 4. 

Member Outreach 

Beginning in August 2017, NSCC 

conducted outreach to Members in 

order to provide them with advance 

notice of the proposed changes. As of 

the date of this filing, no written 

comments relating to the proposed 

changes have been received in response 

to this outreach. The Commission will 

be notified of any written comments 

received. 

Implementation Timeframe 

Pending Commission approval, NSCC 

expects to implement this proposal 

promptly. Members would be advised of 

the implementation date of this 

proposal through issuance of an NSCC 

Important Notice. 

2. Statutory Basis 

NSCC believes that the proposed rule 

change is consistent with the 

requirements of the Act, and the rules 

and regulations thereunder applicable to 

a registered clearing agency. 

Specifically, NSCC believes that the 

proposed rule change is consistent with 

Section 17A(b)(3)(F) of the Act 52 and 

Rules 17Ad–22(e)(13) and 17Ad– 

22(e)(23)(i),53 each as promulgated 

under the Act, for the reasons described 

below. 

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

requires that the Rules be designed to 

promote the prompt and accurate 

clearance and settlement of securities 

transactions and to assure the 

safeguarding of securities and funds 

which are in the custody or control of 

NSCC or for which it is responsible.54

The proposed rule changes to (1) modify 

the calculation and application of 

NSCC’s corporate contribution, (2) 

introduce an Event Period, (3) introduce 

the concept of ‘‘rounds’’ (and 

accompanying Loss Allocation Notices) 

and apply this concept to the timing of 

loss allocation payments and the 

Member withdrawal process in 

connection with the loss allocation 

process, and (4) implement a ‘‘lookback’’ period to calculate a Member’s 

loss allocation obligation (which would 

replace the current calculation of a 

Member’s loss allocation obligation 

based on the Member’s activity in each 

of the various services or ‘‘Systems’’ 

offered by NSCC) and its Loss 

Allocation Cap, taken together, are 

intended to enhance the overall 

resiliency of NSCC’s loss allocation 

process. 

By modifying the calculation of 

NSCC’s corporate contribution, NSCC 

would apply a mandatory fixed 

percentage of its General Business Risk 

Capital Requirement (as compared to 

the current Rules which provide for ‘‘no 

less than’’ a percentage of retained 

earnings), which would provide greater 

transparency and accessibility to 

Members as to how much NSCC would 

contribute in the event of a loss or 

liability. By modifying the application 

of NSCC’s corporate contribution to 

apply to Declared Non-Default Loss 

Events, in addition to Defaulting 

Member Events, on a mandatory basis, 

NSCC would expand the application of 

its corporate contribution beyond losses 

and liabilities from Member 

impairments, which would better align 

the interests of NSCC with those of its 

Members by stipulating a mandatory 

application of the Corporate 

Contribution to a Declared Non-Default 

Loss Event prior to any allocation of the 

loss among Members. Taken together, 

these proposed rule changes would 

enhance the overall resiliency of NSCC’s 

loss allocation process by enhancing the 

calculation and application of NSCC’s 

Corporate Contribution, which is one of 

the key elements of NSCC’s loss 

allocation process. Moreover, by 

providing greater transparency and 

accessibility to Members, as stated 

above, the proposed rule changes 

regarding the Corporate Contribution, 

including the proposed replenishment 

period, would allow Members to better 

assess the adequacy of NSCC’s loss 

allocation process. 

By introducing the concept of an 

Event Period, NSCC would be able to 

group Defaulting Member Events and 

Declared Non-Default Loss Events 

occurring in a period of ten (10) 

business days for purposes of allocating 

losses to Members. NSCC believes that 

the Event Period would provide a 

defined structure for the loss allocation 

process to encompass potential 

sequential Defaulting Member Events or 

Declared Non-Default Loss Events that 

are likely to be closely linked to an 

initial event and/or market dislocation 

episode. Having this structure would 

enhance the overall resiliency of NSCC’s 

loss allocation process because NSCC 

would be better equipped to address 

losses that may arise from multiple 

Defaulting Member Events and/or 

Declared Non-Default Loss Events that 

arise in quick succession. Moreover, the 

proposed Event Period structure would 

provide certainty for Members 

concerning their maximum exposure to 


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55 17 CFR 240.17Ad–22(e)(13). 

56 17 CFR 240.17Ad–22(e)(23)(i). 

