Federal Register / Vol. 82, No. 191 / Wednesday, October 4, 2017 / Notices 46329 

34 17 CFR 200.30–3(a)(12). 

1See Securities Exchange Act Release No. 34– 

78961 (Sep. 28, 2016), 81 FR 70786, 70788 (Oct. 13, 

2016). 

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 Web site (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 Web site 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; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR– 

NYSEAMER–2017–19, and should be 

submitted on or before October 25, 

2017. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.34

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2017–21280 Filed 10–3–17; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Investment Company Act Release No. 

32839; File No. 812–14818] 

National Securities Clearing 

Corporation 

September 28, 2017. 

AGENCY: Securities and Exchange 

Commission (‘‘Commission’’). 

ACTION: Notice. Notice of application for 

an order under section 3(b)(2) of the 

Investment Company Act of 1940 

(‘‘Act’’). 

APPLICANT: National Securities Clearing 

Corporation (‘‘NSCC’’). 

SUMMARY OF APPLICATION: Applicant 

seeks an order under Section 3(b)(2) of 

the Act declaring it to be primarily 

engaged in a business other than that of 

investing, reinvesting, owning, holding 

or trading in securities. Applicant is 

primarily in the business of providing 

clearing, settlement, risk management, 

central counterparty (‘‘CCP’’) and 

ancillary services to the registered 

broker-dealers, banks and other market 

participants that are its ‘‘Members’’, as 

such term is defined in the rules and 

procedures of Applicant (‘‘NSCC 

Rules’’). 

FILING DATE: The application was filed 

on September 8, 2017. 

HEARING OR NOTIFICATION OF HEARING: An 

order granting the requested relief will 

be issued unless the Commission orders 

a hearing. Interested persons may 

request a hearing by writing to the 

Commission’s Secretary and serving 

applicant with a copy of the request, 

personally or by mail. Hearing requests 

should be received by the Commission 

by 5:30 p.m. on October 23, 2017, and 

should be accompanied by proof of 

service on applicant, in the form of an 

affidavit or, for lawyers, a certificate of 

service. Hearing requests should state 

the nature of the writer’s interest, the 

reason for the request, and the issues 

contested. Persons who wish to be 

notified of a hearing may request 

notification by writing to the 

Commission’s Secretary. 

ADDRESSES: Secretary, Securities and 

Exchange Commission, 100 F Street NE., 

Washington, DC 20549–1090. 

Applicant, c/o David F. Freeman, Jr., 

Arnold & Porter LLP, 601 Massachusetts 

Avenue NW., Washington, DC 20001. 

FOR FURTHER INFORMATION CONTACT: 

Jennifer O. Palmer, Senior Counsel, at 

(202) 551–5786, or Nadya B. Roytblat, 

Assistant Chief Counsel, at (202) 551– 

6825 (Division of Investment 

Management, Chief Counsel’s Office). 

SUPPLEMENTARY INFORMATION: The 

following is a summary of the 

application. The complete application 

may be obtained via the Commission’s 

Web site by searching for the file 

number, or applicant using the 

Company name box, at http://

www.sec.gov/search/search.htm or by 

calling (202) 551–8090. 

Applicant’s Representations 

1. Formed in 1976, Applicant is 

organized under the Business 

Corporation Law of the State of New 

York and is registered as a clearing 

agency under the Securities and 

Exchange Act of 1934, as amended 

(‘‘Exchange Act’’), and the rules and 

regulations thereunder (‘‘Exchange Act 

Rules’’). Applicant is also designated as 

a systemically important financial 

market utility (‘‘SIFMU’’) by the 

Financial Stability Oversight Council 

(‘‘FSOC’’) under Title VIII of The DoddFrank Wall Street Reform and Consumer 

Protection Act (‘‘Dodd-Frank Act’’). As 

a registered clearing agency, Applicant 

is regulated by the Commission. As a 

SIFMU, Applicant is subject to 

enhanced supervision by the 

Commission in consultation with the 

Board of Governors of the Federal 

Reserve System (‘‘FRB’’).1

2. Applicant is a wholly-owned 

subsidiary of The Depository Trust & 

Clearing Corporation (‘‘DTCC’’). 

