23372 Federal Register / Vol. 87, No. 75 / Tuesday, April 19, 2022 / Notices 

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

2 17 CFR 240.19b–4. 

3NSCC filed this proposed rule change as an 

advance notice (SR–NSCC–2022–801) 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) under 

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

advance notice is available at https://

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

4Capitalized terms not defined herein are defined 

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

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

5This rate payment is typically calculated in a 

manner similar to interest on the principal balance 

of a loan and accrues on a daily basis. As a result, 

the rate payment is typically calculated as the 

product of a specified balance (typically the amount 

of cash collateral unless the collateral consists of 

securities) and a specified rate (reflecting both the 

liquidity of the securities and the ability of the 

lender to re-use the cash collateral), divided by 360 

or a similar day count fraction. 

6Basel III is an internationally agreed set of 

measures developed by the Basel Committee on 

Banking Supervision in response to the financial 

crisis of 2007–2009. 

7See, e.g., 12 CFR part 3 (Office of the 

Comptroller of the Currency—Capital Adequacy 

Standards); 12 CFR part 217 (Federal Reserve— 

Capital Adequacy of Bank Holding Companies, 

Savings and Loan Holding Companies, and State 

Member Banks); 12 CFR part 252, subpart Q (Single 

Counterparty Credit Limits); 12 CFR part 324 

(Federal Deposit Insurance Corporation—Capital 

Adequacy of FDIC-Supervised Institutions). 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–94694; File No. SR–NSCC– 

2022–003] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Notice of Filing of 

Proposed Rule Change To Establish 

the Securities Financing Transaction 

Clearing Service and Make Other 

Changes 

April 12, 2022. 

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 March 28, 

2022, 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 

proposed modifications to the NSCC 

Rules & Procedures (‘‘Rules’’) 4 that 

would (i) establish new membership 

categories and requirements for 

sponsoring members and sponsored 

members whereby existing Members 

would be permitted to sponsor certain 

institutional firms into membership, (ii) 

establish a new membership category 

and requirements for agent clearing 

members whereby existing Members 

would be permitted to submit, on behalf 

of their customers, transactions to NSCC 

for novation, (iii) establish the securities 

financing transaction clearing service 

(‘‘Securities Financing Transaction 

Clearing Service’’ or ‘‘SFT Clearing 

Service’’) to make central clearing 

available at NSCC for equity securities 

financing transactions, which are, 

broadly speaking, transactions where 

the parties exchange equity securities 

against cash and simultaneously agree 

to exchange the same securities and 

cash, plus or minus a rate payment, on 

a future date (collectively, ‘‘Securities 

Financing Transactions’’ or ‘‘SFTs’’), 

and (iv) make other amendments and 

clarifications to the Rules, as described 

in greater detail below. 

II. Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

In its filing with the Commission, the 

clearing agency included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

clearing agency has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

(A) Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

1. Purpose 

The purpose of this proposed rule 

change is to (i) establish new 

membership categories and 

requirements for sponsoring members 

and sponsored members whereby 

existing Members would be permitted to 

sponsor certain institutional firms into 

membership, (ii) establish a new 

membership category and requirements 

for agent clearing members whereby 

existing Members would be permitted to 

submit, on behalf of their customers, 

transactions to NSCC for novation, (iii) 

establish the SFT Clearing Service to 

make central clearing available at NSCC 

for SFTs, and (iv) make other 

amendments and clarifications to the 

Rules, as described in greater detail 

below. 

(i) Background 

NSCC is proposing to introduce 

central clearing for SFTs, which are, 

broadly speaking, securities lending 

transactions where parties exchange 

equity securities against cash and 

simultaneously agree to exchange the 

same securities and cash, plus or minus 

a rate payment, on a future date. In 

particular, the proposed SFT Clearing 

Service would expand central clearing 

at NSCC to include SFTs with a one 

Business Day term (i.e., overnight SFTs) 

in eligible equity securities that are 

entered into by Members, institutional 

firms that are sponsored into NSCC by 

a Sponsoring Member (as defined below 

and in the proposed rule change), or 

Agent Clearing Members (as defined 

below and in the proposed rule change) 

on behalf of Customers (as defined 

below and in the proposed rule change), 

as applicable. 

SFTs involve the owner of securities 

(typically a registered investment 

company, pension plan, sovereign 

wealth fund or other institutional firm) 

transferring those securities temporarily 

to a borrower (typically a hedge fund). 

SFTs are often facilitated and 

intermediated by broker-dealers and 

agent lenders (i.e., custodial banks or 

other institutions that lend out 

securities as agent on behalf of 

institutional firms). In return for the lent 

securities, the borrower transfers 

collateral, and a net rate payment is 

typically transferred to either the lender 

or the borrower that reflects the 

liquidity of the lent securities, as well 

as interest on any cash collateral.5 NSCC 

understands that SFTs provide liquidity 

to markets and facilitates the ability of 

market participants to make delivery on 

short-sales, and thereby avoid failures to 

deliver, ‘‘naked’’ shorts, and similar 

situations. On a typical Business Day, 

The Depository Trust Company 

(‘‘DTC’’), an NSCC affiliate, processes 

deliver orders related to securities 

lending transactions on securities 

having a value of approximately $150 

billion. 

Capital Efficiency Opportunities 

The Basel III 6 capital and leverage 

requirements, as implemented by the 

U.S. banking regulators, constrain the 

ability of agent lenders and brokers to 

intermediate and facilitate SFTs.7 NSCC 

believes central clearing of SFTs would 

be able to address these constraints, 

which may otherwise impair market 

participants’ ability to engage in SFTs. 

For example, NSCC believes it is 

uniquely positioned to create balance 

sheet netting opportunities for market 

participants (i.e., the ability to offset 


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8See 12 CFR 217.10(c)(4)(ii)(E)–(F). 

9See 12 CFR 217.32 and 217.37 generally. 

10See 12 CFR 217.35(c)(3). 

11See 12 CFR 252.77(a)(3). 

12Members should discuss this matter with their 

accounting and regulatory capital experts. 

13Fire sale risk is the risk of rapid sales of assets 

in large amounts that temporarily depress market 

prices of such assets and create financial instability. 

14See Financial Stability Board, Strengthening 

Oversight and Regulation of Shadow Banking: 

Policy Framework for Addressing Shadow Banking 

Risks in Securities Lending and Repos, at 5 (August 

29, 2013) available at https://www.fsb.org/wpcontent/uploads/r_130829b.pdf?page_moved=1. 

See also United States Securities and Exchange 

Commission: Securities Lending and Short Sale 

Roundtable Transcript (September 29, 2009), 

Former Chairman Schapiro’s Remarks, at 2–3, 

available at https://www.sec.gov/news/ 

openmeetings/2009/roundtable-transcript092909.pdf. 15See, e.g., id. 

cash payables and receivables versus 

NSCC) by becoming the legal 

counterparty to both pre-novation 

counterparties to an SFT through 

novation. Specifically, market 

participants that borrow securities 

through NSCC and then onward lend 

those securities, or other securities, to 

another NSCC Member through the 

proposed SFT Clearing Service may 

have the ability to net down the cash 

collateral return obligations and 

entitlements related to such SFTs. By 

contrast, for bilateral SFTs, market 

participants may be required to record 

those payables and receivables on their 

balance sheets on a gross (rather than 

netted) basis. A netted balance sheet can 

create significant capital benefits for 

market participants because it can 

reduce the amount of regulatory capital 

they must hold against SFTs under the 

U.S. ‘‘supplementary leverage ratio’’ and 

other capital requirements that favor a 

netted balance sheet.8

In addition, under Basel III, bank 

holding companies that have brokerdealer subsidiary borrowers are required 

to reserve capital against their exposures 

to institutional firm lenders of securities 

in relation to the cash collateral posted 

by such borrowers. Those capital 

requirements can vary depending on the 

credit profile of the institutional firm 

lender, and generally are well in excess 

of those applied to exposures to 

qualifying central counterparties, such 

as NSCC.9 The counterparty risk weight 

of a qualifying central counterparty, like 

NSCC, is 2%,10 which may result in 

considerable capital savings to these 

bank holding companies, to the extent 

they participate in central clearing. 

Moreover, agent lending banks and 

bank holding company parents of 

broker-dealer borrowers that participate 

in central clearing could receive 

beneficial treatment under the single 

counterparty credit limits, which 

exempt exposures to qualifying central 

counterparties.11

In light of the potential for central 

clearing to alleviate the aforementioned 

capital constraints otherwise applicable 

to bilateral SFTs, NSCC believes that 

central clearing of SFTs may increase 

the capacity of market participants to 

engage in SFTs.12

Fire Sale Risk Mitigation 

In addition to creating capital 

efficiency opportunities for market 

participants, NSCC believes that 

broadening the scope of central clearing 

at NSCC to SFTs would also reduce the 

potential for market disruption from fire 

sales. 

In the case of securities lending 

transactions, the primary risk of fire 

sales 13 relates to the reinvestment of 

cash collateral by institutional firms that 

are the lenders in securities lending 

transactions. Those institutional firms 

will typically reinvest the cash 

collateral they receive from the 

borrower into other securities. If the 

borrower of the securities thereafter 

defaults, the institutional firm lenders 

generally need to quickly liquidate the 

securities representing the reinvestment 

in order to raise cash to purchase the 

originally lent security. A substantial 

number of disconnected and competing 

liquidations by multiple lenders can 

create fire sale conditions for the 

securities being liquidated, which can 

harm not only the institutional firm 

lenders by potentially lowering the 

amount of cash they can raise in the sale 

of such securities, but also create market 

losses for all holders of such 

securities.14

Moreover, if an institutional firm 

lender should default and fail to return 

the cash collateral back to its borrowers, 

the borrowers would typically be 

looking to liquidate the borrowed 

securities in order to make themselves 

whole for the cash collateral they 

delivered to the institutional firm 

lender. Competing and disconnected 

sales of such securities could similarly 

create fire sale conditions and not only 

harm the borrowers to the extent the 

value of the securities decline, but also 

create market losses for all holders of 

the borrowed securities. 

NSCC believes that broadening the 

scope of central clearing at NSCC to 

SFTs would reduce the potential for 

market disruption from fire sales for a 

number of reasons. First, in the event of 

a default, NSCC would conduct a 

centralized, orderly liquidation of the 

defaulter’s SFT Positions (as defined 

below and in the proposed rule change). 

Such an organized liquidation should 

result in substantially less price 

depreciation and market disruption than 

multiple independent non-defaulting 

parties racing against one another to 

liquidate the positions. Second, NSCC 

would only need to liquidate the 

defaulter’s net positions. By contrast, in 

the context of a default by a brokerdealer intermediary that runs a matched 

book in the bilateral securities market, 

both the ultimate lender and the 

ultimate borrower need to liquidate the 

defaulter’s gross positions. Limiting the 

positions that need to be liquidated to 

the defaulter’s net positions should 

reduce the volume of required sales 

activity, which in turn should limit the 

price and market impact of the close-out 

of the defaulter’s positions. Lastly, 

NSCC would use its risk management 

resources to provide confidence to 

market participants that they will 

receive back their cash or securities, as 

applicable, which should limit the 

propensity for market participants to 

seek to unwind their transactions in a 

stressed market scenario. 

Liquidity Drain Risk Mitigation 

Liquidity risk may also arise if, in the 

context of a stressed market scenario, 

borrowers or lenders concerned about 

their counterparties’ creditworthiness 

seek to unwind their securities lending 

transactions and obtain the return of 

their cash collateral or securities. This 

occurred to a certain extent in 2008, 

when borrowers began demanding to 

return borrowed securities in exchange 

for the cash collateral the borrowers had 

posted to institutional firm lenders.15

These ‘‘runs’’ may require institutional 

firm lenders to quickly sell off securities 

that are the subject of their cash 

reinvestments to raise cash to return to 

the borrowers, thereby also creating 

potential fire sale conditions with 

respect to the reinvestment securities, as 

described above. Similarly, borrowers 

may need to purchase or re-borrow 

securities in stressed market conditions, 

leading to potentially significant losses. 

NSCC believes that having SFTs be 

centrally cleared by NSCC would lower 

the risk of a liquidity drain in a stress 

scenario. Specifically, NSCC believes 

that having it clear SFT activity would 

provide confidence to borrowers and 

lenders that they will receive back their 

cash or securities and thereby lessen 

parties’ inclination to rush to unwind 

their transactions in a stressed market 

scenario. 


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16See Rule 3A (Sponsoring Members and 

Sponsored Members) of the FICC GSD Rulebook 

(‘‘GSD Rules’’), available at https://dtcc.com/ 

∼media/Files/Downloads/legal/rules/ficc_gov_

rules.pdf. 

17FICC’s Sponsoring Member/Sponsored Member 

Program also allows sponsoring members to submit 

to FICC transactions entered into between a 

sponsored member and a third-party netting 

member. However, based on feedback from market 

participants, NSCC has decided to address this type 

of trading via the proposed agent clearing model for 

SFT. 

18 In addition, certain other agent lenders who are 

not themselves banks or broker-dealers (and so are 

not eligible to become Members of NSCC) preferred 

a model where the institutional firm client becomes 

the direct member of NSCC with no obligations 

running between the agent lender and the clearing 

agency. 

19See Securities Exchange Act Release Nos. 

80563 (May 1, 2017), 82 FR 21284 (May 5, 2017) 

(SR–FICC–2017–003) (Expand the types of entities 

that are eligible to participate in FICC as Sponsored 

Members), 85470 (March 29, 2019), 84 FR 13328 

(April 4, 2019) (SR–FICC–2018–013) (Expand 

Sponsoring Member Eligibility in the GSD 

Rulebook), and 88262 (February 21, 2020), 85 FR 

11401 (February 27, 2020) (SR–FICC–2019–007) 

(Close-Out and Funds-Only Settlement Processes 

Associated with the Sponsoring Member/Sponsored 

Member Service). 

20NSCC decided at this time not to incorporate 

a direct model for institutional firm clearing into 

the proposed SFT Clearing Service because in its 

experience with a similar model in FICC (the CCIT 

Service), the requirements that a clearing agency, 

such as NSCC, would be required to apply to an 

institutional firm that participated as a direct 

member (e.g., Clearing Fund and loss allocation) 

would, as a general matter, not likely be compatible 

with the regulatory requirements and investment 

guidelines applicable to many of the regulated 

institutional firms that NSCC anticipates would be 

interested in participating in the proposed SFT 

Clearing Service. 

21As defined in Rule 1 (Definitions and 

Descriptions), the term ‘‘Member’’ means any 

Person specified in Section 2.(i) of Rule 2 who has 

qualified pursuant to the provisions of Rule 2A. As 

Addition of New Membership 

Categories for Institutional Firm SFT 

Activity 

When evaluating the opportunity to 

expand its cleared offerings to SFTs, 

NSCC engaged in extensive discussions 

with numerous market participants, 

including agent lenders, brokers, 

institutional firms, and critical third 

parties, such as matching service 

providers and books and records service 

providers. NSCC also organized several 

industry working groups to discuss the 

possibility of clearing SFTs. Each 

constituency has a unique perspective 

on the proposed SFT Clearing Service. 

By capturing their differing viewpoints 

in the design, NSCC has sought to 

ensure that the proposed SFT Clearing 

Service would reflect their needs and 

facilitate industry adoption of the 

proposed SFT Clearing Service. 

There was a considerable amount of 

discussion between NSCC and market 

participants regarding the appropriate 

model(s) through which institutional 

firms should access central clearing. 

Some market participants expressed 

interest in allowing Members to sponsor 

institutional firms into NSCC 

membership in a manner similar to that 

provided for under the sponsoring 

member/sponsored member program at 

the Government Securities Division 

(‘‘GSD’’) of Fixed Income Clearing 

Corporation (‘‘FICC’’), an NSCC affiliate 

(‘‘FICC’s Sponsoring Member/ 

Sponsored Member Program’’).16 Under 

FICC’s Sponsoring Member/Sponsored 

Member Program, sponsoring members 

may submit to FICC transactions entered 

into on a principal-to-principal basis 

between the sponsoring member and the 

sponsored member.17 On the other 

hand, certain other market participants, 

including in particular certain agent 

lending banks, requested that the central 

clearing service accommodate agentstyle trading (i.e., where the agent 

lender enters into the transaction on 

behalf of the institutional firm, rather 

than as principal counterparty). As 

NSCC understands it, agent-style trading 

is the way such agent lenders are 

typically approved to transact in 

securities lending transactions on behalf 

of their institutional firm clients 

today.18

NSCC considered all of this input, as 

well as the recent experiences of FICC 

in expanding the suite of both 

transactions and participants eligible for 

FICC’s Sponsoring Member/Sponsored 

Member Program,19 and ultimately 

decided to incorporate both the 

sponsoring/sponsored membership type 

(to facilitate principal style trading for 

institutional firms and their sponsoring 

members) as well as the Agent Clearing 

Member membership type (to facilitate 

agent-style trading by agent lenders on 

behalf of institutional firm clients) into 

the proposed SFT Clearing Service.20

NSCC expects these proposed new 

membership types would help expand 

access to central clearing for 

institutional firms and facilitate 

industry adoption of the proposed SFT 

Clearing Service. 

The proposed SFT Clearing Service 

would also allow for the submission of 

broker-to-broker activity as well as 

client-to-client activity (credit 

intermediated by Sponsoring Members 

and/or Agent Clearing Members) into 

the NSCC system. 

(ii) Key Parameters of the Proposed SFT 

Clearing Service 

Overnight SFTs 

NSCC is proposing central clearing for 

SFTs with a one Business Day term (i.e., 

overnight SFTs) in eligible equity 

securities that are entered into by 

Members, institutional firms that are 

sponsored into NSCC by Sponsoring 

Members, or Agent Clearing Members 

on behalf of customers. NSCC has 

determined that overnight term SFTs 

with a daily pair off option are more 

appropriate for the proposed SFT 

Clearing Service than open transactions 

with mark-to-market collections. This is 

because, as NSCC understands it, open 

transactions are not eligible for balance 

sheet netting given they do not have a 

scheduled off-leg/settlement date. As 

described above, the proposed SFT 

Clearing Service is designed to offer 

both balance sheet netting and capital 

efficiency opportunities to market 

participants. NSCC therefore finds it 

appropriate to make overnight term 

SFTs with a scheduled date for Final 

Settlement (as defined below and in the 

proposed rule change) of the next 

Business Day, rather than open 

transactions, eligible for central clearing 

through the proposed SFT Clearing 

Service. 

For example, assume that a Transferor 

(as defined below and in the proposed 

rule change) and Transferee (as defined 

below and in the proposed rule change) 

enter into an SFT pursuant to which: (i) 

In the Initial Settlement (as defined 

below and in the proposed rule change) 

on Monday, the Transferor will transfer 

100 shares of security X to the 

Transferee against $100 per share; and 

(ii) in the Final Settlement on Tuesday, 

the Transferee will transfer 100 shares 

of security X to the Transferor against 

$100 per share. After the Initial 

Settlement occurs on Monday, the Final 

Settlement of the SFT is novated to 

NSCC. In the Final Settlement on 

Tuesday, the Transferee will return 100 

shares of security X to the Transferor for 

$100 per share. The Rate Payment (as 

defined below and in the proposed rule 

change) would be passed by NSCC as 

between the Transferor and Transferee 

on Tuesday as part of NSCC’s end-ofday final money settlement process. 

SFT Counterparties 

The proposed SFT Clearing Service 

would only be available for SFTs 

entered into between (i) a Member and 

another Member, (ii) a Sponsoring 

Member and its Sponsored Member (as 

defined below and in the proposed rule 

change), and (iii) an Agent Clearing 

Member acting on behalf of a Customer 

and either (x) a Member or (y) the same 

or another Agent Clearing Member 

acting on behalf of a Customer. As used 

in the Rules, ‘‘Member’’ includes fullservice NSCC clearing members, but not 

Sponsored Members.21 In addition, as 


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such, the term ‘‘Member’’ does not include a 

Sponsored Member. Supra note 4. 

22See Section 5 of proposed Rule 56, which 

provides that a Sponsoring Member shall be 

permitted to submit to NSCC SFTs between itself 

and its Sponsored Members. 

23The per share price limitation could be 

modified by NSCC without any regulatory filings; 

however, any change in the per share price 

limitation would be announced by NSCC via an 

Important Notice posted to its website. 

24This is referred to as ‘‘SFT Cash’’ in the 

proposed rule text. 

25See Section 5(a) of proposed Rule 56 and the 

definition of ‘‘Securities Financing Transaction’’. 

26As an example, a registered investment 

company that lends securities through an agent may 

be required under Section 17(f) of the Investment 

Company Act of 1940 and Rule 17f–2 thereunder 

to collect cash collateral equal to no less than 102% 

of the market value of the lent securities. See, e.g., 

The Adams Express Company, SEC No-Action 

Letter (Oct. 8, 1984). Other institutional firms may 

be subject to similar requirements under their 

established investment guidelines or applicable 

rules, regulations or guidance. 

27As described below, the Final Settlement and 

other obligations of each Sponsored Member 

Transaction would, at the direction of NSCC, settle 

on the books and records of the relevant Sponsoring 

Member. 

28On March 28, 2022, DTC submitted a proposed 

rule change to provide DTC participants that are 

also NSCC Members with settlement services in 

connection with NSCC’s proposed SFT Clearing 

Service. See SR–DTC–2022–002, which was filed 

with the Commission but has not yet been 

published in the Federal Register. A copy of this 

proposed rule change is available at https://

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

proposed, the only SFTs entered into by 

Sponsored Members that would be 

eligible for novation to NSCC would be 

SFTs between the Sponsored Member 

and its Sponsoring Member.22

Approved SFT Submitters 

Consistent with the manner in which 

NSCC accepts cash market transactions, 

SFTs would be required to be submitted 

to NSCC on a locked-in/matched basis 

by an Approved SFT Submitter (as 

defined below and in the proposed rule 

change) in accordance with the 

communication links, formats, 

timeframes and deadlines established by 

NSCC for such purpose. Approved SFT 

Submitters would be selected by the 

SFT Members (as defined below and in 

the proposed rule change), subject to 

NSCC’s approval. An Approved SFT 

Submitter could either be a Member or 

a third-party vendor. SFTs submitted to 

NSCC by an Approved SFT Submitter 

would be valid and binding obligations 

of each SFT Member designated by the 

Approved SFT Submitter as a party 

thereto. 

Eligible Equity Securities and Per Share 

Price Minimum 

NSCC will maintain eligibility criteria 

for the securities that may underlie an 

SFT that NSCC will accept for novation. 

Consistent with NSCC’s general 

approach to eligibility for securities, the 

eligibility criteria would not be a rule, 

but a separate document maintained by 

NSCC and available to Members. It is 

currently contemplated that eligible 

securities for SFTs in the proposed SFT 

Clearing Service will be limited to CNSeligible securities. 

In light of the fact that central clearing 

of SFTs would be a new service for 

NSCC, and market participants would 

be able to elect which of their eligible 

SFTs to novate to NSCC (i.e., central 

clearing of SFTs would not be 

mandatory for Members), NSCC is not 

able to anticipate at this time the size 

and composition of the SFT portfolios 

that would be novated to NSCC. Due to 

this lack of history, NSCC would, as an 

initial matter, provide proposed SFT 

Clearing Service for only those SFTs 

where the underlying securities are 

CNS-eligible equity securities that have 

a per share price of $5 or more. NSCC 

selected $5 as the per share price 

minimum for underlying equity 

securities that could be the subject of a 

novated SFT because $5 is a common 

share price minimum adopted in 

brokerage margin eligibility schedules. 

This proposed share price limitation 

would be implemented systemically by 

NSCC as one of the eligibility criteria for 

determining whether an equity security 

is eligible to be the subject of a novated 

SFT (rather than as a rule), and such per 

share price limitation could be modified 

by NSCC23 at a later date after NSCC 

gains more experience with the nature 

of the SFT portfolios submitted for 

clearing. In addition, if the share price 

of underlying securities of an SFT that 

has already been novated to NSCC falls 

below $5, such SFT would continue to 

be novated to NSCC, but the Required 

SFT Deposit (as defined below and in 

the proposed rule change) for the 

affected Members would include an 

amount equal to 100% of the market 

value of such underlying securities until 

such time as the per share price of the 

underlying securities equals or exceeds 

$5. 

Cash Collateral 

Consistent with the cash market 

transactions NSCC clears today where 

cash is used to satisfy Members’ 

purchase obligations in eligible 

securities, cash would likewise be the 

only eligible form of collateral for 

novated SFTs under the proposed SFT 

Clearing Service.24 More specifically, 

NSCC would limit the SFTs that it is 

willing to novate to SFTs that have SFT 

Cash (as defined below and in the 

proposed rule change) equal to or 

greater than 100% market value of the 

lent securities, and would not novate 

any obligations to return collateral 

consisting of securities.25

NSCC would novate the Final 

Settlement obligations of an SFT as of 

the time the Initial Settlement of such 

SFT is completed, unless the SFT is a 

Bilaterally Initiated SFT (as defined 

below and in the proposed rule change) 

or a Sponsored Member Transaction (as 

defined below and in the proposed rule 

change), in which case novation of the 

Final Settlement obligations would 

occur upon NSCC reporting to the 

Approved SFT Submitter that the SFT 

has been validated and novated to 

NSCC. 

As described above, each SFT would 

be collateralized by cash equal to no less 

than 100% of the market value of the 

lent securities. In addition, in order to 

address regulatory and investment 

guideline requirements applicable to 

certain institutional firms,26 a Member 

would be permitted (but not required) to 

transfer an additional cash haircut 

above 100% (e.g., 102%) to such 

institutional firms, i.e., Independent 

Amount SFT Cash (as defined below 

and in the proposed rule change), as 

part of the Initial Settlement of the SFT. 

The Sponsoring Member or Agent 

Clearing Member, as applicable, that 

receives the Independent Amount SFT 

Cash in the Initial Settlement would 

also receive a commensurate Clearing 

Fund call, i.e., an Independent Amount 

SFT Cash Deposit Requirement (as 

defined below and in the proposed rule 

change), from NSCC to reflect the value 

received by such Member above the 

market price of the equity security lent. 

NSCC’s novation of Final Settlement 

obligations related to Independent 

Amount SFT Cash would be tied to the 

time the Sponsoring Member or Agent 

Clearing Member, as applicable, satisfies 

the related Independent Amount SFT 

Cash Deposit Requirement in cash. 

RVP/DVP Settlement at DTC 

The Final Settlement obligations of 

each SFT, other than a Sponsored 

Member Transaction, that is novated to 

NSCC would settle receive-versuspayment/delivery-versus-payment 

(‘‘RVP/DVP’’) at DTC.27 SFT deliver 

orders would be processed in 

accordance with DTC’s rules and 

procedures, including provisions 

relating to risk controls. DTC would 

accept delivery instructions for an SFT 

from NSCC, as agent for DTC 

participants that are SFT Members.28

Pre-novation counterparties to an SFT 

that is due to settle may elect to pair off 

(i.e., offset) the Final Settlement 


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29NSCC does not believe retaining the buy-in and 

acceleration mechanisms would undermine 

novation because NSCC would remain the obligor 

and obligee in respect of the Final Settlement, Rate 

Payment, and Distribution Payment (as defined 

below and in the proposed rule change) 

entitlements and obligations. These mechanisms 

simply affect the timing and manner in which those 

obligations are discharged. 

obligations of such SFT against the 

Initial Settlement obligations of a new 

SFT between the same parties on the 

same securities. NSCC believes that 

such offsets would minimize the 

operational burden of settling overnight 

obligations. NSCC would calculate and 

process the difference in cash collateral 

between the paired off SFTs, i.e., Price 

Differential (as defined below and in the 

proposed rule change). Price Differential 

would also be processed in accordance 

with DTC rules and procedures, 

including provisions relating to risk 

controls. DTC would accept Price 

Differential payment orders for an SFT 

from NSCC, as agent for DTC 

participants that are SFT Members. 

Settlement of the Rate Payment 

obligations and payment obligations 

arising from certain mandatory 

corporate actions and cash dividends 

would be processed as part of NSCC’s 

end-of-day final money settlement 

process. 

As an example of an SFT with a full 

pair off (i.e., offset), assume that a 

Transferor and Transferee enter into an 

SFT pursuant to which: (i) In the Initial 

Settlement on Monday, the Transferor 

will transfer 100 shares of security X to 

the Transferee against $100 per share; 

and (ii) in the Final Settlement on 

Tuesday, the Transferee will transfer 

100 shares of security X to the 

Transferor against $100 per share. After 

the Initial Settlement occurs on 

Monday, the Final Settlement of the 

SFT is novated to NSCC. At the end of 

day on Monday, the share price of 

security X is $99 per share. On Tuesday, 

the Approved SFT Submitter, on behalf 

of the Transferor and the Transferee, 

instructs NSCC to pair off the parties’ 

Final Settlement obligations on the 

Settling SFT (as defined below and in 

the proposed rule change) with a Linked 

SFT (as defined below and in the 

proposed rule change) pursuant to 

which (i) in the Initial Settlement on 

Tuesday, the Transferor will transfer 

100 shares of security X to the 

Transferee against $99 per share; and (ii) 

in the Final Settlement on Wednesday, 

the Transferee will transfer 100 shares 

of security X to the Transferor against 

$99 per share. NSCC would, on 

Tuesday, collect $1 per share in Price 

Differential from the Transferor and pay 

$1 per share in Price Differential to the 

Transferee in connection with the pair 

off. In addition, the Rate Payment for 

the Settling SFT would be passed by 

NSCC as between the Transferor and 

Transferee on Tuesday as part of NSCC’s 

end-of-day final money settlement 

process. In the Final Settlement on 

Wednesday, the Transferee will return 

100 shares of security X to the 

Transferor for $99 per share. The Rate 

Payment for the Linked SFT would be 

passed by NSCC as between the 

Transferor and Transferee on 

Wednesday as part of NSCC’s end-ofday final money settlement process. 

As an example of an SFT with a 

partial pair off (i.e., offset), assume that 

a Transferor and Transferee enter into 

an SFT pursuant to which: (i) In the 

Initial Settlement on Monday, the 

Transferor will transfer 100 shares of 

security X to the Transferee against $100 

per share; and (ii) in the Final 

Settlement on Tuesday, the Transferee 

will transfer 100 shares of security X to 

the Transferor against $100 per share. 

After the Initial Settlement occurs on 

Monday, the Final Settlement of the 

SFT is novated to NSCC. At the end of 

day on Monday, the share price of 

security X is $99 per share. On Tuesday, 

the Approved SFT Submitter, on behalf 

of the Transferor and the Transferee, 

instructs NSCC to partially pair off the 

parties’ Final Settlement obligations on 

the Settling SFT with a Linked SFT 

pursuant to which (i) in the Initial 

Settlement on Tuesday, the Transferor 

will transfer 25 shares of security X to 

the Transferee against $99 per share; 

and (ii) in the Final Settlement on 

Wednesday, the Transferee will transfer 

25 shares of security X to the Transferor 

against $99 per share. In the Final 

Settlement on Tuesday for the 

remaining Settling SFT, the Transferee 

will return 75 shares of security X to the 

Transferor for $100 per share. NSCC 

would, on Tuesday, collect $1 per share 

in Price Differential from the Transferor 

and pay $1 per share in Price 

Differential to the Transferee in relation 

to the shares subject to pair off (i.e., 25 

shares of security X). In addition, the 

Rate Payment for the Settling SFT (i.e., 

100 shares of security X) would be 

passed by NSCC as between the 

Transferor and Transferee on Tuesday 

as part of NSCC’s end-of-day final 

money settlement process. In the Final 

Settlement on Wednesday for the 

Linked SFT, the Transferee will return 

25 shares of security X to the Transferor 

for $99 per share. The Rate Payment on 

the Linked SFT (i.e., 25 shares of 

security X) would be passed by NSCC as 

between the Transferor and Transferee 

on Wednesday as part of NSCC’s end-ofday final money settlement process. 

Buy-In, Recall and Accelerated 

Settlement 

It is occasionally the case in the 

securities lending market that a 

borrower is solvent and able to satisfy 

its general obligations as they become 

due but unable to deliver the lent 

securities to the lender within the 

timeline requested by the lender. The 

contractual remedy that has developed 

in the bilateral securities lending market 

for these situations is a ‘‘buy-in.’’ Under 

this remedy, the lender may purchase 

securities equivalent to the borrowed 

securities in the market and charge the 

borrower for the cost of this purchase. 

This serves to benefit the lender because 

it allows the lender to recover the 

securities within its required timeline, 

and it benefits the borrower by avoiding 

a situation in which the borrower’s 

failure to perform under a single 

transaction results in an event of default 

and close-out of all of its securities 

lending transactions (and potentially 

other positions through a cross-default). 

Similarly, in the bilateral space, 

securities borrowers may have the need 

to accelerate settlement of securities 

lending transactions if they lose a 

‘‘permitted purpose’’ for such loans 

under Regulation T. The proposed SFT 

Clearing Service would seek to retain 

the buy-in and acceleration 

mechanisms, as they ensure the smooth 

functioning of securities markets 

without causing unnecessary and 

disorderly defaults or regulatory 

violations.29

Consistent with their rights under 

industry-standard documentation for 

bilateral SFTs, as proposed, Transferors 

would have the right to submit a Recall 

Notice (as defined below and in the 

proposed rule change) to NSCC in 

respect of a novated SFT for which 

Final Settlement obligations have not 

yet been satisfied. If the Transferee does 

not return the lent securities by the 

Recall Date (as defined below and in the 

proposed rule change) specified in such 

notice, and the Transferor would be 

eligible to Buy-In (as defined below and 

in the proposed rule change), in 

accordance with such timeframes and 

deadlines as established by NSCC for 

such purpose, such securities. 

For example, assume that a Transferor 

and Transferee enter into an SFT 

pursuant to which: (i) In the Initial 

Settlement on Monday, the Transferor 

will transfer 100 shares of security X to 

the Transferee against $100 per share; 

and (ii) in the Final Settlement on 

Tuesday, the Transferee will transfer 

100 shares of security X to the 

Transferor against $100 per share. After 

the Initial Settlement occurs on 


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30As currently defined in Rule 1 (Definitions and 

Descriptions), the term ‘‘Clearing Fund’’ means the 

fund created pursuant to Rule 4. Supra note 4. 31NSCC is not proposing at this time to portfolio 

margin a Member’s SFT Positions with any CNS 

positions of the Member, except with respect to the 

MLA charge. NSCC may reconsider this position 

after it obtains a reasonable amount of experience 

observing the nature and volume of SFT activity 

submitted by Members to NSCC for novation 

through the proposed SFT Clearing Service. 

32This $250,000 minimum deposit is a 

requirement that is separate from a Member’s 

minimum (non-SFT) Clearing Fund deposit 

requirement, although it is designed to be 

consistent with such requirement. 

Monday, the Final Settlement of the 

SFT is novated to NSCC. At the end of 

day on Monday, the share price of 

security X is $99 per share. On Tuesday, 

the Approved SFT Submitter, on behalf 

of the Transferor and the Transferee, 

instructs NSCC to pair off (i.e., offset) 

the parties’ Final Settlement obligations 

on the Settling SFT with a Linked SFT 

pursuant to which (i) in the Initial 

Settlement on Tuesday, the Transferor 

will transfer 100 shares of security X to 

the Transferee against $99 per share; 

and (ii) in the Final Settlement on 

Wednesday, the Transferee will transfer 

100 shares of security X to the 

Transferor against $99 per share. NSCC 

would, on Tuesday, collect $1 per share 

in Price Differential from the Transferor 

and pay $1 per share in Price 

Differential to the Transferee in 

connection with the pair off. In 

addition, the Rate Payment for the 

Settling SFT would be passed by NSCC 

as between the Transferor and 

Transferee on Tuesday as part of NSCC’s 

end-of-day final money settlement 

process. 

Later in the day on Tuesday, the 

Transferor determines it now needs 100 

shares of security X back in its 

inventory, and so the Approved SFT 

Submitter submits a Recall Notice to 

NSCC, prior to the deadline established 

by NSCC, on behalf of the Transferor for 

100 shares of security X with a Recall 

Date of Thursday. At the end of day on 

Tuesday, the share price of security X is 

$98 per share. Upon receipt of the 

Recall Notice, the SFT would be treated 

as a Non-Returned SFT (as defined 

below and in the proposed rule change) 

by NSCC pursuant to Section 9(e) of 

proposed Rule 56 (Securities Financing 

Transaction Clearing Service). 

Accordingly, pursuant to Section 9(a) of 

proposed Rule 56, the Final Settlement 

Date (as defined below and in the 

proposed rule change) of the SFT would 

be rescheduled to Thursday, and NSCC 

would, on Wednesday collect $1 per 

share in Price Differential from the 

Transferor and pay $1 per share in Price 

Differential to the Transferee on the 

Non-Returned SFT. The Rate Payment 

for the Non-Returned SFT would also be 

passed by NSCC as between the 

Transferor and Transferee on 

Wednesday as part of NSCC’s end-ofday final money settlement process. 

Assume further that the Transferee 

does not transfer the 100 shares of 

security X on Wednesday and that the 

end of day price of security X on 

Wednesday is $97 per share. On 

Thursday, NSCC would again collect $1 

per share in Price Differential from the 

Transferor and pay $1 per share in Price 

Differential to the Transferee on the 

Non-Returned SFT. The Rate Payment 

for the Non-Returned SFT would also be 

passed by NSCC as between the 

Transferor and Transferee on Thursday 

as part of NSCC’s end-of-day final 

money settlement process. In addition, 

since the Recall Notice specified 

Thursday as the Recall Date, the 

Transferor would be entitled to 

purchase (or deem itself to have 

purchased) 100 shares of security X in 

accordance with the provisions of 

Section 9(b) of proposed Rule 56. 

Assuming that the Transferor paid a 

price of $95 per share for security X and 

submitted a written notice to NSCC of 

its Buy-In Costs (as defined below and 

in the proposed rule change) on 

Thursday, the Transferor would owe 

NSCC a Buy-In Amount (as defined 

below and in the proposed rule change) 

of $2 per share ($100 per share of SFT 

Cash received by the Transferor at the 

Initial Settlement of the SFT, less the 

$95 per share Buy-In Costs of the 

Transferor, minus $3 per share Price 

Differential paid by the Transferor to 

NSCC), and such Buy-In Amount would 

be debited by NSCC from the Transferor 

and credited to the Transferee as part of 

NSCC’s end-of-day final money 

settlement process on Friday. 

Similarly, consistent with their rights 

under industry-standard documentation 

for bilateral SFTs, Transferees would 

have the right to accelerate the 

scheduled Final Settlement of a novated 

SFT through notice from the Approved 

SFT Submitter to NSCC of such 

accelerated settlement. 

For example, assume that a Transferor 

and Transferee enter into an SFT 

pursuant to which: (i) In the Initial 

Settlement on Monday, the Transferor 

will transfer 100 shares of security X to 

the Transferee against $100 per share; 

and (ii) in the Final Settlement on 

Tuesday, the Transferee will transfer 

100 shares of security X to the 

Transferor against $100 per share. After 

the Initial Settlement occurs on 

Monday, the Final Settlement of the 

SFT is novated to NSCC. At the end of 

day on Monday, the share price of 

security X is $99 per share. On Tuesday, 

the Approved SFT Submitter, on behalf 

of the Transferor and the Transferee, 

instructs NSCC to net the parties’ Final 

Settlement obligations on the Settling 

SFT with a Linked SFT pursuant to 

which (i) in the Initial Settlement on 

Tuesday, the Transferor will transfer 

100 shares of security X to the 

Transferee against $99 per share; and (ii) 

in the Final Settlement on Wednesday, 

the Transferee will transfer 100 shares 

of security X to the Transferor against 

$99 per share. NSCC would, on 

Tuesday, collect $1 per share in Price 

Differential from the Transferor and pay 

$1 per share in Price Differential to the 

Transferee in connection with the pair 

off. Later in the day on Tuesday, the 

Transferee loses permitted purpose 

under Regulation T for the borrowing of 

100 shares of security X. Therefore, 

pursuant to Section 11 of proposed Rule 

56 (Securities Financing Transaction 

Clearing Service), the Approved SFT 

Submitter submits a notice to NSCC on 

behalf of the Transferee to accelerate the 

Final Settlement of the Linked SFT to 

Tuesday. The Transferee then on 

Tuesday returns 100 shares of security 

X to NSCC for $99 per share, and NSCC 

returns 100 shares of security X to the 

Transferor for $99 per share. The Rate 

Payment would be passed by NSCC for 

the Settling SFT as between the 

Transferor and Transferee on Tuesday 

as part of NSCC’s end-of-day final 

money settlement process. 