57 15 U.S.C. 78q–1(b)(3)(I). 

mutualized losses with respect to such 

events. 

By introducing the concept of 

‘‘rounds’’ (and accompanying Loss 

Allocation Notices) and applying this 

concept to the timing of loss allocation 

payments and the Member withdrawal 

process in connection with the loss 

allocation process, NSCC would (i) set 

forth a defined amount that it would 

allocate to Members during each round 

(i.e., the round cap), (ii) advise Members 

of loss allocation obligation information 

as well as round information through 

the issuance of Loss Allocation Notices, 

and (iii) provide Members with the 

option to limit their loss allocation 

exposure after the issuance of the first 

Loss Allocation Notice in each round. 

These proposed rule changes would 

enhance the overall resiliency of NSCC’s 

loss allocation process because they 

would enable NSCC to continue the loss 

allocation process in successive rounds 

until all of NSCC’s losses are allocated 

and enable NSCC to identify continuing 

Members for purposes of calculating 

subsequent loss allocation obligations in 

successive rounds. Moreover, the 

proposed rule changes would define for 

Members a clear manner and process in 

which they could cap their loss 

allocation exposure to NSCC. 

By implementing a ‘‘look-back’’ 

period to calculate a Member’s loss 

allocation obligations and its Loss 

Allocation Cap, NSCC would discourage 

Members from reducing their settlement 

activity during a time of stress primarily 

to limit their loss allocation obligations. 

By determining a Member’s loss 

allocation obligations and its Loss 

Allocation Cap based on the greater of 

its Required Fund Deposit or the 

average thereof over a look-back period, 

NSCC would be able to calculate a 

Member’s pro rata share of losses and 

liabilities based on the amount of risk 

that the Member brings to NSCC. These 

proposed rule changes would enhance 

the overall resiliency of NSCC’s loss 

allocation process because they would 

deter Members from reducing their 

settlement activity during a time of 

stress primarily to limit their Loss 

Allocation Caps. 

Taken together, the foregoing 

proposed rule changes would establish 

a stronger (for all the reasons discussed 

above) and clearer loss allocation 

process for NSCC, which NSCC believes 

would allow it to take timely action to 

address losses. The ability to timely 

address losses would allow NSCC to 

continue to meet its clearance and 

settlement obligations, especially in 

circumstances that may involve a series 

of substantially contemporaneous loss 

events. Therefore, NSCC believes that 

these proposed rule changes would 

promote the prompt and accurate 

clearance and settlement of securities 

transactions, consistent with Section 

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

By reducing the time within which 

NSCC is required to return a former 

Member’s Clearing Fund deposit, NSCC 

would enable firms that have exited 

NSCC to have access to their funds 

sooner than under the current Rules 

while at the same time protecting NSCC 

and its provision of clearance and 

settlement services because such return 

would only occur if all obligations of 

the terminating Member to NSCC have 

been satisfied. As such, NSCC would 

maintain the requisite level of Clearing 

Fund deposit to ensure that it can 

continue to meet its clearance and 

settlement obligations. Therefore, NSCC 

believes that this proposed rule change 

would promote the prompt and accurate 

clearance and settlement of securities 

transactions, consistent with Section 

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

Rule 17Ad–22(e)(13) under the Act 

requires, in part, that NSCC establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to ensure NSCC has 

the authority and operational capacity 

to take timely action to contain losses 

and continue to meet its obligations.55

As described above, the proposed rule 

changes to (1) modify the calculation 

and application of NSCC’s corporate 

contribution, (2) introduce an Event 

Period, (3) introduce the concept of 

‘‘rounds’’ (and accompanying Loss 

Allocation Notices) and apply this 

concept to the timing of loss allocation 

payments and the Member withdrawal 

process in connection with the loss 

allocation process, and (4) implement a 

‘‘look-back’’ period to calculate a 

Member’s loss allocation obligation 

(which would replace the current 

calculation of a Member’s loss 

allocation obligation based on the 

Member’s activity in each of the various 

services or ‘‘Systems’’ offered by NSCC) 

and its Loss Allocation Cap, taken 

together, are designed to enhance the 

resiliency of NSCC’s loss allocation 

process. Having a resilient loss 

allocation process would help ensure 

that NSCC can effectively and timely 

address losses relating to or arising out 

of either the default of one or more 

Members or one or more non-default 

loss events, which in turn would help 

NSCC contain losses and continue to 

meet its clearance and settlement 

obligations. Therefore, NSCC believes 

that the proposed rule changes to 

enhance the resiliency of NSCC’s loss 

allocation process are consistent with 

Rule 17Ad–22(e)(13) under the Act. 