Applicant has one authorized class of 

stock, which is common stock. All 

issued and outstanding shares of 

Applicant’s common stock are held by 

DTCC and there are no plans to alter 

this wholly-owned subsidiary structure. 

There is no trading market in 

Applicant’s shares. 

3. Applicant provides clearing, 

settlement, risk management and CCP 

services to its Members for broker-tobroker trades in the United States 

involving equities, corporate and 

municipal debt, American depositary 

receipts, exchange traded funds and 

unit investment trusts. In addition to 

these core services, Applicant also offers 

ancillary, non-guaranteed services, 

including wealth management services 

(‘‘WMS’’) and insurance and retirement 

services (‘‘I&RS’’), which automate 

manual processes in the mutual funds, 

insurance and alternative investment 

products areas. Applicant’s operations 

are national. 

4. Applicant operates a continuous 

net settlement (‘‘CNS’’) system, through 

which the trades in CNS-eligible 

securities are processed. Applicant acts 

as a CCP in respect of such CNS trades, 

becoming the buyer to every seller and 

the seller to every buyer, thereby 

guaranteeing the completion of such 

trades and eliminating counterparty risk 

among its Members. As a result, 

Applicant has obligations to and claims 

against its Members on opposite sides of 

guaranteed netted transactions. 

Applicant also provides a trade 

guarantee with respect to balance order 

transactions. 

5. Due to the nature of Applicant’s 

operations and the large volume and 

dollar value of trades that it guarantees, 

Applicant maintains a large clearing 

fund (‘‘Clearing Fund’’) and a large 

amount of other cash on hand. The 

Clearing Fund consists of deposits (i.e., 

margin and other contributions) posted 

by Members in the form of cash and 


sradovich on DSK3GMQ082PROD with NOTICES
46330 Federal Register / Vol. 82, No. 191 / Wednesday, October 4, 2017 / Notices 

2Exchange Act Rule 17 Ad–22 requires, among 

other things, that Applicant hold assets in a way 

that minimizes risk of loss or delay in access to 

them and to invest assets in instruments with 

minimal credit, market, and liquidity risks. 

3See Securities Exchange Act Release No. 34– 

75730 (August 19, 2015), 80 FR 51638 (August 25, 

2015) (SR–NSCC–2015–802) (Notice of Filing of 

Amendment No. 1 and No Objection to Advance 

Notice Filing, as Modified by Amendment No. 1, to 

Establish a Prefunded Liquidity Program As Part of 

NSCC’s Liquidity Risk Management). 

4Applicant has previously held greater than 40% 

of the value of its total assets, exclusive of 

Government securities and cash items, in bank CDs 

and other investment securities. Applicant has 

relied on Rule 3a–3 under the Act, which provides 

an exemption from the definition of investment 

company for wholly-owned subsidiaries of a 

company that is not itself an investment company. 

However, that exemption does not apply if the 

wholly-owned subsidiary has issued paper (other 

than short-term paper) to other holders. On 

September 10, 2015, Applicant launched a 

commercial paper and extendible note program 

(‘‘CP Program’’) under which Applicant could issue 

paper other than short-term paper. Out of an 

abundance of caution, (a) prior to the launch of the 

CP Program, Applicant reduced its holdings of 

investment securities to less than 40% of the value 

of Applicant’s total assets, exclusive of Government 

securities and cash items, and (b) pending the 

application, Applicant has maintained its holdings 

of investment securities below the 40% threshold. 

5Tonopah Mining Company of Nevada, 26 SEC 

426, 427 (1947). 

6See Securities Acts Amendments of 1975, Public 

Law 94–29, 89 Stat. 97 (1975). 

eligible securities. Pursuant to the NSCC 

Rules, Members are required to 

maintain deposits in the Clearing Fund. 

The amount of each Member’s required 

deposit is calculated by Applicant using 

a risk-based margin methodology. 