Risk Management of SFT Positions 

Under the proposal, NSCC is 

requiring a deposit to the Clearing 

Fund 30 for SFT Positions, i.e., Required 

SFT Deposit. From a market risk 

standpoint, SFT activity would, except 

as otherwise noted below, be risk 

managed by NSCC in a manner 

consistent with Members’ CNS positions 

but would be margined independently 

of the Member’s other positions,31 and 

a Required SFT Deposit would be 

collected by NSCC for all SFT activity 

of an SFT Member, subject to a $250,000 

minimum deposit.32 Specifically, NSCC 

is proposing to calculate an SFT 

Member’s Required SFT Deposit by 

applying the sections of Procedure XV 

(Clearing Fund Formula and Other 

Matters) specified in Section 12 of 

proposed Rule 56 (i.e., Sections 

I.(A)(1)(a), (b), (c), (e), (f), (g) of 

Procedure XV as well as the additional 

Clearing Fund formula in Section 

I.(B)(5) (Intraday Mark-to-Market 

Charge) of Procedure XV as such 

sections apply to CNS Transactions, and 

the additional Clearing Fund formula in 

Sections I.(B)(1) (Additional Deposits 

for Members on the Watch List); (2) 

(Excess Capital Premium), (3) 


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33 ‘‘Net Unsettled Positions’’ means a Member’s 

net of unsettled Regular Way, When-Issued and 

When-Distributed positions in CNS Securities that 

have not yet passed Settlement Date and net 

positions in CNS Securities that did not settle on 

Settlement Date. See Rule 1, supra note 4. 

34This $250,000 minimum cash deposit 

requirement is designed to be consistent with the 

minimum amount of cash that must be used to 

satisfy a Member’s (non-SFT) Clearing Fund deposit 

requirement. NSCC believes a $250,000 minimum 

cash deposit would serve to strengthen NSCC’s 

liquidity resources. Cash may also be easier to 

access upon a Member’s default, further reducing 

the risk of losses and using non-defaulting 

Member’s securities or funds, or NSCC funds. 

35These requirements are designed to be 

consistent with FICC GSD’s clearing fund 

requirements of its members given that NSCC 

anticipates that there would be considerable 

overlap between the membership of FICC GSD that 

participate in FICC for purposes of clearing their 

securities financing transaction activity (including 

in particular sponsored repo activity) and the 

Members that would elect to participate in the 

proposed SFT Clearing Service. Specifically, FICC 

GSD Rule 4, Section 3 requires (i) a minimum of 

40 percent of a member’s required fund deposit to 

be in the form of cash and/or eligible clearing fund 

treasury securities and (ii) the lesser of $5,000,000 

or 10 percent of the required fund deposit, with a 

minimum of $100,000, be made and maintained in 

cash. See Rule 4 (Clearing Fund and Loss 

Allocation) of the FICC GSD Rulebook, supra note 

16. 

36See Section 7(c) of proposed Rule 2C and 

Section 6(c) of proposed 2D. 

37Supra note 27. 

(Backtesting Charge), (4) (Bank Holiday 

Charge); Minimum Clearing Fund and 

Additional Deposit Requirements in 

Sections II.(A)1(a)–(b), II.(B), II.(C), and 

II.(D); as well as Section III (Collateral 

Value of Eligible Clearing Fund 

Securities) of Procedure XV, as such 

sections apply to Members). 

Furthermore, NSCC would require an 

additional Required SFT Deposit for 

Non-Returned SFTs that is intended to 

mirror the premium charged for CNS 

Fails Positions. NSCC would also apply 

the Independent Amount SFT Cash 

Deposit Requirement for SFTs that have 

Incremental Additional Independent 

Amount SFT Cash. 

For the purpose of applying Section 

I.(A)(1)(a)(i) of Procedure XV (Value-atRisk (VaR) charge), unlike the current 

calculation of the volatility of a 

Member’s Net Unsettled Positions 33 in 

CNS Transactions, NSCC is proposing 

that the volatility of an SFT Member’s 

SFT Positions shall be the sum of (a) the 

highest resultant value between Section 

I.(A)(1)(a)(i)I. (Core Parametric 

Estimation) and Section I.(A)(1)(a)(i)III. 

(Margin Floor) and (b) the resultant 

value of Section I.(A)(1)(a)(i)II. (Gap 

Risk Measure). This proposed change is 

designed to capture idiosyncratic risk 

associated with an SFT Member’s 

portfolio by enabling NSCC to apply the 

Gap Risk Measure more frequently. 

NSCC is also proposing that, for the 

purpose of applying Section I.(A)(1)(g) 

of Procedure XV (Margin Liquidity 

Adjustment (MLA) charge), SFT 

Positions shall be aggregated with Net 

Unsettled Positions in the same asset 

group or subgroup; provided, however, 

in the event such aggregation results in 

a reduction of the aggregate positions in 

the relevant asset group or subgroup, 

NSCC shall apply the greater of (a) the 

sum of MLA charges separately 

calculated for SFT Positions and Net 

Unsettled Positions in the asset group or 

subgroup and (b) the MLA charge 

calculated from aggregating the SFT 

Positions and the Net Unsettled 

Positions in the asset group or subgroup. 

This proposed change is designed to 

enable NSCC to better risk manage the 

SFT activity by assessing the MLA 

charge in a circumstance where the 

combined SFT Positions and Net 

Unsettled Positions in total trigger the 

applicable MLA charge thresholds, 

whereas, if calculated separately, the 

MLA charge would not be triggered. 

In addition, NSCC is proposing that 

each SFT Member, other than an SFT 

Member that is a Sponsored Member, so 

long as such Member is an SFT Member, 

would provide Supplemental Liquidity 

Deposits to the Clearing Fund, as may 

be required pursuant to Rule 4A 

(Supplemental Liquidity Deposits). 

Consistent with the manner in which 

clearing fund requirements are satisfied 

by members of FICC for their cleared 

securities financing transactions, NSCC 

would require that (i) a minimum of 

40% of an SFT Member’s Required SFT 

Deposit consist of a combination of cash 

and Eligible Clearing Fund Treasury 

Securities and (ii) the lesser of 

$5,000,000 or 10% of an SFT Member’s 

Required SFT Deposit (but not less than 

$250,000) consist of cash.34 35 NSCC 

would also have the discretion to 

require an SFT Member to post its 

Required SFT Deposit in proportion of 

cash higher than would otherwise be 

required as described above. NSCC’s 

determination to impose any such 

requirement would be made in view of 

market conditions and other financial 

and operational capabilities of the 

relevant SFT Member. For example, as 

proposed in Section 12 of Rule 56, if 

NSCC had specific concerns about a 

particular SFT Member’s financial or 

operational capabilities, but NSCC had 

not yet come to the determination that 

ceasing to act for the SFT Member 

would be appropriate (but could 

potentially become appropriate within 

the near term), NSCC may request that 

a greater portion of the SFT Member’s 

Required SFT Deposit to the Clearing 

Fund be in the form of cash in order to 

simplify any potential close-out 

liquidation required in the event of that 

SFT Member’s default. Separately, 

pursuant to Section II.(A)1(a) of 

Procedure XV, if an SFT Member’s 

deposit of Eligible Clearing Fund 

Agency Securities or Eligible Clearing 

Fund Mortgage-Backed Securities is in 

excess of 25% of the SFT Member’s 

Required Fund Deposit, NSCC would 

subject the deposit to an additional 

haircut. 

The Sponsoring Member Required 

Fund Deposits (as defined below and in 

the proposed rule change) and Agent 

Clearing Member Required Fund 

Deposits (as defined below and in the 

proposed rule change) would each be 

calculated on a gross basis, and no 

offsets for netting of positions as 

between different Sponsored Members 

or different Customers,36 as applicable, 

would be permitted. This is to ensure 

that NSCC’s volatility-based Clearing 

Fund deposit requirements represent 

the sum of each individual institutional 

firm’s activity. 

As proposed and as described above, 

the Final Settlement obligations and 

Price Differential of each SFT, other 

than a Sponsored Member Transaction, 

that is novated to NSCC would settle 

RVP/DVP at DTC.37 SFT deliver orders 

would be processed in accordance with 

DTC’s rules and procedures, including 

provisions relating to risk controls. 

Therefore each DTC participant’s Final 

Settlement obligation would complete at 

DTC on a fully collateralized basis, and 

the associated debits (if any) would be 

subject to DTC’s risk controls. 

To the extent the Price Differential is 

not processed by DTC, for example if a 

receiver does not satisfy DTC’s risk 

controls, NSCC would debit and credit 

the Price Differential from and to the 

SFT Accounts (as defined below and in 

the proposed rule change) of the SFT 

Member parties to the SFT as part of its 

end of day final money settlement. 

In the event NSCC ceases to act for a 

Defaulting SFT Member (as defined 

below and in the proposed rule change), 

on the Business Day that NSCC ceased 

to act, NSCC’s daily liquidity need 

calculation would include all Price 

Differential debits owed by the 

Defaulting SFT Member not processed 

at DTC. On subsequent days of the 

liquidation of the Defaulting SFT 

Member’s SFT Positions, NSCC’s total 

liquidity need calculations would 

include all novated SFT activity that has 

not reached Final Settlement on the 

Business Day NSCC ceased to act, netted 

together with all other outstanding 


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38See proposed Rule 56, Section 14(b)(ix). 

39See Securities Exchange Act Release Nos. 

82377 (December 21, 2017), 82 FR 61617 (December 

28, 2017) (File No. SR–NSCC–2017–005); 90649 

(December 11, 2020), 85 FR 81961 (December 17, 

2020) (File No. SR–NSCC–2020–021). This 

framework sets forth the manner in which NSCC 

measures, monitors and manages the liquidity risks 

that arise in or are borne by it, and the qualifying 

liquidity resources that NSCC maintains in order to 

cover those risks. Such resources include, for 

example, cash deposits to the Clearing Fund and 

SLD that may be collected, when applicable. 

40For example, assume that a Transferor and 

Transferee enter into an SFT pursuant to which: (i) 

In the Initial Settlement on Monday, the Transferor 

will transfer 100 shares of security X to the 

Transferee against $100 per share; and (ii) in the 

Final Settlement on Tuesday, the Transferee will 

transfer 100 shares of security X to the Transferor 

against $100 per share. Assume further that at 

midnight on Monday, NSCC ceases to act for the 

Transferor. 

On Tuesday, NSCC executes a sale of 100 shares 

of security X for $99 per share. In accordance with 

the normal settlement cycle for purchases and sales 

of equity securities, this sale will settle on 

Thursday. 

Pursuant to Section 14(b)(viii) of proposed Rule 

56 (Securities Financing Transaction Clearing 

Service), NSCC would likewise settle the Final 

Settlement obligations of the defaulting Transferor’s 

SFT with the non-defaulting Transferee on 

Thursday. 

Assume further that the end-of-day price of 

security X on Tuesday is $99 per share. On 

Wednesday, NSCC would pay $1 per share in Price 

Differential to the non-defaulting Transferee 

pursuant to Section 14(b)(ix) of proposed Rule 56. 

Assume further that the end-of-day price of security 

X on Wednesday is $98 per share. 

On Thursday, NSCC would pay an additional $1 

per share in Price Differential to the non-defaulting 

Transferee pursuant to Section 14(b)(ix) of proposed 

Rule 56. The Transferee would then return 100 

shares of security X to NSCC and receive $98 per 

share (i.e., the current market price for security X) 

from NSCC. As such, the non-defaulting Transferee 

would be made whole by NSCC for the $100 per 

share it transferred in the Initial Settlement of the 

Defaulted-Related SFT (as defined below and in the 

proposed rule change) since NSCC would have 

transferred to it $98 per share in Final Settlement 

plus an additional $2 per share in Price Differential. 

NSCC would incur a net loss of $1 per share in this 

example since it would have sold security X for $99 

per share and paid the non-defaulting Transferee a 

total of $100 per share (i.e., $98 per share in Final 

Settlement proceeds plus $2 per share in Price 

Differential). NSCC would be entitled to deduct this 

amount from the defaulted Transferor’s Clearing 

Fund deposits (including its SFT Deposit). 

41 If a Member is a Registered Broker-Dealer, then 

such Member would only be eligible to apply to 

become a Sponsoring Member if it satisfies the 

credit criteria in proposed Rule 2C (Sponsoring 

Members and Sponsored Members) (i.e., if it has (i) 

Net Worth of at least $25 million and (ii) excess net 

capital over the minimum net capital requirement 

imposed by the SEC (or such higher minimum 

capital requirement imposed by the Member’s 

designated examining authority) of at least $10 

million). Such credit criteria are comparable to the 

credit criteria applicable to category 2 sponsoring 

members that are registered broker-dealers in FICC’s 

Sponsoring Member/Sponsored Member Program. 

A Sponsoring Member applicant would be viewed 

and surveilled as the credit counterparty to NSCC 

in respect to its Sponsored Member Sub-Account(s) 

(as defined below and in the proposed rule change) 

in light of its responsibility to NSCC as the 

processing agent and unconditional guarantor of its 

Sponsored Members’ performance to NSCC. 

In addition, NSCC may require that a Person be 

a Member for a time period deemed necessary by 

NSCC before that Person may be considered to 

become a Sponsoring Member. This requirement 

may be imposed by NSCC on a new Member that 

has yet to demonstrate a track record of financial 

responsibility and operational capability. 

Furthermore, as proposed, the application of a 

Member to be a Sponsoring Member at NSCC that 

is an Agent Clearing Member or an existing FICC 

sponsoring member would not be required to be 

approved by the NSCC Board of Directors. NSCC 

believes this approach to Board of Director’s 

approval for Sponsoring Members is appropriate in 

light of the fact that the critical components of the 

FICC sponsoring member application as well as the 

NSCC Sponsoring Member and Agent Clearing 

Member applications and the criteria that the 

respective boards assess when determining whether 

to admit a Member in such respective capacities are 

substantially similar. Nonetheless, NSCC would 

apply the same rigorous counterparty credit review 

process to any Member applying to be a Sponsoring 

Member at NSCC, whether or not the Member is an 

existing FICC sponsoring member. 

settlement activity of the Defaulting SFT 

Member at NSCC. 

Until NSCC has satisfied the Final 

Settlement obligations owing to nondefaulting SFT Members, NSCC would 

continue paying to and receiving from 

non-defaulting SFT Members the 

applicable Price Differential (i.e., the 

change in market value of the relevant 

securities) with respect to their novated 

SFTs.38 By continuing to process these 

Price Differential payments until Final 

Settlement occurs, NSCC would ensure 

that non-defaulting SFT Members are 

kept in largely the same position as if 

the Defaulting SFT Member had not 

defaulted and the pre-novation 

counterparties had instead agreed to roll 

the SFTs. This is because even though 

the non-payment of the Rate Payment in 

an SFT Member default context may 

have an impact on non-defaulting SFT 

Members, such impact is generally de 

minimis. To the extent NSCC is required 

to pay a Price Differential, as well as any 

Final Settlement obligations, to a nondefaulting SFT Member, NSCC would 

rely on NSCC’s liquidity resources, 

including the Required SFT Deposit and 

any Supplemental Liquidity Deposits 

(‘‘SLD’’) that may be collected, when 

applicable, in order to cover the 

liquidity need associated with any such 

Price Differential and Final Settlement 

obligations, consistent with the Clearing 

Agency Liquidity Risk Management 

Framework.39 40 In addition, NSCC 

would anticipate being in regular 

communication with the non-defaulting 

SFT Members as to the timing of the 

satisfaction of any Final Settlement 

obligations related to a defaulting SFT 

Member. 

(iii) Sponsoring Members and 

Sponsored Members 

NSCC is proposing a sponsored 

membership program to allow Members 

to play the role of pre-novation 

counterparty and credit intermediary for 

their institutional firm clients in 

clearing. 

NSCC has modeled a number of the 

aspects of the proposed sponsored 

member program, including the 

eligibility criteria and many of the risk 

management requirements, on FICC’s 

Sponsoring Member/Sponsored Member 

Program. FICC’s Sponsoring Member/ 

Sponsored Member Program allows an 

FICC Netting Member to sponsor an 

entity that satisfies certain requirements 

and submit to FICC for novation certain 

securities transactions between the 

Netting Member and the sponsored 

entity. These securities transactions 

generally include the off-leg of 

repurchase transactions on U.S. 

Government or agency securities or 

straight purchase and sales of such 

securities. Such transactions present 

similar risk management, legal, 

accounting, and operation 

considerations to SFTs, as both involve 

an obligation of a sponsored member 

and a sponsoring member to exchange 

cash against securities. Since 2005, FICC 

has worked with its members to 

improve its Sponsoring Member/ 

Sponsored Member Program to address 

these considerations. Based on feedback 

from Members and its own internal 

assessments, NSCC believes that 

leveraging the provisions of FICC’s 

Sponsoring Member/Sponsored Member 

program and the learning over the past 

decade and a half would allow NSCC to 

provide a sponsored member program 

that has a solid risk management, 

accounting, legal and operational 

foundation. 

Sponsoring Members 

Under the proposal, all Members 

would be eligible to apply to become 

Sponsoring Members in NSCC, subject 

to credit criteria that are designed to be 

substantially similar to those applicable 

to category 2 sponsoring members in 

FICC’s Sponsoring Member/Sponsored 

Member Program for the reasons 

described above in Item II(A)1(iii) 

‘‘Sponsoring Members and Sponsored 

Members.’’ 41 A Member whose 

application to become a Sponsoring 

Member has been approved by the 

Board of Directors or NSCC, as 

applicable, pursuant to proposed Rule 

2C (‘‘Sponsoring Member’’) would be 

permitted to sponsor their institutional 

firm clients into membership as 

Sponsored Members. Such Sponsoring 

Members would then be able to 

facilitate their institutional firm clients’ 

cleared activity via two back-to-back 

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42The following example illustrates how loss 

allocation would occur with respect to Sponsoring 

Members and Sponsored Members: Assume NSCC 

incurs a $100 million aggregate loss from a 

Defaulting Member Event. In addition, assume that 

the Corporate Contribution amount that NSCC 

would first apply to any loss from a Defaulting 

Member Event is $25 million. This means NSCC 

would allocate the remaining $75 million losses 

(i.e., $100 million minus $25 million) to Members 

pursuant to Section 4 of Rule 4 (Clearing Fund), 

including Sponsored Member Sub-Accounts as if 

each were a Member. If the allocated losses to a 

Sponsoring Member’s Sponsored Member SubAccounts is $1 million and the allocated losses to 

its Sponsoring Member in its capacity as a Member 

is $2 million, the Sponsoring Member would be 

responsible for a total of $3 million loss allocation 

($1 million for its Sponsored Member Sub-Account 

loss allocation amount and $2 million for its own 

default loss allocation as a Member). 

43See Section 14 of proposed Rule 2C 

(Sponsoring Members and Sponsored Members). 

44 17 CFR 230.144A. 

45 15 U.S.C. 77a et seq. 

Sponsoring Member and Sponsoring 

Member-to-broker (or to another 

institutional firm client that the 

Sponsoring Member has sponsored into 

membership), and each of such 

transactions would be eligible for 

novation to NSCC. 

Consistent with the requirements 

applicable to sponsoring members in 

FICC’s Sponsoring Member/Sponsored 

Member Program for the reasons 

described above in Item II(A)1(iii) 

‘‘Sponsoring Members and Sponsored 

Members,’’ a Sponsoring Member would 

be responsible for (i) submitting data on 

its Sponsored Members’ SFTs to NSCC 

or appointing a third-party Approved 

SFT Submitter to do so, (ii) posting to 

NSCC all of the Clearing Fund 

associated with the SFT activity of its 

Sponsored Members, which would be 

calculated on a gross basis (i.e., SFT 

activity would not be netted across 

Sponsored Members for Clearing Fund 

purposes), (iii) providing an 

unconditional guaranty to NSCC for its 

Sponsored Members’ Final Settlement 

and other obligations to NSCC, and (iv) 

covering any default loss allocable to its 

Sponsored Members (in addition to its 

own default loss allocation as a 

Member). 

Specifically, as proposed, a 

Sponsoring Member would be permitted 

to submit to NSCC for novation 

Sponsored Member Transactions, 

subject to an activity limit designed to 

be substantially similar to that 

applicable to category 2 sponsoring 

members in FICC’s Sponsoring Member/ 

Sponsored Member Program for the 

reasons described above in Item 

II(A)1(iii) ‘‘Sponsoring Members and 

Sponsored Members.’’ Under the 

proposal, if the sum of the Volatility 

Charges (as defined below and in the 

proposed rule change) applicable to a 

Sponsoring Member’s Sponsored 

Member Sub-Accounts (as defined 

below and in the proposed rule change) 

and its other accounts at NSCC exceeds 

its Net Member Capital (as defined 

below and in the proposed rule change), 

the Sponsoring Member would not be 

permitted to submit activity into its 

Sponsored Member Sub-Accounts, 

unless otherwise determined by NSCC 

in order to promote orderly settlement. 

As defined in Section 5 of proposed 

Rule 2C, Sponsored Member 

Transactions are SFTs between a 

Sponsoring Member and its Sponsored 

Members. 

The Sponsoring Member would 

establish one or more accounts at NSCC 

for its Sponsored Members’ positions 

arising from such Sponsored Member 

Transactions, i.e., Sponsored Member 

Sub-Accounts, which would be separate 

from the Sponsoring Member’s 

proprietary accounts. For operational 

and administrative purposes, NSCC 

would interact solely with the 

Sponsoring Member as agent of its 

Sponsored Members. 

Sponsoring Members would be 

responsible for providing NSCC with a 

Sponsoring Member Guaranty (as 

defined below and in the proposed rule 

change) whereby the Sponsoring 

Member guarantees to NSCC the 

payment and performance by its 

Sponsored Members of their obligations 

under the Sponsored Member 

Transactions submitted by the 

Sponsoring Member for novation. 

Although Sponsored Members are 

principally liable to NSCC for their own 

settlement obligations under such 

transactions in accordance with the 

Rules, the Sponsoring Member Guaranty 

requires the Sponsoring Member to 

satisfy those settlement obligations on 

behalf of a Sponsored Member if the 

Sponsored Member defaults and fails 

perform its settlement obligations. 

In addition, a Sponsoring Member 

would be responsible for posting to 

NSCC all of the Clearing Fund 

associated with the Sponsored Member 

Transactions (which would not be 

netted across Sponsored Members for 

Clearing Fund purposes) and covering 

any default loss allocable to its 

Sponsored Members, as well as its own 

default loss allocation as a Member.42

As proposed, consistent with FICC’s 

Sponsoring Member/Sponsored Member 

Program for the reasons described above 

in Item II(A)1(iii) ‘‘Sponsoring Members 

and Sponsored Members,’’ NSCC would 

also provide a mechanism by which a 

Sponsoring Member may cause the 

termination and liquidation of a 

Sponsored Member’s positions arising 

from Sponsored Member Transactions 

between the Sponsoring Member and 

such Sponsored Member that have been 

novated to NSCC.43

Sponsored Members 

Consistent with the requirements 

applicable to sponsored members in 

FICC’s Sponsoring Member/Sponsored 

Member Program for the reasons 

described above in Item II(A)1(iii) 

‘‘Sponsoring Members and Sponsored 

Members,’’ any Person that has been 

approved by NSCC to be sponsored into 

membership by a Sponsoring Member 

pursuant to proposed Rule 2C 

(‘‘Sponsored Member’’) would be 

required to be either a ‘‘qualified 

institutional buyer’’ as defined by Rule 

144A 44 under the Securities Act of 

1933, as amended (‘‘Securities Act’’),45

or a legal entity that, although not 

organized as an entity specifically listed 

in paragraph (a)(1)(i)(H) of Rule 144A 

under the Securities Act, satisfies the 

financial requirements necessary to be a 

‘‘qualified institutional buyer’’ as 

specified in that paragraph. 

(iv) Agent Clearing Members and 

Customers 

NSCC is proposing an agent clearing 

membership designed to allow Members 

to play the role of agent and credit 

intermediary for their institutional firm 

clients in clearing. This membership 

type is being proposed in response to 

the request of certain market 

participants, including in particular 

certain agent lending banks, that the 

proposed SFT Clearing Service 

accommodate agent-style trading (i.e., 

where the agent lender enters into the 

transactions on behalf of its institutional 

firm clients with a third-party market 

participant, rather than acting as its 

institutional firm clients’ principal prenovation counterparty). Agent-style 

trading is the manner in which such 

agent lenders are typically approved to 

transact in securities lending 

transactions on behalf of their 

institutional firm clients. Under the 

proposal, a Member that enters into 

transactions on behalf of its institutional 

firm clients in accordance with the 

provisions of proposed Rule 2D (‘‘Agent 

Clearing Member’’) would be permitted 

to submit SFTs executed by it (as agent 

on behalf of its institutional firm clients, 

with each such client referred to as a 

‘‘Customer’’) with a Member 

participating in the proposed SFT 

Clearing Service (which could include a 

Member acting in a proprietary capacity 

within the proposed SFT Clearing 


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46 If a Member is a Registered Broker-Dealer, then 

such Member would only be eligible to apply to 

become an Agent Clearing Member if it satisfies the 

credit criteria in proposed Rule 2D (i.e., if it has (i) 

Net Worth of at least $25 million and (ii) excess net 

capital over the minimum net capital requirement 

imposed by the SEC (or such higher minimum 

capital requirement imposed by the Member’s 

designated examining authority) of at least $10 

million). Such credit criteria are comparable to the 

credit criteria applicable to sponsoring members 

that are registered broker-dealers in FICC’s 

Sponsoring Member/Sponsored Member Program. 

Similar to the review of a Sponsoring Member 

applicant, an Agent Clearing Member applicant 

would also be viewed and surveilled as the credit 

counterparty to NSCC in light of its role as the 

Member with respect to its Agent Clearing Member 

Customer Omnibus Account(s). 

In addition, NSCC may require a Person be a 

Member for a time period deemed necessary by 

NSCC before that Person may be considered to 

become an Agent Clearing Member. This 

requirement may be imposed by NSCC on a new 

Member that has yet to demonstrate a track record 

of financial responsibility and operational 

capability. 

Furthermore, as proposed, the application of a 

Member to be an Agent Clearing Member at NSCC 

that is a Sponsoring Member or an existing FICC 

sponsoring member would not be required to be 

approved by the NSCC Board of Directors. NSCC 

believes this approach to the Board of Director’s 

approval for Agent Clearing Members is appropriate 

in light of the fact that the critical components of 

the FICC sponsoring member application as well as 

the NSCC Sponsoring Member and Agent Clearing 

Member applications and the criteria that the 

respective boards assess when determining whether 

to admit a Member in such respective capacities are 

substantially similar. Nonetheless, NSCC would 

apply the same rigorous counterparty credit review 

process to any Member applying to be an Agent 

Clearing Member at NSCC, whether or not the 

Member is an existing FICC sponsoring member. 

47The following example illustrates how loss 

allocation would occur with respect to Agent 

Clearing Members: Assume NSCC incurs a $100 

million aggregate loss from a Defaulting Member 

Event. In addition, assume that the Corporate 

Contribution amount that NSCC would first apply 

to any loss from a Defaulting Member Event is $25 

million. This means NSCC would allocate the 

remaining $75 million losses (i.e., $100 million 

minus $25 million) to Members pursuant to Section 

4 of Rule 4 (Clearing Fund), including Agent 

Clearing Member Customer Omnibus Accounts as if 

each were a Member. If the allocated losses to an 

Agent Clearing Member’s Agent Clearing Member 

Customer Omnibus Account is $1 million and the 

allocated losses to the Agent Clearing Member in its 

capacity as a Member is $2 million, the Agent 

Clearing Member would be responsible for a total 

of $3 million loss allocation ($1 million for its 

Agent Clearing Member Customer Omnibus 

Account loss allocation amount and $2 million for 

its own default loss allocation as a Member). 

48See Section 11 of proposed Rule 2D (Agent 

Clearing Members). 

49Supra note 12. 

Service as well as an Agent Clearing 

Member). 

All Members would be eligible to 

apply to become Agent Clearing 

Members in NSCC, subject to credit 

criteria that are substantially similar to 

those applicable to Sponsoring Members 

as well as category 2 sponsoring 

members in FICC’s Sponsoring Member/ 

Sponsored Member Program.46

Under the proposal, the requirements 

to be imposed on Agent Clearing 

Members would largely mirror those 

imposed on Sponsoring Members. 

However, NSCC is not proposing to 

impose the same types of requirements 

on an Agent Clearing Member’s 

Customers as it does on Sponsored 

Members because a Customer would not 

be a direct member of NSCC. 

Specifically, as proposed, an Agent 

Clearing Member would be permitted to 

submit to NSCC for novation Agent 

Clearing Member Transactions (as 

defined below and in the proposed rule 

change), on behalf of one or more of its 

Customers, subject to an activity limit. 

Specifically, under the proposal, if the 

sum of the Volatility Charges applicable 

to an Agent Clearing Member’s Agent 

Clearing Member Customer Omnibus 

Account(s) (as defined below and in the 

proposed rule change) and its other 

accounts at NSCC exceeds its Net 

Member Capital, the Agent Clearing 

Member would not be permitted to 

submit activity into its Agent Clearing 

Member Customer Omnibus Account(s), 

unless otherwise determined by NSCC 

in order to promote orderly settlement. 

As defined in Section 4 of proposed 

Rule 2D, Agent Clearing Member 

Transactions are SFTs that an Agent 

Clearing Member submits to NSCC on 

behalf of one or more Customers. 

The Agent Clearing Member would 

establish one or more accounts at NSCC 

for its Customers’ positions, i.e., an 

Agent Clearing Member Customer 

Omnibus Account, that would be in the 

name of the Agent Clearing Member for 

the benefit of its Customers; however, 

each Agent Clearing Member Customer 

Omnibus Account may only contain 

activity where the Agent Clearing 

Member is acting as Transferor on 

behalf of its Customers, or as Transferee 

on behalf of its Customers, but not both 

(i.e., activity would not be netted across 

Customers for Clearing Fund purposes). 

Under the proposal, the Agent Clearing 

Member would act solely as agent of its 

Customers in connection with the 

clearing of Agent Clearing Member 

Transactions; however, the Agent 

Clearing Member would remain fully 

liable for the performance of all 

obligations to NSCC arising in 

connection with Agent Clearing Member 

Transactions. 

In addition, as proposed under the 

sponsoring/sponsored membership 

model, the Agent Clearing Member 

would be responsible for posting to 

NSCC all of the Clearing Fund and any 

applicable SLD associated with the 

activity of its Customers and covering 

any default loss allocable to its 

Customers, as well as its own default 

loss allocation as a Member; 47 however, 

unlike a Sponsoring Member, an Agent 

Clearing Member would not be required 

to provide an unconditional guaranty to 

NSCC for its Customer’s obligations. 

This is because, as described above, the 

Agent Clearing Member would be fully 

liable for all obligations of its Customers 

under the Agent Clearing Member 

Transactions that it submitted to NSCC 

as the Member. 

As proposed, NSCC would also 

provide a mechanism by which an 

Agent Clearing Member may, upon a 

default of a Customer and consent of 

NSCC, transfer Agent Clearing Member 

Transactions of the Customer 

established in one or more of the Agent 

Clearing Member’s Agent Clearing 

Member Customer Omnibus Accounts 

from such Agent Clearing Member 

Customer Omnibus Accounts to the 

Agent Clearing Member’s proprietary 

account at NSCC as a Member.48

(v) Sponsoring Member/Sponsored 

Member vs. Agent Clearing Member/ 

Customers 

The direct costs of central clearing 

(i.e., Clearing Fund, loss allocation, fees 

and performance on behalf of an 

institutional firm clients) would be 

largely equivalent as between what 

NSCC proposes to apply to a Sponsoring 

Member and what NSCC proposes to 

apply to an Agent Clearing Member. 

Likewise, the capital costs to 

Sponsoring Members and Agent 

Clearing Members of intermediating 

institutional firm activity as between the 

two buy-side clearing models would be 

largely equivalent. That being said, 

because Sponsoring Members would be 

required to ensure that (i) each of their 

clients separately onboards with NSCC 

as a Sponsored Member (which NSCC 

understands is generally required from 

an accounting perspective in order for 

the Sponsoring Member to net on its 

balance sheet its SFTs with Sponsored 

Members against the Sponsoring 

Member’s other NSCC-cleared SFTs),49

(ii) each of their client’s SFTs is 

individually submitted to NSCC for 

clearing, and (iii) each Sponsored 

Member continues to remain in 

compliance with the financial standards 

applicable to Sponsored Members 

throughout the course of its 

membership, Sponsoring Members may 

incur more legal, onboarding, 

operational and ongoing administrative 

costs than Agent Clearing Members with 

respect to their institutional firm 

clearing activity. 

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50NSCC is proposing these financial minimums 

for Registered Broker-Dealer Sponsoring Member 

applicants to reflect the additional responsibility 

that the applicant would undertake as a Sponsoring 

Member. These financial minimums are determined 

based on NSCC’s assessment of the minimum 

capital that would be necessary for a broker-dealer 

to conduct meaningful level of NSCC-cleared 

activity while serving as a credit counterparty in 

respect of others’ trades. In its assessment, NSCC 

considered various factors, such as the amount of 

a Registered Broker-Dealer Member’s capital and its 

impact on such Member’s financial responsibility 

and operational capability, comparability with the 

financial requirements of other clearing agencies, 

and the desire to strike a balance between credit 

risk mitigation and member accessibility. For the 

reasons described above in Item II(A)1(iii) 

‘‘Sponsoring Members and Sponsored Members,’’ 

these financial minimums are also designed to be 

consistent with the requirements applicable to 

registered broker/dealers that are sponsoring 

members in FICC’s Sponsoring Member/Sponsored 

Member Program. 

51 17 CFR 240.15c3–1d. 

52 It is NSCC’s understanding that FICC is 

evaluating a change to the GSD Rules to provide 

that the application of an FICC sponsoring member 

applicant that is already an NSCC Sponsoring 

Member or Agent Clearing Member would not 

require approval of FICC’s board of directors. 

style trading between a Sponsoring 

Member and its Sponsored Member 

where the Sponsoring Member and 

Sponsored Member are pre-novation 

counterparties, which would generally 

create the opportunity for a Sponsoring 

Member to make an economic spread 

between its trade with its Sponsored 

Member and its offsetting trades with 

other NSCC Members or Sponsored 

Members. The opportunity for such 

economic spread and the ability of a 

Sponsoring Member to achieve balance 

sheet netting and capital efficiency on 

such trading activity through the 

novation of SFTs to NSCC could, for 

some market participants, offset the 

indirect additional costs associated with 

acting as a Sponsoring Member, rather 

than acting as an Agent Clearing 

Member. 

On the other hand, as NSCC 

understands it, for some market 

participants, particularly agent lenders, 

their business models are not typically 

predicated on principal-style trading. 

Rather, these agency businesses 

typically charge fees for their services 

(rather than taking economic spreads) 

and their business models and their 

agreed upon investment guidelines with 

their institutional firm customers may 

only permit agented (rather than 

principal-style) trading for securities 

lending transactions. So, for such 

market participants, participating in 

clearing at NSCC as an Agent Clearing 

Member may be a better fit for their 

overall business model. 

From the perspective of an 

institutional firm client, the costs of 

clearing that may be passed through to 

it by its intermediary (depending on 

their commercial arrangements) would 

be largely equivalent. That said, some 

institutional firms that engage in 

securities lending may be prohibited 

from acting as Sponsored Members and 

engaging in principal-style trading with 

their intermediary in clearing for 

regulatory and/or investment guideline 

reasons. For those institutional firms, 

being able to transact SFTs as a 

Customer within an Agent Clearing 

Member Customer Omnibus Account 

would offer them a means to access 

central clearing that would otherwise 

not be available to them if the 

sponsoring/sponsored membership 

model were the only model available for 

buy-side clearing. 

(vi) Proposed Rule Changes 

(A) Proposed Rule 2C—Sponsoring 

Members and Sponsored Members 

NSCC is proposing to add Rule 2C, 

entitled ‘‘Sponsoring Members and 

Sponsored Members.’’ This new rule 

would govern the proposed sponsored 

membership and would be comprised of 

14 sections, each of which is described 

below. 

Proposed Rule 2C, Section 1 (General) 

Section 1 of proposed Rule 2C would 

be a general provision regarding the 

Rules applicable to Sponsoring 

Members and Sponsored Members. 

Section 1 of proposed Rule 2C would 

provide that NSCC will permit the 

establishment of a sponsored 

membership relationship between a 

Member that is approved as a 

Sponsoring Member and one or more 

Persons that are accepted by NSCC as 

Sponsored Members of that particular 

Sponsoring Member. Section 1 of 

proposed Rule 2C would further provide 

that the rights, liabilities and obligations 

of Sponsoring Members and Sponsored 

Members shall be governed by proposed 

Rule 2C, and that references to the term 

‘‘Member’’ in other Rules would not 

apply to Sponsoring Members and to 

Sponsored Members, in their respective 

capacities as such, unless specifically 

noted as such in proposed Rule 2C or in 

such other Rules. 

Section 1 of proposed Rule 2C would 

also provide that a Sponsoring Member 

shall continue to have all of the rights, 

liabilities and obligations as set forth in 

the Rules and in any agreement between 

it and NSCC pertaining to its status as 

a Member, and such rights, liabilities 

and obligations shall be separate from 

its rights, liabilities and obligations as a 

Sponsoring Member except as 

contemplated under Sections 7, 8 and 9 

of proposed Rule 2C and under the 

Sponsoring Member Guaranty. 

Proposed Rule 2C, Section 2 

(Qualifications of Sponsoring Members, 

the Application Process and 

Continuance Standards) 

Section 2 of proposed Rule 2C would 

establish the eligibility requirements for 

Members that wish to become 

Sponsoring Members, the membership 

application process that would be 

required of each Member to become a 

Sponsoring Member, the on-going 

membership requirements that would 

apply to Sponsoring Members, as well 

as the requirements regarding a 

Sponsoring Member’s election to 

voluntarily terminate its membership. 

Under Section 2(a) of proposed Rule 

2C, any Member would be eligible to 

apply to become a Sponsoring Member; 

however, if a Member is a Registered 

Broker-Dealer, such Member would only 

be permitted to apply to become a 

Sponsoring Member if it has (1) Net 

Worth (as defined below and in the 

proposed rule change) of at least $25 

million and (2) excess net capital over 

the minimum net capital requirement 

imposed by the Commission (or such 

higher minimum capital requirement 

imposed by the Member’s designated 

examining authority) of at least $10 

million.50 In connection therewith, 

NSCC is proposing ‘‘Net Worth’’ to 

mean, as of a particular date, the 

amount equal to the excess of the assets 

of a Person over the liabilities of such 

Person, computed in accordance with 

generally accepted accounting 

principles, and for Registered BrokerDealers, Net Worth shall include 

liabilities that are subordinated to the 

claims of creditors pursuant to a 

satisfactory subordination agreement, as 

defined in Appendix D to Rule 15c3–1 

of the Act.51 As proposed, NSCC may 

require that a Person be a Member for 

a certain time period before that Person 

may be considered to become a 

Sponsoring Member. 

Section 2(b) of proposed Rule 2C 

would provide that each Member 

applicant to become a Sponsoring 

Member would be required to provide 

an application and other information 

requested by NSCC. Sponsoring Member 

applications shall first be reviewed by 

NSCC and would require the Board of 

Directors’ approval, unless the Member 

applicant is already an Agent Clearing 

Member under proposed Rule 2D or a 

sponsoring member of FICC.52 NSCC 

believes this approach to the Board of 

Director’s approval for Sponsoring 

Members is appropriate in light of the 

fact that the critical components of the 

FICC sponsoring member application as 

well as the NSCC Sponsoring Member 

and Agent Clearing Member 


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53 If the increased financial requirements are 

imposed in connection with a Sponsoring Member 

application that does not require the Board of 

Directors’ approval, the increased financial 

requirements would not be subject to the Board of 

Directors’ approval. Nonetheless, once a Sponsoring 

Member application is approved with increased 

financial requirements, NSCC would thereafter 

regularly review such Sponsoring Member 

regarding its continued adherence to such increased 

financial requirements as well as determine 

whether such increased financial requirements are 

still appropriate. If the Sponsoring Member is 

unable to adhere to the increased financial 

requirements, the Board of Directors may, pursuant 

to Section 10 of proposed Rule 2C, suspend, 

prohibit or limit the Sponsoring Member’s access to 

NSCC’s services. 

54As an example, NSCC may require a 

Sponsoring Member or a Sponsoring Member 

applicant to furnish adequate assurances of such 

Sponsoring Member or Sponsoring Member 

applicant’s financial responsibility and operational 

capability if NSCC has concerns about such 

Sponsoring Member or Sponsoring Member 

applicant’s overall financial health or credit rating. 