Rule 17Ad–22(e)(23)(i) under the Act 

requires NSCC to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

publicly disclose all relevant rules and 

material procedures, including key 

aspects of NSCC’s default rules and 

procedures.56 The proposed rule 

changes to (i) align the loss allocation 

rules of the DTCC Clearing Agencies, (ii) 

improve the overall transparency and 

accessibility of the provisions in the 

Rules governing loss allocation, and (iii) 

make conforming and technical 

changes, would not only ensure that 

NSCC’s loss allocation rules are, to the 

extent practicable and appropriate, 

consistent with the loss allocation rules 

of other DTCC Clearing Agencies, but 

also would help to ensure that NSCC’s 

loss allocation rules are transparent and 

clear to Members. Aligning the loss 

allocation rules of the DTCC Clearing 

Agencies would provide consistent 

treatment, to the extent practicable and 

appropriate, especially for firms that are 

participants of two or more DTCC 

Clearing Agencies. Having transparent 

and clear loss allocation rules would 

enable Members to better understand 

the key aspects of NSCC’s default rules 

and procedures and provide Members 

with increased predictability and 

certainty regarding their exposures and 

obligations. As such, NSCC believes that 

the proposed rule changes to align the 

loss allocation rules of the DTCC 

Clearing Agencies as well as to improve 

the overall transparency and 

accessibility of NSCC’s loss allocation 

rules are consistent with Rule 17Ad– 

22(e)(23)(i) under the Act. 

(B) Clearing Agency’s Statement on 

Burden on Competition 

NSCC does not believe that the 

proposed rule changes to enhance the 

resiliency of NSCC’s loss allocation 

process would impact competition.57 As 

described above, the proposed rule 

changes to (1) modify the calculation 

and application of NSCC’s corporate 

contribution, (2) introduce an Event 

Period, (3) introduce the concept of 

‘‘rounds’’ (and accompanying Loss 

Allocation Notices) and apply this 

concept to the timing of loss allocation 

payments and the Member withdrawal 

process in connection with the loss 

allocation process, and (4) implement a 

‘‘look-back’’ period to calculate a 

Member’s loss allocation obligation 

(which would replace the current 

calculation of a Member’s loss 


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58 Id. 59 Id. 

allocation obligation based on the 

Member’s activity in each of the various 

services or ‘‘Systems’’ offered by NSCC) 

and its Loss Allocation Cap, taken 

together, are intended to enhance the 

overall resiliency of NSCC’s loss 

allocation process, and would apply 

equally to all Members. While the 

proposed rule changes would amend the 

manner in which NSCC’s corporate 

contribution and loss allocation are 

calculated and applied, such proposed 

rule changes would maintain NSCC’s 

current core loss allocation waterfall in 

the case of a loss relating to or arising 

out of the default of a Member for whom 

NSCC has ceased to act following 

application of the defaulting Member’s 

resources, i.e., NSCC’s corporate 

contribution and loss allocation among 

Members. With respect to a loss or 

liability arising from a non-default loss 

event, the proposed rule changes clarify 

NSCC’s contribution to such loss and 

liability, but, as with losses and 

liabilities arising from a Member default 

event, the proposed rule changes would 

maintain the loss mutualization 

requirement under the current Rule 4. 

While the calculation of the loss 

obligations associated with non-default 

losses would change under the 

proposal, NSCC would maintain this 

aspect of the loss allocation waterfall 

(i.e., loss mutualization among Members 

for non-default losses). Based on the 

foregoing, NSCC believes that these 

proposed rule changes to enhance the 

resiliency of NSCC’s loss allocation 

process would not have any impact on 

competition. 

NSCC does not believe the proposed 

rule change to reduce the time within 

which NSCC is required to return a 

former Member’s Clearing Fund deposit 

would impact competition.58 This 

proposed rule change is intended to 

enable firms who have exited NSCC to 

have use of their Clearing Fund deposit 

sooner, while at the same time 

protecting NSCC because such return 

would only occur if all obligations of 

the terminated Member to NSCC have 

been satisfied. While the proposed rule 

change would reduce the applicable 

timeframe, it does not change the 

requirement that the return occur after 

all obligations to NSCC have been 

satisfied and the proposed rule change 

would apply equally to all Members. 

