Federal Register / Vol. 87, No. 108 / Monday, June 6, 2022 / Notices 34339 

32 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 94694 

(April 12, 2022), 87 FR 23372 (April 19, 2022) (SR– 

NSCC–2022–003) (‘‘Notice of Filing’’). NSCC also 

filed the proposal contained in the Proposed Rule 

Change as advance notice SR–NSCC–2022–801 

(‘‘Advance Notice’’) with the Commission pursuant 

to Section 806(e)(1) of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act entitled the 

Payment, Clearing, and Settlement Supervision Act 

of 2010 (‘‘Clearing Supervision Act’’). 12 U.S.C. 

5465(e)(1); 17 CFR 240.19b–4(n)(1)(i). Notice of 

filing of the Advance Notice was published for 

comment in the Federal Register on April 19, 2022. 

Securities Exchange Act Release No. 94695 (April 

12, 2022), 87 FR 23328 (April 19, 2022) (SR–NSCC– 

2022–801). On May 27, 2022, the Commission 

published a notice of no objection to the Advance 

Notice. Securities Exchange Act Release No. 94998 

(May 27, 2022). The proposal contained in the 

Proposed Rule Change and the Advance Notice 

shall not take effect until all regulatory actions 

required with respect to the proposal are 

completed. 

4The Options Clearing Corporation (‘‘OCC’’) 

operates a stock loan program as a CCP. NSCC’s 

new service is similar to OCC’s service with one key 

difference: Unlike OCC’s service, which only covers 

transactions between OCC’s direct members (i.e., 

broker to broker), NSCC’s new service would allow 

indirect participation by buy-side clients. See 

Section II.B.(2). 

5A short sale is any sale of securities that a seller 

does not own or has borrowed. See 17 CFR 

242.200(a). 

6Capitalized terms not defined herein are defined 

in the NSCC Rules & Procedures (‘‘Rules’’), 

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

Downloads/legal/rules/nscc_rules.pdf. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s internet 

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

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

CBOE–2022–024. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–CBOE–2022–024. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

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

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

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

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549, on official 

business days between the hours of 

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

filing also will be available for 

inspection and copying at the principal 

office of the Exchange. 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–CBOE–2022–024, and 

should be submitted on or before June 

27, 2022. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.32

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2022–12012 Filed 6–3–22; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–95011; File No. SR–NSCC– 

2022–003] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Order Approving 

Proposed Rule Change To Introduce 

Central Clearing for Securities 

Financing Transaction Clearing 

Service 

May 31, 2022. 

I. Introduction 

On March 28, 2022, National 

Securities Clearing Corporation 

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

Exchange Commission (‘‘Commission’’), 

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

Securities Exchange Act of 1934 

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

proposed rule change SR–NSCC–2022– 

003. The proposed rule change was 

published for comment in the Federal 

Register on April 19, 2022.3 For the 

reasons discussed below, the 

Commission is approving the proposed 

rule change. 

II. Description of the Proposed Rule 

Change 

A. Overview of Proposal 

NSCC proposes to expand its central 

counterparty (‘‘CCP’’) services to 

include securities financing transactions 

(‘‘SFTs’’), also referred to generally as 

securities lending.4 SFTs are 

transactions in which a securities lender 

loans securities to a securities borrower, 

for a fee. The borrowers typically use 

the borrowed securities to cover short 

sales or fails to deliver that may result 

from either short or long sales.5 A 

lender typically lends securities to 

generate income through the fees that it 

charges. 

As a CCP, NSCC would interpose 

itself between the securities lender and 

borrower and become the counterparty 

to each entity. NSCC would then be 

obligated to complete the transaction, 

that is, to return loaned securities to the 

lender and collateral to the borrower, 

even if a lender or borrower in an SFT 

fails to satisfy its obligations, thereby 

assuming the risk of each entity’s failure 

to perform to each other. 

Specifically, NSCC would novate and 

guarantee SFTs that involve eligible 

securities, meaning equity securities 

(including ETFs) cleared at NSCC with 

a particular per share price, initially set 

at $5 or greater. The service would be 

limited to overnight SFTs (i.e., with a 

one business day term), with the ability 

for the parties to extend an expiring SFT 

into a new transaction. 

The SFT service would be available to 

existing NSCC members.6 In addition, 

NSCC would create two new 

membership categories that would be 

able to submit SFTs for central clearing: 

Sponsoring Members that would 

sponsor institutional clients into NSCC 

and act as a principal to SFTs with their 

clients, and Agent Clearing Members 

that submit SFTs on behalf of 

institutional customers strictly as an 

agent. These two new types of 

membership would allow the proposed 

service to meet the existing market 

practices for SFTs, where different types 

of entities employ different trading 

strategies and relationships to 

accommodate their regulatory and other 

requirements. 

Consistent with its risk management 

for all other transactions in equity 

securities, NSCC would collect margin 

from the lender and borrower for 


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7See Notice of Filing, supra note 3, at 23372–73. 

8See 12 CFR 217.10(c)(4)(ii)(E)–(F). 

9The Basel III capital and leverage requirements, 

as implemented by the U.S. banking regulators, 

mandate banks and depository institutions to hold 

certain amounts of capital. See generally, e.g., 12 

CFR part 3; 12 CFR part 217; 12 CFR part 252, 

subpart Q; 12 CFR part 324. 

10See Notice of Filing, supra note 3, at 23373. 

11 Id. 

12 Id. 

13See Notice of Filing, supra note 3, at 23374. 

14Specifically, the transaction data for an SFT 

must be submitted by an entity that the parties have 

selected, which could be either a member or a thirdparty vendor. The SFT members would select 

which approved submitter to use, and NSCC would 

have to approve any entity serving as an approved 

submitter. 