55See Addendum P (Fine Schedule), supra note 

4. 

applications and the criteria that the 

respective boards assess when 

determining whether to admit a Member 

in such respective capacities are 

substantially similar. 

Under Section 2(c) of proposed Rule 

2C, if the Sponsoring Member 

application is denied, such denial 

would be handled in accordance with 

Section 1 of Rule 2A (Initial 

Membership Requirements). 

As proposed in Section 2(d) of 

proposed Rule 2C, NSCC may impose 

additional financial requirements on a 

Sponsoring Member applicant based 

upon the level of the anticipated 

positions and obligations of such 

applicant, the anticipated risk 

associated with the volume and types of 

transaction such applicant proposes to 

process through NSCC as a Sponsoring 

Member and the overall financial 

condition of such applicant. Under the 

proposal, with respect to an application 

of a Member to become a Sponsoring 

Member that requires the Board of 

Directors’ approval, the Board of 

Directors shall also approve any 

increased financial requirements 

imposed by NSCC in connection with 

the approval of the application, and 

NSCC would thereafter regularly review 

such Sponsoring Member regarding its 

compliance with the increased financial 

requirements.53

In addition, under Section 2(e) of 

proposed Rule 2C, NSCC may require 

each Sponsoring Member or any 

Sponsoring Member applicant to furnish 

adequate assurances of such Sponsoring 

Member or Sponsoring Member 

applicant’s financial responsibility and 

operational capability within the 

meaning of Rule 15 (Assurances of 

Financial Responsibility and 

Operational Capability), as NSCC may at 

any time or from time to time deem 

necessary or advisable in order to 

protect NSCC, its participants, creditors 

or investors, to safeguard securities and 

funds in the custody or control of NSCC 

and for which NSCC is responsible, or 

to promote the prompt and accurate 

clearance, settlement and processing of 

securities transactions.54

Section 2(f) of proposed Rule 2C 

would provide that each Member whose 

Sponsoring Member application is 

approved would sign and deliver to 

NSCC (i) an agreement between NSCC 

and the Member and specifies the terms 

and conditions deemed by NSCC to be 

necessary in order to protect itself and 

its participants (‘‘Sponsoring Member 

Agreement’’), (ii) a guaranty, in the form 

and substance acceptable to NSCC, 

whereby the Member, in its capacity as 

a Sponsoring Member, guarantees to 

NSCC the payment and performance by 

its Sponsored Members of their 

obligations under the Rules in respect of 

the Sponsoring Member’s Sponsored 

Member Sub-Accounts, including, 

without limitation all of the settlement 

obligations of its Sponsored Members in 

respect of such Sponsored Member SubAccounts (‘‘Sponsoring Member 

Guaranty’’), and a related legal opinion 

in a form satisfactory to NSCC. In 

addition, Section 2(f) of proposed Rule 

2C would provide that nothing in the 

Rules shall prohibit a Sponsoring 

Member from seeking reimbursement 

from a Sponsored Member for payments 

made by the Sponsoring Member 

(whether pursuant to the Sponsoring 

Member Guaranty, out of Clearing Fund 

deposits or otherwise) with respect to 

obligations as to which the Sponsored 

Member is a principal obligor under the 

Rules, or as otherwise may be agreed by 

the Sponsored Member and Sponsoring 

Member. 

Section 2(g) of proposed Rule 2C 

would provide that each Sponsoring 

Member shall submit to NSCC, within 

the timeframes and in the formats 

required by NSCC, the reports and 

information that all Members are 

required to submit regardless of type of 

Member and the reports and 

information required to be submitted for 

its respective type of Member, all 

pursuant to Section 2 of Rule 2B 

(Ongoing Membership Requirements 

and Monitoring) and, if applicable, 

Addendum O (Admission of Non-US 

Entities as Direct NSCC Members). 

Section 2(h) of proposed Rule 2C 

would provide that a Sponsoring 

Member’s books and records, insofar as 

they relate to the Sponsored Member 

Transactions submitted to NSCC, shall 

be open to the inspection of the duly 

authorized representatives of NSCC to 

the same extent provided in Rule 2A 

(Initial Membership Requirements) for 

other Members. 

Section 2(i) of proposed Rule 2C 

would provide that a Sponsoring 

Member shall promptly inform NSCC, 

both orally and in writing, if it is no 

longer in compliance with the relevant 

standards and qualifications for 

applying to become a Sponsoring 

Member set forth in the proposed Rule 

2C. Notification must take place 

immediately and in no event later than 

2 Business Days from the date on which 

the Sponsoring Member first learns of 

its non-compliance. As proposed, NSCC 

would assess a fine in accordance with 

the Fine Schedule in Addendum P 

against any Sponsoring Member that 

fails to so notify NSCC.55 If the 

Sponsoring Member fails to remain in 

compliance with the relevant standards 

and qualifications, NSCC would, if 

necessary, undertake appropriate action 

to determine the status of the 

Sponsoring Member and its continued 

eligibility as such. In addition, NSCC 

may review the financial responsibility 

and operational capability of the 

Sponsoring Member, and otherwise 

require from the Sponsoring Member 

additional reports of its financial or 

operational condition at such intervals 

and in such detail as NSCC shall 

determine. In addition, if NSCC has 

reason to believe that a Sponsoring 

Member may fail to comply with any of 

the Rules applicable to Sponsoring 

Members, it may require the Sponsoring 

Member to provide it, within such 

timeframe, and in such detail, and 

pursuant to such manner as NSCC shall 

determine, with assurances in writing of 

a credible nature that the Sponsoring 

Member shall not, in fact, violate any of 

the Rules. 

Section 2(j) of proposed Rule 2C 

would provide that in the event that a 

Sponsoring Member fails to remain in 

compliance with the relevant 

requirements of the Rules, the 

Sponsoring Member Agreement or the 

Sponsoring Member Guaranty, NSCC 

shall have the right to cease to act for 

the Sponsoring Member in its capacity 

as a Sponsoring Member pursuant to 

Section 10 of proposed Rule 2C, unless 

the Sponsoring Member requests that 

such action not be taken and NSCC 

determines that, depending upon the 

specific circumstances and the record of 

the Sponsoring Member, it is 

appropriate instead to establish for such 

Sponsoring Member a time period, 

which shall be determined by NSCC and 


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56NSCC selected the Volatility Charges and Net 

Member Capital as the criteria for purposes of 

establishing the activity limit for Sponsoring 

Members. This is because a Sponsoring Member’s 

total Volatility Charges being in excess of its Net 

Member Capital is an important indicator that the 

Sponsoring Member’s financial resources, as 

measured by its Net Capital, net assets or equity 

capital, may be insufficient to meet the largest 

component of its Required Fund Deposit (i.e., 

Volatility Charges). 

57 17 CFR 240.15c3–1(c)(2). 

58Section 2(n) of proposed Rule 2C is designed 

to be consistent with provisions in the Rules 

relating to the confidentiality of information 

furnished by participants. See Rule 2A (Initial 

Membership Requirements), supra note 4. 

which shall be no longer than 30 

calendar days unless otherwise 

determined by NSCC, during which the 

Sponsoring Member must resume 

compliance with such requirements. As 

proposed, in the event that the 

Sponsoring Member is unable to satisfy 

such requirements within the time 

period specified by NSCC, NSCC shall, 

pursuant to the Rules, cease to act for 

the Sponsoring Member in its capacity 

as a Sponsoring Member pursuant to 

Section 10 of the proposed Rule 2C. 

Section 2(k) of proposed Rule 2C 

would provide that if the sum of the 

Volatility Charges applicable to a 

Sponsoring Member’s Sponsored 

Member Sub-Accounts and its other 

accounts at NSCC exceeds its Net 

Member Capital (as defined below and 

in the proposed rule change), the 

Sponsoring Member shall not be 

permitted to submit activity into its 

Sponsored Member Sub-Accounts, 

unless otherwise determined by NSCC 

in order to promote orderly 

settlement.56 As proposed, ‘‘Volatility 

Charge’’ would mean, in respect to a 

Member, the amount of its Required 

Fund Deposit calculated by NSCC by 

applying Sections I.(A)(1)(a)(i)–(iii) of 

Procedure XV (Clearing Fund Formula 

and Other Matters); ‘‘Net Member 

Capital’’ would mean Net Capital (as 

defined below and in the proposed rule 

change), net assets or equity capital, as 

applicable to a Member, based on the 

type of regulation, and in particular the 

capital requirements, to which the 

Member is subject; and ‘‘Net Capital’’ 

would mean, as of a particular date, the 

amount equal to the net capital of a 

Registered Broker-Dealer as defined in 

Rule 15c3–1(c)(2) of the Act,57 or any 

successor rule or regulation thereto. 

Section 2(l) of proposed Rule 2C 

would provide that a Sponsoring 

Member may voluntarily elect to 

terminate its status as a Sponsoring 

Member, with respect to all Sponsored 

Members or with respect to one or more 

Sponsored Members from time to time, 

by providing NSCC with a written 

notice from a Sponsoring Member to 

NSCC that the Sponsoring Member is 

voluntarily electing to terminate its 

status as a Sponsoring Member with 

respect to all of its Sponsored Members 

or with respect to one or more of its 

Sponsored Members (‘‘Sponsoring 

Member Voluntary Termination 

Notice’’). The Sponsoring Member shall 

specify in the Sponsoring Member 

Voluntary Termination Notice the 

Sponsored Member(s) in respect of 

which the Sponsoring Member is 

terminating its status (the ‘‘Former 

Sponsored Members’’) and a desired 

date for such termination, which date 

shall not be prior to the scheduled Final 

Settlement Date of any remaining 

obligation owed by the Sponsoring 

Member to NSCC with respect to the 

Former Sponsored Members as of the 

time such Sponsoring Member 

Voluntary Termination Notice is 

submitted to NSCC, unless otherwise 

approved by NSCC. 

Section 2(l) of proposed Rule 2C 

would also provide that such 

termination would not be effective until 

accepted by NSCC, which shall be no 

later than 10 Business Days after the 

receipt of the Sponsoring Member 

Voluntary Termination Notice from 

such Sponsoring Member. NSCC’s 

acceptance shall be evidenced by a 

notice to NSCC’s participants 

announcing the termination of the 

Sponsoring Member’s status as such 

with respect to the Former Sponsored 

Members and the date on which the 

termination of the Sponsoring Member’s 

status as a Sponsoring Member becomes 

effective (‘‘Sponsoring Member 

Termination Date’’). As proposed, after 

the close of business on the Sponsoring 

Member Termination Date, the 

Sponsoring Member shall no longer be 

eligible to submit Sponsored Member 

Transactions on behalf of the Former 

Sponsored Members, and each Former 

Sponsored Member shall cease to be a 

Sponsored Member unless it is the 

Sponsored Member of another 

Sponsoring Member. If any Sponsored 

Member Transactions is submitted to 

NSCC by the Sponsoring Member on 

behalf of a Former Sponsored Member 

that is scheduled to settle after the 

Sponsoring Member Termination Date, 

such Sponsoring Member’s Sponsoring 

Member Voluntary Termination Notice 

would be deemed void, and the 

Sponsoring Member would remain 

subject to the proposed Rule 2C as if it 

had not given such Sponsoring Member 

Voluntary Termination Notice. 

Section 2(m) of proposed Rule 2C 

would provide that a Sponsoring 

Member’s voluntary termination of its 

status as such, in whole or in part, shall 

not affect its obligations to NSCC, or the 

rights of NSCC, including under the 

Sponsoring Member Guaranty, with 

respect to Sponsored Member 

Transactions submitted to NSCC before 

the applicable Sponsoring Member 

Termination Date. Any such Sponsored 

Member Transactions that have been 

novated to NSCC shall continue to be 

processed by NSCC. The return of the 

Sponsoring Member’s Clearing Fund 

deposit shall be governed by Section 7 

of Rule 4 (Clearing Fund). If an Event 

Period were to occur after a Sponsoring 

Member has submitted the Sponsoring 

Member Voluntary Termination Notice 

but on or prior to the Sponsoring 

Member Termination Date, in order for 

the Sponsoring Member to benefit from 

its Loss Allocation Cap pursuant to 

Section 4 of Rule 4, the Sponsoring 

Member would need to comply with the 

provisions of Section 6 of Rule 4 and 

submit a Loss Allocation Withdrawal 

Notice, which notice, upon submission, 

shall supersede and void any pending 

Sponsoring Member Voluntary 

Termination Notice previously 

submitted by the Sponsoring Member. 

Section 2(n) of proposed Rule 2C 

would provide that any non-public 

information furnished to NSCC 

pursuant to proposed Rule 2C shall be 

held in confidence as may be required 

under the laws, rules and regulations 

applicable to NSCC that relate to the 

confidentiality of records. Section 2(n) 

would also provide that each 

Sponsoring Member shall maintain 

DTCC Confidential Information in 

confidence to the same extent and using 

the same means it uses to protect its 

own confidential information, but no 

less than a reasonable standard of care, 

and shall not use DTCC Confidential 

Information or disclose DTCC 

Confidential Information to any third 

party except as necessary to perform 

such Sponsoring Member’s obligations 

under the Rules or as otherwise required 

by applicable law. Section 2(n) would 

further provide that each Sponsoring 

Member acknowledges that a breach of 

its confidentiality obligations under the 

Rules may result in serious and 

irreparable harm to NSCC and/or DTCC 

for which there is no adequate remedy 

at law. In addition, Section 2(n) would 

provide that in the event of such a 

breach by the Sponsoring Member, 

NSCC and/or DTCC shall be entitled to 

seek any temporary or permanent 

injunctive or other equitable relief in 

addition to any monetary damages 

thereunder.58


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59 17 CFR 230.144A. 

60 15 U.S.C. 77a et seq. 

61See Addendum P (Fine Schedule), supra note 

4. 

Proposed Rule 2C, Section 3 

(Qualifications of Sponsored Members, 

Approval Process and Continuance 

Standards) 

Section 3 of proposed Rule 2C would 

establish the eligibility requirements for 

Sponsored Members, the membership 

application process that would be 

required of each Sponsored Member, the 

on-going membership requirements that 

would apply to Sponsored Members, as 

well as the requirements regarding a 

Sponsored Member’s election to 

voluntarily terminate its membership. 

Section 3(a) of proposed Rule 2C 

would provide that a Person shall be 

eligible to apply to become a Sponsored 

Member if: (x) It is sponsored into 

membership by a Sponsoring Member, 

and (y) it (1) is a ‘‘qualified institutional 

buyer’’ as defined by Rule 144A 59 under 

the Securities Act,60 or (2) is a legal 

entity that, although not organized as an 

entity specifically listed in paragraph 

(a)(1)(i)(H) of Rule 144A under the 

Securities Act, satisfies the financial 

requirements necessary to be a 

‘‘qualified institutional buyer’’ as 

specified in that paragraph. NSCC 

would have the right to rely on the 

representation provided by the 

Sponsoring Member regarding 

satisfaction of (y). 

Section 3(b) of proposed Rule 2C 

would provide that each time that a 

Sponsoring Member wishes to sponsor a 

Person into membership, it shall 

provide NSCC with the representation 

referred to in Section 3(a) of proposed 

Rule 2C, as well as any additional 

information in such form as may be 

prescribed by NSCC. NSCC shall 

approve or disapprove Persons as 

Sponsored Members. If NSCC denies the 

request of a Sponsoring Member to add 

a Person as a Sponsored Member, such 

denial shall be handled in the same 

manner as set forth in Section 1 of Rule 

2A (Initial Membership Requirements) 

with respect to membership 

applications except that the written 

statement referred to therein shall be 

provided to both the Sponsoring 

Member and the Person seeking to 

become a Sponsored Member. 

Section 3(c) of proposed Rule 2C 

would provide that each Person to 

become a Sponsored Member shall sign 

and deliver to NSCC an agreement 

whereby the Person shall agree to any 

terms and conditions deemed by NSCC 

to be necessary in order to protect itself 

and its participants (the ‘‘Sponsored 

Member Agreement’’). Each Person to 

become a Sponsored Member that shall 

be an FFI Member must be FATCA 

Compliant. 

Section 3(d) of proposed Rule 2C 

would provide that a Sponsored 

Member shall immediately inform its 

Sponsoring Member, both orally and in 

writing, if the Sponsored Member is no 

longer in compliance with the 

requirements of Section 3(a) of proposed 

Rule 2C. A Sponsoring Member shall 

promptly inform NSCC, both orally and 

in writing, if a Sponsored Member is no 

longer in compliance with the 

requirements of Section 3(a) of proposed 

Rule 2C. Notification to NSCC by the 

Sponsoring Member must take place 

within one (1) Business Day from the 

date on which the Sponsoring Member 

first learns of the Sponsored Member’s 

non-compliance. NSCC would assess a 

fine in accordance with the Fine 

Schedule in Addendum P against any 

Sponsoring Member that fails to so 

notify NSCC.61

Section 3(e) of proposed Rule 2C 

would provide that a Sponsored 

Member may voluntarily elect to 

terminate its membership by providing 

NSCC with a written notice from the 

Sponsored Member to NSCC that the 

Sponsored Member is voluntarily 

electing to terminate its membership 

(‘‘Sponsored Member Voluntary 

Termination Notice’’). The Sponsored 

Member shall specify in the Sponsored 

Member Voluntary Termination Notice 

a desired date for the termination, 

which date shall not be prior to the 

scheduled Final Settlement Date of any 

remaining obligation owed by the 

Sponsored Member to NSCC as of the 

time such Sponsored Member Voluntary 

Termination Notice is submitted to 

NSCC, unless otherwise approved by 

NSCC. 

In addition, Section 3(e) of proposed 

Rule 2C would provide that such 

termination would not be effective until 

accepted by NSCC, which shall be no 

later than 10 Business Days after the 

receipt of the Sponsored Member 

Voluntary Termination Notice from 

such Sponsored Member. NSCC’s 

acceptance shall be evidenced by a 

notice to NSCC’s participants 

announcing the termination of the 

Sponsored Member and the date on 

which the termination of the Sponsored 

Member becomes effective (‘‘Sponsored 

Member Termination Date’’). After the 

close of business on the Sponsored 

Member Termination Date, the relevant 

Sponsoring Member shall no longer be 

eligible to submit Sponsored Member 

Transactions on behalf of the Sponsored 

Member. If any Sponsored Member 

Transaction is submitted to NSCC by the 

relevant Sponsoring Member on behalf 

of the Sponsored Member that is 

scheduled to settle after the Sponsored 

Member Termination Date, such 

Sponsored Member’s Sponsored 

Member Voluntary Termination Notice 

would be deemed void, and the 

Sponsored Member would remain 

subject to the proposed Rule 2C as if it 

had not given such Sponsored Member 

Voluntary Termination Notice. 

Section 3(f) of proposed Rule 2C 

would provide that a Sponsored 

Member’s voluntary termination shall 

not affect its obligations to NSCC, or the 

rights of NSCC, including under the 

Sponsoring Member Guaranty, with 

respect to Sponsored Member 

Transactions submitted to NSCC before 

the Sponsored Member Termination 

Date, and the Sponsoring Member 

Guaranty shall remain in effect to cover 

all outstanding obligations of the 

Sponsored Member to NSCC that are 

within the scope of such Sponsoring 

Member Guaranty. 

Proposed Rule 2C, Section 4 

(Compliance With Laws) 

Section 4 of proposed Rule 2C would 

provide that each Sponsoring Member 

and Sponsored Member shall comply in 

all material respects with all applicable 

laws, including applicable laws relating 

to securities, taxation and money 

laundering, as well as global sanctions 

laws, in connection with the use of 

NSCC’s services. 

Proposed Rule 2C, Section 5 (Sponsored 

Member Transactions) 

Section 5 of proposed Rule 2C would 

provide that a Sponsoring Member shall 

be permitted to submit to NSCC SFTs 

between itself and its Sponsored 

Members (‘‘Sponsored Member 

Transactions’’) in accordance with 

proposed Rule 56, as described below. 

Section 5 of proposed Rule 2C would 

further provide that NSCC directs each 

Sponsored Member and Sponsoring 

Member to settle all Final Settlement, 

Rate Payment, Price Differential, and 

other securities delivery and payment 

obligations arising under a Sponsored 

Member Transaction that has been 

novated to NSCC by causing the 

relevant cash and securities to be 

transferred to the Transferor or 

Transferee, as applicable, on the books 

and records of the Sponsoring Member, 

and each Sponsored Member and 

Sponsoring Member agrees that any 

such transfer shall satisfy NSCC’s 

corresponding obligation with respect to 

such Sponsored Member Transaction. 


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62NSCC believes it unlikely that it would exercise 

this authority, as the Clearing Fund deposits 

associated with each Sponsored Member SubAccount, Agent Clearing Member Customer 

Omnibus Account and proprietary account of a 

Sponsoring Member are designed to be sufficient to 

cover the obligations of such account or subaccount. However, if a Sponsoring Member defaults 

or fails to perform and the Clearing Fund deposits 

associated with a given account or sub-account of 

such Sponsoring Member are not sufficient to 

discharge the Sponsoring Member’s obligations in 

relation to such account or sub-account, NSCC 

would look to the Clearing Fund deposits related 

to the Sponsoring Member’s other accounts or subaccounts. For example, if NSCC ceased to act for a 

Sponsoring Member and the close-out of the SFT 

Positions established in the Sponsoring Member’s 

Sponsored Member Sub-Accounts resulted in a loss 

to NSCC in excess of the Clearing Fund previously 

posted by the Sponsoring Member in relation to 

such SFT Positions, NSCC may apply to the excess 

any other Clearing Fund deposits posted by the 

Sponsoring Member to NSCC, such as Clearing 

Fund posted in connection with the proprietary 

positions of the Sponsoring Member. Similarly, if 

a Sponsoring Member failed to perform under the 

Sponsoring Member Guaranty outside the context of 

a cease-to-act situation and the Clearing Fund 

previously posted by the Sponsoring Member in 

relation to the SFT Positions established in the 

Sponsoring Member’s Sponsored Member SubAccounts was not sufficient to satisfy the 

obligations under the Sponsoring Member 

Guaranty, NSCC may apply to the remainder any 

other Clearing Fund deposits posted by the 

Sponsoring Member to NSCC. 

NSCC believes this is appropriate because the 

Clearing Fund deposits of a Sponsoring Member are 

the proprietary assets of the Sponsoring Member, 

and NSCC generally has the right to apply the 

Clearing Fund deposits of a Member to any of the 

Member’s obligations to NSCC, regardless of 

whether those were the obligations that generated 

the Clearing Fund deposit requirement. NSCC 

therefore believes that, consistent with the FICC 

Sponsoring Member/Sponsored Member Program 

for the reasons described above in Item II(A)1(iii) 

‘‘Sponsoring Members and Sponsored Members,’’ a 

Sponsoring Member’s Clearing Fund deposits 

should be available to satisfy any of the Sponsoring 

Member’s guaranty or other obligations to NSCC. 

Proposed Rule 2C, Section 6 

(Sponsoring Member Agent Obligations) 

Section 6 of proposed Rule 2C would 

provide that a Sponsored Member shall 

appoint its Sponsoring Member to act as 

agent with respect to the Sponsored 

Member’s satisfaction of its settlement 

obligations arising under Sponsored 

Member Transactions between the 

Sponsored Member and the Sponsoring 

Member and for performing all 

functions and receiving reports and 

information set forth in the Rules. 

NSCC’s provision of such reports and 

information to the Sponsoring Member 

shall constitute satisfaction of any 

obligation of NSCC to provide such 

reports and information to the affected 

Sponsored Members. As proposed, 

notwithstanding the foregoing and any 

other activities the Sponsoring Member 

may perform in its capacity as agent for 

Sponsored Members, each Sponsored 

Member shall be obligated as principal 

to NSCC with respect to all settlement 

obligations under the Rules, and the 

Sponsoring Member shall not be a 

principal under the Rules with respect 

to settlement obligations of its 

Sponsored Members. 

Proposed Rule 2C, Section 7 (Clearing 

Fund Obligations) 

Section 7 of proposed Rule 2C would 

set forth the Clearing Fund obligations. 

Section 7(a) of proposed Rule 2C 

would provide that NSCC shall 

maintain a ledger maintained on the 

books and records of NSCC for a 

Sponsoring Member that reflects the 

outstanding SFTs that a Sponsoring 

Member enters into in respect of a 

Sponsored Member and that have been 

novated to NSCC, the SFT Positions or 

SFT Cash associated with those 

transactions and any debits or credits of 

cash associated with such transactions 

effected pursuant to Rule 12 

(Settlement) (each a ‘‘Sponsored 

Member Sub-Account’’). Each 

Sponsoring Member shall make and 

maintain so long as such Member is a 

Sponsoring Member a deposit to the 

Clearing Fund as a Required Fund 

Deposit to support the activity in its 

Sponsored Member Sub-Accounts (the 

‘‘Sponsoring Member Required Fund 

Deposit’’). 

Under Section 7(a), each Sponsoring 

Member, so long as such Member is a 

Sponsoring Member, shall also provide 

SLD to the Clearing Fund, as may be 

required pursuant to Rule 4A 

(Supplemental Liquidity Deposits); 

however, the Supplemental Liquidity 

Deposits shall be calculated without 

regard to Sponsored Member 

Transactions. This is because Sponsored 

Member Transactions do not 

independently create liquidity risk for 

NSCC as NSCC would not be required 

to complete settlement of any 

Sponsored Member Transactions in the 

event that either the Sponsoring 

Member or Sponsored Member defaults. 

In the event that the Sponsoring 

Member defaults, Section 12(b) of 

proposed Rule 2C (as described below) 

would permit NSCC to closeout (rather 

than settle) the Sponsored Member 

Transactions of the defaulter’s 

Sponsored Members. Likewise, if the 

Sponsored Member defaults, NSCC 

would also not be required to complete 

settlement. Rather, under Section 8 of 

proposed Rule 2C (as described below), 

NSCC may offset its settlement 

obligations to the Sponsoring Member 

against the Sponsoring Member’s 

obligations under the Sponsoring 

Member Guaranty to perform on behalf 

of its defaulted Sponsored Member. 

Section 7(a) would also propose that 

deposits to the Clearing Fund would be 

held by NSCC or its designated agents, 

to be applied as provided in the Rules. 

Section 7(b) of proposed Rule 2C 

would provide that, in the ordinary 

course, for purposes of satisfying the 

Sponsoring Member’s Clearing Fund 

requirements under the Rules for its 

Member activity, its Sponsoring 

Member activity, and, to the extent 

applicable, its Agent Clearing Member 

activity, the Sponsoring Member’s 

proprietary accounts, its Sponsored 

Member Sub-Accounts, and its Agent 

Clearing Member Customer Omnibus 

Account(s), if any, shall be treated 

separately, as if they were accounts of 

separate entities. Notwithstanding the 

previous sentence, however, NSCC may, 

in its sole discretion, at any time and 

without prior notice to the Sponsoring 

Member (but being obligated to give 

notice to the Sponsoring Member as 

soon as possible thereafter) and whether 

or not the Sponsoring Member or any of 

its Sponsored Members is in default of 

its obligations to NSCC, treat the 

Sponsoring Member’s accounts as a 

single account for the purpose of 

applying Clearing Fund deposits; apply 

Clearing Fund deposits made by the 

Sponsoring Member with respect to any 

account as necessary to ensure that the 

Sponsoring Member meets all of its 

obligations to NSCC under any other 

account(s); and otherwise exercise all 

rights to offset and net against the 

Clearing Fund deposits any net 

obligations among any or all of the 

accounts, whether or not any other 

Person is deemed to have any interest in 

such account.62

Section 7(c) of proposed Rule 2C 

would provide that the Sponsoring 

Member Required Fund Deposit for each 

Sponsored Member Sub-Account shall 

be calculated separately based on the 

Sponsored Member Transactions in 

such Sponsored Member Sub-Account, 

and the Sponsoring Member shall, as 

principal, be required to satisfy the 

Sponsoring Member Required Fund 

Deposit for each of the Sponsoring 

Member’s Sponsored Member SubAccounts. 

Section 7(d) of proposed Rule 2C 

would provide that Sections 1, 2, 4, 5, 

6, 7, 8, 9, 10, 11 and 12 of Rule 4 

(Clearing Fund) shall apply to the 

Sponsoring Member Required Fund 

Deposit with respect to obligations of a 

Sponsoring Member under the Rules, 

including its obligations arising under 

the Sponsored Member Sub-Accounts, 

and the obligations of a Sponsoring 

Member under its Sponsoring Member 


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63NSCC believes the most likely circumstance in 

which it would exercise this authority would be in 

the context of a Sponsoring Member default. If, in 

such circumstance, NSCC realizes a profit in closing 

out the positions associated with a proprietary 

account of the Sponsoring Member, but incurs a 

loss in closing out the positions associated with the 

Sponsored Member Sub-Accounts of the 

Sponsoring Member, it would offset its obligation 

to turn over to the Sponsoring Member the gains in 

relation to the Sponsoring Member’s proprietary 

account against the obligations of the Sponsoring 

Member under the Sponsoring Member Guaranty. 

Guaranty to the same extent as such 

sections apply to any Required Fund 

Deposit and any other obligations of a 

Member. For purposes of Section 1 of 

Rule 4, obligations and liabilities of a 

Member to NSCC that shall be secured 

shall include, without limitation, a 

Member’s obligations as a Sponsoring 

Member under the Rules, including, 

without limitation, any obligation of any 

such Sponsoring Member to provide the 

Sponsoring Member Required Fund 

Deposit, such Sponsoring Member’s 

obligations arising under the Sponsored 

Member Sub-Accounts of such 

Sponsoring Member and such 

Sponsoring Member’s obligations under 

its Sponsoring Member Guaranty. 

Section 7(e) of proposed Rule 2C 

would provide that a Sponsoring 

Member shall be subject to such fines as 

may be imposed in accordance with the 

Rules for any late satisfaction of a 

Clearing Fund deficiency call. 

Proposed Rule 2C, Section 8 (Right of 

Offset) 

Section 8 of proposed Rule 2C would 

provide that in the ordinary course, 

with respect to satisfaction of any 

Sponsored Member’s obligations under 

the Rules, the Sponsoring Member’s 

Sponsored Member Sub-Accounts, the 

Sponsoring Member’s proprietary 

accounts, and the Sponsoring Member’s 

Agent Clearing Member Customer 

Omnibus Accounts, if any, at NSCC 

shall be treated separately, as if they 

were accounts of separate entities. 

Notwithstanding the previous sentence, 

however, NSCC may, in its sole 

discretion, at any time any obligation of 

the Sponsoring Member arises under the 

Sponsoring Member Guaranty to pay or 

perform thereunder with respect to any 

Sponsored Member, exercise a right of 

offset and net any such obligation of the 

Sponsoring Member under its 

Sponsoring Member Guaranty against 

any obligations of NSCC to the 

Sponsoring Member in respect of such 

Sponsoring Member’s proprietary 

accounts at NSCC.63 NSCC would 

generally anticipate exercising this right 

if, upon a Sponsoring Member default, 

the Sponsoring Member owed an 

amount under the Sponsoring Member 

Guaranty and was owed an amount by 

NSCC in relation to the Sponsoring 

Member’s proprietary or other 

obligations. 

Proposed Rule 2C, Section 9 (Loss 

Allocation Obligations) 

Section 9 of proposed Rule 2C would 

establish loss allocation obligations 

under the sponsored membership 

model. 

Section 9(a) of proposed Rule 2C 

would provide that Sponsored Members 

shall not be obligated for allocations, 

pursuant to Rule 4 (Clearing Fund), of 

loss or liability incurred by NSCC. To 

the extent that a loss or liability is 

determined by NSCC to arise in 

connection with Sponsored Member 

Transactions (i.e., in connection with 

the insolvency or default of a 

Sponsoring Member), the Sponsored 

Members shall not be responsible for or 

considered in the loss allocation 

calculation, but rather such loss shall be 

allocated to other Members in 

accordance with the principles set forth 

in Section 4 of Rule 4. 

Section 9(b) of proposed Rule 2C 

would provide that, to the extent NSCC 

incurs a loss or liability from a 

Defaulting Member Event or a Declared 

Non-Default Loss Event and a loss 

allocation obligation arises, that would 

be the responsibility of a Sponsored 

Member Sub-Account as if the 

Sponsored Member Sub-Account were a 

Member, NSCC shall calculate such loss 

allocation obligation as if the affected 

Sponsored Member were subject to such 

allocations pursuant to Section 4 of Rule 

4, but the Sponsoring Member shall be 

responsible for satisfying such 

obligations. 

Section 9(c) of proposed Rule 2C 

would provide that the entire amount of 

the Required Fund Deposit associated 

with the Sponsoring Member’s 

proprietary accounts at NSCC and the 

entire amount of the Sponsoring 

Member Required Fund Deposit may be 

used to satisfy any amount allocated 

against a Sponsoring Member, whether 

in its capacity as a Member, a 

Sponsoring Member, or otherwise. With 

respect to an obligation to make 

payment due to any loss allocation 

amounts assessed on a Sponsoring 

Member pursuant to Section 9(b) of 

proposed Rule 2C, the Sponsoring 

Member may instead elect to terminate 

its membership in NSCC pursuant to 

Section 6 of Rule 4 and thereby benefit 

from its Loss Allocation Cap pursuant to 

Section 4 of Rule 4; however, for the 

purpose of determining the Loss 

Allocation Cap for such Sponsoring 

Member, its Required Fund Deposit 

shall be the sum of its Required Fund 

Deposits associated with its proprietary 

accounts at NSCC (including its 

proprietary SFT Account pursuant to 

proposed Rule 56), its Sponsoring 

Member Required Fund Deposit, and its 

Agent Clearing Member Required Fund 

Deposits, if any, for each of its Agent 

Clearing Member Customer Omnibus 

Accounts. 

Proposed Rule 2C, Section 10 

(Restrictions on Access to Services by a 

Sponsoring Member) 

Section 10 of proposed Rule 2C would 

establish the rights of NSCC to restrict 

a Sponsoring Member’s access to 

NSCC’s services. 

Section 10(a) of proposed Rule 2C 

would provide that the Board of 

Directors may at any time, upon NSCC 

providing notice to a Sponsoring 

Member pursuant to Section 5 of Rule 

45 (Notices), suspend a Sponsoring 

Member in its capacity as a Sponsoring 

Member from any service provided by 

NSCC either with respect to a particular 

transaction or transactions or with 

respect to transactions generally or 

prohibit or limit such Sponsoring 

Member’s access to services offered by 

NSCC in the event that one or more of 

the factors set forth in Section 1 of Rule 

46 (Restrictions on Access to Services) 

is present with respect to the 

Sponsoring Member. 

Section 10(b) of proposed Rule 2C 

would provide that Rule 46 shall apply 

with respect to a Sponsoring Member in 

the same way as it applies to Members, 

including the Board of Directors’ right to 

summarily suspend the Sponsoring 

Member and to cease to act for such 

Sponsoring Member. As under Rule 46, 

the Board of Directors would need to 

make the determination of whether to 

suspend, prohibit or limit a Sponsoring 

Member’s access to services offered by 

NSCC on the basis of the factors set 

forth in that rule. 

Section 10(c) of proposed Rule 2C 

would provide that if NSCC ceases to 

act for a Sponsoring Member in its 

capacity as a Sponsoring Member, 

Section 14 of proposed Rule 56 shall 

apply and NSCC shall decline to accept 

or process data from the Sponsoring 

Member on Sponsored Member 

Transactions and NSCC shall cease to 

act for all of the Sponsored Members of 

the affected Sponsoring Member (unless 

such Sponsored Members are also 

Sponsored Members of other 

Sponsoring Members). Section 10(c) 

would also provide that if NSCC 

suspends, prohibits or limits a 

Sponsoring Member in its capacity as a 

Sponsoring Member with respect to 

such Sponsoring Member’s access to 

services offered by NSCC, NSCC shall 


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decline to accept or process data from 

the Sponsoring Member on Sponsored 

Member Transactions and shall suspend 

the Sponsored Members of the affected 

Sponsoring Member (unless they are 

also Sponsored Members of other 

Sponsoring Members) for so long as 

NSCC is suspending, prohibiting or 

limiting the Sponsoring Member. Any 

Sponsored Member Transactions which 

have been novated to NSCC shall 

continue to be processed by NSCC. In 

addition, Section 10(c) would provide 

that NSCC, in in sole discretion, shall 

determine whether to close-out the 

affected Sponsored Member 

Transactions or permit the Sponsored 

Members to complete their settlement. 

This is different from how NSCC 

would treat Agent Clearing Member 

Transactions of an Agent Clearing 

Member under Section 9 of proposed 

Rule 2D if NSCC ceased to act for the 

Agent Clearing Member. Specifically, 

for Agent Clearing Member 

Transactions, as proposed, NSCC would 

close-out any Agent Clearing Member 

Transactions which have been novated 

to NSCC; however, with respect to 

Sponsored Member Transactions, 

consistent with FICC’s Sponsoring 

Member/Sponsored Member Program 

for the reasons described above in Item 

II(A)1(iii) ‘‘Sponsoring Members and 

Sponsored Members,’’ NSCC would 

have the option to either terminate or 

settle a Sponsored Member’s novated 

positions after ceasing to act for the 

Sponsoring Member. NSCC would have 

the practical and legal capability to 

make such an election because each 

Sponsored Member would be a limitedpurpose member of NSCC. Accordingly, 

NSCC would have the requisite 

information about each of the 

Sponsored Member’s novated positions 

(by virtue of each Sponsored Member’s 

novated portfolio represented as a 

different sub-account of the Sponsoring 

Member (i.e., Sponsored Member SubAccount) on the books and records of 

NSCC) to make such an election. By 

contrast, an Agent Clearing Member’s 

Customers would not be limitedpurpose members of NSCC nor would 

NSCC know which transactions within 

an Agent Clearing Member Customer 

Omnibus Account belong to which 

Customers. As such, NSCC would not be 

able to separately terminate or complete 

settlement with respect to Customers’ 

novated positions. 

Proposed Rule 2C, Section 11 

(Restrictions on Access to Services by a 

Sponsored Member) 

Section 11 of proposed Rule 2C would 

establish the rights of NSCC to restrict 

a Sponsored Member’s access to NSCC’s 

services. 

Section 11(a) of proposed Rule 2C 

would provide that the Board of 

Directors may at any time upon NSCC 

providing notice to a Sponsored 

Member and its Sponsoring Member 

pursuant to Section 5 of Rule 45 

(Notices), suspend a Sponsored Member 

from any service provided by NSCC 

either with respect to a particular 

transaction or transactions or with 

respect to transactions generally, or 

prohibit or limit such Sponsored 

Member with respect to access to 

services offered by NSCC in the event 

that one or more of the factors set forth 

in Section 1 of Rule 46 (Restrictions on 

Access to Services) is present with 

respect to the Sponsored Member. 

Section 11(b) of proposed Rule 2C 

would provide that Rule 46 shall apply 

with respect to a Sponsored Member in 

the same way as it applies to Members, 

including the Board of Directors’ right to 

summarily suspend a Sponsored 

Member and to cease to act for such 

Sponsored Member. As under Rule 46, 

the Board of Directors would need to 

make the determination of whether to 

suspend, prohibit or limit a Sponsored 

Member’s access to services offered by 

NSCC on the basis of the factors set 

forth in that rule. 

Section 11(c) of proposed Rule 2C 

would provide that if NSCC ceases to 

act for a Sponsored Member, Section 14 

of proposed Rule 56 shall apply. 

Section 11(d) of proposed Rule 2C 

would provide that NSCC shall cease to 

act for a Sponsored Member that is no 

longer in compliance with the 

requirements of Section 3(a) of proposed 

Rule 2C. 

Proposed Rule 2C, Section 12 

(Insolvency of a Sponsoring Member) 

Section 12(a) of proposed Rule 2C 

would provide that a Sponsoring 

Member shall be obligated to 

immediately notify NSCC that (a) it 

fails, or is unable, to perform its 

contracts or obligations or (b) it is 

insolvent, as required by Section 1 of 

Rule 20 (Insolvency) for other Members. 

A Sponsoring Member shall be treated 

by NSCC in all respects as insolvent 

under the same circumstances set forth 

in Section 2 of Rule 20 for other 

Members. Section 3 of Rule 20 shall 

apply, in the same manner in which 

such section applies to other Members, 

in the case where NSCC treats a 

Sponsoring Member as insolvent. 

Section 12(b) of proposed Rule 2C 

would provide that in the event that 

NSCC determines to treat a Sponsoring 

Member as insolvent pursuant to Rule 

20 (Insolvency), NSCC shall have the 

right to cease to act for the insolvent 

Sponsoring Member pursuant to Section 

10 of the proposed Rule 2C. If NSCC 

ceases to act for the insolvent 

Sponsoring Member, NSCC shall 

decline to accept or process data from 

the Sponsoring Member, including 

Sponsored Member Transactions, and 

NSCC shall terminate the membership 

of all of the insolvent Sponsoring 

Member’s Sponsored Members unless 

they are the Sponsored Members of 

another Sponsoring Member. Any 

Sponsored Member Transactions which 

have been novated to NSCC shall 

continue to be processed by NSCC. 

