[Federal Register Volume 87, Number 75 (Tuesday, April 19, 2022)]
[Notices]
[Pages 23328-23370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-08171]



[[Page 23327]]

Vol. 87

Tuesday,

No. 75

April 19, 2022

Part II





Securities and Exchange Commission





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Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Advance Notice To Establish the 
Securities Financing Transaction Clearing Service and Make Other 
Changes; Notice

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

[[Page 23328]]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94695; File No. SR-NSCC-2022-801]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Advance Notice To Establish the 
Securities Financing Transaction Clearing Service and Make Other 
Changes

April 12, 2022.
    Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities 
Exchange Act of 1934 (``Act''),\2\ notice is hereby given that on March 
28, 2022, National Securities Clearing Corporation (``NSCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
advance notice 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 advance notice from 
interested persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ NSCC filed this advance notice as a proposed rule change 
(SR-NSCC-2021-010) with the Commission pursuant to Section 19(b)(1) 
of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4 thereunder, 17 CFR 
240.19b-4. A copy of the proposed rule change is available at 
https://www.dtcc.com/legal/sec-rule-filings.aspx.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    This advance notice 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.
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    \4\ Capitalized terms not defined herein are defined in the 
Rules, available at https://www.dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the advance notice 
and discussed any comments it received on the advance notice. 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 and B below, of the most significant aspects of such 
statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants, or Others

    NSCC reviewed the proposal 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 
proposal 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 
<a href="/cdn-cgi/l/email-protection#12666073767b7c75737c767f736079776661526177713c757d64"><span class="__cf_email__" data-cfemail="7f0b0d1e1b1611181e111b121e0d141a0b0c3f0c1a1c51181009">[email protected]</span></a> or 202-551-5777.
    NSCC reserves the right not to respond to any comments received.

(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing 
Supervision Act

Nature of the Proposed Change
    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

[[Page 23329]]

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.
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    \5\ This 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.
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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.
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    \6\ Basel 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.
    \7\ See, 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).
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    For example, NSCC believes it is uniquely positioned to create 
balance sheet netting opportunities for market participants (i.e., the 
ability to offset 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\
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    \8\ See 12 CFR 217.10(c)(4)(ii)(E)-(F).
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    In addition, under Basel III, bank holding companies that have 
broker-dealer 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.
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    \9\ See 12 CFR 217.32 and 217.37 generally.
    \10\ See 12 CFR 217.35(c)(3).
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    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\
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    \11\ See 12 CFR 252.77(a)(3).
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    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\
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    \12\ Members should discuss this matter with their accounting 
and regulatory capital experts.
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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\
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    \13\ Fire 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.
    \14\ See 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/wp-content/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-transcript-092909.pdf.
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    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 broker-
dealer 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

[[Page 23330]]

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.
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    \15\ See, e.g., id.
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    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.
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 agent-style 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\
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    \16\ See 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.
    \17\ FICC'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.
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    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.
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    \19\ See 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).
    \20\ NSCC 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.
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    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)

[[Page 23331]]

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-of-day 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 full-service NSCC clearing members, but not 
Sponsored Members.\21\ In addition, as 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\
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    \21\ As 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 such, 
the term ``Member'' does not include a Sponsored Member. Supra note 
4.
    \22\ See 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.
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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 CNS-eligible 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 NSCC \23\ 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.
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    \23\ The 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.
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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\
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    \24\ This is referred to as ``SFT Cash'' in the proposed rule 
text.
    \25\ See Section 5(a) of proposed Rule 56 and the definition of 
``Securities Financing Transaction''.
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    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

[[Page 23332]]

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.
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    \26\ As 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.
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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-versus-payment/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\
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    \27\ As 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.
    \28\ On 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.
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    Pre-novation counterparties to an SFT that is due to settle may 
elect to pair off (i.e., offset) the Final Settlement 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-of-day 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-of-day 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

[[Page 23333]]

mechanisms, as they ensure the smooth functioning of securities markets 
without causing unnecessary and disorderly defaults or regulatory 
violations.\29\
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    \29\ NSCC 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.
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    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 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-of-day 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.