15To address regulatory and investment guideline 

requirements applicable to certain institutional 

firms (e.g., Section 17(f) of the Investment Company 

Act of 1940 and Rule 17f–2 thereunder), a 

participant would be permitted to transfer an 

additional cash haircut above 100% (e.g., 102%) to 

such institutional firms as part of this initial 

settlement of the SFT. 

16NSCC refers to this daily interest as a ‘‘Rate 

Payment.’’ 

17NSCC processes clearance and settlement of 

equity securities using the CNS System. Securities 

are CNS-eligible if they are eligible for book-entry 

transfer on the books of DTC, not subject to certain 

transfer restrictions, and not subject to certain 

corporate actions. NSCC, Disclosure Framework for 

Covered Clearing Agencies and Financial Market 

Infrastructures (December 2021), https://

www.dtcc.com/-/media/Files/Downloads/legal/ 

policy-and-compliance/NSCC_Disclosure_

Framework.pdf. (‘‘NSCC Disclosure’’). 

NSCC would maintain a list of the securities that 

may underlie an SFT that NSCC will accept. Such 

list would not be a rule but a separate document 

maintained by NSCC and available to members, 

consistent with NSCC’s practice for equity 

securities. See Notice of Filing, supra note 3, at 

23375; Rule 3 (Lists to be Maintained) of the Rules, 

supra note 6. 

18Notice of Filing, supra note 3, at 23375. NSCC 

selected $5 as the per share price minimum for 

underlying equity securities because $5 is a 

common share price minimum adopted in 

brokerage margin eligibility schedules. NSCC may 

modify the eligible equity securities’ minimum 

share price and would announce any such change 

via notice to its members. See id. 

19After a buy-in, the lender would give written 

notice to NSCC of its costs to purchase the relevant 

SFT securities or the buy-in costs. NSCC would 

then transfer the costs from the borrower to the 

lender, and the SFT would be closed. 

novated SFTs to address the credit risk 

arising from such transactions. NSCC 

would also identify potential liquidity 

exposures if an SFT member were to 

default and address that potential need 

in its risk management. 

According to NSCC, the proposed SFT 

clearing service would provide several 

benefits for market participants, 

including increased balance sheet 

netting benefits, capital efficiency 

opportunities, and mitigation of fire sale 

risk.7 With respect to balance sheet 

netting benefits and capital efficiency 

opportunities, NSCC states that the SFT 

clearing service may allow participants 

to net down payables and receivables 

related to the SFTs on their balance 

sheets because such payables and 

receivables have one counterparty, 

NSCC. In turn, NSCC states that because 

of the capital requirements arising 

under Basel III rules that favor a netted 

balance sheet,8 market participants may 

reduce the amount of capital they are 

required to hold under the applicable 

leverage requirements.9

In addition, NSCC believes that the 

proposal would reduce the potential for 

market disruption from fire sales for a 

number of reasons.10 First, NSCC 

believes that it would be able to better 

manage default scenarios by conducting 

a centralized and orderly liquidation of 

the defaulter’s SFT positions.11 NSCC 

represents that a centralized and orderly 

liquidation would result in substantially 

less price depreciation and market 

disruption compared to the multiple 

independent non-defaulting parties 

racing against one another to liquidate 

the positions. Second, NSCC would be 

able to liquidate the defaulter’s net 

positions instead of gross positions, 

meaning that a position that needs to be 

liquidated would be smaller in size and 

a market disruption can be minimized. 

Third, by guaranteeing SFTs through 

central clearing, NSCC believes that it 

would be able to provide confidence to 

market participants in a stressed market 

scenario, thereby lessening any 

inclination to rush to unwind 

transactions.12

B. Securities Financing Transaction 

Clearing Service 

NSCC proposes to introduce central 

clearing for SFTs by establishing rules 

governing (1) key aspects of the SFTs; 

(2) SFT participant categories; and (3) 

SFT risk management, as elaborated 

below. 

(1) Key Aspects of the SFTs 

Overnight SFTs. The proposed SFT 

clearing service would apply to 

transactions with a one business day 

term (i.e., overnight SFTs) in eligible 

equity securities. NSCC represents that 

the proposal applies to overnight SFTs, 

as opposed to open SFTs, to offer 

balance sheet netting and capital 

efficiency opportunities, which require 

a scheduled settlement date.13 However, 

a lender and a borrower would have an 

option to extend an expiring SFT by 

rolling it, or a portion thereof, into a 

new, linked SFT. Accordingly, an 

expiring SFT would be eligible for 

renewal every day. 

Operational Issues. SFTs would be 

required to be submitted to NSCC on a 

locked-in basis and matched between 

the lender and the borrower.14 NSCC 

would receive underlying SFT securities 

from a lender, send them to a borrower, 

receive cash collateral equal to no less 

than 100% of the market value of the 

securities from the borrower, and send 

it to the lender.15

When an SFT settles, in general, 

NSCC would essentially reverse the 

transaction of the prior day by receiving 

the underlying SFT securities from the 

borrower and returning them to the 

lender, and receiving the cash collateral 

from the lender and returning it to the 

borrower. NSCC would also pass 

through daily interest,16 as applicable. If 

the parties decide to extend into a 

linked SFT, instead of transferring the 

underlying securities and collateral, 

NSCC would transfer the daily interest 

and calculate and pass through a markto-market payment on the underlying 

securities, effectively putting the parties 

in a position of closing the settling SFT 

and starting a new SFT. 

Eligible Equity Securities. As an initial 

matter, NSCC would provide the 

proposed SFT service for securities that 

are eligible to be processed through 

NSCC’s Continuous Net Settlement 

(‘‘CNS’’) System,17 and have a per share 

price of $5 or more.18 If the price of the 

underlying securities of a novated SFT 

falls below the threshold price 

established by NSCC, that SFT would 

continue to be novated to NSCC, but the 

margin required for such SFT would be 

100% of the market value of such 

underlying securities until the per share 

price of the underlying securities equals 

or exceeds the threshold price. 