Based on the foregoing, NSCC believes 

that the proposed rule change to reduce 

the time within which NSCC is required 

to return a former Member’s Clearing 

Fund deposit would not have any 

impact on competition. 

NSCC also does not believe that the 

proposed rule changes to (i) align the 

loss allocation rules of the DTCC 

Clearing Agencies, (ii) increase the 

transparency and accessibility of 

provisions in the Rules governing loss 

allocation, and (iii) make conforming 

and technical changes, would impact 

competition.59 These changes would 

apply equally to all Members. 

Alignment of the loss allocation rules of 

the DTCC Clearing Agencies are 

intended to increase the consistency of 

the Rules with the rules of other DTCC 

Clearing Agencies in order to provide 

consistent treatment, to the extent 

practicable and appropriate, especially 

for firms that are participants of two or 

more DTCC Clearing Agencies. Having 

transparent and accessible provisions in 

the Rules governing loss allocation are 

intended to improve the readability and 

clarity of the Rules regarding the loss 

allocation process. Making conforming 

and technical changes to ensure the 

Rules remain clear and accurate would 

facilitate Members’ understanding of the 

Rules and their obligations thereunder. 

As such, NSCC believes that these 

proposed rule changes would not have 

any impact on competition. 

(C) Clearing Agency’s Statement on 

Comments on the Proposed Rule 

Change Received From Members, 

Participants, or Others 

Written comments relating to this 

proposed rule change have not been 

solicited or received. NSCC will notify 

the Commission of any written 

comments received by NSCC. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this 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 

• Use the Commission’s internet 

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

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

NSCC–2017–018 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–NSCC–2017–018. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

internet website (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549 on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of NSCC and on DTCC’s website 

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

will be posted without change. Persons 

submitting comments are cautioned that 

we do not redact or edit personal 

identifying information from comment 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–NSCC– 

2017–018 and should be submitted on 

or before January 29, 2018. 


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60 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3On December 18, 2017, DTC filed this proposed 

rule change as an advance notice (SR–DTC–2017– 

804) with the Commission pursuant to Section 

806(e)(1) of Title VIII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act entitled the 

Payment, Clearing, and Settlement Supervision Act 

of 2010, 12 U.S.C. 5465(e)(1), and Rule 19b– 

4(n)(1)(i) of the Act, 17 CFR 240.19b–4(n)(1)(i). A 

copy of the advance notice is available at http://

www.dtcc.com/legal/sec-rule-filings.aspx. 

4Each capitalized term not otherwise defined 

herein has its respective meaning as set forth in the 

Rules, By-Laws and Organization Certificate of DTC 

(the ‘‘Rules’’), available at http://www.dtcc.com/ 

legal/rules-and-procedures.aspx. 

5On December 18, 2017, NSCC and FICC 

submitted proposed rule changes and advance 

notices to enhance their rules regarding allocation 

of losses. See SR–NSCC–2017–018, SR–FICC–2017– 

022 and SR–NSCC–2017–806, SR–FICC–2017–806, 

which were filed with the Commission and the 

Board of Governors of the Federal Reserve System, 

respectively, available at http://www.dtcc.com/ 

legal/sec-rule-filings.aspx. 

6 DTC’s primary objective is to complete 

settlement on each Business Day in reliance on 

liquidity resources comprised of, primarily, the 

Participants Fund and a committed secured line of 

credit from a syndicate of lenders. Settlement 

obligations of each Participant are limited by the 

amount of these liquidity resources through its Net 

Debit Cap and fully secured by Collateral of the 

Participant measured by its Collateral Monitor. 

These risk management controls are designed so 

that DTC may complete settlement notwithstanding 

the failure to settle of a Participant or Affiliated 

Family of Participants with the largest settlement 

obligation on any Business Day. The proposed rule 

change clarifies the use of the Participants Fund in 

this respect. The Actual Participants Fund Deposits 

of defaulting Participants would be applied to 

satisfy their settlement obligations and, should 

those be insufficient, the balance of the Participants 

Fund is also available as a liquidity resource. 