[[Page 23334]]

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) (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.
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    \30\ As currently defined in Rule 1 (Definitions and 
Descriptions), the term ``Clearing Fund'' means the fund created 
pursuant to Rule 4. Supra note 4.
    \31\ NSCC 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.
    \32\ This $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.
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    For the purpose of applying Section I.(A)(1)(a)(i) of Procedure XV 
(Value-at-Risk (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.
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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.
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    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.<SUP>34 35</SUP> 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.
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    \34\ This $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.
    \35\ These 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.
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    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

[[Page 23335]]

the sum of each individual institutional firm's activity.
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    \36\ See Section 7(c) of proposed Rule 2C and Section 6(c) of 
proposed 2D.
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    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.
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    \37\ Supra note 27.
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    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 settlement activity of the 
Defaulting SFT Member at NSCC.
    Until NSCC has satisfied the Final Settlement obligations owing to 
non-defaulting 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 
non-defaulting 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.<SUP>39 40</SUP> 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.
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    \38\ See proposed Rule 56, Section 14(b)(ix).
    \39\ See 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.
    \40\ 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. 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).
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(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(B)(iii) ``Sponsoring Members 
and Sponsored Members.'' \41\ A Member whose

[[Page 23336]]

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 principal SFTs, 
i.e., client-to-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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    Consistent with the requirements applicable to sponsoring members 
in FICC's Sponsoring Member/Sponsored Member Program for the reasons 
described above in Item II(B)(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(B)(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\
---------------------------------------------------------------------------

    \42\ The 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 Sub-
Accounts 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).
---------------------------------------------------------------------------

    As proposed, consistent with FICC's Sponsoring Member/Sponsored 
Member Program for the reasons described above in Item II(B)(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\
---------------------------------------------------------------------------

    \43\ See Section 14 of proposed Rule 2C (Sponsoring Members and 
Sponsored Members).
---------------------------------------------------------------------------

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(B)(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

[[Page 23337]]

financial requirements necessary to be a ``qualified institutional 
buyer'' as specified in that paragraph.
---------------------------------------------------------------------------

    \44\ 17 CFR 230.144A.
    \45\ 15 U.S.C. 77a et seq.
---------------------------------------------------------------------------

(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 pre-
novation 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 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\
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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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \47\ The 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \48\ See Section 11 of proposed Rule 2D (Agent Clearing 
Members).

---------------------------------------------------------------------------

[[Page 23338]]

(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.
---------------------------------------------------------------------------

    \49\ Supra note 12.
---------------------------------------------------------------------------

    However, the sponsoring/sponsored membership model allows for 
principal-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,

[[Page 23339]]

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 Broker-Dealers, 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.
---------------------------------------------------------------------------

    \50\ NSCC 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(B)(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.
---------------------------------------------------------------------------

    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 
applications and the criteria that the respective boards assess when 
determining whether to admit a Member in such respective capacities are 
substantially similar.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \54\ As 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.
---------------------------------------------------------------------------

    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 Sub-Accounts (``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

[[Page 23340]]

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.
---------------------------------------------------------------------------

    \55\ See Addendum P (Fine Schedule), supra note 4.
---------------------------------------------------------------------------

    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 
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.
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    \56\ NSCC 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).
---------------------------------------------------------------------------

    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

[[Page 23341]]

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\
---------------------------------------------------------------------------

    \58\ Section 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.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    \59\ 17 CFR 230.144A.
    \60\ 15 U.S.C. 77a et seq.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \61\ See Addendum P (Fine Schedule), supra note 4.
---------------------------------------------------------------------------

    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

[[Page 23342]]

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.
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\
---------------------------------------------------------------------------

    \62\ NSCC believes it unlikely that it would exercise this 
authority, as the Clearing Fund deposits associated with each 
Sponsored Member Sub-Account, 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 sub-
account. 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 sub-
accounts. 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 Sub-Accounts 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(B)(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.