Recall, Buy-In, and Accelerated 

Settlement. Consistent with the existing 

bilateral market, NSCC proposes to 

introduce recall, buy-in, and accelerated 

settlement features in its proposed SFT 

clearing service. Under the proposal, a 

lender would have a right to recall an 

existing SFT and stop the SFT from 

being extended. 

Once a lender issues a recall notice, 

a borrower would be required to satisfy 

its final settlement obligations by the 

recall date, which would be the second 

business day following NSCC’s receipt 

of such notice. If the borrower fails to 

satisfy its final settlement obligations by 

the recall date, the lender could go to 

the market to conduct a buy-in in a 

commercially reasonable manner,19 that 

is, to purchase some or all of securities 

equivalent to the underlying securities 

that are the subject to the SFT and 

charge the borrower for the cost of this 

purchase or to elect to be deemed to 


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20NSCC states that the requirement that a party 

exercising buy-in rights do so in a ‘‘commercially 

reasonable manner’’ is the current industry 

standard, as reflected in the Master Securities Loan 

Agreement published by Securities Industry and 

Financial Markets Association. See Notice of Filing, 

supra note 3, at 23402; Section 13.1 of the Master 

Securities Loan Agreement published by Securities 

Industry and Financial Markets Association. 

21Specifically, NSCC states that borrowers may 

have the need to accelerate settlement of securities 

lending transactions if they lose a ‘‘permitted 

purpose’’ for such loans under Regulation T. See 12 

CFR 220.1–220.12. 

22See Notice of Filing, supra note 3, at 23374. 

23See Notice of Filing, supra note 3, at 23382. 

24See id. 

25See Notice of Filing, supra note 3, at 23381– 

82. 

26See Notice of Filing, supra note 3, at 23374. 

27 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 certain 

financial requirements. 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, for 

example, for a new member that has yet to 

demonstrate a track record of financial 

responsibility and operational capability. Moreover, 

after becoming a Sponsoring Member, it would be 

obligated to notify NSCC if it is no longer compliant 

with the relevant standards and qualifications. 

NSCC would have a right to review the financial 

responsibility and operational capability of 

Sponsoring Members. 

28NSCC aggregates all members’ margin together 

with certain other deposits required under NSCC’s 

Rules as its clearing fund. NSCC would be able to 

access the clearing fund should a defaulted 

member’s own margin be insufficient to satisfy 

losses to NSCC caused by the liquidation of that 

member’s portfolio. See Rule 4 (Clearing Fund) and 

Procedure XV (Clearing Fund Formula and Other 

Matters) of the Rules, supra note 6. 

29Specifically, if the sum of the margin charges 

applied by NSCC to capture the risks related to 

market price movement applicable to its Sponsored 

Member sub-accounts and its other accounts at 

NSCC exceeds its required net assets or equity 

capital, the Sponsoring Member would not be 

permitted to submit new Sponsored Member 

transactions, unless otherwise determined by 

NSCC. 

30The term qualified institutional buyer is 

defined by Rule 144A under the Securities Act of 

1933, as amended. See 17 CFR 230.144A. 

have purchased such securities.20

Similar to a lender’s recall right, a 

borrower would have a right to 

accelerate the scheduled final 

settlement of an SFT that has been 

novated to NSCC. NSCC states that this 

right is required to ensure that certain 

borrowers would be able to satisfy their 

regulatory requirements.21

(2) SFT Participant Categories 

The proposed SFT clearing service 

would be available for SFTs entered into 

between two current NSCC members. In 

addition, NSCC proposes new categories 

of membership that are designed to 

accommodate current bilateral SFT 

arrangements.22

First, the Sponsoring Member/ 

Sponsored Member categories would 

accommodate principal-style trades, in 

which a Sponsoring Member acting as 

principal for its own account completes 

a Sponsored Member’s trades using its 

own inventory. Typically, in these types 

of arrangements, a Sponsoring Member 

can earn a profit from the bid-ask spread 

differences between its Sponsored 

Member trades and any offsetting trades. 

Second, the Agent Clearing Member 

category would accommodate 

transactions by firms who typically 

conduct trades on an agent basis for 

their institutional clients. An Agent 

Clearing Member would arrange a 

transaction on behalf of an institutional 

client and charge fees for the services 

(rather than taking spreads).23 Such 

client firms may, as part of their 

business models and agreed-upon 

investment guidelines, only permit 

agented transactions, making the Agent 

Clearing Member a better fit. 

According to NSCC, the costs of 

clearing that may be passed through to 

the institutional clients, whether as 

Sponsored Members or as clients to the 

Agent Clearing Members (‘‘Customers’’), 

by its intermediary would be largely 

equivalent.24 However, one key 

difference between Sponsored Members 

and Customers would be that Sponsored 

Members would have a contractual 

relationship with NSCC while the Agent 

Clearing Member’s Customers would 

not. NSCC states that, from the 

perspective of an institutional firm 

client, whether to become a Sponsored 

Member or Customer to an Agent 

Clearing Member may be determined 

based on who the client’s current 

clearing intermediaries are and the 

nature of the client’s commercial 

arrangement with its intermediaries.25

NSCC states that giving a choice to 

institutions to become a Sponsored 

Member or Customer should facilitate 

additional central clearing of SFTs.26

Sponsoring Members. All NSCC 

members would be eligible to apply to 

become Sponsoring Members, so long as 

they meet the specified requirements.27

For operational and administrative 

purposes, NSCC would interact solely 

with the Sponsoring Member as the 

agent of its Sponsored Members, and the 

Sponsoring Member would be 

responsible for posting the required 

margin on Sponsored Member 

transactions and for covering any 

default loss allocated to Sponsored 

Members.28

Sponsoring Members would 

unconditionally guarantee to NSCC the 

payment and performance of their 

Sponsored Members’ 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 proposal, the Sponsoring 

Member would be required to satisfy 

those settlement obligations on behalf of 

a Sponsored Member if the Sponsored 

Member defaults and fails to perform its 

settlement obligations. Moreover, 

Sponsoring Members would be subject 

to an activity limit based on the 

perceived volatility of its portfolio as 

compared to its capital.29

Sponsored Members. Sponsored 

Members would be required to be either 

a qualified institutional buyer 30 or a 

legal entity that satisfies the financial 

requirements necessary to be a qualified 

institutional buyer. Sponsored Members 

would enter into an agreement with 

NSCC whereby Sponsored Members 

would agree to terms and conditions 

NSCC identifies as necessary in order to 

protect NSCC and its members. 