NSCC, in its sole discretion, shall 

determine whether to close-out the 

affected Sponsored Member 

Transactions and/or permit the 

Sponsored Members to complete their 

settlement. This is different from how 

NSCC would treat Agent Clearing 

Member Transactions. As described 

above, NSCC would close-out any Agent 

Clearing Member Transactions which 

have been novated to NSCC. However, 

with respect to Sponsored Member 

Transactions, consistent with FICC’s 

Sponsoring Member/Sponsored Member 

Program for the reasons described above 

in Item II(A)1(iii) ‘‘Sponsoring Members 

and Sponsored Members,’’ NSCC would 

have the option to either terminate or 

settle a Sponsored Member’s novated 

positions after ceasing to act for the 

Sponsoring Member. This is because 

NSCC would have the practical and 

legal capability to make such an election 

because each Sponsored Member would 

be a limited-purpose member of NSCC. 

Accordingly, NSCC would have the 

requisite information about each of the 

Sponsored Member’s novated positions 

(by virtue of each Sponsored Member’s 

novated portfolio represented as a 

different sub-account of the Sponsoring 

Member (i.e., Sponsored Member SubAccount) on the books and records of 

NSCC) to make such an election. By 

contrast, an Agent Clearing Member’s 

Customers would not be limitedpurpose members of NSCC nor would 

NSCC know which transactions within 

an Agent Clearing Member Customer 

Omnibus Account belong to which 

Customers. As such, NSCC would not be 

able to separately terminate or complete 

settlement with respect to Customers’ 

novated positions. 

Proposed Rule 2C, Section 13 

(Insolvency of a Sponsored Member) 

Section 13 of proposed Rule 2C would 

establish NSCC’s rights in the event of 

an insolvency of a Sponsored Member. 

Section 13(a) of proposed Rule 2C 

would provide that a Sponsored 

Member and its Sponsoring Member (to 


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64 It bears noting in this regard that termination 

of the Sponsored Member’s positions would not be 

the exclusive mechanism by which a Sponsoring 

Member may limit its credit risk. As described 

above, under Section 2(m) of proposed Rule 2C, a 

Sponsoring Member may voluntarily elect to 

terminate its status as a Sponsoring Member in 

respect of one or more Sponsored Members. Such 

a termination would not affect the settlement of the 

Sponsored Member’s existing positions but would 

restrict the ability of the Sponsored Member to have 

its future trades accepted for novation by NSCC 

through such Sponsoring Member. The proposed 

rule change in Section 14(b) of proposed Rule 2C 

would not affect the functioning of the proposed 

rule change in Section 2(m) of proposed Rule 2C or 

the general ability of a Sponsoring Member and the 

Sponsored Member to agree on the circumstances 

of when the Sponsoring Member may terminate its 

status as Sponsoring Member for the Sponsored 

Member. 

the extent it has knowledge thereof) 

shall be obligated to immediately notify 

NSCC that the Sponsored Member is 

insolvent or that the Sponsored Member 

would be unable to perform any of its 

material contracts, obligations or 

agreements in the same manner as 

required by Section 1 of Rule 20 

(Insolvency) for other Members. For 

purposes of Section 13 of proposed Rule 

2C, a Sponsoring Member shall be 

deemed to have knowledge that a 

Sponsored Member is insolvent or 

would be unable to perform on any of 

its material contracts, obligations or 

agreements if one or more duly 

authorized representatives of the 

Sponsoring Member, in its capacity as 

such, has knowledge of such matters. A 

Sponsored Member shall be treated by 

NSCC in all respects as insolvent under 

the same circumstances set forth in 

Section 2 of Rule 20 for other Members. 

Section 3 of Rule 20 shall apply, in the 

same manner in which such section 

applies to other Members, in the case 

where NSCC treats a Sponsored Member 

as insolvent. 

Section 13(b) of proposed Rule 2C 

would provide that in the event that 

NSCC determines to treat a Sponsored 

Member as insolvent pursuant to Rule 

20 (Insolvency), NSCC shall have the 

right to cease to act for the insolvent 

Sponsored Member pursuant to Section 

11 of the proposed Rule 2C. If NSCC 

ceases to act for the insolvent Sponsored 

Member, Section 14 of proposed Rule 56 

shall apply with respect to the close-out 

of the insolvent Sponsored Member’s 

Sponsored Member Transactions. 

Proposed Rule 2C, Section 14 

(Liquidation of Sponsored Member and 

Related Sponsoring Member Positions) 

Section 14 of proposed Rule 2C would 

provide a mechanism by which a 

Sponsoring Member may cause the 

termination and liquidation of a 

Sponsored Member’s positions arising 

from Sponsored Member Transactions 

between the Sponsoring Member and its 

Sponsored Member that have been 

novated to NSCC. Specifically, in the 

event (i) the Sponsoring Member 

triggers the termination of a Sponsored 

Member’s positions or (ii) NSCC ceases 

to act for the Sponsored Member and 

the Sponsoring Member does not 

continue to perform the obligations of 

the Sponsored Member, both the 

Sponsored Member’s positions and the 

Sponsoring Member’s corresponding 

positions arising from the Sponsored 

Member Transactions between the 

Sponsoring Member and the Sponsored 

Member would be terminated. 

Thereupon, the Sponsoring Member 

would calculate a net liquidation value 

of such terminated positions, which 

liquidation value would be paid either 

to or by the Sponsored Member by or to 

the Sponsoring Member. NSCC would 

not, as a practical matter, be involved in 

such settlement and would not need to 

take any market action because the 

termination of the Sponsored Member’s 

positions and the corresponding 

Sponsoring Member’s positions would 

leave NSCC flat. Additionally, the 

Sponsoring Member would indemnify 

NSCC for any claim by a Sponsored 

Member arising out of the Sponsoring 

Member’s calculation of the net 

liquidation value. 

Section 14(a) of proposed Rule 2C 

would specify the scope of positions to 

which Section 14 of proposed Rule 2C 

applies. It would state that Section 14 

only applies with respect to the 

liquidation of positions resulting from 

Sponsored Member Transactions that 

have been novated to NSCC. 

Section 14(a) of proposed Rule 2C 

would further state that such section 

would only apply if (i) a Sponsoring 

Member is a Defaulting Member and 

NSCC has not ceased to act for the 

Sponsoring Member and (ii) a 

Corporation Default has not occurred. 

This is because, as described above in 

Section 12(b) of proposed Rule 2C, 

NSCC would have discretion in the 

event it ceases to act for a Sponsoring 

Member to close-out the positions of 

Sponsored Members for which the 

defaulting Sponsoring Member was 

responsible or to allow them to settle. If 

NSCC does close-out such positions, it 

would do so in accordance with Section 

14 of proposed Rule 56. If a Corporation 

Default has occurred with respect to 

NSCC, each Sponsored Member’s 

positions would be closed out in 

accordance with Section 17 of proposed 

Rule 56. 

Section 14(b) of proposed Rule 2C 

would set out the process by which a 

Sponsoring Member or NSCC may cause 

the termination of a Sponsored 

Member’s positions. It would provide 

that on any Business Day, the 

Sponsoring Member or NSCC may cause 

such termination by delivering a notice 

to NSCC or the Sponsoring Member, 

respectively. NSCC anticipates that each 

Sponsored Member and Sponsoring 

Member would agree in the bilateral 

documentation between them as to what 

circumstances or events give rise to the 

ability of the Sponsoring Member to 

deliver a notice to NSCC terminating the 

Sponsored Member’s positions.64

The notice submitted by a Sponsoring 

Member to NSCC (or vice versa) would 

cause the termination of all of the SFT 

Positions of the Sponsored Member 

established in the Sponsored Member 

Sub-Account. The notice would also 

cause the immediate termination of the 

corresponding SFT Positions of the 

Sponsoring Member established in the 

Sponsoring Member’s proprietary SFT 

Account. The effect of such 

terminations would be to leave NSCC 

flat. 

Section 14(b) of proposed Rule 2C 

would also provide that the termination 

of the Sponsored Member’s positions 

(and the Sponsoring Member’s 

corresponding positions) would be 

effected by the Sponsoring Member’s 

establishment of a final net settlement 

position for each eligible security with 

a distinct CUSIP number (‘‘Final Net 

Settlement Position’’). 

Section 14(c) of proposed Rule 2C 

would specify how the Final Net 

Settlement Positions established 

pursuant to Section 14(b) of proposed 

Rule 2C would be liquidated (i.e., how 

such positions would be converted into 

an amount payable). It would also 

provide how the amount payable arising 

from the liquidation of the Final Net 

Settlement Positions would be 

discharged. 

Specifically, Section 14(c) of 

proposed Rule 2C would first provide 

that the Sponsoring Member would 

liquidate the Final Net Settlement 

Positions established pursuant to 

Section 14(b) of proposed Rule 2C by 

establishing (i) a single liquidation 

amount in respect of the Sponsored 

Member’s Final Net Settlement 

Positions (a ‘‘Sponsored Member 

Liquidation Amount’’) and (ii) a single 

liquidation amount in respect of the 

Sponsoring Member’s Final Net 

Settlement Positions (a ‘‘Sponsoring 

Member Liquidation Amount’’). The 

Sponsored Member Liquidation Amount 

would be owed either by NSCC to the 

Sponsored Member or by the Sponsored 

Member to NSCC because it would 

relate to the Sponsored Member’s Final 


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Net Settlement Positions with NSCC, 

while the Sponsoring Member 

Liquidation Amount would be owed 

either by NSCC to the Sponsoring 

Member or by the Sponsoring Member 

to NSCC because it would relate to the 

Sponsoring Member’s Final Net 

Settlement Positions with NSCC. 

Because the Final Net Settlement 

Positions of the Sponsoring Member 

would be identical to, but in the 

opposite direction of, the Final Net 

Settlement Positions of the Sponsored 

Member, the Sponsored Member 

Liquidation Amount would equal the 

Sponsoring Member Liquidation 

Amount. Therefore, if NSCC were to 

owe the Sponsored Member Liquidation 

Amount to the Sponsored Member, the 

Sponsoring Member would owe the 

Sponsoring Member Liquidation 

Amount to NSCC. By the same token, if 

the Sponsored Member were to owe the 

Sponsored Member Liquidation Amount 

to NSCC, NSCC would owe the 

Sponsoring Member the Sponsoring 

Member Liquidation Amount. In all 

instances, NSCC would owe and be 

owed the same amount of money. 

Section 14(c) of proposed Rule 2C 

would also provide how the Sponsoring 

Member may calculate the Sponsoring 

Member Liquidation Amount. It would 

state that the Sponsoring Member may 

calculate the Sponsoring Member 

Liquidation Amount based on 

prevailing market prices of the relevant 

securities and/or the gains realized and 

losses incurred by the Sponsoring 

Member in hedging its risk associated 

with the liquidation of the Sponsoring 

Member’s Final Net Settlement 

Positions. Section 14(c) of proposed 

Rule 2C would further clarify that such 

Sponsoring Member Liquidation 

Amount may also take into account any 

losses and expenses incurred by the 

Sponsoring Member in connection with 

the liquidation of the positions. 

Section 14(c) of proposed Rule 2C 

would further provide that, if a 

Sponsored Member Liquidation Amount 

is due to NSCC, the Sponsoring Member 

would be obligated to pay such 

Sponsored Member Liquidation Amount 

to NSCC under the Sponsoring Member 

Guaranty and that this obligation would, 

automatically and without further 

action, be set off against the obligation 

of NSCC to pay the corresponding 

Sponsoring Member Liquidation 

Amount to the Sponsoring Member. By 

virtue of such setoff, the Sponsored 

Member’s obligation to NSCC would be 

discharged, as would NSCC’s obligation 

to the Sponsoring Member. The 

Sponsoring Member would, however, 

have a reimbursement claim against the 

Sponsored Member in an amount equal 

to the Sponsored Member Liquidation 

Amount. This reimbursement claim 

would arise as a matter of law by virtue 

of the Sponsoring Member’s 

performance under Sponsoring Member 

Guaranty, though Sponsoring Members 

and Sponsored Members may specify 

terms related to the reimbursement 

claim in their bilateral submission. 

NSCC would have no rights or 

obligations in respect of any such 

reimbursement claim. 

If a Sponsored Member Liquidation 

Amount were owed by NSCC to the 

Sponsored Member, Section 14(c) of 

proposed Rule 2C would provide for the 

Sponsoring Member to satisfy that 

obligation by transferring the Sponsored 

Member Liquidation Amount to the 

Sponsoring Member’s account at its 

Settling Bank (‘‘Sponsoring Member 

Settling Bank Omnibus Account’’). 

Section 14(c) of proposed Rule 2C 

would state that, to the extent the 

Sponsoring Member makes such a 

transfer, it would discharge NSCC’s 

obligation to transfer the Sponsored 

Member Liquidation Amount to the 

Sponsored Member and the Sponsoring 

Member’s corresponding obligation to 

transfer the Sponsoring Member 

Liquidation Amount to NSCC. 

Section 14(d) of proposed Rule 2C 

would provide for the Sponsoring 

Member to indemnify NSCC and its 

employees, officers, directors, 

shareholders, agents, and Members 

(collectively, the ‘‘Sponsoring/ 

Sponsored Membership Program 

Indemnified Parties’’ or ‘‘SMP 

Indemnified Parties’’) for any and all 

losses, liability, or expenses arising from 

any claim by an affected Sponsored 

Member disputing the Sponsoring 

Member’s calculation of any Sponsored 

Member Liquidation Amount or 

Sponsoring Member Liquidation 

Amount. 

Section 14(e) of proposed Rule 2C 

would provide that NSCC acknowledges 

that a Sponsoring Member may take a 

security interest in NSCC’s obligations 

to a Sponsored Member in respect of its 

transactions that have been novated to 

NSCC by such Sponsoring Member and 

established in the Sponsoring Member’s 

Sponsored Member Sub-Account for the 

Sponsored Member. Such security 

interest would not impose new 

obligations on NSCC but could allow 

the Sponsoring Member to direct NSCC 

to submit payments due to the 

Sponsored Member to the Sponsoring 

Member, so that the Sponsoring Member 

can apply such amounts to the 

Sponsored Member’s unsatisfied 

obligations to the Sponsoring Member. 

(B) Proposed Rule 2D—Agent Clearing 

Members 

NSCC is proposing to add Rule 2D, 

entitled ‘‘Agent Clearing Members.’’ 

This new rule would govern the 

proposed agent clearing membership 

and would be comprised of 12 sections, 

each of which is described below. 

Proposed Rule 2D, Section 1 (General) 

Section 1 of proposed Rule 2D would 

be a general provision regarding the 

Rules applicable to Agent Clearing 

Members. 

Section 1 of proposed Rule 2D would 

provide that NSCC will permit a 

Member that is approved to be an Agent 

Clearing Member to submit transactions 

to NSCC for novation on behalf of one 

or more of the Agent Clearing Member’s 

Customers. Section 1 of proposed Rule 

2D would further provide that the 

rights, liabilities and obligations of 

Agent Clearing Members shall be 

governed by proposed Rule 2D, and that 

references to the term ‘‘Member’’ in 

other Rules would not apply to Agent 

Clearing Members, in their respective 

capacities as such, unless specifically 

noted as such in proposed Rule 2D or 

in such other Rules. 

Section 1 of proposed Rule 2D would 

also provide that an Agent Clearing 

Member shall continue to have all of the 

rights, liabilities and obligations as set 

forth in the Rules and in any agreement 

between it and NSCC pertaining to its 

status as a Member, and such rights, 

liabilities and obligations shall be 

separate from its rights, liabilities and 

obligations as an Agent Clearing 

Member except as contemplated under 

Sections 6, 7 and 8 of proposed Rule 2D. 

Proposed Rule 2D, Section 2 

(Qualifications of Agent Clearing 

Members, the Application Process and 

Continuance Standards) 

Section 2 of proposed Rule 2D would 

establish the eligibility requirements for 

Members that wish to become Agent 

Clearing Members, the membership 

application process that would be 

required of each Member to become an 

Agent Clearing Member, the on-going 

membership requirements that would 

apply to Agent Clearing Members, as 

well as the requirements regarding an 

Agent Clearing Member’s election to 

voluntarily terminate its membership. 

Under Section 2(a) of proposed Rule 

2D, any Member would be eligible to 

apply to become an Agent Clearing 

Member; however, if a Member is a 

Registered Broker-Dealer, such Member 

would only be permitted to apply to 

become an Agent Clearing Member if it 

has (1) Net Worth of at least $25 million 


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65NSCC is proposing these financial minimums 

for Registered Broker-Dealer Agent Clearing 

Member applicants to reflect the additional 

responsibility that the applicant would undertake 

as an Agent Clearing Member. These financial 

minimums are determined based on NSCC’s 

assessment of the minimum capital that would be 

necessary for a broker-dealer to conduct meaningful 

level of NSCC-cleared activity while serving as a 

credit counterparty in respect of others’ trades. In 

addition, NSCC is proposing these financial 

minimums for Registered Broker-Dealer Agent 

Clearing Member applicants to be consistent with 

proposed requirements applicable to Registered 

Broker-Dealer Sponsoring Member applicants. 

NSCC believes this approach to financial 

minimums is appropriate because both Sponsoring 

Members and Agent Clearing Members would be 

viewed and surveilled as the credit counterparties 

to NSCC in respect of the transactions that they 

submit for clearing in respect of Sponsoring 

Member Sub-Accounts and Agent Clearing Member 

Customer Omnibus Accounts, respectively. 

Although the model of clearing would differ as 

between Sponsoring Members and Agent Clearing 

Members, both would be types of Members that 

would be standing behind the credit of their clients. 

Accordingly, NSCC believes it is appropriate to use 

consistent financial minimums. 

66 If the increased financial requirements are 

imposed in connection with an Agent Clearing 

Member application that does not require the Board 

of Directors’ approval, the increased financial 

requirements would not be subject to the Board of 

Directors’ approval. Nonetheless, once an Agent 

Clearing Member application is approved with 

increased financial requirements, NSCC would 

thereafter regularly review such Agent Clearing 

Member regarding its continued adherence to such 

increased financial requirements as well as 

determine whether such increased financial 

requirements are still appropriate. If the Agent 

Clearing Member is unable to adhere to the 

increased financial requirements, the Board of 

Directors may, pursuant to Section 9 of proposed 

Rule 2D, suspend, prohibit or limit the Agent 

Clearing Member’s access to NSCC’s services. 

67As an example, NSCC may require an Agent 

Clearing Member or an Agent Clearing Member 

applicant to furnish adequate assurances of such 

Agent Clearing Member or Agent Clearing Member 

applicant’s financial responsibility and operational 

capability if NSCC has concerns about such Agent 

Clearing Member or Agent Clearing Member 

applicant’s overall financial health or credit rating. 

68See Addendum P (Fine Schedule), supra note 

4. 

and (2) excess net capital over the 

minimum net capital requirement 

imposed by the Commission (or such 

higher minimum capital requirement 

imposed by the Member’s designated 

examining authority) of at least $10 

million.65 As proposed, NSCC may 

require that a Person be a Member for 

a certain time period before that Person 

may be considered to become an Agent 

Clearing Member. 

Section 2(b) of proposed Rule 2D 

would provide that each Member 

applicant to become an Agent Clearing 

Member would be required to provide 

an application and other information 

requested by NSCC. Agent Clearing 

Member applications shall first be 

reviewed by NSCC and would require 

the Board of Directors’ approval, unless 

the Member applicant is already a 

Sponsoring Member under proposed 

Rule 2C or a sponsoring member of 

FICC. NSCC believes this approach to 

the Board of Directors’ approval for 

Agent Clearing Members is appropriate 

in light of the fact that the critical 

components of the FICC sponsoring 

member applications as well as the 

NSCC Agent Clearing Member and 

Sponsoring Member applications and 

the criteria that the respective boards 

assess when determining whether to 

admit a Member in such respective 

capacities are substantially similar. 

Under Section 2(c) of proposed Rule 

2D, if the Agent Clearing Member 

application is denied, such denial 

would be handled in accordance with 

Section 1 of Rule 2A (Initial 

Membership Requirements). 

As proposed in Section 2(d) of 

proposed Rule 2D, NSCC may impose 

additional financial requirements on an 

Agent Clearing Member applicant based 

upon the level of the anticipated 

positions and obligations of such 

applicant, the anticipated risk 

associated with the volume and types of 

transaction such applicant proposes to 

process through NSCC as an Agent 

Clearing Member and the overall 

financial condition of such applicant. 

Under the proposal, with respect to an 

application of a Member to become an 

Agent Clearing Member that requires the 

Board of Directors’ approval, the Board 

of Directors shall also approve any 

increased financial requirements 

imposed by NSCC in connection with 

the approval of the application, and 

NSCC would thereafter regularly review 

such Agent Clearing Member regarding 

its compliance with the increased 

financial requirements.66

In addition, under Section 2(e) of 

proposed Rule 2D, NSCC may require 

each Agent Clearing Member or any 

Agent Clearing Member applicant to 

furnish adequate assurances of such 

Agent Clearing Member or Agent 

Clearing Member applicant’s financial 

responsibility and operational capability 

within the meaning of Rule 15 

(Assurances of Financial Responsibility 

and Operational Capability), as NSCC 

may at any time or from time to time 

deem necessary or advisable in order to 

protect NSCC, its participants, creditors 

or investors, to safeguard securities and 

funds in the custody or control of NSCC 

and for which NSCC is responsible, or 

to promote the prompt and accurate 

clearance, settlement and processing of 

securities transactions.67

Section 2(f) of proposed Rule 2D 

would provide that each Member whose 

Agent Clearing Member application is 

approved would sign and deliver to 

NSCC an agreement between NSCC and 

the Member and specifies the terms and 

conditions deemed by NSCC to be 

necessary in order to protect itself and 

its participants (‘‘Agent Clearing 

Member Agreement’’) and a related legal 

opinion in a form satisfactory to NSCC. 

Section 2(g) of proposed Rule 2D 

would provide that each Agent Clearing 

Member shall submit to NSCC, within 

the timeframes and in the formats 

required by NSCC, the reports and 

information that all Members are 

required to submit regardless of type of 

Member and the reports and 

information required to be submitted for 

its respective type of Member, all 

pursuant to Section 2 of Rule 2B 

(Ongoing Membership Requirements 

and Monitoring) and, if applicable, 

Addendum O (Admission of Non-US 

Entities as Direct NSCC Members). 

Section 2(h) of proposed Rule 2D 

would provide that an Agent Clearing 

Member’s books and records, insofar as 

they relate to the Agent Clearing 

Member Transactions submitted to 

NSCC, shall be open to the inspection 

of the duly authorized representatives of 

NSCC to the same extent provided in 

Rule 2A (Initial Membership 

Requirements) for other Members. 

Section 2(i) of proposed Rule 2D 

would provide that an Agent Clearing 

Member shall promptly inform NSCC, 

both orally and in writing, if it is no 

longer in compliance with the relevant 

standards and qualifications for 

applying to become an Agent Clearing 

Member set forth in the proposed Rule 

2D. Notification must take place 

immediately and in no event later than 

2 Business Days from the date on which 

the Agent Clearing Member first learns 

of its non-compliance. As proposed, 

NSCC would assess a fine in accordance 

with the Fine Schedule in Addendum P 

against any Agent Clearing Member that 

fails to so notify NSCC.68 If the Agent 

Clearing Member fails to remain in 

compliance with the relevant standards 

and qualifications, NSCC would, if 

necessary, undertake appropriate action 

to determine the status of the Agent 

Clearing Member and its continued 

eligibility as such. In addition, NSCC 

may review the financial responsibility 

and operational capability of the Agent 

Clearing Member, and otherwise require 

from the Agent Clearing Member 

additional reports of its financial or 

operational condition at such intervals 

and in such detail as NSCC shall 

determine. In addition, if NSCC has 

reason to believe that an Agent Clearing 

Member may fail to comply with any of 

the Rules applicable to Agent Clearing 

Members, it may require the Agent 


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69NSCC selected the Volatility Charges and Net 

Member Capital as the criteria for purposes of 

establishing the activity limit for Agent Clearing 

Members. This is because an Agent Clearing 

Member’s total Volatility Charges being in excess of 

its Net Member Capital is an important indicator 

that the Agent Clearing Member’s financial 

resources, as measured by its Net Capital, net assets 

or equity capital, may be insufficient to meet the 

largest component of its Required Fund Deposit 

(i.e., Volatility Charges). 

70Section 2(n) of proposed Rule 2D is designed 

to be consistent with provisions in the Rules 

Clearing Member to provide it, within 

such timeframe, and in such detail, and 

pursuant to such manner as NSCC shall 

determine, with assurances in writing of 

a credible nature that the Agent Clearing 

Member shall not, in fact, violate any of 

the Rules. 

Section 2(j) of proposed Rule 2D 

would provide that in the event that an 

Agent Clearing Member fails to remain 

in compliance with the relevant 

requirements of the Rules or the Agent 

Clearing Member Agreement, NSCC 

shall have the right to cease to act for 

the Agent Clearing Member in its 

capacity as an Agent Clearing Member 

in accordance with Section 9 of 

proposed Rule 2D or as a Member more 

generally, unless the Agent Clearing 

Member requests that such action not be 

taken and NSCC determines that, 

depending upon the specific 

circumstances and the record of the 

Agent Clearing Member, it is 

appropriate instead to establish for such 

Agent Clearing Member a time period, 

which shall be determined by NSCC and 

which shall be no longer than 30 

calendar days unless otherwise 

determined by NSCC, during which the 

Agent Clearing Member must resume 

compliance with such requirements. As 

proposed, in the event that the Agent 

Clearing Member is unable to satisfy 

such requirements within the time 

period specified by NSCC, NSCC shall, 

pursuant to the Rules, cease to act for 

the Agent Clearing Member in its 

capacity as an Agent Clearing Member 

pursuant to Section 9 of the proposed 

Rule 2D or as a Member more generally. 

Section 2(k) of proposed Rule 2D 

would provide that if the sum of the 

Volatility Charges applicable to an 

Agent Clearing Member’s Agent 

Clearing Member Customer Omnibus 

Account(s) and its other accounts at 

NSCC exceeds its Net Member Capital, 

the Agent Clearing Member shall not be 

permitted to submit activity into its 

Agent Clearing Member Customer 

Omnibus Account(s), unless otherwise 

determined by NSCC in order to 

promote orderly settlement.69 As 

proposed, an ‘‘Agent Clearing Member 

Customer Omnibus Account’’ would 

mean a ledger maintained on the books 

and records of NSCC that reflects the 

outstanding Agent Clearing Member 

Transactions that an Agent Clearing 

Member enters into on behalf of 

Customers and that have been novated 

to NSCC, the SFT Positions or SFT Cash 

associated with those transactions, and 

any debits or credits of cash associated 

with such transactions effected pursuant 

to Rule 12 (Settlement). 

Section 2(l) of proposed Rule 2D 

would provide that an Agent Clearing 

Member may voluntarily elect to 

terminate its status as an Agent Clearing 

Member by providing NSCC with a 

written notice from an Agent Clearing 

Member to NSCC that the Agent 

Clearing Member is voluntarily electing 

to terminate its status as an Agent 

Clearing Member (‘‘Agent Clearing 

Member Voluntary Termination 

Notice’’). The Agent Clearing Member 

shall specify in the Agent Clearing 

Member Voluntary Termination Notice 

a desired date for such termination, 

which date shall not be prior to the 

scheduled Final Settlement Date of any 

remaining obligation owed by the Agent 

Clearing Member to NSCC as of the time 

such Agent Clearing Member Voluntary 

Termination Notice is submitted to 

NSCC, unless otherwise approved by 

NSCC. 

Section 2(l) of proposed Rule 2D 

would also provide that such 

termination would not be effective until 

accepted by NSCC, which shall be no 

later than 10 Business Days after the 

receipt of the Agent Clearing Member 

Voluntary Termination Notice from 

such Agent Clearing Member. NSCC’s 

acceptance shall be evidenced by a 

notice to NSCC’s participants 

announcing the termination of the 

Agent Clearing Member’s status as such 

and the date on which the termination 

of the Agent Clearing Member’s status as 

an Agent Clearing Member becomes 

effective (‘‘Agent Clearing Member 

Termination Date’’). As proposed, after 

the close of business on the Agent 

Clearing Member Termination Date, the 

Agent Clearing Member shall no longer 

be eligible to submit Agent Clearing 

Member Transactions. If any Agent 

Clearing Member Transaction is 

submitted to NSCC by the Agent 

Clearing Member that is scheduled to 

settle after the Agent Clearing Member 

Termination Date, such Agent Clearing 

Member’s Agent Clearing Member 

Voluntary Termination Notice would be 

deemed void, and the Agent Clearing 

Member would remain subject to the 

proposed Rule 2D as if it had not given 

such Agent Clearing Member Voluntary 

Termination Notice. 

Section 2(m) of proposed Rule 2D 

would provide that an Agent Clearing 

Member’s voluntary termination of its 

status as such shall not affect its 

obligations to NSCC, or the rights of 

NSCC, with respect to Agent Clearing 

Member Transactions submitted to 

NSCC before the applicable Agent 

Clearing Member Termination Date. 

Any such Agent Clearing Member 

Transactions that have been novated to 

NSCC shall continue to be processed by 

NSCC. The return of the Agent Clearing 

Member’s Clearing Fund deposit shall 

be governed by Section 7 of Rule 4 

(Clearing Fund). If an Event Period were 

to occur after an Agent Clearing Member 

has submitted the Agent Clearing 

Member Voluntary Termination Notice 

but on or prior to the Agent Clearing 

Member Termination Date, in order for 

the Agent Clearing Member to benefit 

from its Loss Allocation Cap pursuant to 

Section 4 of Rule 4, the Agent Clearing 

Member would need to comply with the 

provisions of Section 6 of Rule 4 and 

submit a Loss Allocation Withdrawal 

Notice, which notice, upon submission, 

shall supersede and void any pending 

Agent Clearing Member Voluntary 

Termination Notice previously 

submitted by the Agent Clearing 

Member. 

Section 2(n) of proposed Rule 2D 

would provide that any non-public 

information furnished to NSCC 

pursuant to proposed Rule 2D shall be 

held in confidence as may be required 

under the laws, rules and regulations 

applicable to NSCC that relate to the 

confidentiality of records. Section 2(n) 

would also provide that each Agent 

Clearing Member shall maintain DTCC 

Confidential Information in confidence 

to the same extent and using the same 

means it uses to protect its own 

confidential information, but no less 

than a reasonable standard of care, and 

shall not use DTCC Confidential 

Information or disclose DTCC 

Confidential Information to any third 

party except as necessary to perform 

such Agent Clearing Member’s 

obligations under the Rules or as 

otherwise required by applicable law. 

Section 2(n) would further provide that 

each Agent Clearing Member 

acknowledges that a breach of its 

confidentiality obligations under the 

Rules may result in serious and 

irreparable harm to NSCC and/or DTCC 

for which there is no adequate remedy 

at law. In addition, Section 2(n) would 

provide that in the event of such a 

breach by the Agent Clearing Member, 

NSCC and/or DTCC shall be entitled to 

seek any temporary or permanent 

injunctive or other equitable relief in 

addition to any monetary damages 

thereunder.70


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relating to the confidentiality of information 

furnished by participants. See Rule 2A (Initial 

Membership Requirements), supra note 4. 

71 If an Agent Clearing Member were permitted to 

maintain SFTs entered into as both Transferee and 

Transferor in the same Agent Clearing Member 

Customer Omnibus Account, the Required Fund 

Deposit obligations of the Agent Clearing Member 

could potentially be reduced by offsetting SFT 

Positions of different Customers in the same SFT 

Security. 

72NSCC believes this is appropriate because the 

Clearing Fund deposits of an Agent Clearing 

Member are the proprietary assets of the Agent 

Clearing Member and NSCC generally has the right 

to apply the Clearing Fund deposits of a Member 

to any of the Member’s obligations to NSCC, 

Continued 

Proposed Rule 2D, Section 3 

(Compliance With Laws) 

Section 3 of proposed Rule 2D would 

provide that each Agent Clearing 

Member shall comply in all material 

respects with all applicable laws, 

including applicable laws relating to 

securities, taxation and money 

laundering, as well as global sanctions 

laws, in connection with the use of 

NSCC’s services. 

Proposed Rule 2D, Section 4 (Agent 

Clearing Member Transactions) 

Section 4 of proposed Rule 2D would 

provide that an Agent Clearing Member 

shall be permitted to submit to NSCC on 

behalf of one or more Customers’ 

Securities Financing Transactions 

(‘‘Agent Clearing Member 

Transactions’’) in accordance with 

proposed Rule 56, as described below. 

Proposed Rule 2D, Section 5 (Agent 

Clearing Member Agent Obligations) 

Section 5 of proposed Rule 2D would 

establish rules-based obligations for 

Agent Clearing Members and the 

establishment of Agent Clearing 

Member Customer Omnibus Accounts. 

Section 5(a) of proposed Rule 2D 

would provide that an Agent Clearing 

Member shall be permitted to submit to 

NSCC for novation Agent Clearing 

Member Transactions entered into by 

the Agent Clearing Member as agent on 

behalf of one or more Customers. Any 

such submission shall be in accordance 

with proposed Rule 2D. As proposed, 

subject to the provisions of the Rules, an 

Agent Clearing Member’s clearing of 

Agent Clearing Member Transactions for 

Customers (‘‘Customer Clearing 

Service’’) may be provided by an Agent 

Clearing Member to its Customers on 

any terms and conditions mutually 

agreed to by the Agent Clearing Member 

and its Customers; provided, that each 

Agent Clearing Member shall, before 

providing Customer Clearing Service to 

any Customer, enter into an agreement 

with that Customer that binds the 

Customer to the provisions of the Rules 

applicable to Agent Clearing Member 

Transactions and Customers. 

Section 5(b) of proposed Rule 2D 

would provide that, with respect to an 

Agent Clearing Member that submits 

Agent Clearing Member Transactions to 

NSCC for novation on behalf of its 

Customers, NSCC shall maintain one or 

more Agent Clearing Member Customer 

Omnibus Accounts in the name of the 

Agent Clearing Member for the benefit 

of its Customers. Each Agent Clearing 

Member Customer Omnibus Account 

would be permitted to contain only (i) 

SFTs entered into by the Agent Clearing 

Member, on behalf of a Customer, as 

Transferor or (ii) SFTs entered into by 

the Agent Clearing Member, on behalf of 

a Customer, as a Transferee. An Agent 

Clearing Member would not be 

permitted to combine SFTs entered into 

as Transferee and Transferor in the same 

Agent Clearing Member Customer 

Omnibus Account. This is designed to 

ensure that NSCC’s volatility-based 

Clearing Fund deposit requirements 

represent the sum of each individual 

Customer’s activity (i.e., that the 

positions are margined on a gross 

basis).71

Section 5(c) of proposed Rule 2D 

would provide that an Agent Clearing 

Member shall act solely as agent of its 

Customers in connection with the 

clearing of Agent Clearing Member 

Transactions; provided that the Agent 

Clearing Member shall remain fully 

liable for the performance of all 

obligations to NSCC arising in 

connection with Agent Clearing Member 

Transactions; and provided further, that 

the liabilities and obligations of NSCC 

with respect to Agent Clearing Member 

Transactions entered into by the Agent 

Clearing Member shall extend only to 

the Agent Clearing Member. Section 5(c) 

of proposed Rule 2D would further 

provide that, without limiting the 

generality of the foregoing, NSCC shall 

not have any liability or obligation 

arising out of or with respect to any 

Agent Clearing Member Transaction to 

any Customer on behalf of whom an 

Agent Clearing Member entered into the 

Agent Clearing Member Transaction. 

Section 5(d) of proposed Rule 2D 

would provide that nothing in the Rules 

shall prohibit an Agent Clearing 

Member from seeking reimbursement 

from a Customer for payments made by 

the Agent Clearing Member (whether 

out of Clearing Fund deposits or 

otherwise) under the Rules, or as 

otherwise may be agreed between the 

Agent Clearing Member and the 

Customer. 

Proposed Rule 2D, Section 6 (Clearing 

Fund Obligations) 

Section 6 of proposed Rule 2D would 

set forth the Clearing Fund obligations. 

Section 6(a) of proposed Rule 2D 

would provide that NSCC shall 

maintain one or more Agent Clearing 

Member Customer Omnibus Accounts 

for an Agent Clearing Member. Each 

Agent Clearing Member shall make and 

maintain so long as such Member is an 

Agent Clearing Member a deposit to the 

Clearing Fund as a Required Fund 

Deposit to support the activity in its 

Agent Clearing Member Customer 

Omnibus Account(s) (the ‘‘Agent 

Clearing Member Required Fund 

Deposit’’). Each Agent Clearing Member, 

so long as such Member is an Agent 

Clearing Member, shall also provide 

SLD to the Clearing Fund, as may be 

required pursuant to Rule 4A 

(Supplemental Liquidity Deposits), to 

support the activity in its Agent 

Clearing Member Customer Omnibus 

Account(s). Deposits to the Clearing 

Fund would be held by NSCC or its 

designated agents, to be applied as 

provided in the Rules. 

Section 6(b) of proposed Rule 2D 

would provide that, in the ordinary 

course, for purposes of satisfying the 

Agent Clearing Member’s Clearing Fund 

requirements under the Rules for its 

Member activity, its Agent Clearing 

Member activity, and, to the extent 

applicable, its Sponsoring Member 

activity, the Agent Clearing Member’s 

proprietary accounts, its Agent Clearing 

Member Customer Omnibus Account(s), 

and its Sponsored Member SubAccounts, if any, shall be treated 

separately, as if they were accounts of 

separate entities. Notwithstanding the 

previous sentence, however, NSCC may, 

in its sole discretion, at any time and 

without prior notice to the Agent 

Clearing Member (but being obligated to 

give notice to the Agent Clearing 

Member as soon as possible thereafter) 

and whether or not the Agent Clearing 

Member is in default of its obligations 

to NSCC, treat the Agent Clearing 

Member’s accounts as a single account 

for the purpose of applying Clearing 

Fund deposits; apply Clearing Fund 

deposits made by the Agent Clearing 

Member with respect to any account as 

necessary to ensure that the Agent 

Clearing Member meets all of its 

obligations to NSCC under any other 

account(s); and otherwise exercise all 

rights to offset and net against the 

Clearing Fund deposits any net 

obligations among any or all of the 

accounts, whether or not any other 

Person is deemed to have any interest in 

such account.72


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regardless of whether those were the obligations 

that generated the Clearing Fund deposit 

requirement. NSCC therefore believes that, 

consistent with the FICC Sponsoring Member/ 

Sponsored Member Program for the reasons 

described above in Item II(A)1(iii) ‘‘Sponsoring 

Members and Sponsored Members,’’ an Agent 

Clearing Member’s Clearing Fund deposits should 

be available to satisfy any of the Agent Clearing 

Member’s obligations to NSCC. 

Section 6(c) of proposed Rule 2D 

would provide that the Agent Clearing 

Member Required Fund Deposit for each 

Agent Clearing Member Customer 

Omnibus Account shall be calculated 

separately based on the Agent Clearing 

Member Transactions in such Agent 

Clearing Member Customer Omnibus 

Account, and the Agent Clearing 

Member shall, as principal, be required 

to satisfy the Agent Clearing Member 

Required Fund Deposit for each of the 

Agent Clearing Member’s Agent 

Clearing Member Customer Omnibus 

Accounts. 

Section 6(d) of proposed Rule 2D 

would provide that Sections 1, 2, 4, 5, 

6, 7, 8, 9, 10, 11 and 12 of Rule 4 

(Clearing Fund) shall apply to the Agent 

Clearing Member Required Fund 

Deposit with respect to obligations of an 

Agent Clearing Member under the 

Rules, including its obligations arising 

under the Agent Clearing Member 

Customer Omnibus Account(s), to the 

same extent as such sections apply to 

any Required Fund Deposit and any 

other obligations of a Member. For 

purposes of Section 1 of Rule 4, 

obligations and liabilities of a Member 

to NSCC that shall be secured shall 

include, without limitation, a Member’s 

obligations as an Agent Clearing 

Member under the Rules, including, 

without limitation, any obligation of any 

such Agent Clearing Member to provide 

the Agent Clearing Member Required 

Fund Deposit and such Agent Clearing 

Member’s obligations arising under 

SFTs established in the Agent Clearing 

Member Customer Omnibus Accounts 

of such Agent Clearing Member. 