6. Applicant uses the Clearing Fund, 

among other resources, to manage its 

risks related to its trade guarantee. 

Specifically, deposits in the Clearing 

Fund, among other resources, are 

available to Applicant to facilitate 

settlement in the event of a Member 

default and to cover potential losses due 

to such an event. Additionally, 

Applicant uses its liquid assets to meet 

the requirements imposed on it as a 

registered clearing agency and SIFMU 

and to generate revenue to the extent 

such assets are not otherwise being put 

to productive use. 

7. To more efficiently utilize Clearing 

Fund cash and other cash on hand, 

Applicant seeks to prudently invest part 

of the Clearing Fund cash and other 

cash on hand in bank certificates of 

deposit (‘‘CDs’’) and other investment 

securities. The managed investment of 

cash on hand also provides a measure 

of protection against inflationary factors 

and bolsters and protects NSCC’s 

financial position over time. 

8. Applicant is permitted under the 

NSCC Rules to invest Clearing Fund 

cash in accordance with an investment 

policy approved by Applicant’s board of 

directors (‘‘Board of Directors’’). 

Applicant is also permitted to invest 

other cash on hand in accordance with 

such investment policy (‘‘Clearing 

Agency Investment Policy’’). 

9. The Clearing Agency Investment 

Policy is designed to comply with the 

laws, rules and regulations applicable to 

Applicant as a registered clearing 

agency and SIFMU, including, without 

limitation, Exchange Act Section 17A 

and Exchange Act Rule 17Ad–22.2 The 

Clearing Agency Investment Policy was 

approved by the Commission pursuant 

to delegated authority.3 Any material 

changes to the Clearing Agency 

Investment Policy must be approved by 

the Board of Directors. Any changes to 

the Clearing Agency Investment Policy, 

regardless of materiality, will be 

submitted to the Commission pursuant 

to Exchange Act Rule 19b–4, with 

confidential treatment requested. 

Applicant’s Legal Analysis 

1. Section 3(a)(l)(A) of the Act defines 

the term ‘‘investment company’’ to 

include an issuer that is or holds itself 

out as being engaged primarily, or 

proposes to engage primarily, in the 

business of investing, reinvesting or 

trading in securities. Section 3(a)(l)(C) of 

the Act further defines an investment 

company as an issuer that is engaged or 

proposes to engage in the business of 

investing, reinvesting, owning, holding 

or trading in securities, and owns or 

proposes to acquire investment 

securities having a value in excess of 40 

percent of the value of the issuer’s total 

assets (exclusive of Government 

securities and cash items) on an 

unconsolidated basis. Applicant states 

that it does not hold itself out as being 

engaged primarily in the business of 

investing, reinvesting or trading in 

securities within the meaning of Section 

3(a)(l)(A) of the Act. Applicant states 

that it does not currently hold, but has 

previously held 4 and may again wish to 

hold, more than 40 percent of its total 

assets, exclusive of Government 

securities and cash items, in bank CDs 

and other investment securities. Upon 

such change in composition of its assets, 

Applicant might fall within the 

definition of investment company under 

Section 3(a)(l)(C) of the Act. 

2. Rule 3a–1 under the Act provides 

an exemption from the definition of 

investment company if no more than 45 

percent of a company’s total assets 

consist of, and not more than 45 percent 

of its net income over the last four 

quarters is derived from, securities other 

than Government securities and 

securities of majority-owned 

subsidiaries and companies primarily 

controlled by it. Applicant states that it 

cannot rely on Rule 3a–1 because it may 

again wish to hold more than 45 percent 

of its total assets in bank CDs and other 

investment securities and, upon such 

change in composition of its assets, it 

will not meet the requirements of Rule 

3a–1. 

3. Section 3(b)(2) of the Act provides 

that, notwithstanding Section 3(a)(l)(C) 

of the Act, the Commission may issue 

an order declaring an issuer to be 

primarily engaged in a business other 

than that of investing, reinvesting, 

owning, holding, or trading in securities 

directly, through majority-owned 

subsidiaries, or controlled companies 

conducting similar types of businesses. 