Sponsored Members would not be fullservice NSCC members, but instead 

would be limited members which rely 

on the Sponsoring Members to access 

NSCC’s services. 

A Sponsored Member would only be 

eligible to submit transactions in which 

its respective Sponsoring Member is the 

counterparty (i.e., ‘‘done with’’ 

transactions). However, a Sponsored 

Member can be sponsored by more than 

one Sponsoring Member, should it wish 

to continue to transact with different 

entities. 

Agent Clearing Members. Agent 

Clearing Members would serve as agent 

and credit intermediary for its 

institutional clients. Agent-style trading 

is the manner in which such agent 

lenders are typically approved to 

transact in securities lending 

transactions on behalf of their 

Customers. All NSCC members would 

be eligible to apply to become Agent 

Clearing Members in NSCC, so long as 

they meet the specified requirements. 

In addition, Agent Clearing Members 

would be subject to similar 

responsibilities as Sponsoring Members. 

Specifically, an Agent Clearing Member 

would be responsible for posting to 

NSCC the required margin for its 

Customers’ activity and covering any 

default loss allocable to its Customers. 

Agent Clearing Member transactions 

would be subject to the same activity 

limit applicable to Sponsored Member 

transactions. 

An Agent Clearing Member would be 

fully liable for all obligations of its 

Customers under the Agent Clearing 

Member transactions that it submitted to 


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31Like a Sponsoring Member, an Agent Clearing 

Member would be obligated to notify NSCC if it is 

no longer in compliance with the relevant standards 

and qualifications. NSCC would have a right to 

review Agent Clearing Members’ financial and 

operational capability. 

32Specifically, it would include the volatility 

charge, mark-to-market charge, special charge, 

margin required differential component charge, 

coverage component charge, and margin liquidity 

adjustment (‘‘MLA’’) charge set forth in NSCC’s 

Rules, as well as charges for non-returned SFTs, 

which is similar to the charges that NSCC for CNS 

fails under its Rules. A further description of these 

charges is available in Procedure XV of NSCC’s 

Rules and in the NSCC Disclosure. For the volatility 

charge, NSCC would consider the potential future 

exposure of a given portfolio based on historical 

price movements and the margin floor, and it would 

also determine margin to address the risk due to a 

high concentration level in a single stock (‘‘gap 

risk’’). For the MLA charge, NSCC would consider 

the risk when a member’s portfolio contains large 

net unsettled positions in a particular group of 

securities with a similar risk profile or in a 

particular asset type, which could pose particular 

liquidation risk in the event of a default. 

33See supra note 31. 

34NSCC would be able to take actions listed 

above when NSCC ‘‘ceases to act’’ for an SFT 

member. The factors NSCC would consider in 

making the decision to cease to act include the 

member’s suspension from any regulatory 

organization, failure to make a payment to NSCC, 

or other financial issues. See Rules 46 (Restrictions 

on Access to Service) and 18 (Procedures for When 

the Corporation Ceases to Act) of the Rules, supra 

note 6. 

35The proposal would specify that in the case of 

a default-related SFT, the commercial 

reasonableness of a buy-in shall be determined by 

NSCC based on whether such buy-in would create 

a disorderly market in the relevant SFT security, 

consistent with the applicable market standard. See 

supra note 20. 

36Specifically, under NSCC’s loss allocation rule, 

NSCC would use its own capital (referred to as the 

‘‘Corporate Contribution’’) and then allocate losses 

to members pro rata via rounds of cash calls. See 

Rule 4 (Clearing Fund) of the Rules, supra note 6. 

37See Rule 4A (Supplemental Liquidity Deposits) 

of the Rules, supra note 6. 

NSCC as the member.31 Unlike 

Sponsored Members, Customers would 

not have any direct relationship with 

NSCC and would not need to apply to 

become a member or enter into an 

agreement with NSCC. Moreover, the 

Agent Clearing Members would be able 

to submit transactions with a 

counterparty other than the Agent 

Clearing Member, resulting in 

transactions ‘‘done away’’ from the 

Agent Clearing Member. 

(3) Risk Management 

Under the proposal, NSCC would 

centrally manage risks associated with 

SFTs in a manner consistent with other 

transactions in equity securities that 

NSCC clears. 

Calculation of Margin. NSCC would 

require all SFT members to provide 

margin with respect to their SFT 

activity, subject to a $250,000 minimum 

amount. NSCC is proposing to calculate 

an SFT member’s required margin by 

applying the methodology used to 

determine margin for transactions in 

equity securities. Specifically, the 

determination would include certain 

risk-based margin components 32 that 

are currently applicable to NSCC’s 

equity securities transactions. 

NSCC would determine an SFT 

member’s required margin 

independently of the member’s other 

positions, including its equity securities 

transaction positions outside of the 

SFTs. NSCC would not net a member’s 

SFT positions with its other positions to 

determine margin, except for the margin 

liquidity adjustment charge component. 

Because NSCC would aggregate all 

members’ margins together as its 

clearing fund 33 regardless of whether 

they are for SFTs or CNS transactions, 

an SFT or CNS member default may 

impact NSCC’s clearing fund as a whole. 

In other words, a default by an SFT 

member may impact non-SFT members 

and vice versa. 