Collateral of defaulting Participants may be pledged 

to secure a borrowing under the committed line of 

credit. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.60

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–00076 Filed 1–5–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–82426; File No. SR–DTC– 

2017–022] 

Self-Regulatory Organizations; The 

Depository Trust Company; Notice of 

Filing of a Proposed Rule Change To 

Amend the Loss Allocation Rules and 

Make Other Changes 

January 2, 2018. 

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

Securities Exchange Act of 1934 

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

notice is hereby given that on December 

18, 2017, The Depository Trust 

Company (‘‘DTC’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I, II and III 

below, which Items have been prepared 

by the clearing agency.3 The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Proposed 

Rule Change 

The proposed rule change would 

revise Rule 4 (Participants Fund and 

Participants Investment) to (i) provide 

separate sections for (x) the use of the 

Participants Fund as a liquidity resource 

for settlement and (y) loss allocation 

among Participants of losses and 

liabilities arising out of Participant 

defaults or due to non-default events; 

and (ii) enhance the resiliency of DTC’s 

loss allocation process so that DTC can 

take timely action to contain multiple 

loss events that occur in succession 

during a short period of time.4 In 

connection therewith, the proposed rule 

change would (i) align the loss 

allocation rules of the three clearing 

agencies of The Depository Trust & 

Clearing Corporation (‘‘DTCC’’), namely 

DTC, National Securities Clearing 

Corporation (‘‘NSCC’’), and Fixed 

Income Clearing Corporation (‘‘FICC’’) 

(collectively, the ‘‘DTCC Clearing 

Agencies’’),5 so as to provide consistent 

treatment, to the extent practicable and 

appropriate, especially for firms that are 

participants of two or more DTCC 

Clearing Agencies, (ii) increase 

transparency and accessibility of the 

provisions relating to the use of the 

Participants Fund as a liquidity resource 

for settlement and the loss allocation 

provisions, by enhancing their 

readability and clarity, (iii) require a 

defined corporate contribution to losses 

and liabilities that are incurred by DTC 

prior to any allocation among 

Participants, whether such losses and 

liabilities arise out of Participant 

defaults or due to non-default events, 

(iv) reduce the time within which DTC 

is required to return a former 

Participant’s Actual Participants Fund 

Deposit, and (v) make conforming and 

technical changes. The proposed rule 

change would also amend Rule 1 

(Definitions; Governing Law) to add 

cross-references to terms that would be 

defined in proposed Rule 4, as 

discussed 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 

The proposed rule change would 

revise Rule 4 (Participants Fund and 

Participants Investment) to (i) provide 

separate sections for (x) the use of the 

Participants Fund as a liquidity resource 

for settlement and (y) loss allocation 

among Participants of losses and 

liabilities arising out of Participant 

defaults or due to non-default events; 

and (ii) enhance the resiliency of DTC’s 

loss allocation process so that DTC can 

take timely action to contain multiple 

loss events that occur in succession 

during a short period of time. In 

connection therewith, the proposed rule 

change would (i) align the loss 

allocation rules of the DTCC Clearing 

Agencies, so as to provide consistent 

treatment, to the extent practicable and 

appropriate, especially for firms that are 

participants of two or more DTCC 

Clearing Agencies, (ii) increase 

transparency and accessibility of the 

provisions relating to the use of the 

Participants Fund as a liquidity resource 

for settlement and the loss allocation 

provisions, by enhancing their 

readability and clarity, (iii) require a 

defined corporate contribution to losses 

and liabilities that are incurred by DTC 

prior to any allocation among 

Participants, whether such losses and 

liabilities arise out of Participant 

defaults or due to non-default events, 

(iv) reduce the time within which DTC 

is required to return a former 

Participant’s Actual Participants Fund 

Deposit, and (v) make conforming and 

technical changes. The proposed rule 

change would also amend Rule 1 

(Definitions; Governing Law) to add 

cross-references to terms that would be 

defined in proposed Rule 4, as 

discussed below. 

(i) Background 

Current Rule 4 provides a single set of 

tools and a common process for the use 

of the Participants Fund for both 

liquidity purposes to complete 

settlement among non-defaulting 

Participants, if one or more Participants 

fails to settle,6 and for the satisfaction of 

losses and liabilities due to Participant 


sradovich on DSK3GMQ082PROD with NOTICES