Applicant requests an order under 

Section 3(b)(2) of the Act declaring that 

it is primarily engaged in a business 

other than that of investing, reinvesting, 

owning, holding or trading in securities, 

and therefore is not an investment 

company as defined in the Act. In 

determining whether an issuer is 

‘‘primarily engaged’’ in a noninvestment company business under 

Section 3(b)(2) of the Act, the 

Commission considers the following 

factors: (a) The company’s historical 

development, (b) its public 

representations of policy, (c) the 

activities of its officers and directors, (d) 

the nature of its present assets, and (e) 

the sources of its present income.5

4. Applicant submits that it satisfies 

the criteria for issuance of an order 

under Section 3(b)(2) of the Act because 

the facts show that Applicant is 

primarily engaged in the business of 

providing clearing, settlement, risk 

management, CCP and ancillary services 

to its Members, and not in the business 

of investing, reinvesting, owning, 

holding or trading in securities. 

a. Historical Development. Applicant 

states that its origins date back to the 

back-office crisis of the late 1960s and 

early 1970s and the enactment of the 

Securities Acts Amendments of 1975, 

which enabled the development of a 

national securities market system and a 

national clearance and settlement 

system and their regulation.6 Applicant 

was formed in 1976 and now operates 

as a wholly-owned subsidiary of DTCC. 

Applicant states that it (a) is a clearing 

agency registered under the Exchange 

Act and, as such, is subject to 

comprehensive regulation by the 

Commission and (b) has been 

designated by FSOC as a SIFMU under 

Title VIII of the Dodd-Frank Act and, as 

such, is subject to enhanced supervision 

by the Commission in consultation with 

the FRB. Applicant states that both the 


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Federal Register / Vol. 82, No. 191 / Wednesday, October 4, 2017 / Notices 46331 

7Specifically, Applicant asserts that in the notice 

of final rulemaking issued by the Commission and 

the FRB (among other federal agencies) to 

implement the Volcker Rule, the agencies 

supported their decision not to expressly exclude 

FMUs from the definition of ‘‘covered funds’’ for 

purposes of the Volcker Rule by (a) stating that 

‘‘[they] believe that FMUs are not investment 

vehicles of the type [the Volcker Rule] was designed 

to address, but rather entities that generally engage 

in other activities, including acting as central 

counterparties that reduce counterparty risk in 

clearing and settlement activities’’ and (b) noting 

that ‘‘if the FMU is primarily engaged in 

transferring, clearing, or settling payments, 

securities, or other financial transactions among or 

between financial institutions, the FMU could rely 

on the exclusion to the definition of investment 

company provided by section 3(b)(1)’’ of the Act. 

See 79 FR 5536, 5700 (Jan. 31, 2014). 

Commission and the FRB, among other 

federal agencies, have previously 

indicated that they believe FMUs such 

as securities clearing agencies generally 

engage in activities other than those of 

an investment company.7

Applicant represents that 

substantially all of its activities since its 

formation have been devoted to 

providing clearing, settlement, risk 

management, CCP and ancillary services 

to its Members, and Applicant intends 

to continue to be primarily engaged in 

providing such services. 

Applicant further represents that all 

of its issued and outstanding shares are 

held by DTCC. Applicant states that its 

shares have not been, and will not be, 

held out as a financial investment for 

profit to the public. 

b. Public Representations of Policy. 

Applicant states that it has never made 

any public representations that would 

indicate that it is in any business other 

than providing clearing, settlement, risk 

management, CCP and ancillary 

services. Applicant represents that it has 

never held itself out as an investment 

company within the meaning of the Act. 

Applicant provides that all annual 

reports, web postings, press releases and 

written communications issued by 

Applicant have related to its business of 

providing clearing, settlement, risk 

management, CCP and ancillary 

services. Applicant states that no press 

release or advertising or promotional 

piece has been issued by Applicant 

concerning its holdings of investment 

securities or its capital investment 

policies, or concerning any potential for 

profit or appreciation in value relating 

to its own shares. 

c. Activities of Officers and Directors. 