NSCC would require that a certain 

portion of its margin be a combination 

of cash and eligible securities, i.e., the 

specific Treasury securities that NSCC 

accepts as collateral. NSCC would also 

have the discretion to require an SFT 

member to post its margin in a higher 

proportion of cash than would 

otherwise be required, based on the 

current market conditions and the SFT 

member’s financial and operational 

capabilities. 

For transactions submitted by 

Sponsoring Members or Agent Clearing 

Members, NSCC would require that the 

Sponsoring Members and Agent 

Clearing Members establish an account 

or accounts for the margin collected on 

behalf of Sponsored Members and 

Customers, respectively. This account 

would be separate from the Sponsoring 

Member or Agent Clearing Member’s 

proprietary account. NSCC would 

determine the required margin for 

transactions for each Sponsored 

Member and Customer on a gross basis, 

that is, separately without netting. The 

margin obligated for a Sponsoring 

Member or Agent Clearing Member 

would be the sum of the individual 

margin amounts determined for each 

Sponsored Member and Customer to 

ensure that the total margin amount 

represents the sum of each individual 

institutional client’s activity. 

Default Management. NSCC’s 

proposed rules would specify the 

procedures that it would use to centrally 

manage the default of that member,34

including liquidating the underlying 

securities and meeting the final 

settlement obligations. If there is an SFT 

member default, NSCC would continue 

paying to and receiving from a nondefaulting SFT member the difference in 

market value of the underlying 

securities with respect to the novated 

SFTs until final settlement. By 

continuing to process the difference in 

market value, NSCC would maintain the 

non-defaulting SFT member in largely 

the same position as if the defaulting 

SFT member has not defaulted. 

In addition, in the event an SFT 

member defaults, NSCC would have all 

the rights and obligations of the 

defaulting party, whether it was the 

lender or borrower in relation to such 

default-related SFTs. For example, if a 

borrower defaults, NSCC would assume 

all the rights of a lender and the 

defaulting borrower, and be able to issue 

a recall notice and conduct a buy-in in 

a commercially reasonable manner.35

On the other hand, if a lender defaults, 

NSCC would be able to deliver a recall 

notice to a borrower to stop the final 

settlement date of a default-related SFT 

from being further delayed. 

To the extent that an SFT default 

generates a loss larger than the resources 

that the defaulter has provided to NSCC, 

i.e., its margin and the proceeds from its 

liquidated portfolio, NSCC’s loss 

allocation rule would apply to all 

members including Sponsoring 

Members and Agent Clearing 

Members.36

Liquidity Risk. The proposal also 

describes how NSCC manages potential 

liquidity exposures arising from clearing 

SFT transactions. Currently, NSCC is 

required to hold sufficient liquidity 

resources to cover the largest settlement 

obligation stemming from the cleared 

CNS positions, assuming a member 

default. Under the proposal, NSCC’s 

liquidity exposures would also include 

settlement obligation arising from SFT 

positions. Specifically, the liquidity 

obligations relating to SFT would 

include the daily market to market of 

the underlying securities as well as any 

final cash settlement obligation owed by 

the defaulting member. 

To account for a potentially higher 

liquidity need as a result of the SFT 

expansion, NSCC is planning to utilize 

its current suite of qualifying liquidity 

resources, including the supplemental 

liquidity deposit. NSCC may collect 

supplemental liquidity deposits from 

members whose default would pose the 

largest liquidity exposure to NSCC.37

Accordingly, such deposits may be used 

to address any heightened liquidity 

exposures stemming from clearing SFTs 

because the deposits, by design, act to 

cover the difference between a 


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38 15 U.S.C. 78s(b)(2)(C). 

39 15 U.S.C. 78q–1(b)(3)(F). 

40 15 U.S.C. 78q–1(b)(3)(I). 

41 17 CFR 240.17Ad–22(e)(6), (e)(7), (e)(18), 

(e)(19), and (e)(21). 

42 15 U.S.C. 78q–1(b)(3)(F). 43See Notice of Filing, supra note 3, at 23374. 44See supra note 36. 

member’s peak liquidity need and 

NSCC’s liquidity resources. 

III. Discussion and Commission 

Findings 

Section 19(b)(2)(C) of the Act 38

directs the Commission to approve a 

proposed rule change of a selfregulatory organization if it finds that 

such proposed rule change is consistent 

with the requirements of the Act and 

rules and regulations thereunder 

applicable to such organization. After 

carefully considering the proposed rule 

change, the Commission finds that the 

proposed rule change is consistent with 

the requirements of the Act and the 

rules and regulations thereunder 

applicable to NSCC. In particular, the 

Commission finds that the proposed 

rule change is consistent with Sections 

17A(b)(3)(F) 39 and (b)(3)(I) 40 of the Act 

and Rules 17Ad–22(e)(6), (e)(7), (e)(18), 

(e)(19), and (e)(21) 41 for the reasons 

described below. 

A. Consistency With Section 

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

Section 17A(b)(3)(F) of the Act 42

requires that the rules of a clearing 

agency, such as NSCC, be designed to, 

among other things, promote the prompt 

and accurate clearance and settlement of 

securities transactions; assure the 

safeguarding of securities and funds 

which are in the custody or control of 

the clearing agency or for which it is 

responsible; and foster cooperation and 

coordination with persons engaged in 

the clearance and settlement of 

securities transactions. 

The Commission believes that the 

proposal is consistent with Section 

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

stated below. 

(1) Prompt and Accurate Clearance and 

Settlement 

The Commission believes that NSCC’s 

proposal to introduce the central 

clearing of SFTs is designed to promote 

the prompt and accurate clearance and 

settlement of securities transactions, 

and to protect investors and the public 

interest. 