---------------------------------------------------------------------------

[[Page 23343]]

    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 Sub-Accounts.
    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 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.
---------------------------------------------------------------------------

    \63\ NSCC 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.
---------------------------------------------------------------------------

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

[[Page 23344]]

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 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(B)(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 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 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

[[Page 23345]]

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(B)(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 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 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 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\
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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.
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    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.

[[Page 23346]]

    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 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

[[Page 23347]]

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 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.
---------------------------------------------------------------------------

    \65\ NSCC 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.
---------------------------------------------------------------------------

    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\
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    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \67\ As 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.
---------------------------------------------------------------------------

    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

[[Page 23348]]

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 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.
---------------------------------------------------------------------------

    \68\ See Addendum P (Fine Schedule), supra note 4.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \69\ NSCC 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).
---------------------------------------------------------------------------

    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

[[Page 23349]]

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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    \70\ Section 2(n) of proposed Rule 2D 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.
---------------------------------------------------------------------------

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\
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    \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.
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    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

[[Page 23350]]

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 Sub-Accounts, 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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    \72\ NSCC 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, 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(B)(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.
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    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

[[Page 23351]]

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 
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 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 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 close-out 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

[[Page 23352]]

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 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 Close-out 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 
Buy-In 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.

[[Page 23353]]

    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 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.

[[Page 23354]]

    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.
    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\
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    \73\ Section 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 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

[[Page 23355]]

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 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.
---------------------------------------------------------------------------

    \74\ Where 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.
---------------------------------------------------------------------------

    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 Non-Returned 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

[[Page 23356]]

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-to-
principal 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\
---------------------------------------------------------------------------

    \75\ This 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.
---------------------------------------------------------------------------

    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 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

[[Page 23357]]

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 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\
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    \76\ With 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.
---------------------------------------------------------------------------

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 (Non-Returned 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

[[Page 23358]]

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 Buy-In 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 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 Buy-In.
    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 SFT \78\ 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-of-pocket 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 Buy-In, 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.
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    \77\ The 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.
    \78\ The Transferor would purchase these securities from one or 
more third parties.
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    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 
Buy-In 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.

[[Page 23359]]

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 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 Sub-Account(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

[[Page 23360]]

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.
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    \79\ Supra note 32.
    \80\ The 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.
    \81\ Supra note 34.
    \82\ Supra note 33.
---------------------------------------------------------------------------

    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 
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.
---------------------------------------------------------------------------

    \83\ This 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.
---------------------------------------------------------------------------

    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 NSCC \85\ at a later date after NSCC gains more 
experience with the nature of the SFT portfolios submitted for 
clearing, as discussed above.
---------------------------------------------------------------------------

    \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.
    \85\ Supra note 23.
---------------------------------------------------------------------------

    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

[[Page 23361]]

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.
---------------------------------------------------------------------------

    \86\ The 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.
    \87\ NSCC 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.
---------------------------------------------------------------------------

    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 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 non-defaulting 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 Sub-Accounts (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

[[Page 23362]]

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 Default-Related 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 
Default-Related 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 Default-Related 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.
    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 Sub-
Accounts. 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

[[Page 23363]]

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 
(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, 
Non-Returned 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 
Sub-Account, 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

[[Page 23364]]

Member Required Fund Deposit, and the Required SFT Deposit, unless 
noted otherwise in the Rules.
---------------------------------------------------------------------------

    \88\ NSCC 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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \89\ NSCC 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).
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

    \90\ See Addendum A (Fee Structure), supra note 4.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \91\ Id.
---------------------------------------------------------------------------

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

[[Page 23365]]

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 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 on-going 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(B)(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 10(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.
Expected Effect on, and Management of, Risks to the Clearing Agency, 
Its Participants and the Market
    NSCC expects certain market, liquidity, credit and operational 
risks may be presented by the establishment of the proposed SFT 
Clearing Service and the additional membership categories proposed in 
connection therewith. Accordingly, NSCC proposes to address and manage 
each of these risks as detailed below.
Market Risk
    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.\92\
---------------------------------------------------------------------------