Section 6(e) of proposed Rule 2D 

would provide that an Agent Clearing 

Member shall be subject to such fines as 

may be imposed in accordance with the 

Rules for any late satisfaction of a 

Clearing Fund deficiency call. 

Proposed Rule 2D, Section 7 (Right of 

Offset) 

Section 7 of proposed Rule 2D would 

provide that in the ordinary course, 

with respect to satisfaction of any Agent 

Clearing Member’s obligations under the 

Rules, the Agent Clearing Member’s 

Agent Clearing Member Customer 

Omnibus Accounts, the Agent Clearing 

Member’s proprietary accounts, and the 

Agent Clearing Member’s Sponsored 

Member Sub-Accounts, if any, at NSCC 

shall be treated separately, as if they 

were accounts of separate entities. 

Notwithstanding the previous sentence, 

however, NSCC may, in its sole 

discretion, at any time any obligation of 

the Agent Clearing Member arises in 

respect of any Agent Clearing Member 

Customer Omnibus Account, exercise a 

right of offset and net any such 

obligation against any obligations of 

NSCC to the Agent Clearing Member in 

respect of such Agent Clearing 

Member’s proprietary accounts at NSCC. 

Proposed Rule 2D, Section 8 (Loss 

Allocation Obligations) 

Section 8 of proposed Rule 2D would 

establish loss allocation obligations for 

Agent Clearing Members. 

Section 8(a) of proposed Rule 2D 

would provide that, to the extent NSCC 

incurs a loss or liability from a 

Defaulting Member Event or a Declared 

Non-Default Loss Event and a loss 

allocation obligation arises, that would 

be the responsibility of the Agent 

Clearing Member Customer Omnibus 

Account as if the Agent Clearing 

Member Customer Omnibus Account 

were a Member, NSCC shall calculate 

such loss allocation obligation and the 

Agent Clearing Member shall be, as 

principal, responsible for satisfying 

such obligations. 

Section 8(b) of proposed Rule 2D 

would provide that the entire amount of 

the Required Fund Deposit associated 

with the Agent Clearing Member’s 

proprietary accounts at NSCC and the 

entire amount of the Agent Clearing 

Member Required Fund Deposit may be 

used to satisfy any amount allocated 

against an Agent Clearing Member, 

whether in its capacity as a Member, an 

Agent Clearing Member, or otherwise. 

With respect to an obligation to make 

payment due to any loss allocation 

amounts assessed on an Agent Clearing 

Member pursuant to Section 8(a) of 

proposed Rule 2D, the Agent Clearing 

Member may instead elect to terminate 

its membership in NSCC pursuant to 

Section 6 of Rule 4 and thereby benefit 

from its Loss Allocation Cap pursuant to 

Section 4 of Rule 4; however, for the 

purpose of determining the Loss 

Allocation Cap for such Agent Clearing 

Member, its Required Fund Deposit 

shall be the sum of its Required Fund 

Deposits associated with its proprietary 

accounts at NSCC (including its 

proprietary SFT Account pursuant to 

proposed Rule 56), its Agent Clearing 

Member Required Fund Deposit for each 

of its Agent Clearing Member Customer 

Omnibus Accounts, and its Sponsoring 

Member Required Fund Deposit, if any. 

Proposed Rule 2D, Section 9 

(Restrictions on Access to Services by 

an Agent Clearing Member) 

Section 9 of proposed Rule 2D would 

establish the rights of NSCC to restrict 

an Agent Clearing Member’s access to 

NSCC’s services. 

Section 9(a) of proposed Rule 2D 

would provide that the Board of 

Directors may at any time upon NSCC 

providing notice to an Agent Clearing 

Member pursuant to Section 5 of Rule 

45 (Notices), suspend an Agent Clearing 

Member in its capacity as an Agent 

Clearing Member from any service 

provided by NSCC either with respect to 

a particular transaction or transactions 

or with respect to transactions generally, 

or prohibit or limit such Agent Clearing 

Member’s access to services offered by 

NSCC in the event that one or more of 

the factors set forth in Section 1 of Rule 

46 (Restrictions on Access to Services) 

is present with respect to the Agent 

Clearing Member. 

Section 9(b) of proposed Rule 2D 

would provide that Rule 46 shall apply 

with respect to an Agent Clearing 

Member in the same way as it applies 

to Members, including the Board of 

Directors’ right to summarily suspend 

the Agent Clearing Member and to cease 

to act for such Agent Clearing Member. 

As under Rule 46, the Board of Directors 

would need to make the determination 

of whether to suspend, prohibit or limit 

an Agent Clearing Member’s access to 

services offered by NSCC on the basis of 

the factors set forth in that rule. 

Section 9(c) of proposed Rule 2D 

would provide that if NSCC ceases to 

act for an Agent Clearing Member in its 

capacity as an Agent Clearing Member, 

Section 14 of proposed Rule 56 shall 

apply and NSCC shall decline to accept 

or process data from the Agent Clearing 

Member on Agent Clearing Member 

Transactions and close-out any Agent 

Clearing Member Transactions that have 

been novated to NSCC. Section 9(c) 

would also provide that if NSCC 

suspends, prohibits or limits an Agent 

Clearing Member in its capacity as an 

Agent Clearing Member with respect to 

such Agent Clearing Member’s access to 

services offered by NSCC, NSCC shall 

decline to accept or process data from 

the Agent Clearing Member on Agent 

Clearing Member Transactions for so 

long as NSCC is suspending, prohibiting 

or limiting the Agent Clearing Member. 

Furthermore, Section 9(c) would state 

that, in addition, NSCC would close-out 

any Agent Clearing Member 

Transactions which have been novated 

to NSCC. 

This is different from how NSCC 

would treat Sponsored Member 


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Transactions of a Sponsoring Member 

under Section 10 of proposed Rule 2C 

if NSCC ceases to act for the Sponsoring 

Member. With respect to such 

transactions, NSCC would have the 

option to either terminate or settle a 

Sponsored Member’s positions after 

ceasing to act for the Sponsoring 

Member. The reason for this difference 

is that NSCC would have the practical 

and legal capability to make such an 

election because each Sponsored 

Member would be a limited-purpose 

member of NSCC. Accordingly, NSCC 

would have the requisite information 

about each of the Sponsored Member’s 

novated positions (by virtue of each 

Sponsored Member’s novated portfolio 

represented as a different sub-account of 

the Sponsoring Member (i.e., Sponsored 

Member Sub-Account) on the books and 

records of NSCC) to make such an 

election. By contrast, an Agent Clearing 

Member’s Customers would not be 

limited-purpose members of NSCC nor 

would NSCC know which transactions 

within an Agent Clearing Member 

Customer Omnibus Account belong to 

which Customers. As such, NSCC 

would not be able to separately 

terminate or complete settlement with 

respect to Customer’s novated positions. 

Proposed Rule 2D, Section 10 

(Insolvency of an Agent Clearing 

Member) 

Section 10(a) of proposed Rule 2D 

would provide that an Agent Clearing 

Member shall be obligated to 

immediately notify NSCC that (a) it 

fails, or is unable, to perform its 

contracts or obligations or (b) it is 

insolvent as required by Section 1 of 

Rule 20 (Insolvency) for other Members. 

An Agent Clearing Member shall be 

treated by NSCC in all respects as 

insolvent under the same circumstances 

set forth in Section 2 of Rule 20 for 

other Members. Section 3 of Rule 20 

shall apply, in the same manner in 

which such section applies to other 

Members, in the case where NSCC treats 

an Agent Clearing Member as insolvent. 

Section 10(b) of proposed Rule 2D 

would provide that in the event that 

NSCC determines to treat an Agent 

Clearing Member as insolvent pursuant 

to Rule 20 (Insolvency), NSCC shall 

have the right to cease to act for the 

insolvent Agent Clearing Member 

pursuant to Section 9 of proposed Rule 

2D. If NSCC ceases to act for the 

insolvent Agent Clearing Member, 

NSCC shall decline to accept or process 

data from the Agent Clearing Member, 

including Agent Clearing Member 

Transactions. As proposed, NSCC 

would close-out any Agent Clearing 

Member Transactions which have been 

novated to NSCC. 

This is different from how NSCC 

would treat Sponsored Member 

Transactions. As described above, NSCC 

would have the option to either 

terminate or settle a Sponsored 

Member’s novated positions after 

ceasing to act for the Sponsoring 

Member. However, with respect to 

Agent Clearing Member Transactions, 

NSCC would close-out any such 

transactions which have been novated 

to NSCC. This is because NSCC would 

have the practical and legal capability to 

make such an election with respect to 

Sponsored Member Transactions 

because each Sponsored Member would 

be a limited-purpose member of NSCC. 

Accordingly, NSCC would have the 

requisite information about each of the 

Sponsored Member’s novated positions 

(by virtue of each Sponsored Member’s 

novated portfolio represented as a 

different sub-account of the Sponsoring 

Member (i.e., Sponsored Member SubAccount) on the books and records of 

NSCC) to make such an election. By 

contrast, an Agent Clearing Member’s 

Customers would not be limitedpurpose members of NSCC nor would 

NSCC know which transactions within 

an Agent Clearing Member Customer 

Omnibus Account belong to which 

Customers. As such, NSCC would not be 

able to separately terminate or complete 

settlement with respect to Customers’ 

novated positions. 

Proposed Rule 2D, Section 11 (Transfer 

of Agent Clearing Member Transactions 

in Agent Clearing Member Customer 

Omnibus Accounts) 

Section 11 of proposed Rule 2D 

would (i) permit an Agent Clearing 

Member, upon a default of a Customer 

and consent of NSCC, to transfer Agent 

Clearing Member Transactions of the 

Customer established in one or more of 

the Agent Clearing Member’s Agent 

Clearing Member Customer Omnibus 

Accounts from such Agent Clearing 

Member Customer Omnibus Accounts 

to the Agent Clearing Member’s 

proprietary account at NSCC as a 

Member and (ii) govern how the transfer 

would be effectuated. 

Section 11(a) of proposed Rule 2D 

would clarify the scope to which 

Section 11 of proposed Rule 2D applies. 

It would state that Section 11 would not 

apply if either (i) the relevant Agent 

Clearing Member is a Defaulting 

Member or (ii) a Corporation Default has 

occurred. This is because, as described 

above with respect to Section 10(b) of 

proposed Rule 2D, NSCC would closeout all Agent Clearing Member 

Transactions for which the defaulting 

Agent Clearing Member was 

responsible. If a Corporation Default has 

occurred with respect to NSCC, each 

Agent Clearing Member’s positions 

would be closed out in accordance with 

Section 17 of proposed Rule 56. 

Section 11(b) of proposed Rule 2D 

would set out the process by which an 

Agent Clearing Member may transfer the 

Agent Clearing Member Transactions of 

a defaulting Customer in one or more of 

Agent Clearing Member’s Agent 

Clearing Member Customer Omnibus 

Accounts. It would provide that, to the 

extent permitted under applicable laws 

and regulations, an Agent Clearing 

Member may, upon a default of a 

Customer and the consent of NSCC, 

transfer the Agent Clearing Member 

Transactions of the Customer 

established in one or more of the Agent 

Clearing Member’s Agent Clearing 

Member Customer Omnibus Accounts 

from such Agent Clearing Member 

Customer Omnibus Accounts to the 

Agent Clearing Member’s proprietary 

account at NSCC as a Member. As 

proposed, any such transfer shall occur 

by novation, such that the obligations 

between NSCC and the relevant 

Customer in respect of the Agent 

Clearing Member Transactions shall be 

terminated and replaced with identical 

obligations between NSCC and the 

Agent Clearing Member, acting as 

principal. Section 11(b) would also 

provide the Agent Clearing Member 

shall indemnify NSCC, and its 

employees, officers, directors, 

shareholders, agents, and Members, for 

any and all losses, liability, or expenses 

incurred by them arising from, or in 

relation to, any such transfer. 

Proposed Rule 2D, Section 12 (Customer 

Acknowledgments) 

Section 12 of proposed Rule 2D 

would provide that each Agent Clearing 

Member on behalf of each of its 

Customers agrees that such Customer, 

by participating in and entering into 

Agent Clearing Member Transactions 

through the Agent Clearing Member, 

understands, acknowledges, and agrees 

that: (a) The service provided by NSCC 

with regard to the Customer Clearing 

Service would be subject to and 

governed by the Rules; (b) the Rules 

shall govern the novation of Agent 

Clearing Member Transactions and all 

transactions between the Customer and 

its Agent Clearing Member resulting in 

the novation of such transactions, and at 

the time of novation of an Agent 

Clearing Member Transaction, the 

Customer on whose behalf it was 

submitted would be bound by the Agent 

Clearing Member Transaction 

automatically and without any further 


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action by the Customer or by its Agent 

Clearing Member, and the Customer 

agrees to be bound by the applicable 

provisions of the Rules in all respects; 

(c) NSCC shall be under no obligation to 

deal directly with the Customer, and 

NSCC may deal exclusively with the 

Customer’s Agent Clearing Member; (d) 

NSCC shall have no obligations to the 

Customer with respect to any Agent 

Clearing Member Transactions 

submitted by an Agent Clearing Member 

on behalf of the Customer, including 

with respect to any payment or delivery 

obligations; and (e) the Customer shall 

have no right to receive from NSCC, or 

any right to assert a claim against NSCC 

with respect to, nor shall NSCC be liable 

to the Customer for, any payment or 

delivery obligation in connection with 

any Agent Clearing Member 

Transactions submitted by an Agent 

Clearing Member on behalf of the 

Customer, and NSCC shall make any 

such payments or redeliveries solely to 

the relevant Agent Clearing Member. 

(C) Proposed Rule 56—Securities 

Financing Transaction Clearing Service 

NSCC is proposing to add Rule 56, 

entitled ‘‘Securities Financing 

Transaction Clearing Service.’’ This new 

rule would govern the proposed SFT 

Clearing Service and would be 

comprised of 18 sections, each of which 

is described below. 

In connection with the proposed SFT 

Clearing Service, NSCC is proposing to 

add the following terms and definitions, 

as described below. 

The term ‘‘Aggregate Net SFT Closeout Value’’ would mean, with respect to 

an SFT Member, the sum of the SFT 

Close-out Value (as defined below and 

in the proposed rule change) for each 

SFT Position to which the SFT Member 

is a party. 

The term ‘‘Approved SFT Submitter’’ 

would mean a provider of transaction 

data on an SFT that the parties to the 

SFT have selected and NSCC has 

approved, subject to such terms and 

conditions as to which the Approved 

SFT Submitter and NSCC may agree. 

The term ‘‘Bilaterally Initiated SFT’’ 

would mean an SFT, the Initial 

Settlement of which occurred prior to 

the submission of such SFT to NSCC. 

The term ‘‘Buy-In Amount’’ would 

mean a net amount equal to (x) the BuyIn Costs or Deemed Buy-In Costs (as 

defined below and in the proposed rule 

change) of the SFT Securities (as 

defined below and in the proposed rule 

change) in respect of which a Transferor 

has effected a Buy-In, less (y) the 

amount of the SFT Cash for the relevant 

SFT (unless the Transferor effected a 

Buy-In in respect of some, but not all, 

of the SFT Securities that are the subject 

of the SFT, in which case (y) shall be 

the amount of the Corresponding SFT 

Cash (as defined below and in the 

proposed rule change)). 

The term ‘‘Contract Price’’ would 

mean, with respect to SFT Securities 

subject to an SFT, the price of such 

securities at the time the SFT is 

submitted to NSCC for novation, which 

price shall be determined by the SFT 

Member parties to the relevant SFT and 

provided by an Approved SFT 

Submitter to NSCC in accordance with 

the communication links, formats, 

timeframes and deadlines established by 

NSCC for such purpose; provided that if 

no such price is provided by the time 

required by NSCC, the ‘‘Contract Price’’ 

shall be the Current Market Price of the 

SFT Securities. 

The term ‘‘Corresponding SFT Cash’’ 

would mean (a) in respect of a Recalled 

SFT (as defined below and in the 

proposed rule change) for which a 

Transferor has effected a Buy-In in 

respect of some, but not all, of the SFT 

Securities that are the subject of the 

SFT, the portion of the SFT Cash for 

such SFT equal to the product of (i) the 

percentage of the SFT Securities in 

respect of which the Transferor effected 

a Buy-In and (ii) the SFT Cash of the 

SFT; and (b) in respect of a Settling SFT 

which has a greater quantity of SFT 

Securities as its subject than the 

corresponding Linked SFT, the portion 

of the SFT Cash of the Settling SFT 

equal to the product of (i) the percentage 

of the SFT Securities of the Settling SFT 

that the Linked SFT has as its subject 

and (ii) the SFT Cash of the Settling 

SFT. 

The term ‘‘Deemed Buy-In Costs’’ 

would mean the product of the number 

of SFT Securities subject to the relevant 

Buy-In and the per-share price therefor 

on the date of the Buy-In obtained from 

a generally recognized source or the last 

bid quotation from such a source at the 

most recent close of trading for the SFT 

Security. 

The term ‘‘Defaulting SFT Member’’ 

would mean an SFT Member for which 

NSCC has ceased to act in accordance 

with Section 14 of proposed Rule 56, as 

described below. 

The term ‘‘Distribution’’ would mean, 

with respect to any SFT Security at any 

time, any cash payment of amounts 

equivalent to dividends and other 

distributions on the SFT Security. 

The term ‘‘Distribution Amount’’ 

would mean, in respect of an SFT, an 

amount of cash equal to the product of: 

(a) The amount per security in respect 

of (x) a cash dividend on the SFT 

Securities that are the subject of the SFT 

or (y) an exchange of the SFT Securities 

that are the subject of the SFT for cash; 

and (b) the number of the relevant SFT 

Securities subject to the SFT. 

The term ‘‘Distribution Payment’’ 

would mean an amount payable by one 

party to an SFT to the other party to the 

SFT during the term of the SFT in 

respect of a Distribution on the SFT 

Securities subject to the SFT. 

The term ‘‘Existing Master 

Agreement’’ would mean, in respect of 

an SFT, a written agreement that (i) 

exists at the time transaction data for the 

SFT is submitted to NSCC by an 

Approved SFT Submitter, (ii) provides 

for, among other things, terms governing 

the payment and delivery obligations of 

the parties and (iii) the parties have 

established (by written agreement, oral 

agreement, course of conduct or 

otherwise) would govern such SFT. 

The term ‘‘Final Settlement’’ would 

mean the exchange of SFT Securities for 

SFT Cash described in clause (b) of the 

proposed definition of Securities 

Financing Transaction. 

The term ‘‘Final Settlement Date’’ 

would mean the Business Day on which 

the final settlement of a transaction is 

scheduled to occur. If the transaction is 

an SFT, the Final Settlement Date 

means the Business Day on which the 

Final Settlement of the SFT is 

scheduled to occur in accordance with 

proposed Rule 56 or, if the SFT is 

accelerated in accordance with 

proposed Rule 56, the date to which the 

Final Settlement obligations have been 

accelerated. 

The term ‘‘Incremental Additional 

Independent Amount SFT Cash’’ would 

mean, (a) in respect of a Linked SFT, the 

excess, if any, of the Independent 

Amount SFT Cash of the Linked SFT 

over the Independent Amount SFT Cash 

of the Settling SFT; (b) in respect of a 

Non-Returned SFT, the portion of the 

Price Differential payable by the 

Transferee, if any, that is attributable to 

the Independent Amount SFT Cash of 

the SFT (which shall be calculated by 

multiplying such Priced Differential by 

the excess, if any, of the Independent 

Amount Percentage (as defined below 

and in the proposed rule change) over 

100%); and (c) in respect of any other 

SFT, the Independent Amount SFT 

Cash of such SFT. 

The term ‘‘Independent Amount 

Percentage’’ would mean, in respect of 

an SFT, a percentage obtained by 

dividing the SFT Cash of such SFT by 

the Market Value SFT Cash (as defined 

below and in the proposed rule change) 

of such SFT. 

The term ‘‘Independent Amount SFT 

Cash’’ would mean the portion, if any, 

of the SFT Cash for an SFT equal to the 

amount by which the SFT Cash for such 


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SFT at the time of the Initial Settlement 

exceeds the Contract Price of the SFT 

Securities that are the subject of such 

SFT. 

The term ‘‘Ineligibility Date’’ would 

mean, with respect to an SFT, the date 

on which the SFT Security that is the 

subject of the SFT becomes an Ineligible 

SFT Security (as defined below and in 

the proposed rule change). 

The term ‘‘Ineligible SFT’’ would 

mean an SFT that has, as its subject, 

SFT Securities that have become 

Ineligible SFT Securities. 

The term ‘‘Ineligible SFT Security’’ 

would mean an SFT Security that is not 

eligible to be the subject of a novated 

SFT. 

The term ‘‘Initial Settlement’’ would 

mean the exchange of SFT Securities for 

SFT Cash described in clause (a) of the 

proposed definition of Securities 

Financing Transaction. 

The term ‘‘Linked SFT’’ would mean 

an SFT entered into by the pre-novation 

SFT Member parties to a Settling SFT 

that has the same Transferor, Transferee 

and subject SFT Securities (including 

CUSIP) as the Settling SFT. As 

proposed, a Linked SFT would include 

an SFT that has as its subject fewer SFT 

Securities than the corresponding 

Settling SFT but would not include an 

SFT that has as its subject more SFT 

Securities than the corresponding 

Settling SFT. 

The term ‘‘Market Value SFT Cash’’ 

would mean the portion of the SFT Cash 

for an SFT equal to the amount of the 

SFT Cash for such SFT minus the 

Independent Amount SFT Cash of such 

SFT. 

The term ‘‘Price Differential’’ would 

mean (a) for purposes of the discharge 

of offsetting Final Settlement and Initial 

Settlement obligations, (i) the SFT Cash 

for the Settling SFT (or if the Settling 

SFT has a greater quantity of SFT 

Securities as its subject than the 

corresponding Linked SFT, the 

Corresponding SFT Cash) minus (ii) the 

SFT Cash for the Linked SFT; and (b) for 

all other purposes, (i) the SFT Cash for 

the SFT minus (ii) the product of the 

Independent Amount Percentage, if any, 

and the Current Market Price of the SFT 

Securities. 

The term ‘‘Rate Payment’’ would 

mean an amount payable from one party 

to an SFT to the other party to the SFT 

at the Final Settlement expressed as a 

percentage of the amount of SFT Cash 

for the SFT. As an example, if the Rate 

Payment is specified as 0.02%, the 

amount payable would be the product 

0.02% and the SFT Cash for the SFT. 

The term ‘‘Recall Date’’ would mean, 

in respect of a Recall Notice, the second 

Business Day following NSCC’s receipt 

of such Recall Notice. 

The term ‘‘Recall Notice’’ would mean 

a notice that triggers the provisions of 

Section 9(b) of proposed Rule 56, 

relating to a Buy-In in respect of an SFT 

and that is submitted by an Approved 

SFT Submitter on behalf of a Transferor 

in accordance with the communication 

links, formats, timeframes and deadlines 

established by NSCC for such purpose. 

The term ‘‘Recalled SFT’’ would mean 

an SFT that has been novated to NSCC 

in respect of which a Recall Notice has 

been submitted. 

The term ‘‘Securities Financing 

Transaction’’ or ‘‘SFT’’ would mean a 

transaction between two SFT Members 

pursuant to which (a) one SFT Member 

agrees to transfer specified SFT 

Securities to another SFT Member 

versus the SFT Cash; and (b) the 

Transferee agrees to retransfer such 

specified SFT Securities or equivalent 

SFT Securities (including quantity and 

CUSIP) to the Transferor versus the SFT 

Cash on the following Business Day. 

The term ‘‘Settling SFT’’ would mean, 

as of any Business Day, an SFT that has 

been novated to NSCC, the Final 

Settlement of which is scheduled to 

occur on that Business Day. 

The term ‘‘SFT Account’’ would mean 

a ledger maintained on the books and 

records of NSCC that reflects the 

outstanding SFTs that an SFT Member 

enters into and that have been novated 

to NSCC, the SFT Positions or SFT Cash 

associated with those transactions and 

any debits or credits of cash associated 

with such transactions effected pursuant 

to Rule 12 (Settlement). As proposed, 

the term ‘‘SFT Account’’ would include 

any Agent Clearing Member Customer 

Omnibus Account and any Sponsored 

Member Sub-Account. 

The term ‘‘SFT Cash’’ would mean the 

specified amount of U.S. dollars that the 

Transferee agrees to transfer to the 

Transferor at the Initial Settlement of an 

SFT, (i) plus any Price Differential paid 

by NSCC to the SFT Member as 

Transferor or by the SFT Member as 

Transferee to NSCC during the term of 

the SFT and (ii) less any Price 

Differential paid by NSCC to the SFT 

Member as Transferee or by the SFT 

Member as Transferor to NSCC during 

the term of the SFT. 

The term ‘‘SFT Close-out Value’’ 

would mean, with respect to an SFT 

Position of an SFT Member, an amount 

equal to: (i) If the SFT Member is the 

Transferor of the SFT Securities that are 

the subject of such SFT, (a) the CNS 

Market Value of the SFT Securities that 

are the subject of such SFT minus (b) 

the SFT Cash for such SFT; and (ii) if 

the SFT Member is a Transferee of the 

SFT Securities that are the subject of 

such SFT, (a) the SFT Cash for such SFT 

minus (b) the CNS Market Value of the 

SFT Securities that are the subject of 

such SFT. 

The term ‘‘SFT Long Position’’ would 

mean the number of units of an SFT 

Security which an SFT Member is 

entitled to receive from NSCC at Final 

Settlement of an SFT against payment of 

the SFT Cash. 

The term ‘‘SFT Member’’ would mean 

any Member, Sponsored Member acting 

in its principal capacity, Sponsoring 

Member acting in its principal capacity 

or Agent Clearing Member acting on 

behalf of a Customer, in each case that 

is a party to an SFT, permitted to 

participate in NSCC’s SFT Clearing 

Service. 

The term ‘‘SFT Position’’ would mean 

an SFT Member’s SFT Long Position or 

SFT Short Position (as defined below 

and in the proposed rule change) in an 

SFT Security that is the subject of an 

SFT that has been novated to NSCC. 

The term ‘‘SFT Security’’ would mean 

a security that is eligible to be the 

subject of an SFT novated to NSCC and 

is included in the list for which 

provision is made in proposed Section 

1(g) of Rule 3 (Lists to be Maintained), 

as described below. As proposed, if any 

new or different security is exchanged 

for any SFT Security in connection with 

a recapitalization, merger, consolidation 

or other corporate action, such new or 

different security shall, effective upon 

such exchange, become an SFT Security 

in substitution for the former SFT 

Security for which such exchange is 

made. 

The term ‘‘SFT Short Position’’ would 

mean the number of units of an SFT 

Security that an SFT Member is 

obligated to deliver to NSCC at Final 

Settlement of an SFT against payment of 

the SFT Cash. 

The term ‘‘Transferee’’ would mean 

the SFT Member party to an SFT that 

agrees to receive SFT Securities from 

the other SFT Member party to the SFT 

in exchange for SFT Cash in connection 

with the Initial Settlement of the SFT. 

The term ‘‘Transferor’’ would mean 

the SFT Member party to an SFT that 

agrees to transfer SFT Securities to the 

other SFT Member party to the SFT in 

exchange for SFT Cash in connection 

with the Initial Settlement of the SFT. 

Proposed Rule 56, Section 1 (General) 

Section 1 of proposed Rule 56 would 

be a general provision regarding the SFT 

Clearing Service applicable to Members, 

Sponsoring Members and Agent 

Clearing Members that participate in the 

proposed SFT Clearing Service. 


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73Section 6 of Rule 7 (Comparison and Trade 

Recording Operation (Including Special 

Representative/Index Receipt Agent)) provides that 

NSCC may require organizations that deliver trade 

data to NSCC as described in that Rule to provide 

a Cybersecurity Confirmation before agreeing to 

accept such trade data. Supra note 4. 

Section 1(a) of proposed Rule 56 

would establish that NSCC may accept 

for novation SFTs entered into between 

(i) a Member and another Member, (ii) 

a Sponsoring Member and its Sponsored 

Member, or (iii) an Agent Clearing 

Member acting on behalf of a Customer 

and either (x) a Member or (y) the same 

or another Agent Clearing Member 

acting on behalf of a Customer. 

Section 1(b) of proposed Rule 56 

would provide that any SFT that is 

submitted to NSCC for novation, and 

any Member and Sponsored Member 

that enters into an SFT (and any 

Customer on behalf of whom an Agent 

Clearing Member enters into an SFT) 

shall be subject to the provisions of 

proposed Rule 56; provided that 

Sections 15 and 16 of proposed Rule 56 

shall only apply to Sponsoring 

Members, Agent Clearing Members, 

Sponsored Members and Customers, as 

applicable. 

Section 1(c) of proposed Rule 56 

would further provide that any amount 

of cash described in proposed Rule 56 

may be rounded up to the nearest one 

cent, five cents, 10 cents, 25 cents or 

dollar according to the rounding 

convention requested by the SFT 

Member parties to the relevant SFT as 

conveyed to NSCC in accordance with 

the communication links, formats, 

timeframes and deadlines established by 

NSCC for such purpose. 

Proposed Rule 56, Section 2 (Eligibility 

for SFT Clearing Service: SFT Member) 

Section 2 of proposed Rule 56 would 

establish the eligibility requirements for 

using the proposed SFT Clearing 

Service. 

Under Section 2 of proposed Rule 56, 

NSCC may permit any Member acting in 

its principal capacity, Sponsored 

Member acting in its principal capacity, 

or Agent Clearing Member acting on 

behalf of a Customer to be an SFT 

Member and participate in the proposed 

SFT Clearing Service. 

Section 2 of proposed Rule 56 would 

provide that the rights, liabilities and 

obligations of SFT Members in their 

capacity as such shall be governed by 

the proposed Rule 56. References to a 

Member would not apply to an SFT 

Member in its capacity as such, unless 

specifically noted in the proposed Rule 

56 or in such other Rules as applicable 

to an SFT Member. 

Section 2 of proposed Rule 56 would 

also provide that an SFT Member that 

participates in NSCC in another 

capacity pursuant to another Rule, or 

which has entered into an agreement 

with NSCC independent from proposed 

Rule 56, shall continue to have all the 

rights, liabilities and obligations set 

forth in such other Rule or pursuant to 

such agreement, and such rights, 

liabilities and obligations shall be 

separate from its rights, liabilities and 

obligations as an SFT Member, except as 

contemplated under Sections 15 and 16 

of proposed Rule 56, as described 

below. 

Proposed Rule 56, Section 3 

(Membership Documents) 

Section 3 of proposed Rule 56 would 

govern the documents that SFT Member 

applicants would be required to 

complete and deliver to NSCC. 

Specifically, Section 3 of proposed Rule 

56 would provide that to become an 

SFT Member, each applicant shall 

complete and deliver to NSCC 

documents in such forms as may be 

prescribed by NSCC from time to time 

and any other information requested by 

NSCC. 

Proposed Rule 56, Section 4 (Securities 

Financing Transaction Data Submission) 

Section 4 of proposed Rule 56 would 

govern the submission of transaction 

data for SFTs into NSCC for novation by 

Approved SFT Submitters on behalf of 

Transferors (e.g., lenders) and 

Transferees (e.g., borrowers). 

Section 4(a) of proposed Rule 56 

would provide that in order for an SFT 

to be submitted to NSCC, the transaction 

data for the SFT must be submitted to 

NSCC by an Approved SFT Submitter in 

accordance with the communication 

links, formats, timeframes and deadlines 

established by NSCC for such purpose. 

Any such transaction data shall be 

submitted to NSCC on a locked-in basis. 

In determining whether to accept 

transaction data from an Approved SFT 

Submitter, NSCC may require the 

Approved SFT Submitter to provide a 

Cybersecurity Confirmation. This is 

consistent with the existing requirement 

in Section 6 of Rule 7 (Comparison and 

Trade Recording Operation (Including 

Special Representative/Index Receipt 

Agent)) for organizations reporting trade 

data to NSCC.73

Section 4(b) of proposed Rule 56 

would provide that NSCC would not act 

upon any instruction received from an 

Approved SFT Submitter in respect of 

an SFT unless each SFT Member (other 

than an SFT Member that is a 

Sponsored Member) designated by the 

Approved SFT Submitter as a party to 

such SFT has consented, in a writing 

delivered to NSCC, to the Approved 

SFT Submitter acting on behalf of the 

SFT Member in respect of SFTs. 

Section 4(c) of proposed Rule 56 

would provide that the obligations 

reflected in the transaction data on an 

SFT shall be deemed to have been 

confirmed and acknowledged by each 

SFT Member designated by the 

Approved SFT Submitter as a party 

thereto and to have been adopted by 

such SFT Member and, for the purposes 

of determining the rights and 

obligations between NSCC and such 

SFT Member under the proposed Rule 

56 and such other Rules applicable to 

SFTs, shall be valid and binding upon 

such SFT Member. In addition, Section 

4(c) would provide that an SFT Member 

which has been so designated by an 

Approved SFT Submitter shall resolve 

any differences or claims regarding the 

rights and obligations reflected in the 

transaction data submitted by the 

Approved SFT Submitter with the 

Approved SFT Submitter, and NSCC 

shall have no responsibility in respect 

thereof or to adjust its records or the 

accounts of the SFT Member in any 

way, other than pursuant to the 

instructions of the Approved SFT 

Submitter. Section 4(c) would also 

provide that any such adjustment shall 

be in the sole discretion of NSCC. 

Section 4(d) of proposed Rule 56 

would provide that NSCC makes no 

representation, whether expressed or 

implied, as to the complete and timely 

performance of an Approved SFT 

Submitter’s duties and obligations. 

Section 4(d) would also provide that 

NSCC assumes no liability to any SFT 

Member for any act or failure to act by 

an Approved SFT Submitter in 

connection with any information 

received by NSCC or given to the SFT 

Member by NSCC via the Approved SFT 

Submitter, as the case may be. 

Section 4(e) of proposed Rule 56 

would provide that the submission of 

each SFT to NSCC and the performance 

of any obligation under such SFT shall 

constitute a representation to NSCC and 

covenant by the Transferor and the 

Transferee, any Sponsoring Member that 

is acting on behalf of the Transferor or 

Transferee and any Agent Clearing 

Member that is acting on behalf of a 

Customer in connection with such SFT 

that its participation in such SFT is in 

compliance, and would continue to 

comply, with all applicable laws and 

regulations, including without 

limitation Rule 15c3–3 and all other 

applicable rules and regulations of the 

Commission, any applicable provisions 

of Regulation T, Regulation U and 

Regulation X of the Board of Governors 

of the Federal Reserve System, and the 


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74Where the Transferor is a Sponsored Member 

receiving Independent Amount SFT Cash, NSCC 

would not be requiring Independent Amount SFT 

Cash Deposit Requirement. This is because in the 

case of the Sponsored Member’s default, the party 

giving the Independent Amount SFT Cash, i.e., 

Sponsoring Member, is the guarantor of the 

settlement obligation of the Sponsored Member 

Independent Amount SFT Cash back to NSCC. 

75This interim novation is designed to avoid any 

credit concerns that would manifest if the Customer 

and the Transferee had to have a principal bilateral 

obligation to each other for the Independent 

Amount SFT Cash. 

rules of FINRA and any other regulatory 

or self-regulatory organization to which 

the Transferor, the Transferee, any 

Sponsoring Member that is acting on 

behalf of the Transferor or Transferee or 

any Agent Clearing Member that is 

acting on behalf of a Customer is 

subject. 

Section 4(f) of proposed Rule 56 

would provide that the submission of 

each SFT to NSCC shall constitute an 

authorization to NSCC by the 

Transferor, the Transferee and any 

Agent Clearing Member that is acting on 

behalf of a Customer for NSCC to give 

instructions regarding the SFT to DTC 

in respect of the relevant accounts of the 

Transferor, Transferee and Agent 

Clearing Member at DTC. 

Proposed Rule 56, Section 5 (Novation 

of Securities Financing Transactions) 

Section 5 of proposed Rule 56 would 

govern the nature and timing of the 

novation to NSCC of obligations related 

to an SFT. 

Section 5(a) of proposed Rule 56 

would provide that NSCC to only novate 

an SFT if, at the time of novation, the 

Final Settlement of such transaction is 

scheduled to occur one Business Day 

following the Initial Settlement and the 

SFT Cash is no less than 100% of the 

Contract Price of the SFT. 

Section 5(b) of proposed Rule 56 

would provide that each SFT that is a 

Bilaterally Initiated SFT, including any 

Sponsored Member Transaction, and 

validated pursuant to the Rules shall be 

novated to NSCC as of the time NSCC 

provides the Approved SFT Submitter 

for such SFT a report confirming such 

novation in accordance with the 

communication links, formats, 

timeframes and deadlines established by 

NSCC for such purpose. Section 5(b) 

would also provide that each SFT that 

is neither a Bilaterally Initiated SFT nor 

a Sponsored Member Transaction and 

that is validated pursuant to the Rules 

shall be novated to NSCC as of the time 

(x) the Initial Settlement of such SFT 

has completed by (i) the Transferor 

instructing DTC to deliver from the 

relevant DTC account of the Transferor 

to NSCC’s account at DTC the subject 

SFT Securities versus payment of the 

amount of the SFT Cash, (ii) NSCC 

instructing DTC to deliver from NSCC’s 

account at DTC to the relevant DTC 

account of the Transferee the subject 

SFT Securities versus payment of the 

amount of SFT Cash and (iii) DTC 

processes the deliveries in accordance 

with the rules and procedures of DTC, 

or (y) the Initial Settlement obligations 

of such SFT have been discharged in 

accordance with Section 8 of proposed 

Rule 56, as described below. In 

addition, Section 5(b) would provide 

that if the Initial Settlement obligations 

of an SFT that is neither a Bilaterally 

Initiated SFT nor a Sponsored Member 

Transaction are not discharged in 

accordance with clause (x) or (y), then 

such SFT shall be deemed void ab 

initio. 

Section 5(c) of proposed Rule 56 

would provide that, subject to Sections 

5(d) and 5(e) of proposed Rule 56 as 

described below, the novation of SFTs 

shall consist of the termination of the 

Final Settlement, Rate Payment and 

Distribution Payment obligations and 

entitlements between the parties to the 

SFT with respect to such SFT and their 

replacement with obligations and 

entitlements to and from NSCC to 

perform, in accordance with the Rules, 

the Final Settlement, Rate Payment, and 

Distribution Payment obligations and 

entitlements under the SFT. 

Section 5(d) of proposed Rule 56 

would govern the novation of SFTs 

having Incremental Additional 

Independent Amount SFT Cash and 

provides when the obligation to return 

Independent Amount SFT Cash for 

which an associated Clearing Fund 

deposit has not been made will be 

novated away from a Transferor to 

NSCC. Specifically, Section 5(d)(i) of 

proposed Rule 56 would provide that if 

an SFT has Incremental Additional 

Independent Amount SFT Cash, then, 

unless the SFT is a Sponsored Member 

Transaction and the Sponsoring 

Member is the Transferee,74 the 

obligation of the Transferor to return the 

Incremental Additional Independent 

Amount SFT Cash to the Transferee 

shall not be terminated and novated to 

NSCC (nor shall NSCC otherwise be 

required to return such Incremental 

Additional Independent Amount SFT 

Cash), except to the extent that the 

Transferor, Sponsoring Member or 

Agent Clearing Member, as applicable, 

has satisfied the associated Independent 

Amount SFT Cash Deposit Requirement. 

As proposed, to the extent the 

associated Clearing Fund deposit has 

not been made in respect of 

Independent Amount SFT Cash at the 

time of the Initial Settlement, the 

obligation to return the Independent 

Amount SFT Cash would not be 

novated to NSCC. 