As described above in Section II.A., 

the proposal would create a new central 

clearing service for SFTs. Unlike 

bilateral transactions, NSCC as the 

central counterparty would become a 

counterparty to all novated trades, and 

in essence, replace multiple 

counterparties as one counterparty to a 

market participant. In turn, NSCC 

would be able to net a participant’s 

transactions and offset delivery 

obligations and reduce the number of 

securities that need to be delivered on 

a settlement date. Central clearing 

would remove the bilateral exposures 

that are scattered among different 

market participants and consolidate 

them into a single net exposure with 

NSCC, which would increase 

operational efficiency and decrease 

trade processing. The Commission 

believes that, by novating and centrally 

clearing SFTs, the proposal is designed 

to promote the prompt and accurate 

clearance and settlement of securities. 

(2) Fostering Cooperation 

The Commission believes that NSCC’s 

proposal to introduce the central 

clearing of SFTs is designed to foster 

cooperation and coordination with 

persons engaged in the clearance and 

settlement of securities transactions. As 

described above in Section II.B., the 

proposal is designed to allow the central 

clearing of SFTs to be accessible by a 

wide range of market participants. For 

example, the membership categories 

able to access the service would 

accommodate market participants’ 

differing business models and 

regulatory requirements, and the 

accelerated settlement feature would 

allow members who need to quickly 

unwind SFTs to satisfy their applicable 

regulatory requirements when needed. 

NSCC represents that the proposal 

reflects the feedback of market 

participants requesting these features.43

By designing the new SFT clearing 

service to be accessible, the proposal is 

designed to encourage more market 

participants to bring SFTs into central 

clearing from the bilateral market. And 

by allowing market participants to 

centrally clear and settle SFTs, the 

Commission believes that the proposal 

is designed to foster cooperation and 

coordination with persons engaged in 

the clearance and settlement of 

securities transactions. 

(3) Safeguarding of Securities and Funds 

The Commission believes that NSCC’s 

proposal to introduce the central 

clearing of SFTs is designed to assure 

the safeguarding of securities and funds 

which are in the custody or control of 

the clearing agency or for which it is 

responsible. 

As described in Section II.B.(3), NSCC 

proposes to manage risks associated 

with the new SFT central clearing 

service by collecting margin for each 

transaction and ensuring that it has 

sufficient resources to meet its liquidity 

needs. First, NSCC would manage its 

credit risk with respect to SFTs by 

requiring minimum margin deposits and 

applying specific aspects of its margin 

methodology to determine the 

appropriate margin to cover the risks 

posed by the SFTs, as well as by 

applying an additive margin component 

designed to address any high 

concentration risk posed by SFTs. When 

calculating margin, NSCC would not net 

SFT members’ SFT positions with other 

CNS position, and NSCC also would not 

net across Sponsored Member accounts 

or Customer accounts, thereby 

collecting greater amounts of margin 

and improving NSCC’s overall 

resilience. NSCC also would specify that 

a certain portion of margin be in cash 

and eligible Treasury clearing fund 

securities to protect against market risk 

of the collateral. Further, as described in 

Section II.B.(2), NSCC would apply 

activity limits to ensure that SFT 

members’ financial resources are 

sufficient to meet their margin 

requirements. 

Second, as described in Section 

II.B.(3), NSCC would include an SFT 

member’s potential liquidity exposures 

as part of NSCC’s potential liquidity 

need. This means that, if a member’s 

SFT activity were to drive NSCC’s 

potential liquidity need, that member 

would have to provide supplemental 

liquidity under NSCC’s existing rules, to 

ensure that NSCC would maintain 

adequate resources to satisfy liquidity 

needs arising from its SFT settlement 

obligations. 

Third, the proposal would provide a 

process to address SFT member defaults 

to allow NSCC to take timely action to 

contain losses and continue to meet its 

obligations. Specifically, NSCC would 

have a right to close out a defaulting 

member’s positions, assume the rights of 

the non-defaulting party in relation to 

such default-related SFTs, and apply its 

loss allocation procedure if the 

defaulting member’s resources are 

insufficient to cover a loss.44

Taken together, these risk 

management procedures should 

minimize the likelihood that losses 

arising out of an SFT member default 

would exceed NSCC’s prefunded 

resources and threaten the safety and 

soundness of NSCC’s ongoing 

operations. Accordingly, the 

Commission believes that the proposal 

is designed to assure the safeguarding of 


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45A large number of commenters expressed 

concerns that the proposal is designed to 

exclusively benefit large institutions by obscuring 

and facilitating negligent risky behavior, and the 

proposal would hamper a fair and transparent 

market. See, e.g., Letters from David Lincoln and 

from Joe Jacobs, dated April 19, 2022. The 

commenters’ concerns generally rely on the premise 

that SFTs are designed to promote short sales and 

potentially naked short sales that such commenters 

believe should be illegal. See, e.g., Letters from Jack 

Sarken and Duncan Stanley, dated April 19, 2022. 

Any SFTs that would be cleared as part of the 

proposed service are transactions that occur 

bilaterally today, and the proposal does not impact 

Commission rules applicable to short sales. Because 

this proposal is not addressing short sales, and is 

designed to reduce risks associated with bilateral 

SFTs, the Commission believes that the 

commenters’ concerns related to short sales are 

outside the scope of the proposed rule change. 

46 17 CFR 240.17Ad–22(e)(6)(i). 

47See supra note 32. 

48See id. 49 17 CFR 240.17Ad–22(e)(7)(i). 

50NSCC is required to have policies and 

procedures reasonably designed to monitor and 

manage its liquidity risk by maintaining sufficient 

liquid resources at the minimum to effect 

settlement of payment obligations with a high 

degree of confidence under a wide range of 

foreseeable stress scenarios that includes, but is not 

limited to, the default of the participant family that 

would generate the largest aggregate payment 

obligation for the covered clearing agency in 

extreme but plausible market conditions, and by 

determining that amount and regularly testing the 

sufficiency of its liquidity resources. 17 CFR 

240.17Ad–22(e)(7)(i) and (vi). Pursuant to this 

regulatory requirement, NSCC’s Liquidity Risk 

Management Framework outlines NSCC’s liquidity 

resources and liquidity risk management practices. 