    \92\ Supra note 32.
---------------------------------------------------------------------------

    As described above, 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

[[Page 23366]]

$5,000,000 or 10% of an SFT Member's Required SFT Deposit (but not less 
than $250,000) consist of cash.<SUP>93 94</SUP> 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.\95\ 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.
---------------------------------------------------------------------------

    \93\ Supra note 34.
    \94\ Supra note 35.
    \95\ See Section 12(d) of proposed Rule 56.
---------------------------------------------------------------------------

    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.\96\ 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.\97\
---------------------------------------------------------------------------

    \96\ See Section 13(b) of proposed Rule 56.
    \97\ See Section 12(e) of proposed Rule 56.
---------------------------------------------------------------------------

    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 CNS-eligible 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.
Liquidity Risk
    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.\98\ 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 t would complete at 
DTC on a fully collateralized basis, and the associated debits (if any) 
would be subject to DTC's risk controls.
---------------------------------------------------------------------------

    \98\ Supra note 27.
---------------------------------------------------------------------------

    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 
non-defaulting 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.\99\ 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.<SUP>100 101</SUP> 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 are generally de minimis. To the extent NSCC is required to pay 
a Price Differential, as well as any Final Settlement obligations, to a 
non-defaulting 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.\102\
---------------------------------------------------------------------------

    \99\ See proposed Rule 56, Section 14(b)(ix).
    \100\ Id.
    \101\ 17 CFR 240.17Ad-22(e)(7).
    \102\ Supra note 39.
---------------------------------------------------------------------------

Credit Risk
    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.
Operational Risk
    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.
    Accordingly, NSCC believes that, taken as a whole, the proposal 
would not have any risks to NSCC, its Members and the market overall 
that cannot be prudently managed or mitigated.

[[Page 23367]]

Consistency With the Clearing Supervision Act
    The proposed rule change would be consistent with Section 805(b) of 
the Clearing Supervision Act.\103\ The objectives and principles of 
Section 805(b) of the Clearing Supervision Act are to promote robust 
risk management, promote safety and soundness, reduce systemic risks, 
and support the stability of the broader financial system.\104\
---------------------------------------------------------------------------

    \103\ 12 U.S.C. 5464(b).
    \104\ Id.
---------------------------------------------------------------------------

    NSCC believes that the proposal would promote robust risk 
management, promote safety and soundness, reduce systemic risks, and 
support the stability of the broader financial system, consistent with 
the objectives and principles of Section 805(b) of the Clearing 
Supervision Act.
Promoting Robust Risk Management and Promoting Safety and Soundness
    NSCC believes that the proposal is consistent with promoting robust 
risk management and promoting safety and soundness, particularly 
management of market risks, liquidity risks, credit risks and 
operational risks presented to NSCC.
    The proposal is structured in a manner that allows NSCC to protect 
itself from associated market risk. SFT activity would, except as 
otherwise noted above, 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.\105\
---------------------------------------------------------------------------

    \105\ See Section 12(c) of proposed Rule 56.
---------------------------------------------------------------------------

    As described above, 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.<SUP>106 107</SUP> 
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.\108\ 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.
---------------------------------------------------------------------------

    \106\ Supra note 34.
    \107\ Supra note 35.
    \108\ See Section 12(d) of proposed Rule 56.
---------------------------------------------------------------------------

    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.\109\ 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.\110\
---------------------------------------------------------------------------

    \109\ See Section 13(b) of proposed Rule 56.
    \110\ See Section 12(e) of proposed Rule 56.
---------------------------------------------------------------------------

    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 CNS-eligible 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 
proposed rule change 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.\111\ 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.
---------------------------------------------------------------------------

    \111\ Supra note 27.
---------------------------------------------------------------------------

    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 
non-defaulting 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.\112\ 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.<SUP>113 114</SUP> 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 are generally de minimis. To the extent NSCC is required to pay 
a Price Differential, as well as any Final Settlement obligations, to a 
non-