Section 5(d)(ii) of proposed Rule 56 

would provide that to the extent the 

Transferor, Sponsoring Member or 

Agent Clearing Member has not satisfied 

the associated Independent Amount 

SFT Cash Deposit Requirement, the 

Transferor’s (or in the case of a NonReturned SFT, NSCC’s) obligation to 

return the Incremental Additional 

Independent Amount SFT Cash shall: 

(1) If the SFT is an Agent Clearing 

Member Transaction for which the 

Agent Clearing Member, acting on 

behalf of the Customer, is the 

Transferor, be terminated and replaced 

with an obligation of the Agent Clearing 

Member, in its capacity as principal, to 

return the Incremental Additional 

Independent Amount SFT Cash to the 

Transferee; or (2) otherwise, remain (or 

in the context of a Non-Returned SFT, 

be terminated and replaced with) a 

bilateral obligation of the Transferor to 

the Transferee. As proposed, if the 

associated Clearing Fund deposit has 

not been made in respect of 

Independent Amount SFT Cash, the 

Independent Amount SFT Cash would 

be owed by the Transferor to the 

Transferee as a bilateral principal-toprincipal obligation, unless the 

Transferor is a Customer of an Agent 

Clearing Member, in which case the 

obligation to return the Independent 

Amount SFT Cash in respect of which 

the Clearing Fund has not been made 

would be novated from the Customer to 

the Agent Clearing Member, and the 

Agent Clearing Member would owe the 

Independent Amount SFT Cash back to 

the Transferee as principal.75

Section 5(d)(iii) of proposed Rule 56 

would provide that each SFT Member 

agrees that any obligation to return 

Incremental Additional Independent 

Amount SFT Cash that is novated to an 

Agent Clearing Member or that remains 

(or becomes) a bilateral obligation of the 

Transferor to the Transferee in 

accordance with Section 5(d)(ii) of 

proposed Rule 56, is a binding and 

enforceable obligation of the Agent 

Clearing Member or Transferor, as 

applicable, regardless of whether the 

Transferee has entered into an Existing 

Master Agreement with the Agent 

Clearing Member or Transferor. In 

addition, Section 5(d)(iii) would 

provide that each SFT Member further 

agrees that any such obligation shall 

only be due and payable to the 

Transferee upon the final discharge of 

NSCC’s Final Settlement obligations to 


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the Transferor under the portion of the 

SFT that has been novated to NSCC in 

accordance with Section 5(b) of 

proposed Rule 56, as described above. 

Section 5(d)(iv) of proposed Rule 56 

would provide that, until the Transferor, 

Sponsoring Member or Agent Clearing 

Member has satisfied in full its 

Independent Amount SFT Cash Deposit 

Requirement, the SFT Cash of the SFT 

shall, for purposes of determining the 

obligations owing to and from NSCC 

under such SFT, equal the SFT Cash of 

the SFT less the Incremental Additional 

Independent Amount SFT Cash. 

Section 5(d)(v) of proposed Rule 56 

would provide that once the Transferor, 

Sponsoring Member or Agent Clearing 

Member, as applicable, has satisfied in 

full its Independent Amount SFT Cash 

Deposit Requirement, the obligation of 

the Transferor to return the Incremental 

Additional Independent Amount SFT 

Cash to the Transferee (or, in the case 

of an SFT that is an Agent Clearing 

Member Transaction, any obligation of 

the Agent Clearing Member to return the 

Incremental Additional Independent 

Amount SFT Cash to the Transferee) 

shall be novated to NSCC, and the SFT 

Cash of the SFT shall, for purposes of 

determining the obligations owing to 

and from NSCC under the SFT, include 

the full amount of the SFT Cash of such 

SFT. 

Section 5(e) of proposed Rule 56 

would govern novation in respect of 

certain corporate actions and provide 

that NSCC would (i) have an obligation 

to pay the cash distribution to the 

Transferor and the Transferee would 

have an obligation to pay the cash 

distribution to NSCC, and (ii) not novate 

any obligations related to unsupported 

corporate actions and distributions. 

Specifically, Section 5(e)(i) of proposed 

Rule 56 would provide that regardless of 

anything to the contrary in any Existing 

Master Agreement (including a 

provision addressing when an issuer 

pays different amounts to different 

security holders due to withholding tax 

or other reasons), the Distribution 

Payment obligations and entitlements 

between NSCC and each party to an SFT 

that has been novated to NSCC shall be 

the obligation of NSCC to pay to the 

Transferor and the obligation of the 

Transferee to pay to NSCC the 

Distribution Amount in respect of each 

Distribution and the corresponding 

entitlements of the Transferor and 

NSCC, in each case, in accordance with 

the Rules. 

Section 5(e)(ii) of proposed Rule 56 

would provide that NSCC shall 

maintain a list of corporate actions and 

distributions that NSCC does not 

support with respect to SFTs. Section 

5(e)(ii) would further provide that no 

Final Settlement, Rate Payment, 

Distribution Payment or other obligation 

resulting from a corporate action or 

distribution that is not supported by 

NSCC shall be novated to NSCC. In 

addition, Section 5(e)(ii) would provide 

that none of such unsupported 

corporate action shall modify the Final 

Settlement, Rate Payment, Distribution 

Payment or other obligations of NSCC, 

Transferor and Transferee under an SFT 

that has been novated to NSCC. Section 

5(e)(ii) would also provide that each 

SFT Member agrees that any obligation 

under an SFT resulting from a corporate 

action or distribution not supported by 

NSCC shall remain a binding and 

enforceable bilateral obligation between 

the Transferor and the Transferee, 

regardless of whether the Transferor and 

Transferee have entered into an Existing 

Master Agreement. 

Section 5(f) of proposed Rule 56 

would provide that the novation of SFTs 

shall not affect the fundamental 

substance of the SFT as a transfer of 

securities by one party in exchange for 

a transfer of cash by the other party and 

an agreement by each party to return the 

property it received and shall not affect 

the economic obligations or 

entitlements of the parties under the 

SFT except that following novation, the 

Final Settlement, Rate Payment and 

Distribution Payment obligations and 

entitlements shall be owed to and by 

NSCC rather than the original 

counterparty under the SFT. 

Section 5(g) of proposed Rule 56 

would provide that the representations 

and warranties made by each of the 

parties to an SFT that has been novated 

to NSCC under the parties’ Existing 

Master Agreement, if any, shall (x) to 

the extent that they are inconsistent 

with the Rules, be eliminated and 

replaced with the Rules and (y) to the 

extent that they are not inconsistent 

with the Rules, remain in effect as 

between the parties to the original SFT, 

but shall not impose any additional 

obligations on NSCC. 

Proposed Rule 56, Section 6 (Rate and 

Distributions) 

Section 6 of proposed Rule 56 would 

govern the settlement of Rate Payments 

and supported Distributions by NSCC 

for novated SFTs. Section 6(a) of 

proposed Rule 56 would provide that 

NSCC shall debit and credit the Rate 

Payment from and to the SFT Accounts 

of the SFT Member parties to an SFT 

that has been novated to NSCC as part 

of its end of day final money settlement 

process in accordance with Rule 12 

(Settlement) and Procedure VIII (Money 

Settlement Service) on the scheduled 

Final Settlement Date for the SFT, 

irrespective of whether Final Settlement 

of such SFT occurs on such date. 

Section 6(b) of proposed Rule 56 

would provide that if (x) a cash 

dividend is made on or in respect of an 

SFT Security that is the subject of an 

SFT that has been novated to NSCC or 

(y) cash is exchanged, in whole or in 

part, for such an SFT Security in a 

merger, consolidation or similar 

transaction, and the Transferor under 

the SFT would have been entitled to a 

cash payment related to the event 

described in clause (x) or (y) had it not 

transferred the SFT Securities that are 

the subject of the SFT to the Transferee 

in the Initial Settlement, then NSCC 

shall, within the time period 

determined by NSCC from time to time, 

credit the Distribution Amount to the 

Transferor’s SFT Account and debit the 

Distribution Amount from the 

Transferee’s SFT Account as part of its 

end of day final money settlement 

process in accordance with Rule 12 and 

Procedure VIII. Section 6(b) would 

further provide that if cash is exchanged 

in whole for such an SFT Security, then 

the completion of the actions described 

in the preceding sentence shall 

discharge NSCC’s Final Settlement 

obligations to the relevant Transferor 

and the Transferee’s Final Settlement 

obligations to NSCC. 

Proposed Rule 56, Section 7 (Final 

Settlement of Securities Financing 

Transactions) 

Section 7 of proposed Rule 56 would 

govern the mechanics of Final 

Settlement of SFTs by providing that, 

subject to Section 11 of proposed Rule 

56, as described below, the Final 

Settlement of an SFT that has been 

novated to NSCC shall be scheduled to 

occur on the Business Day immediately 

following the date the SFT was novated 

to NSCC. Section 7 would further 

provide that unless the Final Settlement 

obligations under such an SFT are 

discharged in accordance with Section 8 

of proposed Rule 56, as described 

below, Final Settlement of the SFT shall 

occur by (x) NSCC instructing DTC to (i) 

deliver from the relevant DTC account 

of the Transferee to NSCC’s account at 

DTC the subject SFT Securities versus 

payment of the amount of SFT Cash and 

(ii) deliver from NSCC’s account at DTC 

to the relevant DTC account of the 

Transferor the subject SFT Securities 

versus payment of the amount of SFT 

Cash, and (y) the processing of such 

deliveries by DTC in accordance to the 

rules and procedures of DTC; provided 

that if such transfers do not occur and 

a Buy-In does not occur in respect of the 

SFT, then the Final Settlement Date 


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76With respect to an SFT between a Sponsoring 

Member and its Sponsored Member, the SFT would 

settle on the books of the Sponsoring Member 

because the Sponsored Member are not participants 

at DTC and thus would not have accounts at DTC. 

Accordingly, the finality of the settlement of such 

SFT would occur when the Sponsoring Member 

credits the securities and cash on its or the relevant 

custodian’s books and records. 

shall be rescheduled for the following 

Business Day as described in Section 9 

of proposed Rule 56, as described 

below. The obligation of a Transferor (or 

a Sponsoring Member that guarantees to 

NSCC the obligation of a Transferor or 

an Agent Clearing Member that is 

responsible for the performance of the 

obligation under an SFT that is an Agent 

Clearing Member Transaction to return 

SFT Cash to NSCC) in respect of the 

Final Settlement of an SFT that has been 

novated to NSCC shall be to pay the SFT 

Cash and, if applicable, the Rate 

Payment to NSCC against the transfer of 

the relevant SFT Securities by NSCC. 

The obligation of a Transferee (or a 

Sponsoring Member that guarantees to 

NSCC the obligation of a Transferee or 

an Agent Clearing Member that is 

responsible for the performance of the 

obligation under an SFT that is an Agent 

Clearing Member Transaction to return 

SFT Securities to NSCC) in respect of 

the Final Settlement of an SFT that has 

been novated to NSCC shall be to 

transfer the SFT Securities and, if 

applicable, the Rate Payment to NSCC 

against the transfer of SFT Cash by 

NSCC. 

Section 7 of proposed Rule 56 would 

also provide that an SFT, or a portion 

thereof, shall be deemed complete and 

final upon Final Settlement of the SFT, 

or such portion, whether pursuant to 

Sections 7, 8, 9(d) or 13(c) of proposed 

Rule 56. Section 7 would also provide 

that from and after the Final Settlement 

of an SFT, or a portion thereof, pursuant 

to any Sections 7, 8, 9(d) or 13(c) of 

proposed Rule 56, NSCC shall be 

discharged from its obligations to the 

Transferor and the Transferee, and 

NSCC shall have no further obligation in 

respect of the SFT or such portion. This 

is to make it clear to SFT Members the 

point at which settlement of an SFT is 

deemed to be complete and final.76

Proposed Rule 56, Section 8 (Discharge 

of Offsetting Final Settlement and Initial 

Settlement Obligations) 

Section 8 of proposed Rule 56 would 

govern the ‘‘roll’’ (i.e., pair off or offset) 

process whereby the Final Settlement 

obligations on one SFT (i.e., the Settling 

SFT) between two parties can be offset 

with the Initial Settlement obligations 

on another SFT between the same 

parties (i.e., the Linked SFT) through the 

debiting and crediting of the difference 

in cash collateral between the two 

offsetting SFTs (i.e., the Price 

Differential). 

Section 8(a) of proposed Rule 56 

would provide that, subject to the 

provisions of Section 13(c) of proposed 

Rule 56, as described below, if, on any 

Business Day, the pre-novation SFT 

Member parties to a Settling SFT enter 

into a Linked SFT and the Approved 

SFT Submitter provides an appropriate 

instruction to NSCC in accordance with 

the communication links, formats, 

timeframes and deadlines established by 

NSCC for such purpose, the Final 

Settlement obligations of the parties to 

the Settling SFT and the Initial 

Settlement obligations of the parties to 

the Linked SFT shall be discharged once 

NSCC has instructed DTC to debit and 

credit the relevant DTC accounts, of the 

SFT Member parties, as described below 

in Section 8(b) of proposed Rule 56, and 

DTC processes such debits and credits 

in accordance with the rules and 

procedures of DTC. To the extent the 

Price Differential is not processed by 

DTC in accordance with the rules and 

procedures of DTC, NSCC shall debit 

and credit the Price Differential from 

and to the SFT Accounts of the SFT 

Member parties as part of its end of day 

final money settlement process in 

accordance with Rule 12 (Settlement) 

and Procedure VIII (Money Settlement 

Service). If the Price Differential is 

positive, NSCC shall (x) credit an 

amount equal to the Price Differential to 

the Transferee’s SFT Account and (y) 

debit an amount equal to the Price 

Differential from the Transferor’s SFT 

Account. If the Price Differential is 

negative, NSCC shall (x) credit an 

amount equal to the absolute value of 

the Price Differential to the Transferor’s 

SFT Account and (y) debit an amount 

equal to the absolute value of the Price 

Differential from the Transferee’s SFT 

Account. However, if the Linked SFT 

has as its subject fewer SFT Securities 

than the Settling SFT, then only the 

following Final Settlement obligations 

under the Settling SFT shall be 

discharged in accordance with Section 8 

of proposed Rule 56: (i) The Transferee’s 

and NSCC’s Final Settlement obligations 

in respect of a quantity of SFT 

Securities equal to the quantity of SFT 

Securities that are the subject of the 

Linked SFT and (ii) the Transferor’s and 

NSCC’s Final Settlement obligations in 

respect of the Corresponding SFT Cash. 

Section 8(b) of proposed Rule 56 

would provide that if the Price 

Differential is positive, NSCC shall (x) 

instruct DTC to debit an amount equal 

to the Price Differential from NSCC’s 

account at DTC and credit such amount 

to the relevant DTC account of the 

Transferee and (y) instruct DTC to debit 

an amount equal to the Price Differential 

from the relevant DTC account of the 

Transferor and credit such amount to 

NSCC’s account at DTC. If the Price 

Differential is negative, NSCC shall (x) 

instruct DTC to debit an amount equal 

to the absolute value of the Price 

Differential from NSCC’s account at 

DTC and credit such amount to the 

relevant DTC account of the Transferor 

and (y) instruct DTC to debit an amount 

equal to the absolute value of the Price 

Differential from the relevant DTC 

account of the Transferee and credit 

such amount to NSCC’s account at DTC. 

Proposed Rule 56, Section 9 (NonReturned Securities Financing 

Transactions and Recalls) 

Section 9 of proposed Rule 56 would 

govern the processing of a novated SFT 

for which the Final Settlement 

obligations have not been discharged 

either through Final Settlement in 

accordance with Section 7 of proposed 

Rule 56 (as described above) or a pair 

off in accordance with Section 8 of 

proposed Rule 56 (as described above), 

and the recall and buy-in process for 

such an SFT. 

Specifically, Section 9(a) of proposed 

Rule 56 would provide that if (x) the 

Transferee does not satisfy its Final 

Settlement obligations in respect of an 

SFT that has been novated to NSCC on 

the Final Settlement Date, (y) such Final 

Settlement obligations have not been 

discharged in accordance with the 

provisions of Section 8 of proposed Rule 

56, as described above, and (z) a BuyIn has not occurred in respect of such 

SFT or a portion thereof (such SFT, a 

‘‘Non-Returned SFT’’), the Final 

Settlement Date of the Non-Returned 

SFT shall be rescheduled for the 

following Business Day, and NSCC shall 

instruct DTC to debit and credit the 

relevant DTC accounts of the SFT 

Member parties, as described in 

subsection (b) of Section 8 above. To the 

extent the Price Differential is not 

processed by DTC in accordance with 

the rules and procedures of DTC, NSCC 

shall debit and credit the Price 

Differential from and to the SFT 

Accounts of the SFT Member parties to 

the Non-Returned SFT as part of its end 

of day final money settlement process in 

accordance with Rule 12 (Settlement) 

and Procedure VIII (Money Settlement 

Service). Section 9(a) would further 

provide that if the Price Differential is 

positive, NSCC shall (x) credit an 

amount equal to the Price Differential to 

the Transferee’s SFT Account and (y) 

debit an amount equal to the Price 

Differential from the Transferor’s SFT 


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77The requirement that a party exercising buy-in 

rights do so in a ‘‘commercially reasonable manner’’ 

is market standard. See, e.g., Section 13.1 of the 

Master Securities Loan Agreement published by 

Securities Industry and Financial Markets 

Association (‘‘SIFMA’’). NSCC has proposed to 

include this language in order to align the standards 

applicable to an exercise of remedies in relation to 

SFTs with those applicable in the bilateral 

uncleared space. NSCC believes that such 

alignment will increase certainty for SFT Members 

and allow them to follow standards with which 

they are familiar. 

78The Transferor would purchase these securities 

from one or more third parties. 

Account; if the Price Differential is 

negative, NSCC shall (x) credit an 

amount equal to the absolute value of 

the Price Differential to the Transferor’s 

SFT Account and (y) debit an amount 

equal to the absolute value of the Price 

Differential from the Transferee’s SFT 

Account. This process would continue 

until Final Settlement, a pair off in 

accordance with Section 8 of proposed 

Rule 56 (as discussed above), or a BuyIn. 

Section 9(b) of proposed Rule 56 

would provide that if NSCC receives a 

Recall Notice in respect of an SFT that 

has been novated to NSCC and the 

Transferee does not satisfy its Final 

Settlement obligations by the Recall 

Date for the Recall Notice, the 

Transferor may, in a commercially 

reasonable manner,77 purchase some or 

all of the SFT Securities that are the 

subject of the SFT78 or elect to be 

deemed to have purchased the SFT 

Securities, in each case in accordance 

with such timeframes and deadlines as 

established by NSCC for such purpose (a 

‘‘Buy-In’’); provided that in the case of 

a Default-Related SFT (as defined below 

and in the proposed rule change), the 

commercial reasonableness of a Buy-In 

shall be determined by NSCC based on 

whether, in the opinion of NSCC, such 

Buy-In would create a disorderly market 

in the relevant SFT Security. Following 

such purchase or deemed purchase, the 

Transferor shall (x) give written notice 

to NSCC of the Transferor’s costs to 

purchase the relevant SFT Securities 

(including the price paid by the 

Transferor and any broker’s fees and 

commissions and reasonable out-ofpocket transaction costs, fees or interest 

expenses incurred in connection with 

such purchase) (such costs, the ‘‘Buy-In 

Costs’’) or, if the Transferor elects to be 

deemed to have purchased the SFT 

Securities, the Deemed Buy-In Costs, 

and (y) indemnify NSCC, and its 

employees, officers, directors, 

shareholders, agents and Members 

(collectively the ‘‘Buy-In Indemnified 

Parties’’), for any and all losses, liability 

or expenses of a Buy-In Indemnified 

Party arising from any claim disputing 

the calculation of the Buy-In Costs, the 

Deemed Buy-In Costs or the method or 

manner of effecting the Buy-In. Section 

9(b) would further provide that each 

SFT Member acknowledges and agrees 

that each SFT Security is of a type 

traded in a recognized market and that, 

in the absence of a generally recognized 

source for prices or bid or offer 

quotations for any SFT Security, the 

Transferor may, for purposes of a BuyIn, establish the source therefor in its 

commercially reasonable discretion. In 

addition, Section 9(b) would provide 

that each SFT Member further 

acknowledges and agrees that NSCC 

would not calculate any Buy-In Costs or 

Deemed Buy-In Costs and shall have no 

liability for any such calculation. 

Section 9(b) would also provide that 

NSCC would assign to any Transferee 

whose SFT is subject to a Buy-In any 

rights it may have against the Transferor 

to dispute the Transferor’s calculation of 

the Buy-In Costs or Deemed Buy-In 

Costs. 

Section 9(c) of proposed Rule 56 

would provide that on the Business Day 

following NSCC’s receipt of written 

notice of the Transferor’s Buy-In Costs, 

NSCC shall debit and credit the Buy-In 

Amount from and to the SFT Accounts 

of the SFT Member parties to the SFT 

as part of its end of day final money 

settlement process in accordance with 

Rule 12 (Settlement) and Procedure VIII 

(Money Settlement Service). Section 

9(c) would provide that if the Buy-In 

Amount is positive, NSCC would (x) 

credit the value of the Buy-In Amount 

to the Transferor’s SFT Account and (y) 

debit the value of the Buy-In Amount 

from the Transferee’s SFT Account. 

Section 9(c) would further provide that 

if the Buy-In Amount is negative, NSCC 

would (x) credit the value of the BuyIn Amount to the Transferee’s SFT 

Account and (y) debit the value of the 

Buy-In Amount from the Transferor’s 

SFT Account. 

Section 9(d) of proposed Rule 56 

would provide that following the 

application of such Buy-In Amount, the 

Final Settlement obligations under the 

SFT shall be discharged; provided that 

if the Transferor effected a Buy-In in 

respect of some but not all of the SFT 

Securities that are the subject of an SFT, 

then only the following obligations shall 

be discharged: (i) The Transferee’s and 

NSCC’s Final Settlement obligations in 

respect of the SFT Securities for which 

the Transferor effected the Buy-In and 

(ii) the Transferor’s and NSCC’s Final 

Settlement obligations in respect of the 

Corresponding SFT Cash. 

Section 9(e) of proposed Rule 56 

would provide that a Recalled SFT shall 

be treated as a Non-Returned SFT by 

NSCC until the earlier of the time that 

the SFT settles or a Buy-In is processed 

by NSCC in accordance with Section 9 

of proposed Rule 56, except that the 

additional SFT Deposit required for 

Non-Returned SFTs under Section 12(c) 

of proposed Rule 56, as described 

below, shall not apply. Section 9(e) 

would further provide that if the 

Transferor effects the Buy-In in respect 

of some, but not all, of the SFT 

Securities that are the subject of a 

Recalled SFT, the Final Settlement 

obligations of the Recalled SFT that are 

not discharged in accordance with 

Section 9(d) of proposed Rule 56 shall 

be treated as a Non-Returned SFT until 

the SFT settles or a Buy-In is processed 

by NSCC in accordance with Section 9 

of proposed Rule 56, and the additional 

SFT Deposit required under Section 

12(c) of proposed Rule 56, as described 

below, for Non-Returned SFTs shall 

apply. 

Proposed Rule 56, Section 10 

(Cancellation, Modification and 

Termination of Securities Financing 

Transactions) 

Section 10 of proposed Rule 56 would 

govern the process for cancellations, 

modifications and terminations of SFTs 

in NSCC’s systems. 

Section 10(a) of proposed Rule 56 

would provide that transaction data on 

an SFT that has not been novated to 

NSCC may be cancelled upon receipt by 

NSCC of appropriate instructions from 

the Approved SFT Submitter with 

respect to such SFT on behalf of both 

SFT Member parties thereto, submitted 

in accordance with the communication 

links, formats, timeframes and deadlines 

established by NSCC for such purpose. 

Section 10(a) would further provide that 

an SFT that is so cancelled by NSCC 

would be deemed to be void ab initio. 

Section 10(b) of proposed Rule 56 

would provide the Rate Payment on an 

SFT that has been novated to NSCC may 

be modified upon receipt by NSCC of 

appropriate instructions from the 

Approved SFT Submitter with respect 

to such SFT, submitted in accordance 

with the communication links, formats, 

timeframes and deadlines established by 

NSCC for such purpose. Section 10(b) 

would further provide that any 

instructions submitted by an Approved 

SFT Submitter to modify the Rate 

Payment of an SFT must be submitted 

on behalf of both SFT Member parties 

to the SFT. 

Section 10(c) of proposed Rule 56 

would provide an SFT that has been 

novated to NSCC in accordance with 

Section 5 of proposed Rule 56, as 

described above, may be terminated 

upon receipt by NSCC of appropriate 


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79Supra note 32. 

80The Required SFT Deposit multipliers 

proposed for Non-Returned SFTs are identical to 

the Required Fund Deposit multipliers applied to 

CNS Fails Positions. See Procedure XV (Clearing 

Fund Formula and Other Matters), Section 

I.(A)(1)(d)), supra note 4. While the concept of a 

‘‘fail’’ does not exist in the securities lending 

market in the same manner as it does in the cash 

market, to the extent that the Final Settlement of an 

SFT is scheduled on a particular date but does not 

occur, whether directly or through a pair off as 

described in Section 8 of proposed Rule 56 (as 

discussed above), that could potentially be a result 

of a ‘‘squeeze’’ or other market dislocation whereby 

NSCC may face increased market risk in the event 

of the default of either the Transferor or the 

Transferee. As a result, NSCC believes it is prudent 

to apply the same Required Fund Deposit multiplier 

to a Non-Returned SFT as it does to CNS Fails 

Positions. 

The Credit Risk Rating Matrix is a financial 

model utilized by NSCC in its ongoing monitoring 

of Members based on various risk criteria. Each 

Member is rated by the Credit Risk Rating Matrix 

on a 7-point rating system, with ‘‘1’’ being the 

strongest credit rating and ‘‘7’’ being the weakest 

credit rating. As described above, to the extent that 

the Final Settlement of an SFT is scheduled on a 

particular date but does not occur, NSCC, as a 

central counterparty, is exposed to market risks. 

Such exposures generally increase when the SFT 

Member’s risk of default increases, as reflected by 

the SFT Member’s Credit Risk Rating Matrix credit 

rating. As such, the Required SFT Deposit 

multipliers proposed for Non-Returned SFTs vary 

based on the SFT Member’s credit rating to reflect 

the potential increase in market risk from SFT 

Members with higher risk of default. 

81Supra note 34. 

82Supra note 33. 

instructions from the Approved SFT 

Submitter with respect to such SFT on 

behalf of both SFT Member parties 

thereto, submitted in accordance with 

the communication links, formats, 

timeframes and deadlines established by 

NSCC for such purposes. Section 10(c) 

would further provide that following 

any such termination, no amounts or 

further obligations shall be owing in 

respect of the SFT between NSCC and 

Transferor or NSCC and the Transferee. 

Proposed Rule 56, Section 11 

(Accelerated Final Settlement) 

Section 11 of proposed Rule 56 would 

allow a Transferee (i.e., the borrower) to 

do a same day return of borrowed 

securities, if necessary, to satisfy its 

regulatory purpose requirements by 

accelerating the Final Settlement of an 

SFT that has been novated to NSCC. 

Specifically, Section 11 would provide 

that the Transferee may accelerate the 

scheduled Final Settlement of an SFT 

that has been novated to NSCC upon 

receipt by NSCC of appropriate 

instruction from the Approved SFT 

Submitter with respect to such SFT, 

submitted in accordance with the 

communication links, formats, 

timeframes and deadlines established by 

NSCC for such purpose. Section 11 

would further provide that such 

accelerated Final Settlement shall be 

effected by NSCC in accordance with 

the provisions of Section 7 of proposed 

Rule 56, as described above. 

Proposed Rule 56, Section 12 (Clearing 

Fund Obligations) 

Section 12 of proposed Rule 56 would 

set out the Clearing Fund obligations for 

SFT Members with respect to their SFT 

activity. 

Section 12(a) of proposed Rule 56 

would provide each SFT Member, other 

than an SFT Member that is a 

Sponsored Member, shall make and 

maintain on an ongoing basis a deposit 

to the Clearing Fund with respect to its 

SFT Positions (the ‘‘SFT Deposit’’). 

Section 12(a) would provide that, for the 

avoidance of doubt, the SFT Positions 

for an SFT Member that is a Sponsoring 

Member shall include all SFT Positions 

held in its Sponsored Member SubAccount(s) in addition to its proprietary 

account(s). 

Section 12(b) of proposed Rule 56 

would provide that the SFT Deposit 

shall be held by NSCC or its designated 

agents as part of the Clearing Fund, to 

be applied as provided in Sections 1 

through 12 of Rule 4 (Clearing Fund). 

Section 12(c) of proposed Rule 56 

would provide that NSCC shall 

calculate the amount of each such SFT 

Member’s required deposit for SFT 

Positions, subject to a $250,000 79

minimum (excluding the minimum 

contribution to the Clearing Fund as 

required by Procedure XV (Clearing 

Fund Formula and Other Matters), 

Section II.(A)), by applying the Clearing 

Fund formula for CNS Transactions in 

Sections I.(A)(1)(a), (b), (c), (e) (f), (g) of 

Procedure XV as well as the additional 

Clearing Fund formula in Section 

I.(B)(5) (Intraday Mark-to-Market 

Charge) of Procedure XV, except as 

noted otherwise, in the same manner as 

such sections apply to CNS 

Transactions submitted to NSCC for 

regular way settlement, plus, with 

respect to any Non-Returned SFT, an 

additional charge that is calculated by 

(x) multiplying the Current Market Price 

of the SFT Securities that are the subject 

of such Non-Returned SFTs by the 

number of such SFT Securities that are 

the subject of the SFT and (y) 

multiplying such product by (i) 5% for 

SFT Members rated 1 through 4 on the 

Credit Risk Rating Matrix, (ii) 10% for 

SFT Members rated 5 or 6 on the Credit 

Risk Rating Matrix, or (iii) 20% for SFT 

Members rated 7 on the Credit Risk 

Rating Matrix shall be applied to each 

SFT Member that is a party thereto 80

(collectively and includes any and all 

Independent Amount SFT Cash Deposit 

Requirements, the ‘‘Required SFT 

Deposit’’); provided, however, 

notwithstanding anything to the 

contrary, (A) a minimum of 40% of an 

SFT Member’s Required SFT Deposit 

shall be made in the form of cash and/ 

or Eligible Clearing Fund Treasury 

Securities and (y) the lesser of 

$5,000,000 or 10% of an SFT Member’s 

Required SFT Deposit, with a minimum 

of $250,000, must be made and 

maintained in cash; 81 provided, further, 

the additional Clearing Fund formula in 

Sections I.(B)(1) (Additional Deposits 

for Members on the Watch List); (2) 

(Excess Capital Premium); (3) 

(Backtesting Charge); (4) (Bank Holiday 

Charge); Minimum Clearing Fund and 

Additional Deposit Requirements in 

Sections II.(A)1(a)–(b), II.(B), II.(C), and 

II.(D); as well as Section III (Collateral 

Value of Eligible Clearing Fund 

Securities) of Procedure XV shall apply 

to SFT Members in the same manner as 

such sections apply to Members. As 

noted in the proposed rule text, for the 

purpose of applying Section I.(A)(1)(a)(i) 

of Procedure XV (Value-at-Risk (VaR) 

charge), the volatility of an SFT 

Member’s SFT Positions shall be the 

sum of (a) the highest resultant value 

between Section I.(A)(1)(a)(i)I. (Core 

Parametric Estimation) and Section 

I.(A)(1)(a)(i)III. (Margin Floor) and (b) 

the resultant value of Section 

I.(A)(1)(a)(i)II. (Gap Risk Measure). Also, 

as noted in the proposed rule text, for 

the purpose of applying Section 

I.(A)(1)(g) of Procedure XV (Margin 

Liquidity Adjustment (MLA) charge), 

SFT Positions shall be aggregated with 

Net Unsettled Positions, as defined in 

Rule 1,82 in the same asset group or 

subgroup; provided, however, in the 

event such aggregation results in a 

reduction of the aggregate positions in 

the relevant asset group or subgroup, 

NSCC shall apply the greater of (a) the 

sum of MLA charges separately 

calculated for SFT Positions and Net 

Unsettled Positions in the asset group or 

subgroup and (b) the MLA charge 

calculated from aggregating the SFT 

Positions and the Net Unsettled 

Positions in the asset group or subgroup. 

Section 12(d) of proposed Rule 56 

would provide that NSCC shall have the 

discretion to require an SFT Member to 

post its Required SFT Deposit in 

proportion of cash higher than as 

required under subsection (c) of 

proposed Section 12, as determined by 

NSCC from time to time in view of 

market conditions and other financial 

and operational capabilities of the SFT 

Member. Section 12(d) would further 

provide that NSCC shall make any such 

determination based on such factors as 


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83This could occur in a situation in which an 

existing SFT settles and then the Transferor enters 

into a new SFT with the same Transferee (e.g., in 

a pair off as described in Section 8 of proposed Rule 

56, discussed above). In that situation, if the 

Transferee (or Sponsoring Member or Agent 

Clearing Member) has not yet called back the 

Independent Amount SFT Cash Deposit it posted in 

respect of the Settling SFT, then NSCC may apply 

the deposit to the Independent Amount SFT Cash 

Deposit obligation associated with the new SFT. 

84 If the Current Market Price of the SFT Security 

falls below the threshold established by NSCC from 

time to time, NSCC would assess the additional 

amount as part of the Required SFT Deposit. 

85Supra note 23. 

86The duration between the declaration and 

Ineligibility Date would vary. If the ineligibility is 

because the SFT Security will become ineligible for 

processing (i.e., no longer CNS eligible), the 

duration would depend on the timing of the CNS 

ineligibility triggering event (e.g., compliance with 

regulatory orders, risk concerns, trading 

suspension, etc.). 

If the ineligibility is because the SFT Security 

will be undergoing an unsupported corporate action 

or distribution, then it would depend on when the 

issuer of the relevant SFT Security announces the 

particular corporate action or distribution event and 

the record date for such corporate action or 

distribution. Specifically, when announcements 

from the issuers are received by DTC, DTC would 

announce the corporate action or distribution event. 

NSCC would notify Members of such event when 

it is announced by DTC and would generally tie the 

Ineligibility Date to shortly before or on the record 

date for the corporate action or distribution. 

87NSCC is proposing this simplified process for 

applying Price Differentials to Ineligible SFTs 

because NSCC anticipates such instances would 

occur on a much less frequent basis than those in 

connection with Linked SFTs pursuant to Section 

8(a) of proposed Rule 56 and Non-Returned SFTs 

pursuant to Section 9(a) of proposed Rule 56. 

NSCC determines to be appropriate from 

time to time. 

Section 12(e) of proposed Rule 56 

would provide that if an SFT has 

Incremental Additional Independent 

Amount SFT Cash, the Transferor shall 

make an additional deposit to the 

Clearing Fund that equals the amount of 

the Incremental Additional Independent 

Amount SFT Cash for such SFT 

(‘‘Independent Amount SFT Cash 

Deposit, and such requirement the 

‘‘Independent Amount SFT Cash 

Deposit Requirement’’). Section 12(e) 

would also provide that the 

Independent Amount SFT Cash Deposit 

Requirement must be satisfied in cash 

and may, at the discretion of NSCC, be 

satisfied using Independent Amount 

SFT Cash Deposits that have previously 

been made by the Transferor in respect 

of SFTs with the same Transferee that 

have since settled.83 Section 12(e) 

would further provide that the 

Transferor shall satisfy any Independent 

Amount SFT Cash Deposit Requirement 

in respect of an SFT on the date that the 

SFT is novated to NSCC pursuant to the 

timeframes and deadlines established by 

NSCC for such purpose. In addition, 

Section 12(e) would provide that if, on 

a given day, the Transferor satisfies its 

Independent Amount SFT Cash Deposit 

Requirement for some, but not all, SFTs 

novated to NSCC on that day, NSCC will 

consider the Transferor to have satisfied 

its Independent Amount SFT Cash 

Deposit Requirement for none of the 

SFTs that were novated to NSCC on that 

day. 

Section 12(f) of proposed Rule 56 

would provide that each SFT Member, 

other than an SFT Member that is a 

Sponsored Member, so long as such 

Member is an SFT Member, shall also 

provide Supplemental Liquidity 

Deposits to the Clearing Fund, as may 

be required pursuant to Rule 4A. In 

addition, Section 12(f) would also 

provide that references to Clearing Fund 

in the other Rules shall include and 

apply to SFT Deposit, and references to 

Required Fund Deposit shall include 

and apply to Required SFT Deposit, 

unless specifically noted otherwise in 

proposed Rule 56 or in such other 

Rules. 

Proposed Rule 56, Section 13 (Ineligible 

SFT Securities and Supported Corporate 

Actions) 

Section 13 of proposed Rule 56 would 

govern the processing of SFTs where the 

underlying securities become ineligible 

SFT Securities and the processing of 

SFTs in the context of supported 

corporate actions. 

Specifically, Section 13(a) of 

proposed Rule 56 would provide that 

NSCC would remove an Ineligible SFT 

Security from the list maintained by 

NSCC as set forth in Rule 3 (Lists to be 

Maintained); provided that NSCC may 

not be able to identify that an SFT 

Security is an Ineligible SFT Security 

and remove such SFT Security from the 

list maintained by NSCC if the reason 

for the ineligibility is that the SFT 

Security is undergoing a corporate 

action or distribution not supported by 

NSCC and NSCC is not in receipt of 

reasonably advanced notice of such 

corporate action or distribution. 

Section 13(b) of proposed Rule 56 

would provide that notwithstanding 

Section 12 of proposed Rule 56, as 

described above, if an SFT Security 

becomes an Ineligible SFT Security 

because the Current Market Price of the 

SFT Security falls below the threshold 

established by NSCC from time to time, 

the Required SFT Deposit of each SFT 

Member party to an SFT which has such 

Ineligible SFT Security as its subject 

shall include an additional amount 

equal to the product of 100% of the 

Current Market Price of such Ineligible 

SFT Security and the number of such 

Ineligible SFT Securities that the SFT 

has as its subject.84 The threshold that 

would be established by NSCC is 

currently $5.00, which could be 

modified by NSCC85 at a later date after 

NSCC gains more experience with the 

nature of the SFT portfolios submitted 

for clearing, as discussed above. 

Section 13(c) of proposed Rule 56 

would provide that if NSCC declares 

that an SFT Security has or would 

become an Ineligible SFT Security 

because the security is or would become 

ineligible for processing or is or would 

be undergoing a corporate action or 

distribution that is not supported by 

NSCC, the Final Settlement of all SFTs 

that have been novated to NSCC and 

have such SFT Security as their subject 

must occur before the Ineligibility 

Date.86 In addition, Section 13(c) would 

provide that if following such 

declaration the Transferee does not 

satisfy its Final Settlement obligations 

in respect of any such SFT as provided 

in Section 7 of proposed Rule 56, as 

described above, by the Ineligibility 

Date, NSCC shall, unless NSCC has 

previously debited and credited the 

Price Differential from and to the SFT 

Accounts of the SFT Member parties to 

the SFT in accordance with Section 8 of 

proposed Rule 56, as described above, 

on Ineligibility Date, debit and credit 

the Price Differential from and to the 

SFT Accounts of the SFT Member 

parties to the SFT as part of its end of 

day final money settlement process in 

accordance with Rule 12 (Settlement) 

and Procedure VIII (Money Settlement 

Service).87 Section 13(c) would further 

provide that if the Price Differential is 

positive, NSCC shall (x) credit an 

amount equal to the Price Differential to 

the Transferee’s SFT Account and (y) 

debit an amount equal to the Price 

Differential from the Transferor’s SFT 

Account. Section 13(c) would also 

provide that if the Price Differential is 

negative, NSCC shall (x) credit an 

amount equal to the absolute value of 

the Price Differential to the Transferor’s 

SFT Account and (y) debit an amount 

equal to the absolute value of the Price 

Differential from the Transferee’s SFT 

Account. Furthermore, Section 13(c) 

would provide that following the 

application of Price Differential to an 

Ineligible SFT on or after the relevant 

Ineligibility Date, all rights and 

obligations as between NSCC and the 

SFT Member parties thereto with 

respect to such SFT shall be discharged. 

Section 13(d) of proposed Rule 56 

would provide that if a corporate action 

supported by NSCC in respect of the 

SFT Securities that are the subject of an 

SFT is scheduled to occur, NSCC may 


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cease to permit the discharge of the 

SFT’s Final Settlement obligations, 

whether pursuant to Section 8 of 

proposed Rule 56, as described above, 

or otherwise, and treat the SFT as a 

Non-Returned SFT for such period of 

time determined by NSCC as necessary 

to process the corporate action, except 

that the additional SFT Deposit required 

for Non-Returned SFTs under Section 

12(c) of proposed Rule 56, as described 

above, shall not apply. Section 13(d) 

would further provide that 

notwithstanding the foregoing, NSCC 

shall not limit the ability of a Member 

to accelerate the Final Settlement of an 

SFT in accordance with Section 11 of 

proposed Rule 56, as described above, 

provided that any Price Differential for 

the SFT has settled in accordance with 

Section 9(a) of proposed Rule 56, as 

described above, and that such 

accelerated Final Settlement is 

permitted in accordance with the rules 

and procedures of DTC. 

Proposed Rule 56, Section 14 (Cease to 

Act Procedures for SFT Members With 

Open Securities Financing 

Transactions) 

Section 14 of proposed Rule 56 would 

establish NSCC’s procedures for when it 

ceases to act for an SFT Member with 

open SFTs, including recalling a nondefaulting SFT Member that is a 

Transferee and liquidating the 

Defaulting SFT Member’s SFT Positions 

by deeming NSCC to have bought in or 

sold out some or all the SFT Securities 

that are the subject of such SFTs at 

prevailing market price or by crossing. 