Applicant represents that all of its 

directors and officers devote 

substantially all of their time spent on 

Applicant’s matters to its business of 

providing clearing, settlement, risk 

management, CCP and ancillary 

services. Applicant states that its 

directors and officers receive no extra or 

separate compensation for any services 

that may directly or indirectly involve 

Applicant’s investment securities. 

Applicant states that the composition of 

its Board of Directors is designed to 

comply with the fair representation 

requirement for clearing agencies set 

forth in Exchange Act Section 17A and 

the governance standards for registered 

clearing agencies set forth in Exchange 

Act Rule 17Ad–22. 

d. Nature of Assets. Applicant states 

that, as a service organization and a 

wholly-owned subsidiary of DTCC, 

Applicant owns very few fixed assets 

and the vast majority of its assets consist 

of cash and securities. Applicant states 

that, as of March 31, 2017, it had about 

$7.85 billion in total assets, of which 

cash and cash equivalents accounted for 

about $2.89 billion (36.84%), Members’ 

segregated cash accounted for about 

$29.59 million (0.38%), receivables 

accounted for about $32.82 million 

(0.42%), other current assets accounted 

for about $5.19 million (0.07%) and 

Clearing Fund accounted for about 

$4.84 billion (61.65%). Applicant states 

that, as of March 31, 2017, it owned 

Government securities valued at 

$201.60 million (2.57% of total assets) 

but did not own investment securities 

(as defined in Section 3(a)(2) of the Act). 

Applicant states that it has previously 

held greater than 40% of the value of its 

total assets, exclusive of Government 

securities and cash items, in bank CDs 

and other investment securities (as 

defined in Section 3(a)(2) of the Act), 

and Applicant may wish to do so again. 

Applicant believes that the fact that it 

has held, and may again wish to hold, 

investment securities in excess of the 

40% threshold should not preclude a 

finding that it is engaged primarily in a 

business other than that of investing, 

reinvesting, owning, holding or trading 

in securities, provided that it uses its 

investment securities for bona fide 

purposes relating to its clearing, 

settlement, risk management, CCP and 

ancillary services, and that it does not 

invest or trade in securities for 

speculative purposes. 

Applicant states that it provides CCP 

services and certain trade guarantees to 

its Members and requires Members that 

utilize such services to make required 

deposits to the Clearing Fund. 

Applicant notes that it is a clearing 

agency registered under the Exchange 

Act and, as such, is subject to 

comprehensive regulation by the 

Commission. Applicant further notes 

that it is a SIFMU designated by FSOC 

under Title VIII of the Dodd-Frank Act 

and, as such, is subject to enhanced 

supervision by the Commission in 

consultation with the FRB. Applicant 

represents that its allocation, 

management and use of investment 

securities is consistent with its business 

of providing CCP and trade guaranty 

services to its Members. Applicant 

represents that all of its investments are 

and will be managed in accordance with 

the Clearing Agency Investment Policy. 

Applicant states that it bears the entire 

counterparty risk for the obligations of 

Members to each other with respect to 

all trades guaranteed by Applicant. 

Applicant explains that it manages this 

risk by, among other things, requiring 

Members to maintain deposits in the 

Clearing Fund; however, that does not 

transfer the risk from Applicant. 

Accordingly, Applicant submits that its 

primary business for purposes of 

Section 3(b)(2) of the Act may be 

determined without regard to the nature 

of its assets. 

e. Sources of Income. Applicant 

represents that it has always received 

the vast majority of its revenues from 

the provision of clearing, settlement, 

risk management, CCP and ancillary 

services to its Members and not from 

interest on investment securities. 

Applicant states that, for the quarter 

ended March 31, 2017, it derived about 

$70.56 million of its total revenues from 

the provision of clearing services, about 

$27.21 million from ancillary services 

(WMS and I&RS), and $0.79 million 

from settlement and asset services. 

Applicant states that it realized interest 

income of about $5.87 million for the 

quarter ended March 31, 2017. 