[[Page 23368]]

defaulting 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.\115\
---------------------------------------------------------------------------

    \112\ See proposed Rule 56, Section 14(b)(ix).
    \113\ Id.
    \114\ 17 CFR 240.17Ad-22(e)(7).
    \115\ Supra note 39.
---------------------------------------------------------------------------

    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.
    For these reasons NSCC believes the proposal would help promote 
robust risk management at NSCC, consistent with the objective and 
principles of Section 805(b) of the Clearing Supervision Act.
Reducing Systemic Risks and Supporting the Stability of the Broader 
Financial System
    NSCC also believes that the proposal is consistent with reducing 
systemic risks and supporting the stability of the broader financial 
system. As described above, 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 proposal would help reduce systemic risks, which in turn helps 
support the stability of the broader financial system, consistent with 
the objectives and principles of Section 805(b) of the Clearing 
Supervision Act.
    NSCC also believes that the proposed rule change is consistent with 
Rules 17Ad-22(e)(7), (8), and (18), promulgated under the Act,\116\ for 
the reasons stated below.
---------------------------------------------------------------------------

    \116\ 17 CFR 240.17Ad-22(e)(7), (8), and (18).
---------------------------------------------------------------------------

    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.\117\ 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.\118\ 
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.
---------------------------------------------------------------------------

    \117\ 17 CFR 240.17Ad-22(e)(7).
    \118\ Supra note 27.
---------------------------------------------------------------------------

    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 
non-defaulting 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.\119\ 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.<SUP>120 121</SUP> 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

[[Page 23369]]

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 non-defaulting 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.\122\ Therefore, NSCC believes that 
the proposed changes to establish the SFT Clearing Service are 
consistent with Rule 17Ad-22(e)(7) under the Act.\123\
---------------------------------------------------------------------------

    \119\ See proposed Rule 56, Section 14(b)(ix).
    \120\ Id.
    \121\ 17 CFR 240.17Ad-22(e)(7).
    \122\ Supra note 39.
    \123\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(8) under the Act \124\ 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) \125\ 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.\126\
---------------------------------------------------------------------------

    \124\ 17 CFR 240.17Ad-22(e)(8).
    \125\ Id.
    \126\ Id.
---------------------------------------------------------------------------

    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.\127\ 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 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. 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 \128\ under 
the Securities Act,\129\ 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.\130\
---------------------------------------------------------------------------

    \127\ 17 CFR 240.17Ad-22(e)(18).
    \128\ 17 CFR 230.144A.
    \129\ 15 U.S.C. 77a et seq.
    \130\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

    Similarly, 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 consistent with Rule 17Ad-22(e)(18) under the Act.\131\
---------------------------------------------------------------------------

    \131\ Id.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Advance Notice, and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. The clearing agency shall not implement the proposed change 
if the Commission has any objection to the proposed change.
    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission providing the clearing agency with prompt written notice 
of the extension. A proposed change may be implemented in less than 60 
days from the date the advance notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies the clearing agency in writing that it does not object to the 
proposed change and authorizes the clearing agency to implement the 
proposed change on an earlier date, subject to any conditions imposed 
by the Commission.
    The clearing agency shall post notice on its website of proposed 
changes that are implemented.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

[[Page 23370]]

IV. Solicitation of Comments

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

Electronic Comments

    <bullet> Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#8efcfbe2eba3ede1e3e3ebe0fafdcefdebeda0e9e1f8"><span class="__cf_email__" data-cfemail="d3a1a6bfb6feb0bcbebeb6bda7a093a0b6b0fdb4bca5">[email protected]</span></a>. Please include 
File Number SR-NSCC-2022-801 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NSCC-2022-801. 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 advance notice that are filed 
with the Commission, and all written communications relating to the 
advance notice 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-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NSCC-2022-801 and should be submitted on 
or before May 4, 2022.
---------------------------------------------------------------------------

    \132\ 17 CFR 200.30-3(a)(91).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\132\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-08171 Filed 4-18-22; 8:45 am]
BILLING CODE 8011-01-P


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