Section 14(a) of proposed Rule 56 

would provide that the provisions of 

Rule 18 (Procedures for When the 

Corporation Ceases to Act) shall not 

apply to the SFTs except for Sections 1 

and 8 of Rule 18. 

Section 14(b) of proposed Rule 56 

would provide that if NSCC has ceased 

to act for an SFT Member and subject 

to Section 14 of proposed Rule 2C, as 

described above: 

(i) Except as otherwise may be 

determined by the Board of Directors, 

any SFT entered into by the SFT 

Member that, at the time NSCC ceased 

to act for such SFT Member, has not 

been novated to NSCC pursuant to 

proposed Rule 56, shall be excluded 

from all operations of NSCC applicable 

to such SFT. 

(ii) NSCC may decline to act upon any 

instructions, transaction data or notices 

submitted by such SFT Member or an 

Approved SFT Submitter on behalf of 

such SFT Member. 

(iii) NSCC shall close-out such SFT 

Member’s proprietary SFT Positions as 

well as any SFT Positions established in 

the SFT Member’s Agent Clearing 

Member Customer Omnibus Account by 

(x) buying in or selling out, as 

applicable, some or all of the SFT 

Securities that are the subject of each 

SFT of the SFT Member that has been 

novated to NSCC but for which the 

Final Settlement has not occurred, (y) 

deeming NSCC to have bought in or sold 

out some or all such SFT Securities at 

the bid or ask price therefor, 

respectively, from a generally 

recognized source or at such price or 

prices as NSCC is able to purchase or 

sell, respectively, some such SFT 

Securities, or (z) otherwise liquidating 

such SFT Member’s SFT Positions. 

(iv) Any Sponsored Member 

Transactions for which a Defaulting SFT 

Member is the Sponsoring Member and 

which have been novated to NSCC shall 

continue to be processed by NSCC. 

NSCC, in its sole discretion, would 

determine whether to close-out the SFT 

Positions established in a Defaulting 

SFT Member’s Sponsored Member SubAccounts (if any), which close out shall 

be effected in accordance with the 

provisions of Section 14(b)(iii), as 

described above, or instead permit the 

relevant Sponsored Members to 

complete settlement of the relevant 

Sponsored Member Transactions. 

(v) If, in the aggregate, the close-out of 

a Defaulting SFT Member’s proprietary 

SFT Positions results in a profit to 

NSCC, such profit shall be applied to 

any loss to NSCC arising from the 

closing out of such Defaulting SFT 

Member (including losses arising from 

closing out the SFT Positions 

established in any of the Defaulting SFT 

Member’s Agent Clearing Member 

Customer Omnibus Accounts or 

Sponsored Member Sub-Accounts or 

losses arising from closing out any Net 

Close Out Positions of the Defaulting 

SFT Member). If, in the aggregate, the 

close-out of a Defaulting SFT Member’s 

proprietary SFT Positions results in a 

loss to NSCC, such loss shall be netted 

against, or otherwise applied to, any 

amounts owed by NSCC to such SFT 

Member in its proprietary capacity and 

thereafter debited from such Defaulting 

SFT Member’s Clearing Fund deposit at 

NSCC. 

(vi) If, in the aggregate, the close-out 

of the SFT Positions established in the 

Agent Clearing Member Customer 

Omnibus Accounts of a Defaulting SFT 

Member results in a profit to NSCC, 

such profit shall be credited to the 

Agent Clearing Member Customer 

Omnibus Accounts. If, in the aggregate, 

the close-out of the SFT Positions 

established in the Agent Clearing 

Member Customer Omnibus Accounts 

of a Defaulting SFT Member results in 

a loss to NSCC, such loss shall be netted 

against, or otherwise applied to, any 

amounts owed by the NSCC to such SFT 

Member in its proprietary capacity, and 

thereafter debited from the Defaulting 

SFT Member’s Clearing Fund deposit at 

NSCC. 

(vii) If, in the aggregate, the close-out 

of the SFT Positions established in a 

Defaulting SFT Member’s Sponsored 

Member Sub-Accounts results in a profit 

to NSCC, such profit shall be credited to 

the Sponsored Member Sub-Accounts. 

If, in the aggregate, the closing out of the 

SFT Positions established in a 

Defaulting SFT Member’s Sponsored 

Member Sub-Accounts results in a loss 

to NSCC, such loss shall be netted 

against, or otherwise applied to, any 

amounts owed by NSCC to such SFT 

Member in its proprietary capacity and 

thereafter debited from such Defaulting 

SFT Member’s Clearing Fund deposit at 

NSCC. 

(viii) The Final Settlement Date of 

each SFT that has been novated to 

NSCC and that, prior to novation, was 

with a Defaulting SFT Member (each, a 

‘‘Default-Related SFT’’) shall be the 

Business Day following the day on 

which NSCC ceased to act for the 

Defaulting SFT Member. 

(ix) Until Final Settlement, each 

Default-Related SFT shall be treated as 

a Non-Returned SFT, and NSCC would 

pay and collect the Price Differential 

amounts described in Section 9(a) of 

proposed Rule 56, as described above. 

NSCC shall have all of the rights of a 

Transferor in relation to any DefaultRelated SFT in respect of which the 

Defaulting SFT Member was the 

Transferor, including the ability to 

deliver a Recall Notice in relation to 

such Default-Related SFT and to effect 

a Buy-In, and all of the rights of a 

Transferee in relation to any DefaultRelated SFT in respect of which the 

Defaulting SFT Member was the 

Transferee, including the ability to 

accelerate the scheduled Final 

Settlement Date of the Default-Related 

SFT. However, no additional SFT 

Deposit required for Non-Returned SFTs 

under Section 12(c) of proposed Rule 

56, as described above, shall apply to 

any Default-Related SFT, and no Rate 

Payments shall accrue on DefaultRelated SFTs after the date on which 

NSCC ceases to act for the Defaulting 

SFT Member. 

Proposed Rule 56, Section 15 

(Sponsored Member SFT Clearing) 

Section 15 of proposed Rule 56 would 

govern the requirements for Sponsored 

Member participation in the proposed 

SFT Clearing Service. 


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Section 15(a) of proposed Rule 56 

would provide that a Sponsoring 

Member shall be permitted to submit, 

either directly as an Approved SFT 

Submitter or via another Approved SFT 

Submitter, to NSCC Sponsored Member 

Transactions between itself and its 

Sponsored Member in accordance with 

the provisions of proposed Rule 56 and 

proposed Rule 2C. 

Section 15(b) of proposed Rule 56 

would provide that NSCC shall 

maintain for the Sponsoring Member 

one or more Sponsored Member SubAccounts. Section 15(b) would further 

provide that the SFT Deposits for each 

Sponsored Member Sub-Account shall 

be calculated separately based on the 

SFT Positions in such Sponsored 

Member Sub-Account, and the 

Sponsoring Member, as principal, shall 

be required to satisfy the SFT Deposits 

for each of the Sponsoring Member’s 

Sponsored Member Sub-Accounts. 

Section 15(c) of proposed Rule 56 

would provide that settlement of the 

Final Settlement, Rate Payment, Price 

Differential, Distribution Payment and 

other obligations of a Sponsored 

Member Transaction that have been 

novated to NSCC shall be effected by the 

Sponsoring Member, as settlement agent 

for the relevant Sponsored Member, 

crediting and debiting the account the 

Sponsoring Member maintains for the 

Sponsored Member on the Sponsoring 

Member’s books and records. 

Proposed Rule 56, Section 16 (Customer 

SFT Clearing) 

Section 16 of proposed Rule 56 would 

govern the requirements for 

participation by Agent Clearing 

Members and their Customers in the 

proposed SFT Clearing Service. 

Section 16(a) of proposed Rule 56 

would provide that an Agent Clearing 

Member shall be permitted to submit, 

either directly as an Approved SFT 

Submitter or via another Approved SFT 

Submitter, to NSCC for novation SFTs 

that are Agent Clearing Member 

Transactions. Section 16(a) would 

further provide that any such 

submission shall be in accordance with 

proposed Rule 56 and proposed Rule 

2D. 

Section 16(b) of proposed Rule 56 

would provide that with respect to an 

Agent Clearing Member that submits 

SFTs to NSCC for novation on behalf of 

its Customers, NSCC shall maintain one 

or more Agent Clearing Member 

Customer Omnibus Accounts in the 

name of the Agent Clearing Member for 

the benefit of its Customers in which all 

SFT Positions and SFT Cash carried by 

the Agent Clearing Member on behalf of 

its Customers are reflected; provided, 

that each Agent Clearing Member 

Customer Omnibus Account may only 

contain activity where the Agent 

Clearing Member is acting as Transferor 

on behalf of its Customers, or as 

Transferee on behalf of its Customers, 

but not both. 

Section 16(c) of proposed Rule 56 

would provide that with respect to SFTs 

entered into on behalf of its Customers 

and maintained in the Agent Clearing 

Member Customer Omnibus Account, 

the Agent Clearing Member shall act 

solely as agent of its Customers in 

connection with the clearing of such 

SFTs; provided, that the Agent Clearing 

Member shall remain fully liable for the 

performance of all obligations to NSCC 

arising in connection with such SFTs; 

and provided further, that the liabilities 

and obligations of NSCC with respect to 

such SFTs entered into by the Agent 

Clearing Member on behalf of its 

Customers shall extend only to the 

Agent Clearing Member. Without 

limiting the generality of the foregoing, 

NSCC shall not have any liability or 

obligation arising out of or with respect 

to any SFT to any Customer of an Agent 

Clearing Member. 

Section 16(d) of proposed Rule 56 

would provide the SFT Deposits for 

each Agent Clearing Member Customer 

Omnibus Account shall be calculated 

separately based on the SFT Positions in 

such Agent Clearing Member Customer 

Omnibus Account, and the Agent 

Clearing Member shall, as principal, be 

required to satisfy the SFT Deposit for 

each of Agent Clearing Member’s Agent 

Clearing Member Customer Omnibus 

Accounts. 

Proposed Rule 56, Section 17 

(Corporation Default) 

Section 17 of proposed Rule 56 would 

govern the close-out netting process that 

would apply with respect to SFTs that 

have been novated to NSCC in the event 

of a default of NSCC. 

Section 17(a) of proposed Rule 56 

would provide that if a ‘‘Corporation 

Default’’ occurs pursuant to Section 2 of 

Rule 41 (Corporation Default), all SFTs 

that have been novated to NSCC but not 

yet settled, and all obligations and rights 

arising thereunder which have been 

assumed by NSCC pursuant to proposed 

Rule 56, shall be immediately 

terminated, and the Board of Directors 

shall determine the Aggregate Net SFT 

Close-out Value owed by or to each SFT 

Member with respect to each of its SFT 

Positions. 

Section 17(b) of proposed Rule 56 

would provide that for purposes of 

Section 17 of proposed Rule 56, a 

Member shall be considered a different 

SFT Member in respect of each of (i) its 

proprietary SFT Positions; (ii) the SFT 

Positions established in its Agent 

Clearing Member Customer Omnibus 

Accounts (if any); and (iii) the SFT 

Positions established in its Sponsored 

Member Sub-Accounts (if any). 

Section 17(c) of proposed Rule 56 

would provide that each SFT Member’s 

Aggregate Net SFT Close-out Value shall 

be netted and offset as described in 

Section 14(b)(v) through Section 

14(b)(vii) of proposed Rule 56, as 

though NSCC had ceased to act for each 

SFT Member. 

Section 17(d) of proposed Rule 56 

would provide that the Board of 

Directors shall notify each SFT Member 

of the Aggregate SFT Close-out Value, 

taking into account the netting and 

offsetting provided for above. SFT 

Members that have been notified that 

they owe an amount to NSCC shall pay 

that amount on or prior to the date 

specified by the Board of Directors, 

subject to any applicable setoff rights. 

SFT Members who have a net claim 

against NSCC shall be entitled to 

payment thereof along with other 

Members’ and any other creditors’ 

claims pursuant to the underlying 

contracts with respect thereto, the Rules 

and applicable law. Section 17(d) would 

further provide that nothing therein 

shall limit the rights of NSCC upon an 

SFT Member default (including 

following a Corporation Default), 

including any rights under any Clearing 

Agency Cross-Guaranty Agreement or 

otherwise. 

Proposed Rule 56, Section 18 (Other 

Applicable Rules, Procedures, and 

Addendums) 

Section 18 of proposed Rule 56 would 

establish certain other Rules as being 

applicable to SFTs and SFT Members, 

unless expressly stated otherwise. 

Specifically, Section 18 of proposed 

Rule 56 would provide that Rule 1 

(Definitions and Descriptions), Rule 2 

(Members, Limited Members and 

Sponsored Members), Rule 5 (General 

Provisions), Rule 12 (Settlement), Rule 

13 (Exception Processing), Rule 17 (Fine 

Payments), Rule 19 (Miscellaneous 

Rights of the Corporation), Rule 21 

(Honest Broker), Rule 22 (Suspension of 

Rules), Rule 23 (Action by the 

Corporation), Rule 24 (Charges for 

Services Rendered), Rule 26 (Bills 

Rendered), Rule 27 (Admission to 

Premises of the Corporation—Powers of 

Attorney, Etc.), Rule 28 (Forms), Rule 29 

(Qualified Securities Depositories), Rule 

32 (Signatures), Rule 33 (Procedures), 

Rule 34 (Insurance), Rule 35 (Financial 

Reports), Rule 36 (Rule Changes), Rule 

37 (Hearing Procedures), Rule 38 

(Governing Law and Captions), Rule 39 


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88NSCC recently added Tax Certification as a 

defined term in Rule 1 (Definitions and 

Descriptions). See Securities Exchange Act Release 

No. 92682 (August 17, 2021), 86 FR 47172 (August 

23, 2021) (SR–NSCC–2021–009). 

89NSCC recently added Section 5 to Rule 2B 

(Ongoing Membership Requirements and 

Monitoring). See Securities Exchange Act Release 

No. 93278 (October 8, 2021), 86 FR 57229 (October 

14, 2021) (SR–NSCC–2021–007). 

(Reliance on Instructions), Rule 40 

(Wind-Down of a Member, Fund 

Member or Insurance Carrier/Retirement 

Services Member), Rule 41 (Corporation 

Default), Rule 42 (Wind-down of the 

Corporation), Rule 45 (Notice), Rule 47 

(Interpretation of Rules), Rule 48 

(Disciplinary Proceedings), Rule 49 

(Release of Clearing Data and Clearing 

Fund Data), Rule 55 (Settling Banks and 

AIP Settling Banks), Rule 58 

(Limitations on Liability), Rule 60 

(Market Disruption and Force Majeure), 

Rule 60A (Systems Disconnect: Threat 

of Significant Impact to the 

Corporation’s Systems), Rule 63 (SRO 

Regulatory Reporting), Procedure I 

(Introduction), Procedure VIII (Money 

Settlement Service), Procedure XII 

(Time Schedule), Procedure XIII 

(Definitions), Procedure XIV (Forms, 

Media and Technical Specifications), 

Procedure XV (Clearing Fund Formula 

and Other Matters), Addendum B 

(Qualifications and Standards of 

Financial Responsibility, Operational 

Capability and Business History), 

Addendum H (Interpretation of the 

Board of Directors Release of Clearing 

Data), Addendum L (Statement of Policy 

Pertaining to Information Sharing), and 

Addendum P (Fine Schedule) shall 

apply to SFTs and SFT Members, unless 

the context otherwise requires. 

(D) Other Rule Changes 

In connection with proposed Rules 

2C, 2D and 56, NSCC is also proposing 

to make conforming and technical 

changes to the following Rules to 

accommodate the proposed introduction 

of the new membership categories and 

the proposed SFT Clearing Service. 

Rule 1 (Definitions and Descriptions) 

In connection with proposed Rules 

2C, 2D and 56, NSCC is proposing to 

add the following defined terms to Rule 

1, in alphabetical order: Agent Clearing 

Member, Agent Clearing Member 

Agreement, Agent Clearing Member 

Customer Omnibus Account, Agent 

Clearing Member Required Fund 

Deposit, Agent Clearing Member 

Termination Date, Agent Clearing 

Member Transaction, Agent Clearing 

Member Voluntary Termination Notice, 

Aggregate Net SFT Close-out Value, 

Approved SFT Submitter, Bilaterally 

Initiated SFT, Buy-In, Buy-In Amount, 

Buy-In Costs, Buy-In Indemnified 

Parties, Contract Price, Corresponding 

SFT Cash, Customer, Customer Clearing 

Service, Deemed Buy-In Costs, 

Defaulting SFT Member, Default-Related 

SFT, Distribution, Distribution Amount, 

Distribution Payment, Existing Master 

Agreement, Final Net Settlement 

Position, Final Settlement, Final 

Settlement Date, Former Sponsored 

Member, Incremental Additional 

Independent Amount SFT Cash, 

Independent Amount Percentage, 

Independent Amount SFT Cash, 

Independent Amount SFT Cash Deposit, 

Independent Amount SFT Cash Deposit 

Requirement, Ineligibility Date, 

Ineligible SFT, Ineligible SFT Security, 

Initial Settlement, Linked SFT, Market 

Value SFT Cash, Net Capital, Net 

Member Capital, Net Worth, NonReturned SFT, Price Differential, Rate 

Payment, Recall Date, Recall Notice, 

Recalled SFT, Required SFT Deposit, 

Securities Financing Transaction or 

SFT, Securities Financing Transaction 

Clearing Service or SFT Clearing 

Service, Settling SFT, SFT Account, 

SFT Cash, SFT Close-out Value, SFT 

Deposit, SFT Long Position, SFT 

Member, SFT Position, SFT Security, 

SFT Short Position, Sponsored Member, 

Sponsored Member Agreement, 

Sponsored Member Liquidation 

Amount, Sponsored Member SubAccount, Sponsored Member 

Termination Date, Sponsored Member 

Transaction, Sponsored Member 

Voluntary Termination Notice, 

Sponsoring Member, Sponsoring 

Member Agreement, Sponsoring 

Member Guaranty, Sponsoring Member 

Liquidation Amount, Sponsoring 

Member Required Fund Deposit, 

Sponsoring Member Settling Bank 

Omnibus Account, Sponsoring Member 

Termination Date, Sponsoring Member 

Voluntary Termination Notice, 

Sponsoring/Sponsored Membership 

Program Indemnified Parties or SMP 

Indemnified Parties, Transferee, 

Transferor and Volatility Charge. 

In addition, NSCC is proposing to add 

three defined terms: ‘‘CNS Market 

Value’’, which is already defined in 

Rule 41 (Corporation Default), ‘‘CNS 

Transaction’’, which is already defined 

in Rule 11 (CNS System), and 

‘‘Corporation Default’’, which is already 

defined in Rule 41 (Corporation 

Default). 

NSCC is also proposing to add the 

defined term ‘‘FICC’’ to mean Fixed 

Income Clearing Corporation. The term 

‘‘FICC’’ is already used in Addendum P 

(Fine Schedule) but has not been 

defined. 

Furthermore, NSCC is proposing to 

reorder the defined term Index Receipt 

Agent so it would be in alphabetical 

order. 

In connection with proposed Rules 

2C, 2D and 56, NSCC is also proposing 

to modify the definitions for the 

following defined terms in Rule 1, in 

alphabetical order: Clearing Fund, FFI 

Member, Qualified Securities 

Depository, and Required Fund Deposit. 

Specifically, NSCC is proposing to 

expand the definition of Clearing Fund 

to include SFT Deposit, unless noted 

otherwise in the Rules. NSCC is also 

proposing to revise the definition of FFI 

Member and the definition of Tax 

Certification 88 to add references to 

Sponsored Members. Furthermore, 

NSCC is proposing to revise the 

definition of Qualified Securities 

Depository to include a reference to 

transfer of securities in respect of the 

proposed SFT Clearing Service. Lastly, 

NSCC is proposing to expand the 

definition of Required Fund Deposit to 

include Sponsoring Member Required 

Fund Deposit, the Agent Clearing 

Member Required Fund Deposit, and 

the Required SFT Deposit, unless noted 

otherwise in the Rules. 

Rule 2 (Members and Limited Members) 

NSCC is proposing to revise the title 

of Rule 2 to include a reference to 

Sponsored Members. As proposed, Rule 

2 would be retitled as ‘‘Members, 

Limited Members and Sponsored 

Members’’. 

NSCC is also proposing to revise 

Section 2 of Rule 2. Specifically, NSCC 

is proposing to clarify in Section 2(i) 

that a Member shall include a Member 

in its capacity as a Sponsoring Member 

to the extent specified in proposed Rule 

2C and an Agent Clearing Member to the 

extent specified in proposed Rule 2D. In 

addition, NSCC is proposing to add a 

new subsection (iii) to Section 2 that 

would describe Sponsored Members as 

any Person that has been approved by 

NSCC to become a Sponsored Member 

and only participates in NSCC’s SFT 

Clearing Service as provided for in 

proposed Rule 56. In addition, NSCC is 

proposing to add references to 

Sponsored Members in the last 

paragraph of Section 2, Sections 4(i) and 

4(ii). 

Rule 2B (Ongoing Membership 

Requirements and Monitoring) 

NSCC is proposing to add references 

to Sponsored Member in Section 5 89 of 

Rule 2B. 

Rule 3 (Lists To Be Maintained) 

NSCC is proposing to add subsection 

(g) to Section 1 of Rule 3 to provide that 

NSCC shall maintain a list of the 

securities that may be the subject of a 


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90See Addendum A (Fee Structure), supra note 

4. 

91 Id. 

novated SFT and may from time to time 

add securities to such list or remove 

securities therefrom. 

NSCC is also proposing to modify 

Sections 3(b) and 4 of Rule 3 to include 

references to Sponsored Members. 

Rule 4 (Clearing Fund) 

NSCC is proposing to modify Section 

1 of Rule 4 in order to make it clear that 

the minimum Required Fund Deposit 

amount provided therein shall not 

include Required SFT Deposit, which is 

subject to a separate minimum $250,000 

deposit requirement pursuant to Section 

12(c) of proposed Rule 56, as described 

above. 

Rule 5 (General Provisions) 

NSCC is proposing to modify Section 

1 of Rule 5 in order to provide that 

delivery of SFT Securities and SFT Cash 

to NSCC shall be made through the 

facilities of a Qualified Securities 

Depository. In addition, NSCC is also 

proposing changes in Section 1 of Rule 

5 to provide that delivery and payment 

with respect to SFT Securities and SFT 

Cash shall be effected as prescribed in 

the Rules and regulations as NSCC may 

from time to time adopt. 

Rule 24 (Charges for Services Rendered) 

NSCC is proposing to modify Section 

1 of Rule 24 to include a reference to 

Sponsored Members. In addition, NSCC 

is proposing to add an additional 

paragraph in Section 1 to clarify that 

Members shall be responsible for all fees 

pertaining to their respective 

Sponsoring Member activity or Agent 

Clearing Member activity, if applicable, 

as set forth in NSCC’s Fee Structure.90

Rule 26 (Bills Rendered) 

NSCC is proposing to modify the first 

paragraph of Rule 26 to include a 

reference to Sponsored Members. In 

addition, NSCC is proposing to add a 

sentence in that paragraph to clarify that 

Members shall receive bills for their 

respective aggregate Sponsoring 

Member activity and Agent Clearing 

Member activity, if applicable, as set 

forth in NSCC’s Fee Structure.91

Rule 32 (Signatures) 

NSCC is proposing to modify Rule 32 

to include a reference to Sponsored 

Member. Specifically, NSCC is 

proposing to modify Rule 32 to provide 

that the use of an electronic signature 

shall have the same validity and effect 

as the use of a signature affixed by hand 

with respect to any and all agreements 

and other documents entered into 

between a Sponsored Member and 

NSCC. 

Rule 38 (Governing Law and Captions) 

NSCC is proposing to modify Section 

1 of Rule 38 to include a reference to 

Sponsored Member. Specifically, NSCC 

is proposing to modify Section 1 of Rule 

38 to provide that Rules and all 

agreements and other documents 

entered into between a Sponsored 

Member and NSCC or otherwise 

delivered to or by NSCC pursuant to the 

Rules, and the rights and obligations 

under the Rules thereunder, shall be 

governed by, and construed in 

accordance with, the laws of the State 

of New York applicable to contracts 

executed and performed therein, unless 

otherwise provided. 

Rule 39 (Reliance on Instructions) 

NSCC is proposing to modify Rule 39 

to include references to Sponsored 

Member and Approved SFT Submitter, 

where applicable. Specifically, NSCC is 

proposing to modify the first paragraph 

of Rule 39 to provide that NSCC may 

accept or rely upon instructions given to 

NSCC by a Sponsored Member or 

Approved SFT Submitter, in addition to 

the various participant types currently 

provided in Rule 39. Similarly, NSCC is 

proposing to add references to 

Approved SFT Submitter in the second 

and last paragraphs of Rule 39 so that 

those paragraphs would also apply to 

instructions submitted by an Approved 

SFT Submitter. 

Rule 42 (Wind-Down of the 

Corporation) 

NSCC is proposing to modify Rule 42 

to include references to Sponsored 

Members. Specifically, for purposes of 

Rule 42, NSCC is proposing to revise the 

defined term ‘‘Limited Member’’ to 

include Sponsored Members. 

Rule 49 (Release of Clearing Data and 

Clearing Fund Data) 

NSCC is proposing to modify Rule 49 

to clarify that NSCC would release 

Clearing Data of a Sponsored Member to 

its Sponsoring Member upon the 

Sponsoring Member’s written request. 

Specifically, as proposed, Section (a) of 

Rule 49 would provide that if the 

participant is a Sponsored Member, 

NSCC would also release Clearing Data 

relating to transactions of such 

participant to such participant’s 

Sponsoring Member upon the 

Sponsoring Member’s written request. 

Rule 58 (Limitations on Liability) 

NSCC is proposing to modify Rule 58 

to clarify that NSCC would not be 

responsible for the completeness or 

accuracy of the transaction data 

received from the Approved SFT 

Submitters, nor shall NSCC, absent 

gross negligence on NSCC’s part, be 

responsible for any errors, omissions or 

delays that may occur in the 

transmission of transaction data from an 

Approved SFT Submitter. 

Rule 64 (DTCC Shareholders 

Agreement) 

The proposed changes to Section 4 of 

Rule 64 and footnote 4 thereto would 

provide that Rule 64 would not be 

applicable to a Sponsored Member. 

However, if the Sponsored Member is 

also a member or participant of another 

clearing agency subsidiary of DTCC, the 

Sponsored Member may be a Mandatory 

Purchaser Participant or a Voluntary 

Purchaser Participant pursuant to the 

terms of the Shareholders Agreement 

and the rules and procedures of such 

other subsidiary. 

Procedure XV (Clearing Fund Formula 

and Other Matters) 

NSCC is proposing to modify 

subsection A of Section II (Minimum 

Clearing Fund and Additional Deposit 

Requirements) in Procedure XV in order 

to make it clear that the minimum 

contribution amount provided therein 

shall not include Required SFT Deposit, 

which is subject to a separate minimum 

$250,000 deposit requirement pursuant 

to Section 12(c) of proposed Rule 56, as 

described above. In addition, NSCC is 

proposing to modify Section II.A of 

Procedure XV to make it clear that 

calculation of a Member’s Required 

Fund Deposit amount that must be in 

cash shall exclude the Required SFT 

Deposit, which is subject to a separate 

$250,000 minimum cash requirement 

pursuant to Section 12(c) of proposed 

Rule 56, as described above. 

Addendum B (Qualifications and 

Standards of Financial Responsibility, 

Operational Capability and Business 

History) 

NSCC is proposing an additional 

section for the Sponsored Members. 

Specifically, NSCC is proposing to add 

Section 12 to Addendum B that would 

describe the qualification and 

operational capability that NSCC would 

require from Sponsored Members. 

In addition, NSCC is proposing a 

conforming change to replace ‘‘net 

worth’’ in Section 3.B.4. with ‘‘Net 

Worth’’ to reflect the proposed defined 

term in Rule 1 (Definitions). 

Addendum P (Fine Schedule) 

NSCC is proposing to modify 

paragraph (2) of Addendum P to reflect 

the proposed notification obligations of 


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92 15 U.S.C. 78q–1(b)(3)(F). 

93 17 CFR 240.17Ad–22(e)(18). 

94 15 U.S.C. 78q–1(b)(3)(F). 

95 Id. 

Sponsoring Members, Sponsored 

Members and Agent Clearing Members 

as proposed under Sections 2(i) and 3(d) 

of proposed Rule 2C and Section 2(i) of 

proposed Rule 2D. 

(vii) Impact of the Proposed SFT 

Clearing Service on Various Persons 

The proposed SFT Clearing Service 

would be voluntary. Institutional firm 

clients that wish to become Sponsored 

Members, and Members that wish to 

participate in the proposed SFT 

Clearing Service would have an 

opportunity to review the proposed rule 

change and determine if they would like 

to participate. Choosing to participate 

would make these entities subject to all 

of the rule changes that would be 

applicable to the proposed SFT Clearing 

Service and membership type, as 

described below. 

The proposed SFT Clearing Service 

would affect institutional firm clients 

that choose to become Sponsored 

Members because it would impose 

various requirements on them. These 

requirements include, but are not 

limited to, proposed Rule 56 and the 

following sections of proposed Rule 2C: 

(1) Eligibility, approval process and ongoing membership requirements as 

specified in Sections 3 and 4, (2) 

requirements related to restriction on 

access to NSCC services in Section 11, 

(3) requirements related to insolvency of 

a Sponsored Member in Section 13, and 

(4) requirements related to liquidation 

of positions resulting from Sponsored 

Member Transactions in Section 14. 

Specific details on the requirements and 

the manner in which the proposed SFT 

Clearing Service would affect 

institutional firm clients that choose to 

become Sponsored Members can be 

found above in Item II(A)1(vi)(A)— 

Proposed Rule Changes—Proposed Rule 

2C—Sponsoring Members and 

Sponsored Members. 

The proposed SFT Clearing Service 

would affect Members that choose to 

participate in the service because it 

would impose various requirements on 

them, depending on whether they are 

participating in the service as a 

Sponsoring Member, an Agent Clearing 

Member and/or as a Member. These 

requirements include, but are not 

limited to, the requirements specified in 

proposed Rule 2C for Members 

participating in the service as a 

Sponsoring Member; the requirements 

specified in proposed Rule 2D for 

Members participating in the service as 

an Agent Clearing Member; and for all 

Members participating in the service, 

the requirements specified in proposed 

Rule 56. Specific details on these 

requirements and the manner in which 

the proposed SFT Clearing Service 

would affect Members that choose to 

participate in the proposed SFT 

Clearing Service are described above in 

Sections 3(a)(vi)(A)—Proposed Rule 

Changes—Proposed Rule 2C— 

Sponsoring Members and Sponsored 

Members, (vi)(B)—Proposed Rule 

Changes—Proposed Rule 2D—Agent 

Clearing Members, and (vi)(C)— 

Proposed Rule Changes—Proposed Rule 

56—Securities Financing Transaction 

Clearing Service. 

The proposed SFT Clearing Service 

would not materially affect existing 

Members that do not choose to 

participate in it. First, the proposed SFT 

Clearing Service would not materially 

affect the operation of CNS or any other 

services offered by NSCC. In addition, 

SFT Members would be subject to the 

same or higher credit standards and 

market risk management requirements 

as those applicable to Members that 

choose not to participate in the 

proposed SFT Clearing Service, as 

described above. Moreover, although 

Members who choose not to participate 

in the proposed SFT Clearing Service 

would be subject to potential loss 

allocation in the event of an SFT 

Member default (just as SFT Members 

would be subject to potential loss 

allocation in the event of the default of 

a Member that chooses not to participate 

in the proposed SFT Clearing Service), 

the underlying securities that would be 

subject of any such default-related 

liquidation of an SFT Member are a 

subset of the same CNS-eligible 

securities with respect to which NSCC 

today guarantees settlement in the cash 

equity market, thus not materially 

affecting the nature of the loss allocation 

risk applicable to Members. 

2. Statutory Basis 

NSCC believes this proposal is 

consistent with the requirements of the 

Act, and the rules and regulations 

thereunder applicable to a registered 

clearing agency for the reasons 

described below. 

Establishing New Membership 

Categories and Requirements for 

Sponsoring Members and Sponsored 

Members 

NSCC believes the proposed changes 

to establish new membership categories 

and requirements for Sponsoring 

Members and Sponsored Members are 

consistent with Section 17A(b)(3)(F) 92

of the Act and Rule 17Ad–22(e)(18),93 as 

promulgated under the Act. 

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

requires, in part, that the Rules be 

designed to (i) assure the safeguarding 

of securities and funds which are in the 

custody or control of the clearing agency 

or for which it is responsible, (ii) 

remove impediments to and perfect the 

mechanism of a national system for the 

prompt and accurate clearance and 

settlement of securities transactions, 

and, in general, to protect investors and 

the public interest, and (iii) promote the 

prompt and accurate clearance and 

settlement of securities transactions.94

NSCC believes the proposed changes to 

establish new membership categories 

and requirements for Sponsoring 

Members and Sponsored Members are 

consistent with these requirements for 

the reasons described below. 

Safeguarding of Securities and Funds 

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

requires, in part, that the Rules be 

designed to assure the safeguarding of 

securities and funds which are in the 

custody or control of the clearing agency 

or for which it is responsible.95 NSCC 

believes the proposed changes to 

establish new membership categories 

and requirements for Sponsoring 

Members and Sponsored Members 

would allow NSCC to help assure the 

safeguarding of securities and funds 

which are in the custody or control of 

NSCC or for which it is responsible. 

Specifically, as proposed, all 

Sponsoring Member applicants would 

be subject to an approval process that is 

separate from their original Member 

applications, ongoing credit 

surveillance in their capacity as 

Sponsoring Members, as well as the 

calculation of the Sponsoring Member 

Required Fund Deposits on a gross basis 

with no offsets for netting of positions 

as between different Sponsored 

Members. 

In addition, as proposed, all 

Sponsoring Member applicants would 

be subject to the same or higher 

financial requirements as those that 

apply to them with respect to their 

respective Member category. 

Furthermore, NSCC would reserve the 

right to impose greater financial 

requirements based upon the level of 

the anticipated positions and 

obligations of such applicant, the 

anticipated risk associated with the 

volume and types of transactions such 

applicant proposes to process through 

NSCC, and the overall financial 

condition of such applicant. An activity 

limit would also be imposed on a 

Sponsoring Member’s Sponsored 


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96 Id. 

97 Id. 98 Id. 

99 Id. 

100 Id. 

101 Id. 

Member activity so that the Sponsoring 

Member would only be permitted to 

submit new Sponsored Member activity 

to NSCC to the extent its aggregate 

Volatility Charges do not exceed its Net 

Member Capital, unless otherwise 

determined by NSCC in order to 

promote orderly settlement. 

Moreover, as proposed, NSCC would 

reserve the right to require each 

Sponsoring Member, or any Member 

applicant to become such, to furnish to 

NSCC such adequate assurances of its 

financial responsibility and operational 

capability within the meaning of Rule 

15 as NSCC may at any time or from 

time to time deem necessary or 

advisable in order to protect NSCC, its 

participants, creditors or investors, to 

safeguard securities and funds in the 

custody or control of NSCC and for 

which NSCC is responsible, or to 

promote the prompt and accurate 

clearance, settlement and processing of 

securities transactions. 

By structuring the proposal in a way 

that addresses potential market and 

credit risks, NSCC believes that the 

proposed changes to establish new 

membership categories and 

requirements for Sponsoring Members 

and Sponsored Members would assure 

the safeguarding of securities and funds 

which are in the custody or control of 

NSCC or for which it is responsible, 

consistent with Section 17A(b)(3)(F) of 

the Act.96

Remove Impediments to and Perfect the 

Mechanism of a National System; 

Protect Investors and Public Interest 

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

requires, in part, that the Rules be 

designed to remove impediments to and 

perfect the mechanism of a national 

system for the prompt and accurate 

clearance and settlement of securities 

transactions, and, in general, to protect 

investors and the public interest.97

NSCC believes the proposed changes to 

establish new membership categories 

and requirements for Sponsoring 

Members and Sponsored Members 

would allow NSCC to help remove 

impediments to and perfect the 

mechanism of a national system for the 

prompt and accurate clearance and 

settlement of securities transactions 

and, in general, to protect investors and 

the public interest. 

Specifically, NSCC believes the 

proposal would help alleviate capital 

constraints and decrease settlement and 

operational risk that market participants 

would otherwise face. This is because 

the proposal would expand access to 

central clearing for institutional firms 

and thus enable a greater number of 

securities transactions to be cleared and 

settled by a central counterparty. As 

described above, NSCC believes that 

having securities transactions cleared 

through a central counterparty may 

create capital benefits for market 

participants and thereby help alleviate 

capital constraints otherwise applicable 

to bilateral securities transactions. In 

addition, by having a greater number of 

securities transactions cleared through a 

central counterparty, the proposal 

would decrease the settlement and 

operational risks that market 

participants would otherwise face to the 

extent they were required to clear and 

settle their securities transactions 

bilaterally because those securities 

transactions would be subject to 

novation and independent risk 

management by the central 

counterparty. By alleviating capital 

constraints and decreasing settlement 

and operational risk that market 

participants would otherwise face, 

NSCC believes the proposed changes to 

establish new membership categories 

and requirements for Sponsoring 

Members and Sponsored Members 

would remove impediments to and 

perfect the mechanism of a national 

system for the prompt and accurate 

clearance and settlement of securities 

transactions, consistent with Section 

17A(b)(3)(F) of the Act.98

The proposal would also protect 

investors and the public interest by 

lowering the risk of liquidity drain and 

protecting against fire sale risks as it 

would expand access to central clearing 

for institutional firms and thus enable a 

greater number of securities transactions 

to be cleared and settled by a central 

counterparty. Specifically, NSCC 

believes that having securities 

transactions cleared and settled by a 

central counterparty would lower the 

risk of liquidity drain in the U.S. 

financial market by lessening 

counterparties’ likely inclination to 

unwind transactions in a stressed 

market scenario. The central 

counterparty would use its risk 

management resources to provide 

confidence to market participants that 

they will receive back their cash or 

securities, as applicable, which should 

limit the propensity for market 

participants to seek to unwind their 

transactions in a stressed market 

scenario. In addition, NSCC believes 

that having securities transactions 

cleared and settled by a central 

counterparty would protect against fire 

sale risk through the central 

counterparty’s ability to centralize and 

control the hedging and liquidation of a 

defaulting counterparty’s portfolio. By 

lowering the risk of liquidity drain in 

the U.S. financial market and protecting 

against fire sale risk, NSCC believes the 

proposed changes to establish new 

membership categories and 

requirements for Sponsoring Members 

and Sponsored Members would protect 

investors and the public interest, 

consistent with the Section 

17(A)(b)(3)(F) of the Act.99

Promote Prompt and Accurate Clearance 

and Settlement 

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

requires, in part, that the Rules be 

designed to promote the prompt and 

accurate clearance and settlement of 

securities transactions.100 NSCC 

believes the proposed changes to 

establish new membership categories 

and requirements for Sponsoring 

Members and Sponsored Members 

would allow NSCC to help promote the 

prompt and accurate clearance and 

settlement of securities transactions. 

Specifically, by expanding the access of 

central clearing for institutional firms 

and thus enable a greater number of 

securities transactions to be cleared and 

settled by a central counterparty, NSCC 

believes the proposal would help 

decrease settlement and operational risk 

that market participants would 

otherwise face to the extent they were 

required to clear and settle their 

securities transactions bilaterally 

because those securities transactions 

would be subject to novation and 

independent risk management by the 

central counterparty. By decreasing 

settlement and operational risk, NSCC 

believes the proposed changes to 

establish new membership categories 

and requirements for Sponsoring 

Members and Sponsored Members 

would promote the prompt and accurate 

clearance and settlement of securities 

transactions, consistent with Section 

17A(b)(3)(F) of the Act.101

By structuring the proposal in a way 

that would allow NSCC to help (i) 

assure the safeguarding of securities and 

funds which are in the custody or 

control of the clearing agency or for 

which it is responsible, (ii) remove 

impediments to and perfect the 

mechanism of a national system for the 

prompt and accurate clearance and 

settlement of securities transactions, 

and, in general, to protect investors and 

the public interest, and (iii) promote the 

prompt and accurate clearance and 


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102 Id. 

103 17 CFR 240.17Ad–22(e)(18). 

104 17 CFR 230.144A. 

105 15 U.S.C. 77a et seq. 

106 17 CFR 240.17Ad–22(e)(18). 

107 15 U.S.C. 78q–1(b)(3)(F). 

108 17 CFR 240.17Ad–22(e)(18). 