Applicant further provides that, for the 

year ended December 31, 2016, it had 

total revenues of $378,943,000 and 

interest income of $11,325,000. 

Applicant states that it currently invests 

its cash in Government securities and 

bank deposits. Applicant notes that total 

revenues as presented in the application 

and the Applicant’s financial statements 

reflect revenues from operations and do 

not include interest income (Applicant’s 

financial statements account for interest 

income as a separate line item). 

Applicant further states that it does not 

break out its expenses using a cost 

allocation method such that a net 

income after taxes figure is available for 

each category of services or interest 

income. Accordingly, Applicant submits 

that its revenues, not net income, 

should be used as the basis for 

evaluating its investment company 

status. 

Applicant projects that its interest 

income will increase over the next three 

years, reaching an estimated 

$55,700,000 in 2019. Applicant 

represents that the projected increase in 

interest income will mostly be driven by 

growth in Applicant’s CP Program and 


sradovich on DSK3GMQ082PROD with NOTICES
46332 Federal Register / Vol. 82, No. 191 / Wednesday, October 4, 2017 / Notices 

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

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 81338 

(August 8, 2017), 82 FR 36049 (August 14, 2017) 

(SR–DTC–2017–014, SR–NSCC–2017–013, SR– 

FICC–2017–017) (‘‘Notice’’). 

4Notice, 82 FR at 37943. 

5 Id. 

6 Id. The parent company of the Clearing 

Agencies is The Depository Trust & Clearing 

Corporation (‘‘DTCC’’). DTCC operates on a shared 

services model with respect to the Clearing 

Agencies. Most corporate functions are established 

and managed on an enterprise-wide basis pursuant 

to intercompany agreements under which it is 

generally DTCC that provides a relevant service to 

a Clearing Agency. 

7Notice, 82 FR at 37943. 

8 Id. 

9 Id. 

10 Id. 

11 Id. 

12 Id. 

13 Id. 

14 Id. The Three Lines of Defense approach to risk 

management identifies the roles and responsibilities 

of different Clearing Agency Businesses or Clearing 

Agency Support Areas in identifying, assessing, 

measuring, monitoring, mitigating, and reporting 

certain key risks faced by the Clearing Agencies. 

The Three Lines of Defense approach is more fully 

described in a separate framework, the Clearing 

Agency Risk Management Framework. See 

Securities Exchange Act Release No. 81635 

(September 15, 2017), 82 FR 44224 (September 21, 

2017)(SR–DTC–2017–013, SR–NSCC–2017–012, 

SR–FICC–2017–016). 

rising interest rates. Applicant states 

that this projection also reflects 

anticipated increases in its holdings of 

investment securities should the 

Commission grant the requested Order; 

however, Applicant does not anticipate 

that its interest income from investment 

securities would ever represent other 

than a small amount as compared to its 

total revenues. Applicant further states 

that its projected increase in interest 

income will not result in any material 

increase in net income for Applicant 

because (a) it passes through to its 

Members substantially all of its earnings 

on Clearing Fund cash and (b) its 

earnings on CP Program proceeds are 

substantially offset by its interest 

expense on the commercial paper notes 

and extendible notes that are issued to 

holders. 

5. Applicant asserts that its historical 

development, its public representations 

of policy, the activities of its officers 

and directors and its sources of revenue, 

as discussed in the application, 

demonstrate that it is engaged primarily 

in the business of providing clearing, 

settlement, risk management, CCP and 

ancillary services to its Members, and 

not in an investment business. 

Applicant thus asserts that it satisfies 

the criteria for issuing an order under 

Section 3(b)(2) of the Act. 

For the Commission, by the Division of 

Investment Management, under delegated 

authority. 

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2017–21282 Filed 10–3–17; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–81745; File Nos. SR–DTC– 

2017–014; SR–NSCC–2017–013; SR–FICC– 

2017–017] 

Self-Regulatory Organizations; The 

Depository Trust Company; National 

Securities Clearing Corporation; Fixed 

Income Clearing Corporation; Order 

Approving Proposed Rule Changes To 

Adopt the Clearing Agency Operational 

Risk Management Framework 

September 28, 2017. 