See Securities Exchange Act Release No. 82377 

(December 21, 2017), 82 FR 61617 (December 28, 

2017). 

One such liquidity resource is NSCC’s 

supplemental liquidity deposit, which is designed 

to withstand NSCC’s fluctuating peak liquidity 

needs and source adequate liquidity at all times. To 

do so, NSCC allocates a funding obligation to those 

members driving peak liquidity needs that surpass 

NSCC’s available liquidity resources through SLDs. 

See Securities Exchange Act Release No. 71000 

(December 5, 2013), 78 FR 75400 (December 11, 

2013). 

51 17 CFR 240.17Ad–22(e)(7)(i). 

52 17 CFR 240.17Ad–22(e)(18). 

securities and funds which are in 

NSCC’s custody or control.45

B. Consistency With Rule 17Ad– 

22(e)(6)(i) 

Rule 17Ad–22(e)(6)(i) under the 

Exchange Act requires that NSCC 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to cover its credit 

exposures to its participants by 

establishing a risk-based margin system 

that, at a minimum, considers, and 

produces margin levels commensurate 

with, the risks and particular attributes 

of each relevant product, portfolio, and 

market.46

As described above in Section 

II.B.(3)(i), NSCC proposes to establish 

margin requirements to cover its credit 

exposures to the SFT members. First, 

NSCC proposes to collect margin from 

SFT members, including the application 

of both a minimum margin amount and 

of NSCC’s existing margin system that 

contains multiple component charges 

designed to cover various types of risk 

and meet applicable regulatory 

requirements.47 Second, NSCC would 

apply more conservative approaches to 

the calculation of SFT, as compared to 

NSCC’s existing margin system. For 

example, unlike the current calculation 

of the volatility of a member’s net 

unsettled positions, NSCC would apply 

a more stringent method to address risks 

associated with issuer-specific events 

affecting the price of the concentrated 

security within the SFT portfolio, and 

risk associated with liquidating a 

defaulted SFT member’s portfolio with 

a large position by asset class, relative 

to market-wide liquidity.48 Further, 

NSCC would not net SFTs against other 

equity transactions at NSCC when 

determining margin requirements, to 

ensure that margins associated with 

SFTs would not be reduced by other 

equity transactions outside of the SFTs. 

Separately, it would collect margin on a 

gross basis for different Sponsored 

Members or different Customers, 

thereby accounting and collecting 

margin for each individual Sponsored 

Member and Customer. 

Because NSCC applies its risk-based 

margin methodology, tailored to address 

SFTs, the Commission believes that the 

proposal is reasonably designed to cover 

NSCC’s credit exposures from SFT 

members and consistent with Rules 

17Ad–22(e)(6)(i). 

C. Consistency With Rule 17Ad–22(e)(7) 

Rule 17Ad–22(e)(7)(i) under the 

Exchange Act requires that NSCC 

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, 

including measuring, monitoring, and 

managing its settlement and funding 

flows on an ongoing and timely basis, 

and its use of intraday liquidity by, at 

a minimum maintaining sufficient 

liquid resources at the minimum in all 

relevant currencies to effect same-day 

and, where appropriate, intraday and 

multiday settlement of payment 

obligations with a high degree of 

confidence under a wide range of 

foreseeable stress scenarios that 

includes, but is not limited to, the 

default of the participant family that 

would generate the largest aggregate 

payment obligation for the covered 

clearing agency in extreme but plausible 

market conditions.49

As described above in Section 

II.B.(3)(ii), when calculating its liquidity 

need, in addition to liquidity exposures 

relating to other equity positions, NSCC 

would include all the differences in 

market value of the underlying 

securities owed by a defaulting SFT 

member in the event an SFT member 

defaults, as well as all novated open 

SFT transactions of a defaulting SFT. 

This determination of the liquidity need 

is designed to ensure that NSCC would 

cover any liquidity need associated with 

its final settlement obligations to nondefaulting SFT members and members. 

NSCC currently relies on various 

liquidity resources, all of which would 

be available in the event of a liquidity 

shortfall relating to SFTs. The 

Commission believes that NSCC’s 

existing liquidity risk management 

framework, including NSCC’s ability to 

collect supplemental liquidity if a 

member’s activity, including its SFT 

activity, increases NSCC’s liquidity 

need,50 would be sufficient to ensure 

that NSCC would continue to meet its 

regulatory obligations. 

The Commission believes that NSCC’s 

proposal to manage its potential 

liquidity exposures associated with 

SFTs by using its established liquidity 

resources is reasonably designed to 

manage the liquidity risk that may arise 

in the SFT central clearing service, and 

consistent with Rule 17Ad–22(e)(7)(i).51

D. Consistency With Rule 17Ad– 

22(e)(18) 

Rule 17Ad–22(e)(18) under the 

Exchange Act requires that NSCC 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to establish 

objective, risk-based, and publicly 

disclosed criteria for participation, 

which permit fair and open access by 

direct and, where relevant, indirect 

participants and other financial market 

utilities, require participants to have 

sufficient financial resources and robust 

operational capacity to meet obligations 

arising from participation in the clearing 

agency, and monitor compliance with 

participation requirements on an 

ongoing basis.52

First, the Commission believes that 

the proposal is reasonably designed to 

establish objective, risk-based, and 

publicly-disclosed criteria for SFT 

members. As described above, all 

members would be eligible to apply to 

become Sponsoring Members or Agent 

Clearing Members subject to such 

criteria, similar to how NSCC currently 

provides membership criteria for its 

members. For example, if a Sponsoring 


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53 Id. 

54 17 CFR 240.17Ad–22(e)(19). 

55 Id. 

56 17 CFR 240.17Ad–22(e)(21). 