109 15 U.S.C. 78q–1(b)(3)(F). 

110 Id. 111 Id. 

settlement of securities transactions, 

NSCC believes the proposed changes to 

establish new membership categories 

and requirements for Sponsoring 

Members and Sponsored Members are 

consistent with Section 17A(b)(3)(F) of 

the Act.102

Rule 17Ad–22(e)(18) under the Act 

requires, in part, that NSCC establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to establish 

objective, risk-based, and publicly 

disclosed criteria for participation.103

NSCC believes the proposed changes to 

establish new membership categories 

and requirements for Sponsoring 

Members and Sponsored Members 

would establish objective, risk-based, 

and publicly disclosed criteria for 

participation in NSCC as Sponsoring 

Members and Sponsored Members. 

Specifically, as proposed, in order for an 

applicant to become a Sponsoring 

Member, the applicant would be 

required to satisfy a number of objective 

and risk-based eligibility criteria. First, 

the applicant must be a Member. In 

addition, if the applicant is a RegisteredBroker-Dealer, then it would be required 

to have (i) Net Worth of at least $25 

million and (ii) excess net capital over 

the minimum net capital requirement 

imposed by the SEC (or such higher 

minimum capital requirement imposed 

by the applicant’s designated examining 

authority) of at least $10 million. 

Likewise, in order for an applicant to 

become a Sponsored Member, the 

applicant would be required to meet 

certain objective, risk-based eligibility 

criteria. Specifically, an applicant 

would be eligible to apply to become a 

Sponsored Member if it is either a 

‘‘qualified institutional buyer’’ as 

defined by Rule 144A 104 under the 

Securities Act,105 or a legal entity that, 

although not organized as an entity 

specifically listed in paragraph 

(a)(1)(i)(H) of Rule 144A under the 

Securities Act, satisfies the financial 

requirements necessary to be a 

‘‘qualified institutional buyer’’ as 

specified in that paragraph. If approved, 

the requirements for proposed new 

Sponsoring Member and Sponsored 

Member membership categories would 

become part of the Rules, which are 

publicly available on DTCC’s website 

(www.dtcc.com), and market 

participants would be able to review 

them in connection with their 

evaluation of potential participation in 

NSCC as Sponsoring Members and 

Sponsored Members. Therefore, NSCC 

believes that the proposed changes to 

establish new membership categories 

and requirements for Sponsoring 

Members and Sponsored Members are 

consistent with Rule 17Ad–22(e)(18) 

under the Act.106

Establishing a New Membership 

Category and Requirements for Agent 

Clearing Members 

NSCC believes the proposed changes 

to establish a new membership category 

and requirements for Agent Clearing 

Members are consistent with Section 

17A(b)(3)(F) 107 of the Act and Rule 

17Ad–22(e)(18),108 as promulgated 

under the Act. 

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

requires, in part, that the Rules be 

designed to (i) assure the safeguarding 

of securities and funds which are in the 

custody or control of the clearing agency 

or for which it is responsible, (ii) 

remove impediments to and perfect the 

mechanism of a national system for the 

prompt and accurate clearance and 

settlement of securities transactions, 

and, in general, to protect investors and 

the public interest, and (iii) promote the 

prompt and accurate clearance and 

settlement of securities transactions.109

NSCC believes the proposed changes to 

establish a new membership category 

and requirements for Agent Clearing 

Members are consistent with these 

requirements for the reasons described 

below. 

Safeguarding of Securities and Funds 

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

requires, in part, that the Rules be 

designed to assure the safeguarding of 

securities and funds which are in the 

custody or control of the clearing agency 

or for which it is responsible.110 NSCC 

believes the proposed changes to 

establish a new membership category 

and requirements for Agent Clearing 

Members would allow NSCC to help 

assure the safeguarding of securities and 

funds which are in the custody or 

control of NSCC or for which it is 

responsible. Specifically, as proposed, 

all Agent Clearing Member applicants 

would be subject to an approval process 

that is separate from their original 

Member applications, ongoing credit 

surveillance in their capacity as Agent 

Clearing Members, as well as the 

calculation of the Agent Clearing 

Member Required Fund Deposits on a 

gross basis with no offsets for netting of 

positions as between different 

Customers. 

In addition, as proposed, all Agent 

Clearing Member applicants would be 

subject to the same or higher financial 

requirements as those that apply to 

them with respect to their respective 

Member category. Furthermore, NSCC 

would reserve the right to impose 

greater financial requirements based 

upon the level of the anticipated 

positions and obligations of such 

applicant, the anticipated risk 

associated with the volume and types of 

transactions such applicant proposes to 

process through NSCC, and the overall 

financial condition of such applicant. 

An activity limit would also be imposed 

on an Agent Clearing Member’s 

Customer activity so that the Agent 

Clearing Member would only be 

permitted to submit new Customer 

activity to NSCC to the extent its 

aggregate Volatility Charges do not 

exceed its Net Member Capital, unless 

otherwise determined by NSCC in order 

to promote orderly settlement. 

Moreover, as proposed, NSCC would 

reserve the right to require each Agent 

Clearing Member, or any Member 

applicant to become such, to furnish to 

NSCC such adequate assurances of its 

financial responsibility and operational 

capability within the meaning of Rule 

15 as NSCC may at any time or from 

time to time deem necessary or 

advisable in order to protect NSCC, its 

participants, creditors or investors, to 

safeguard securities and funds in the 

custody or control of NSCC and for 

which NSCC is responsible, or to 

promote the prompt and accurate 

clearance, settlement and processing of 

securities transactions. 

By structuring the proposal in a way 

that addresses potential market and 

credit risks, NSCC believes that the 

proposed changes to establish a new 

membership category and requirements 

for Agent Clearing Members would 

assure the safeguarding of securities and 

funds which are in the custody or 

control of NSCC or for which it is 

responsible, consistent with Section 

17A(b)(3)(F) of the Act.111

Remove Impediments to and Perfect the 

Mechanism of a National System; 

Protect Investors and Public Interest 

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

requires, in part, that the Rules be 

designed to remove impediments to and 

perfect the mechanism of a national 

system for the prompt and accurate 

clearance and settlement of securities 

transactions, and, in general, to protect 


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112 Id. 

113 Id. 

114 Id. 

115 Id. 

116 Id. 

117 Id. 

118 17 CFR 240.17Ad–22(e)(18). 

investors and the public interest.112

NSCC believes the proposed changes to 

establish a new membership category 

and requirements for Agent Clearing 

Members would allow NSCC to help 

remove impediments to and perfect the 

mechanism of a national system for the 

prompt and accurate clearance and 

settlement of securities transactions 

and, in general, to protect investors and 

the public interest. 

Specifically, NSCC believes the 

proposal would help alleviate capital 

constraints and decrease settlement and 

operational risk that market participants 

would otherwise face. This is because 

the proposal would expand access to 

central clearing for institutional firms 

and thus enable a greater number of 

securities transactions to be cleared and 

settled by a central counterparty. As 

described above, NSCC believes that 

having securities transactions cleared 

through a central counterparty may 

create capital benefits for market 

participants and thereby help alleviate 

capital constraints otherwise applicable 

to bilateral securities transactions. In 

addition, by having a greater number of 

securities transactions cleared through a 

central counterparty, the proposal 

would decrease the settlement and 

operational risks that market 

participants would otherwise face to the 

extent they were required to clear and 

settle their securities transactions 

bilaterally because those securities 

transactions would be subject to 

novation and independent risk 

management by the central 

counterparty. By alleviating capital 

constraints and decreasing settlement 

and operational risk that market 

participants would otherwise face, 

NSCC believes the proposed changes to 

establish a new membership category 

and requirements for Agent Clearing 

Members would remove impediments to 

and perfect the mechanism of a national 

system for the prompt and accurate 

clearance and settlement of securities 

transactions, consistent with Section 

17A(b)(3)(F) of the Act.113

The proposal would also protect 

investors and the public interest by 

lowering the risk of liquidity drain and 

protecting against fire sale risks as it 

would expand access to central clearing 

for institutional firms and thus enable a 

greater number of securities transactions 

to be cleared and settled by a central 

counterparty. Specifically, NSCC 

believes that having securities 

transactions cleared and settled by a 

central counterparty would lower the 

risk of liquidity drain in the U.S. 

financial market by lessening 

counterparties’ likely inclination to 

unwind transactions in a stressed 

market scenario. The central 

counterparty would use its risk 

management resources to provide 

confidence to market participants that 

they will receive back their cash or 

securities, as applicable, which should 

limit the propensity for market 

participants to seek to unwind their 

transactions in a stressed market 

scenario. In addition, NSCC believes 

that having securities transactions 

cleared and settled by a central 

counterparty would protect against fire 

sale risk through the central 

counterparty’s ability to centralize and 

control the hedging and liquidation of a 

defaulting counterparty’s portfolio. By 

lowering the risk of liquidity drain in 

the U.S. financial market and protecting 

against fire sale risk, NSCC believes the 

proposed changes to establish a new 

membership category and requirements 

for Agent Clearing Members would 

protect investors and the public interest, 

consistent with the Section 

17(A)(b)(3)(F) of the Act.114

Promote Prompt and Accurate Clearance 

and Settlement 

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

requires, in part, that the Rules be 

designed to promote the prompt and 

accurate clearance and settlement of 

securities transactions.115 NSCC 

believes the proposed changes to 

establish a new membership category 

and requirements for Agent Clearing 

Members would allow NSCC to help 

promote the prompt and accurate 

clearance and settlement of securities 

transactions. Specifically, by expanding 

the access of central clearing for 

institutional firms and thus enable a 

greater number of securities transactions 

to be cleared and settled by a central 

counterparty, NSCC believes the 

proposal would help decrease 

settlement and operational risk that 

market participants would otherwise 

face to the extent they were required to 

clear and settle their securities 

transactions bilaterally because those 

securities transactions would be subject 

to novation and independent risk 

management by the central 

counterparty. By decreasing settlement 

and operational risk, NSCC believes the 

proposed changes to establish a new 

membership category and requirements 

for Agent Clearing Members would 

promote the prompt and accurate 

clearance and settlement of securities 

transactions, consistent with Section 

17A(b)(3)(F) of the Act.116

By structuring the proposal in a way 

that would allow NSCC to help (i) 

assure the safeguarding of securities and 

funds which are in the custody or 

control of the clearing agency or for 

which it is responsible, (ii) remove 

impediments to and perfect the 

mechanism of a national system for the 

prompt and accurate clearance and 

settlement of securities transactions, 

and, in general, to protect investors and 

the public interest, and (iii) promote the 

prompt and accurate clearance and 

settlement of securities transactions, 

NSCC believes the proposed changes to 

establish a new membership category 

and requirements for Agent Clearing 

Members are consistent with Section 

17A(b)(3)(F) of Act.117

Rule 17Ad–22(e)(18) under the Act 

requires, in part, that NSCC establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to establish 

objective, risk-based, and publicly 

disclosed criteria for participation.118

NSCC believes the proposed changes to 

establish new a membership category 

and requirements for Agent Clearing 

Members would establish objective, 

risk-based, and publicly disclosed 

criteria for participation in NSCC as 

Agent Clearing Members. Specifically, 

as proposed, in order for an applicant to 

become an Agent Clearing Member, the 

applicant would be required to satisfy a 

number of objective and risk-based 

eligibility criteria. First, the applicant 

must be a Member. In addition, if the 

applicant is a Registered-Broker-Dealer, 

then it would be required to have (i) Net 

Worth of at least $25 million and (ii) 

excess net capital over the minimum net 

capital requirement imposed by the SEC 

(or such higher minimum capital 

requirement imposed by the applicant’s 

designated examining authority) of at 

least $10 million. If approved, the 

requirements for proposed new Agent 

Clearing Member membership category 

would become part of the Rules, which 

are publicly available on DTCC’s 

website (www.dtcc.com), and market 

participants would be able to review 

them in connection with their 

evaluation of potential participation in 

NSCC as Agent Clearing Members. 

Therefore, NSCC believes that the 

proposed changes to establish a new 

membership category and requirements 

for Agent Clearing Members are 


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119 Id. 

120 15 U.S.C. 78q–1(b)(3)(F). 

121 17 CFR 240.17Ad–22(e)(7) and (8). 

122 15 U.S.C. 78q–1(b)(3)(F). 

123 Id. 

124See Section 12(c) of proposed Rule 56. 

125Supra note 34. 

126Supra note 35. 

127See Section 12(d) of proposed Rule 56. 

128See Section 13(b) of proposed Rule 56. 

129See Section 12(e) of proposed Rule 56. 

130Supra note 27. 

131See proposed Rule 56, Section 14(b)(ix). 

132 Id. 

133 17 CFR 240.17Ad–22(e)(7). 

consistent with Rule 17Ad–22(e)(18) 

under the Act.119

Establishing the SFT Clearing Service 

NSCC believes the proposed changes 

to establish the SFT Clearing Service are 

consistent with Section 17A(b)(3)(F) 120

of the Act and Rules 17Ad–22(e)(7) and 

(8),121 as promulgated under the Act. 

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

requires, in part, that the Rules be 

designed to (i) assure the safeguarding 

of securities and funds which are in the 

custody or control of the clearing agency 

or for which it is responsible, (ii) 

remove impediments to and perfect the 

mechanism of a national system for the 

prompt and accurate clearance and 

settlement of securities transactions, 

and, in general, to protect investors and 

the public interest, and (iii) promote the 

prompt and accurate clearance and 

settlement of securities transactions.122

NSCC believes the proposed changes to 

establish the SFT Clearing Service are 

consistent with these requirements for 

the reasons described below. 

Safeguarding of Securities and Funds 

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

requires, in part, that the Rules be 

designed to assure the safeguarding of 

securities and funds which are in the 

custody or control of NSCC or for which 

it is responsible.123 NSCC believes that 

the proposed changes to establish the 

SFT Clearing Service would allow 

NSCC to help assure the safeguarding of 

securities and funds which are in the 

custody or control of NSCC or for which 

it is responsible. 

The proposal is structured in a 

manner that allows NSCC to protect 

itself from associated market risk. 

Specifically, as described above, except 

with respect to the VaR charge, SFT 

activity would be risk managed by 

NSCC in a manner consistent with 

Members’ CNS positions. Moreover, 

except with respect to the MLA charge, 

all SFT Positions would be margined 

independently of the Member’s other 

positions, i.e., Required SFT Deposit. 

The Required SFT Deposit would 

generally be calculated using the same 

procedure applicable to CNS positions, 

but with a separate $250,000 

minimum.124

Moreover, consistent with the manner 

in which clearing fund requirements are 

satisfied by members of FICC for their 

cleared securities financing 

transactions, NSCC would require that 

(i) a minimum of 40% of an SFT 

Member’s Required SFT Deposit consist 

of a combination of cash and Eligible 

Clearing Fund Treasury Securities and 

(ii) the lesser of $5,000,000 or 10% of 

an SFT Member’s Required SFT Deposit 

(but not less than $250,000) consist of 

cash.125 126 NSCC would also have the 

discretion to require a Member to post 

its Required SFT Deposit in proportion 

of cash higher than would otherwise be 

required.127 NSCC’s determination to 

impose any such requirement would be 

made in view of market conditions and 

other financial and operational 

capabilities of the relevant SFT Member. 

Furthermore, NSCC would require 

additional Clearing Fund deposits to 

address two situations that may present 

unique risk. First, if the share price of 

underlying securities of an SFT that has 

already been novated to NSCC falls 

below the threshold established by 

NSCC from time to time, NSCC would 

require both pre-novation counterparties 

to the SFT to post Clearing Fund equal 

to 100% of the market value of such 

underlying securities until such time as 

the per share price of the underlying 

securities equals or exceeds such 

threshold.128 Second, in the event an 

SFT is subject to a collateral haircut 

(i.e., the SFT Cash exceeds the market 

value of the securities), NSCC would 

require the Transferor (or in the case of 

an Agent Clearing Member Transaction, 

the Agent Clearing Member) to post 

Clearing Fund equal to such excess.129

Additionally, the Sponsoring Member 

Required Fund Deposits and Agent 

Clearing Member Required Fund 

Deposits would each be calculated on a 

gross basis, and no offsets for netting of 

positions as between different 

Sponsored Members or different 

Customers, as applicable, would be 

permitted. Moreover, any Member that 

opts to apply to become a Sponsoring 

Member or an Agent Clearing Member 

would be subject to an activity limit (as 

described above). 

NSCC is also proposing to limit the 

SFTs eligible for clearing to overnight 

transactions on securities that are CNSeligible equity securities with a share 

price that equals or exceeds the 

threshold established by NSCC from 

time to time and that are fully 

collateralized by cash. NSCC believes 

these limitations, in addition to the 

Clearing Fund requirements, would 

limit the potential market risk 

associated with SFTs. 

The proposal is also structured in a 

manner that allows NSCC to protect 

itself from associated liquidity risk. 

Specifically, the proposal would 

provide that the Final Settlement 

obligations and Price Differential of 

each SFT, other than a Sponsored 

Member Transaction, that is novated to 

NSCC would settle RVP/DVP at DTC.130

SFT deliver orders would be processed 

in accordance with DTC’s rules and 

procedures, including provisions 

relating to risk controls. Therefore each 

DTC participant’s Final Settlement 

obligation would complete at DTC on a 

fully collateralized basis, and the 

associated debit (if any) would be 

subject to DTC’s risk controls. 

To the extent the Price Differential is 

not processed by DTC, for example if a 

receiver does not satisfy DTC’s risk 

controls, NSCC would debit and credit 

the Price Differential from and to the 

SFT Accounts of the SFT Member 

parties to the SFT as part of its end of 

day final money settlement. 

In the event NSCC ceases to act for a 

Defaulting SFT Member, on the 

Business Day that NSCC ceased to act, 

NSCC’s daily liquidity need calculation 

would include all Price Differential 

debits owed by the Defaulting SFT 

Member not processed at DTC. On 

subsequent days of the liquidation of 

the Defaulting SFT Member’s SFT 

Positions, NSCC’s total liquidity need 

calculations would include all novated 

SFT activity that has not reached Final 

Settlement on the Business Day NSCC 

ceased to act, netted together with all 

other outstanding settlement activity of 

the Defaulting SFT Member at NSCC. 

Until NSCC has satisfied the Final 

Settlement obligations owing to nondefaulting SFT Members, NSCC would 

continue paying to and receiving from 

non-defaulting SFT Members the 

applicable Price Differential (i.e., the 

change in market value of the relevant 

securities) with respect to their novated 

SFTs.131 NSCC would take into account 

such Price Differential payment 

obligations, as well as any Final 

Settlement obligations to non-defaulting 

SFT Members, when calculating the 

amount of liquidity resources that NSCC 

may require in the event of the default 

of the participant family that would 

generate the largest aggregate payment 

obligation for NSCC in extreme but 

plausible market conditions.132 133 By 


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134Supra note 39. 

135 15 U.S.C. 78q–1(b)(3)(F). 

136 Id. 

137 Id. 

138 Id. 

139 Id. 

continuing to process these Payment 

Differential payments until Final 

Settlement occurs, NSCC would ensure 

that non-defaulting SFT Members are 

kept in largely the same position as if 

the Defaulting SFT Member had not 

defaulted and the pre-novation 

counterparties had instead agreed to roll 

the SFTs. This is because even though 

the non-payment of the Rate Payment in 

an SFT Member default context may 

have an impact on non-defaulting SFT 

Members, such impact is generally de 

minimis. To the extent NSCC is required 

to pay a Price Differential, as well as any 

Final Settlement obligations, to a nondefaulting SFT Member, NSCC would 

rely on NSCC’s liquidity resources, 

including the Required SFT Deposit and 

any SLD that may be collected, when 

applicable, in order to cover the 

liquidity need associated with any such 

Price Differential and Final Settlement 

obligations, consistent with the Clearing 

Agency Liquidity Risk Management 

Framework.134

The proposal is also structured in a 

manner that allows NSCC to protect 

itself from associated credit risk. In 

addition to the Clearing Fund 

requirements discussed above, any 

Member that elects to participate in the 

proposed SFT Clearing Service would 

be subject to the same initial 

membership requirements and ongoing 

membership requirements and 

monitoring as any other Member. 

Moreover, any Member that opts to 

apply to become a Sponsoring Member 

or an Agent Clearing Member would be 

subject to an activity limit (as described 

above) in addition to an approval 

process that is separate from its original 

Member applications, as well as ongoing 

credit surveillance in its capacity as a 

Sponsoring Member or Agent Clearing 

Member, as applicable. 

The proposal is also structured in a 

manner that allows NSCC to protect 

itself from associated operational risk. 

NSCC proposes to utilize to a significant 

extent the same processes and 

infrastructure as it has used for many 

years to clear and settle cash market 

transactions for purposes of clearing and 

settling SFTs. NSCC staff is well versed 

in such processes and infrastructure and 

has been actively involved in the 

development of the proposed SFT 

Clearing Service, thereby allowing for 

ready integration of support for the 

proposed SFT Clearing Service into 

NSCC staff’s current workflows. 

By structuring the proposal in a way 

that addresses potential market, 

liquidity, credit and operational risks, 

NSCC believes that the proposed 

changes to establish the SFT Clearing 

Service would help assure the 

safeguarding of securities and funds 

which are in the custody or control of 

NSCC or for which it is responsible, 

consistent with Section 17A(b)(3)(F) of 

the Act.135

Remove Impediments to and Perfect the 

Mechanism of a National System; 

Protect Investors and Public Interest 

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

requires, in part, that the Rules be 

designed to remove impediments to and 

perfect the mechanism of a national 

system for the prompt and accurate 

clearance and settlement of securities 

transactions, and, in general, to protect 

investors and the public interest.136

NSCC believes the proposed changes to 

establish the SFT Clearing Service 

would allow NSCC to help remove 

impediments to and perfect the 

mechanism of a national system for the 

prompt and accurate clearance and 

settlement of securities transactions 

and, in general, to protect investors and 

the public interest. 

Specifically, NSCC believes the 

proposal would help alleviate capital 

constraints and decrease settlement and 

operational risk that market participants 

would otherwise face. As described 

above, NSCC believes, by expanding the 

availability of NSCC’s infrastructure to 

SFTs via the proposed SFT Clearing 

Service, the proposal may create capital 

benefits for market participants and 

thereby help alleviate capital constraints 

otherwise applicable to bilateral SFTs. 

In addition, the proposal would 

decrease settlement and operational risk 

that market participants would 

otherwise face by making a greater 

number of securities transactions 

eligible to be cleared, settled and risk 

managed through NSCC via the 

proposed SFT Clearing Service. By 

alleviating capital constraints and 

decreasing settlement and operational 

risk that market participants would 

otherwise face, NSCC believes the 

proposed changes to establish the SFT 

Clearing Service would remove 

impediments to and perfect the 

mechanism of a national system for the 

prompt and accurate clearance and 

settlement of securities transactions, 

consistent with Section 17A(b)(3)(F) of 

the Act.137

The proposal would also protect 

investors and the public interest by 

lowering the risk of liquidity drain and 

protecting against fire sale risks. 

Specifically, the proposal would lower 

the risk of liquidity drain in the U.S. 

equity securities financing market by 

lessening counterparties’ likely 

inclination to unwind transactions in a 

stressed market scenario. NSCC would 

use its risk management resources to 

provide confidence to market 

participants that they will receive back 

their cash or securities, as applicable, 

which should limit the propensity for 

market participants to seek to unwind 

their transactions in a stressed market 

scenario. 

In addition, the proposal would 

protect against fire sale risk. As 

described above, in the event of a 

default, NSCC would conduct a 

centralized, orderly liquidation of the 

defaulter’s SFT Positions. Such an 

organized liquidation should result in 

substantially less price depreciation and 

market disruption than multiple 

independent non-defaulting parties 

racing against one another to liquidate 

the positions. In addition, NSCC would 

only need to liquidate the defaulter’s net 

positions. Limiting the positions that 

need to be liquidated to the defaulter’s 

net positions should reduce the volume 

of required sales activity, which in turn 

should limit the price and market 

impact of the close-out of the defaulter’s 

positions. NSCC would also use its risk 

management resources to provide 

confidence to market participants that 

they will receive back their cash or 

securities, as applicable, which should 

limit the propensity for market 

participants to seek to unwind their 

transactions in a stressed market 

scenario. By lowering the risk of 

liquidity drain in the U.S. equity 

securities financing market and 

protecting against fire sale risk, NSCC 

believes the proposed changes to 

establish the SFT Clearing Service 

would protect investors and the public 

interest, consistent with the Section 

17(A)(b)(3)(F) of the Act.138

Promote Prompt and Accurate Clearance 

and Settlement 

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

requires, in part, that the Rules be 

designed to promote the prompt and 

accurate clearance and settlement of 

securities transactions.139 NSCC 

believes the proposed changes to 

establish the SFT Clearing Service 

would allow NSCC to help promote the 

prompt and accurate clearance and 

settlement of securities transactions. 

Specifically, by expanding the 

availability of NSCC’s infrastructure to 

SFTs via the proposed SFT Clearing 

Service, NSCC believes the proposal 


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140 Id. 

141 Id. 

142 17 CFR 240.17Ad–22(e)(7). 

143Supra note 27. 

144See proposed Rule 56, Section 14(b)(ix). 

145 Id. 

146 17 CFR 240.17Ad–22(e)(7). 

147Supra note 39. 

148 17 CFR 240.17Ad–22(e)(7). 

149 17 CFR 240.17Ad–22(e)(8). 

150 Id. 

151 Id. 

152 15 U.S.C. 78q–1(b)(3)(F). 

would help decrease settlement and 

operational risk that market participants 

would otherwise face by making a 

greater number of securities transactions 

eligible to be cleared, settled and risk 

managed through NSCC. By decreasing 

settlement and operational risk, NSCC 

believes the proposed changes to 

establish the SFT Clearing Service 

would promote the prompt and accurate 

clearance and settlement of securities 

transactions, consistent with Section 

17A(b)(3)(F) of the Act.140

By structuring the proposal in a way 

that would allow NSCC to help (i) 

assure the safeguarding of securities and 

funds which are in the custody or 

control of the clearing agency or for 

which it is responsible, (ii) remove 

impediments to and perfect the 

mechanism of a national system for the 

prompt and accurate clearance and 

settlement of securities transactions, 

and, in general, to protect investors and 

the public interest, and (iii) promote the 

prompt and accurate clearance and 

settlement of securities transactions, 

NSCC believes the proposed changes to 

establish the SFT Clearing Service are 

consistent with Section 17A(b)(3)(F) of 

the Act.141

Rule 17Ad–22(e)(7) under the Act 

requires NSCC to establish, implement, 

maintain, and enforce written policies 

and procedures reasonably designed to 

effectively measure, monitor, and 

manage the liquidity risk that arises in 

or is borne by the covered clearing 

agency.142 NSCC believes that the 

proposed changes to establish the SFT 

Clearing Service are consistent with 

Rule 17Ad–22(e)(7) because, as 

described above, the proposal is 

structured in a manner that allows 

NSCC to protect itself from associated 

liquidity risk. Specifically, the proposal 

would provide that the Final Settlement 

obligations and Price Differential of 

each SFT, other than a Sponsored 

Member Transaction, that is novated to 

NSCC would settle RVP/DVP at DTC.143

SFT deliver orders would be processed 

in accordance with DTC’s rules and 

procedures, including provisions 

relating to risk controls. Therefore each 

DTC participant’s Final Settlement 

obligation would complete at DTC on a 

fully collateralized basis, and the 

associated debits (if any) would be 

subject to DTC’s risk controls. 

To the extent the Price Differential is 

not processed by DTC, for example if a 

receiver does not satisfy DTC’s risk 

controls, NSCC would debit and credit 

the Price Differential from and to the 

SFT Accounts of the SFT Member 

parties to the SFT as part of its end of 

day final money settlement. 

In the event NSCC ceases to act for a 

Defaulting SFT Member, on the 

Business Day that NSCC ceased to act, 

NSCC’s daily liquidity need calculation 

would include all Price Differential 

debits owed by the Defaulting SFT 

Member not processed at DTC. On 

subsequent days of the liquidation of 

the Defaulting SFT Member’s SFT 

Positions, NSCC’s total liquidity need 

calculations would include all novated 

SFT activity that has not reached Final 

Settlement on the Business Day NSCC 

ceased to act, netted together with all 

other outstanding settlement activity of 

the Defaulting SFT Member at NSCC. 

Until NSCC has satisfied the Final 

Settlement obligations owing to nondefaulting SFT Members, NSCC would 

continue paying to and receiving from 

non-defaulting SFT Members the 

applicable Price Differential (i.e., the 

change in market value of the relevant 

securities) with respect to their novated 

SFTs.144 NSCC would take into account 

such Price Differential payment 

obligations, as well as any Final 

Settlement obligations to non-defaulting 

SFT Members, when calculating the 

amount of liquidity resources that NSCC 

may require in the event of the default 

of the participant family that would 

generate the largest aggregate payment 

obligation for NSCC in extreme but 

plausible market conditions.145 146 By 

continuing to process these Price 

Differential payments until Final 

Settlement occurs, NSCC would ensure 

that non-defaulting SFT Members are 

kept in largely the same position as if 

the Defaulting SFT Member had not 

defaulted and the pre-novation 

counterparties had instead agreed to roll 

the SFTs. This is because even though 

the non-payment of the Rate Payment in 

an SFT Member default context may 

have an impact on non-defaulting SFT 

Members, such impact is generally de 

minimis. To the extent NSCC is required 

to pay a Price Differential, as well as any 

Final Settlement obligations, to a nondefaulting SFT Member, NSCC would 

rely on NSCC’s liquidity resources, 

including the Required SFT Deposit and 

any SLD that may be collected, when 

applicable, in order to cover the 

liquidity need associated with any such 

Price Differential and Final Settlement 

obligations, consistent with the Clearing 

Agency Liquidity Risk Management 

Framework.147 Therefore, NSCC 

believes that the proposed changes to 

establish the SFT Clearing Service are 

consistent with Rule 17Ad–22(e)(7) 

under the Act.148

Rule 17Ad–22(e)(8) under the Act 149

requires NSCC to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

define the point at which settlement is 

final to be no later than the end of the 

day on which the payment or obligation 

is due. NSCC believes that the proposed 

changes to establish the SFT Clearing 

Service are consistent with Rule 17Ad– 

22(e)(8) 150 because, as described above, 

the proposal would make it clear to SFT 

Members the point at which settlement 

is final with respect to SFTs cleared 

through NSCC. Specifically, Section 7 in 

the proposed Rule 56 (Securities 

Financing Transaction Clearing Service) 

provides that an SFT, or a portion 

thereof, shall be deemed complete and 

final upon Final Settlement of the SFT, 

or such portion. Having clear provisions 

in this regard would enable SFT 

Members to better identify the point at 

which settlement is final with respect to 

their SFTs. As such, NSCC believes the 

proposed changes to establish the SFT 

Clearing Service are consistent with 

Rule 17Ad–22(e)(8) under the Act.151

Making Other Amendments and 

Clarifications 

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

requires, in part, that the Rules be 

designed to promote the prompt and 

accurate clearance and settlement of 

securities transactions.152 NSCC 

believes that the proposed changes to 

make other amendments and 

clarifications to the Rules would allow 

NSCC to help promote prompt and 

accurate clearance and settlement of 

securities transactions. This is because 

the proposed amendments and 

clarifications to the Rules are 

conforming and technical changes that 

would ensure consistency in the Rules 

and that the Rules remain clear and 

accurate. Having clear and accurate 

Rules would help Members to better 

understand their rights and obligations 

regarding NSCC’s clearance and 

settlement services. NSCC believes that 

when Members better understand their 

rights and obligations regarding NSCC’s 

clearance and settlement services, they 

can act in accordance with the Rules. 

NSCC believes that better enabling 


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153 Id. 

154 15 U.S.C. 78q–1(b)(3)(I). 

Members to comply with the Rules 

would promote the prompt and accurate 

clearance and settlement of securities 

transactions by NSCC. As such, NSCC 

believes the proposed changes to make 

other amendments and clarifications are 

consistent with Section 17A(b)(3)(F) of 

the Act.153

(B) Clearing Agency’s Statement on 

Burden on Competition 

NSCC believes that the proposed rule 

change to establish the SFT Clearing 

Service and the additional membership 

categories in connection therewith 

would promote competition by 

increasing the types of entities that may 

participate in NSCC and therefore 

permit more market participants to 

utilize NSCC’s services. 

At the same time, the proposed rule 

change may impose a burden on 

competition by limiting participation in 

the proposed SFT Clearing Service to 

institutions that are eligible to 

participate in the service. The proposed 

rule change may also impose a burden 

on competition by (i) calculating 

Required Fund Deposits for Sponsoring 

Members and Agent Clearing Members 

on a gross basis with no offsets for 

netting of positions between different 

Sponsored Members or different 

Customers, as applicable, and (ii) 

imposing an additional charge with 

respect to any Non-Returned SFT that is 

calculated based on the relevant SFT 

Member’s Credit Risk Rating Matrix 

rating. However, NSCC believes any 

burden on competition that may result 

from the proposed rule change would 

not be significant and would be 

necessary and appropriate in 

furtherance of the purposes of the 

Act,154 for the reasons described below. 

Although the proposal would limit 

full participation in the proposed SFT 

Clearing Service to Members, and such 

limitation may impact institutional firm 

clients that are unable to satisfy such 

eligibility requirements by excluding 

them from being able to directly submit 

their equity securities financing activity 

in SFT eligible securities to NSCC for 

novation (and avail themselves of the 

commensurate benefits described above 

in Item II(A)1(i)—Background), NSCC 

believes that any related burden on 

competition would be necessary and 

appropriate in furtherance of the 

purposes of the Act. This is because 

such eligibility requirements are 

designed to allow NSCC to prudently 

manage the risks associated with SFT 

Members’ participation in the proposed 

SFT Clearing Service by ensuring that 

SFT Members are able to satisfy their 

obligations to NSCC. In addition, 

although the proposal would limit the 

scope of entities eligible to be 

Sponsored Members to those 

institutions that are able to satisfy the 

eligibility criteria discussed above, 

NSCC does not believe such limit would 

materially impact market participants 

that are unable to satisfy such eligibility 

requirements because such market 

participants would be able to have their 

equity securities financing activity in 

SFT eligible securities submitted to 

NSCC for novation through an Agent 

Clearing Member. Moreover, any burden 

on competition would be necessary and 

appropriate in furtherance of the 

purposes of the Act because the 

eligibility requirements applicable to 

Sponsored Members are designed to 

ensure the financial sophistication of 

Sponsored Members and to prudently 

manage the risk associated with 

Sponsored Members’ participation in 

NSCC. Additionally, although the 

proposal would limit the scope of 

entities able to submit equity securities 

financing activity in SFT eligible 

securities to NSCC on behalf of others 

to entities that are able to satisfy the 

eligibility criteria for Sponsoring 

Members and Agent Clearing Members, 

as specified in proposed Rules 2C and 

2D (i.e., be an existing Member and, if 

the Member applicant is a Registered 

Broker-Dealer, having to satisfy certain 

minimum financial threshold amounts), 

and such limitation may impact 

institutions that are unable to satisfy 

such eligibility requirements by 

excluding them from being able to 

submit transactions on behalf of others 

(and avail themselves of the 

commensurate benefits described above 

in Item II(A)1(i)—Background), NSCC 

believes that any related burden on 

competition would be necessary and 

appropriate in furtherance of the 

purposes of the Act. This is because 

such eligibility requirements are 

designed to allow NSCC to prudently 

manage the risks associated with 

Sponsoring Members’ and Agent 

Clearing Members’ participation in the 

proposed SFT Clearing Service by 

ensuring that such institutions have the 

operational capability and sufficient 

financial ability to meet all of their 

anticipated obligations to NSCC. 

Furthermore, NSCC believes any related 

burden on competition would not be 

significant because, as described above 

in Item II(A)1(vii)—Impact of the 

Proposed SFT Clearing Service on 

Various Persons, participation in the 

proposed SFT Clearing Service would 

be entirely voluntary and would not 

restrict the ability of firms to enter into 

bilateral securities financing 

transactions outside of NSCC. 

Although the proposal would require 

the Sponsoring Member Required Fund 

Deposits and Agent Clearing Member 

Required Fund Deposits to be calculated 

on a gross basis with no offsets for 

netting of positions across different 

Sponsored Members or different 

Customers, as applicable, and such 

requirement may limit the ability of 

certain Members to participate as a 

Sponsoring Member and/or an Agent 

Clearing Member in the proposed SFT 

Clearing Service, NSCC believes that 

any related burden on competition 

would be necessary and appropriate in 

furtherance of the purposes of the Act. 

This is because such requirement is 

designed to allow NSCC to prudently 

manage the risks associated with these 

Members’ participation in the proposed 

SFT Clearing Service by ensuring that 

NSCC’s volatility-based Clearing Fund 

deposit requirements represent the sum 

of each individual institutional firm’s 

activity. Furthermore, NSCC believes 

any related burden on competition 

would not be significant because, as 

described above in Item II(A)1(vii)— 

Impact of the Proposed SFT Clearing 

Service on Various Persons, 

participation in the proposed SFT 

Clearing Service would be entirely 

voluntary and would not restrict the 

ability of firms to enter into bilateral 

securities financing transactions outside 

of NSCC. 

Although the proposal would impose 

an additional charge with respect to any 

Non-Returned SFT that is calculated 

based on the relevant SFT Member’s 

Credit Risk Rating Matrix rating and 

such requirement may limit the ability 

of certain Members to participate in the 

proposed SFT Clearing Service, NSCC 

believes that any related burden on 

competition would be necessary and 

appropriate in furtherance of the 

purposes of the Act. This is because 

such requirement is designed to allow 

NSCC to prudently manage increased 

risks associated with Non-Returned 

SFTs. As described above, to the extent 

that the Final Settlement of an SFT is 

scheduled on a particular date but does 

not occur, whether directly or through 

a pair off in accordance with Section 8 

of proposed Rule 56 (as discussed 

above), that could potentially be a result 

of a ‘‘squeeze’’ or other market 

dislocation whereby NSCC may face 

increased market risk in the event of the 

default of either the Transferor or the 

Transferee. The proposed requirement 

would help to ensure that NSCC’s 

Clearing Fund deposit requirements 

take into account increased market risk 


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155 17 CFR 200.30–3(a)(12). 

that NSCC may face in connection with 

Non-Returned SFTs. Furthermore, 

NSCC believes any related burden on 

competition would not be significant 

because, as described above in Item 

II(A)1(vii)—Impact of the Proposed SFT 

Clearing Service on Various Persons, 

participation in the proposed SFT 

Clearing Service would be entirely 

voluntary and would not restrict the 

ability of firms to enter into bilateral 

securities financing transactions outside 

of NSCC. 

NSCC does not believe the proposal to 

make technical and conforming changes 

would impact competition. These 

changes are being proposed to ensure 

consistency in the Rules. They would 

not change NSCC’s current practices or 

affect Members’ rights and obligations. 

As such, NSCC believes the proposal to 

make technical and conforming 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 

NSCC reviewed the proposed rule 

change with various Members and 

market participants (e.g., agent lenders, 

brokers, matching service providers, and 

books and records service providers) in 

order to benefit from their expertise and 

industry knowledge. Written comments 

relating to this proposed rule change 

have not been received from Members 

or any other person. If any written 

comments are received, they will be 

publicly filed as an Exhibit 2 to this 

filing, as required by Form 19b–4 and 

the General Instructions thereto. 

Persons submitting comments are 

cautioned that, according to Section IV 

(Solicitation of Comments) of the 

Exhibit 1A in the General Instructions to 

Form 19b–4, the Commission does not 

edit personal identifying information 

from comment submissions. 

Commenters should submit only 

information that they wish to make 

available publicly, including their 

name, email address, and any other 

identifying information. 

All prospective commenters should 

follow the Commission’s instructions on 

how to submit comments, available at 

https://www.sec.gov/regulatory-actions/ 

how-to-submit-comments. General 

questions regarding the rule filing 

process or logistical questions regarding 

this filing should be directed to the 

Main Office of the Commission’s 

Division of Trading and Markets at 

tradingandmarkets@sec.gov or 202– 

551–5777. 

NSCC reserves the right not to 

respond to any comments received. 

III. Date of Effectiveness of the 

Proposed Rule Change, and Timing for 

Commission Action 

Within 45 days of the date of 

publication of 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 (https://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

NSCC–2022–003 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549. 

All submissions should refer to File 

Number SR–NSCC–2022–003. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

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

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

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

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549 on official 

business days between the hours of 

10:00 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 

(https://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– 

2022–003 and should be submitted on 

or before May 10, 2022. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.155

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2022–08170 Filed 4–18–22; 8:45 am] 

BILLING CODE 8011–01–P 


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