I. Introduction 

On July 25, 2017, The Depository 

Trust Company (‘‘DTC’’), Fixed Income 

Clearing Corporation (‘‘FICC’’), and 

National Securities Clearing Corporation 

(‘‘NSCC,’’ each a ‘‘Clearing Agency,’’ 

and collectively with DTC and FICC, the 

‘‘Clearing Agencies’’), filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) proposed rule changes 

SR–DTC–2017–014, SR–NSCC–2017– 

013, and SR–FICC–2017–017, 

respectively, pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder.2 The proposed rule changes 

were published for comment in the 

Federal Register on August 14, 2017.3

The Commission did not receive any 

comment letters on the proposed rule 

changes. For the reasons discussed 

below, the Commission approves the 

proposed rule changes. 

II. Description of the Proposed Rule 

Changes 

The proposed rule changes would 

adopt the Clearing Agency Operational 

Risk Management Framework 

(‘‘Framework’’) of the Clearing 

Agencies, as described below. 

A. Overview of the Framework 

The Framework would describe how 

each of Clearing Agency manages 

operational risk. Operational risk is 

defined by the Clearing Agencies in the 

Framework as the risk of direct or 

indirect loss or reputational harm 

resulting from an event, internal or 

external, that is the result of inadequate 

or failed processes, people, and systems 

(‘‘Operational Risk’’).4 More 

specifically, the Framework would 

describe how the Clearing Agencies (i) 

manage Operational Risk; (ii) manage 

their information technology risks; and 

(iii) manage their business continuity 

risks.5 The DTCC Operational Risk 

Management group (‘‘ORM’’) would 

maintain the Framework, on behalf of 

the Clearing Agencies.6

B. Operational Risk Management 

The Framework would describe how 

ORM is charged with establishing 

appropriate systems, policies, 

procedures, and controls to enable the 

Clearing Agencies to identify plausible 

sources of Operational Risk.7

Specifically, the Framework would 

describe how the Clearing Agencies 

identify key risks, including Operational 

Risk, and set metrics to categorize such 

risks (e.g., from ‘‘no impact’’ to ‘‘severe 

impact’’) through ‘‘Risk Tolerance 

Statements.’’ 8 The Framework would 

describe how the Risk Tolerance 

Statements identify the overall risk 

reduction or mitigation objectives of the 

Clearing Agencies, with respect to 

identified risks to the Clearing 

Agencies.9 The Framework would also 

explain how the Risk Tolerance 

Statements document the risk controls 

and other measures the Clearing 

Agencies would use to manage such 

identified risks (including escalation 

requirements in the event of risk metric 

breaches). The Framework would state 

that ORM would annually review, 

revise, update, and/or create, as 

necessary, each Risk Tolerance 

Statement.10

The Framework would also describe 

how the Clearing Agencies monitor key 

risks, including Operational Risk, 

through ‘‘Risk Profiles.’’ 11 The 

Framework would state that ‘‘Risk 

Profiles’’ identify how risk is assessed 

for each of the Clearing Agencies’ 

businesses and support areas (each a 

‘‘Clearing Agency Business’’ and/or 

‘‘Clearing Agency Support Area’’).12 The 

Framework would explain that the risk 

assessment documented in these 

profiles includes (1) assessment of 

inherent risk (i.e., risk without any 

mitigating controls); (2) evaluation of 

existing controls and, as appropriate, 

any new additional controls, as well as 

the evaluation of the same risk against 

the strength of such controls; and (3) 

identification of any residual risk and a 

determination to either further mitigate 

such risk or accept such risk by the 

applicable Clearing Agency Business or 

Clearing Agency Support Area.13

The Framework would then describe 

generally the responsibilities of ORM, 

which is part of the second line of 

defense within the Clearing Agencies’ 

‘‘Three Lines of Defense’’ approach to 

risk management.14 The Framework 

would identify ORM responsibilities 


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