57 Id. 

58 15 U.S.C. 78q–1. 

59 15 U.S.C. 78s(b)(2). 

60 In approving the proposed rule change, the 

Commission considered the proposals’ impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). See also Section II.B. 

61 17 CFR 200.30–3(a)(12). 

or Agent Clearing Member applicant is 

a registered broker-dealer, it would be 

subject to particular financial resource 

requirements, as specified in the 

proposed rule. Only a qualified 

institutional buyer or a legal entity that 

satisfies the financial requirements 

necessary to be a qualified institutional 

buyer would be eligible to be a 

Sponsored Member. In addition, an 

applicant must provide adequate 

assurances for its financial 

responsibility and operational 

capability. 

Second, the proposal is reasonably 

designed to allow direct and indirect 

participants to access the new SFT 

central clearing service by establishing 

new membership categories to allow for 

such access by particular types of 

market participants. For example, a 

participant who cannot or does not want 

to meet the requirements to become 

either a member, a Sponsoring Member, 

or an Agent Clearing Member can 

participate as a Sponsored Member or as 

a Customer, the latter of which does not 

have a direct relationship with NSCC. 

Third, the proposal is reasonably 

designed to allow NSCC to monitor 

compliance with participation 

requirements on an ongoing basis. The 

proposal would require an SFT member 

to notify NSCC if it is no longer in 

compliance with applicable 

requirements to be an SFT member, and 

allow NSCC to inspect SFT members’ 

financial resources and operational 

capability on an ongoing basis. 

For the foregoing reasons, the 

Commission believes that the proposal 

is consistent with Rule 17Ad– 

22(e)(18).53

E. Consistency With Rule 17Ad– 

22(e)(19) 

Rule 17Ad–22(e)(19) under the 

Exchange Act requires a covered 

clearing agency to establish, implement, 

maintain, and enforce written policies 

and procedures reasonably designed to 

identify, monitor, and manage the 

material risks to the covered clearing 

agency arising from arrangements in 

which firms that are indirect 

participants in the covered clearing 

agency rely on the services provided by 

direct participants to access the covered 

clearing agency’s payment, clearing, or 

settlement facilities.54

The proposal allows Sponsoring 

Members to submit Sponsored 

Members’ transactions to NSCC, and 

Agent Clearing Members to submit its 

Customers’ transactions to NSCC. In 

both cases, Sponsoring Members and 

Agent Clearing Members would be 

ultimately responsible to NSCC for 

Sponsored Members’ and Customers’ 

transactions and liable to satisfy all 

settlement obligations. Both Sponsoring 

Members and Agent Clearing Members 

serve as the processing agent for all the 

Sponsored Member and Customer 

transactions responsible for posting 

margin and satisfying any losses arising 

from the client transactions. Sponsoring 

Members and Customers do not have 

any direct mechanism to submit their 

own margin or settle transactions 

directly with NSCC. Moreover, even 

though Sponsored Members would be 

principally liable for their own 

settlement obligations, Sponsoring 

Members’ guaranty requires Sponsoring 

Members to satisfy settlement 

obligations on behalf of its Sponsored 

Members. 

By calculating and collecting margins 

for Sponsored Members’ and Customers’ 

transactions and providing certainty 

that Sponsoring Members and Agent 

Clearing Members would be responsible 

for their Sponsored Members’ and 

Customers’ transactions, the 

Commission believes that the proposal 

is consistent with Rule 17Ad– 

22(e)(19).55

F. Consistency With Rule 17Ad– 

22(e)(21) 

Rule 17Ad–22(e)(21) under the 

Exchange Act requires a covered 

clearing agency to establish, implement, 

maintain, and enforce written policies 

and procedures reasonably designed to 

be efficient and effective in meeting the 

requirements of its participants and the 

markets it serves, including the clearing 

agency’s clearing and settlement 

arrangements and the scope of products 

cleared or settled.56

As described above in Section II.B.(1) 

and (2), the proposal is designed to 

reflect the current structure of the 

bilateral securities lending market, 

ensuring that relevant features and 

market participants subject to differing 

regulatory requirements and existing 

contractual relationships can be 

accommodated as part of the service 

provided by NSCC. For example, the 

proposal would allow for central 

clearing of SFTs with a one business 

day term, in order to provide a 

scheduled settlement date so that the 

transaction may be eligible for balance 

sheet netting benefit as explained in 

Section II.(B)(1). Second, the proposal 

would allow accelerated settlement so 

that certain market participants are able 

to quickly unwind their SFTs to satisfy 

applicable regulatory requirements. 

Third, the proposed membership 

categories would accommodate 

principal and agency trading to allow 

different types of market participants to 

enter into the new SFT central clearing 

service, consistent with their business 

models and applicable regulatory 

requirements. 

Accordingly, the Commission believes 

that the proposal is reasonably designed 

to be efficient and effective in meeting 

the requirements of its participants and 

the market it serves, and consistent with 

Rule 17Ad–22(e)(21).57

VI. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Act and in 

particular with the requirements of 

Section 17A of the Act 58 and the rules 

and regulations promulgated 

thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act 59 that 

proposed rule change SR–NSCC–2022– 

003, be, and hereby is, APPROVED.60

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.61

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2022–12009 Filed 6–3–22; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

Sunshine Act Meetings 

TIME AND DATE: 10:30 a.m. on Thursday, 

June 9, 2022. 

PLACE: The meeting will be held via 

remote means and/or at the 

Commission’s headquarters, 100 F 

Street NE, Washington, DC 20549. 

STATUS: This meeting will be closed to 

the public. 

MATTERS TO BE CONSIDERED: 

Commissioners, Counsel to the 

Commissioners, the Secretary to the 

Commission, and recording secretaries 

will attend the closed meeting. Certain 

staff members who have an interest in 

the matters also may be present. 

In the event that the time, date, or 

location of this meeting changes, an 


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