Document ID: SEC-2018-0491-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corp.
Posted Date: 2018-03-26T04:00Z

[Federal Register Volume 83, Number 58 (Monday, March 26, 2018)]
[Notices]
[Pages 12968-12970]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06016]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82910; File No. SR-NSCC-2017-018]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change To Amend the Loss 
Allocation Rules and Make Other Changes

March 20, 2018.

I. Introduction

    On December 18, 2017, 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-2017-018 to amend the loss allocation 
rules and make other changes (``Proposed Rule Change'').\3\ The 
Proposed Rule Change was published for comment in the Federal Register 
on January 8, 2018.\4\ The Commission did not receive any comments on 
the Proposed Rule Change. On February 8, 2018, pursuant to Section 
19(b)(2)(A)(ii)(I) of the Act,\5\ the Commission designated a longer 
period within which to approve, disapprove, or institute proceedings to 
determine whether to approve or disapprove the Proposed Rule Change.\6\ 
This order institutes proceedings, pursuant to Section 19(b)(2)(B) of 
the Act,\7\ to determine whether to approve or disapprove the Proposed 
Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On December 18, 2017, NSCC filed this proposal as an advance 
notice (SR-NSCC-2017-806) with the Commission pursuant to Section 
806(e)(1) of the Payment, Clearing, and Settlement Supervision Act 
of 2010 (``Clearing Supervision Act'') and Rule 19b-4(n)(1)(i) of 
the Act (``Advance Notice''). On January 24, 2018, the Commission 
extended the review period of the Advance Notice for an additional 
60 days pursuant to Section 806(e)(1)(H) of the Clearing Supervision 
Act. See 12 U.S.C. 5465(e)(1); 17 CFR 240.19b-4(n)(1)(i); 12 U.S.C. 
5465(e)(1)(H); and Securities Exchange Act Release No. 82584 
(January 24, 2018), 83 FR 4377 (January 30, 2018) (SR-NSCC-2017-
806).
    \4\ Securities Exchange Act Release No. 82428 (January 2, 2018), 
83 FR 897 (January 8, 2018) (SR-NSCC-2017-018) (``Notice'').
    \5\ 15 U.S.C. 78s(b)(2)(A)(ii)(I).
    \6\ Securities Exchange Act Release No. 82670 (February 8, 
2018), 83 FR 6626 (February 14, 2018) (SR-DTC-2017-022; SR-FICC-
2017-022; SR-NSCC-2017-018).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change 8
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    \8\ The Commission notes that the Summary of the Proposed Rule 
Change section does not describe the Proposed Rule Change in its 
entirety. Other changes include, but are not limited to, the 
clarification of defined terms, various aspects of the Clearing Fund 
application, and detailed procedures of the loss allocation. The 
complete Proposed Rule Change can be found in the Notice. See 
Notice, supra note 4. In addition, the text of the Proposed Rule 
Change is available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
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    As described in the Notice,\9\ NSCC proposes to revise its Rules 
and Procedures to primarily change (i) the loss allocation process,\10\ 
(ii) the loss allocation governance for Declared Non-Default Loss 
Events,\11\ and (iii) the retention time for the Actual Deposit of 
former members.\12\
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    \9\ The description of the Proposed Rule Change herein is based 
on the statements prepared by NSCC in the Notice. See Notice, supra 
note 4. Each capitalized term not otherwise defined herein has its 
respective meaning either (i) as set forth in the Rules and 
Procedures of NSCC, available at http://www.dtcc.com/legal/rules-and-procedures.aspx, or (ii) as set forth in the Notice.
    \10\ See Notice, supra note 4, at 898-901.
    \11\ See id. at 901.
    \12\ See id. at 901-02.
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A. Loss Allocation Process

    NSCC states that it would retain the current core loss allocation 
process.\13\ However, NSCC proposes to revise certain elements and 
introduce certain new loss allocation concepts, by making five key 
changes to its loss allocation process.
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    \13\ Id. at 898.
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    First, NSCC proposes to replace the calculation of its corporate 
contribution from no less than 25 percent of its retained earnings or 
such higher amount as the Board of Directors shall determine to a 
defined Corporate Contribution.\14\ The proposed Corporate Contribution 
would be defined as an amount equal to 50 percent of NSCC's General 
Business Risk Capital Requirement.\15\ NSCC's General Business Risk 
Capital Requirement is, at a minimum, equal to the regulatory capital 
that NSCC is required to maintain in compliance with Rule 17Ad-
22(e)(15) under the Act.\16\ In addition, NSCC proposes to mandatorily 
apply Corporate Contribution (i) prior to a loss allocation among 
Members, and (ii) to losses arising from both Defaulting Member Events 
and Declared Non-Default Loss Events.\17\
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    \14\ Id.
    \15\ Id.
    \16\ Id.; 17 CFR 240.17Ad-22(e)(15).
    \17\ Notice, supra note 4, at 898.
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    Second, NSCC proposes to introduce an Event Period to address the 
allocation of losses and liabilities that may arise from or relate to 
multiple

[[Page 12969]]

Defaulting Member Events, Declared Non-Default Loss Events, or both 
that arise in quick succession.\18\ The proposal would group together 
Defaulting Member Events and Declared Non-Default Loss Events occurring 
in a period of 10 business days for purposes of allocating losses to 
Members in one or more rounds, subject to the limitations of loss 
allocation in the Proposed Rule Change.\19\
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    \18\ Id. at 899.
    \19\ Id.
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    Third, NSCC proposes to introduce a loss allocation ``round,'' 
which would mean ``a series of loss allocations relating to an Event 
Period, the aggregate amount of which is limited by the sum of the Loss 
Allocation Caps of affected Members.'' \20\ NSCC would notify Members 
subject to a loss allocation of the amounts being allocated to 
them.\21\ Each Member would have five business days from the issuance 
of such first Loss Allocation Notice for the round to notify NSCC of 
its election to withdraw from membership with NSCC, and thereby benefit 
from its Loss Allocation Cap.\22\
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    \20\ Id.
    \21\ Id.
    \22\ Id.
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    Fourth, NSCC proposes to implement a ``look-back'' period to 
calculate a Member's loss allocation pro rata share and its Loss 
Allocation Cap.\23\ NSCC proposes to calculate each Member's pro rata 
share of losses and liabilities in any round to be equal to (i) the 
average of a Member's Required Fund Deposit for 70 business days prior 
to the first day of the applicable Event Period (``Average RFD'') 
divided by (ii) the sum of Average RFD amounts for all Members that are 
subject to a loss allocation in such round.\24\ Additionally, NSCC 
proposes that each Member's Loss Allocation Cap would be equal to the 
greater of (i) its Required Fund Deposit on the first day of the 
applicable Event Period or (ii) its Average RFD.\25\
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    \23\ Id. at 900.
    \24\ Id.
    \25\ Id.
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    Fifth, NSCC proposes to revise the cap on a loss allocation and the 
withdrawal process followed by the loss allocation. As proposed, if a 
Member provides notice of its withdrawal from membership, the Member's 
maximum amount of losses with respect to any loss allocation round 
would be its Loss Allocation Cap.\26\ NSCC further proposes that 
Members would have two business days after NSCC issues a first round 
Loss Allocation Notice to pay the amount specified in such notice.\27\ 
Members would have five business days from the issuance of the first 
Loss Allocation Notice in any round to decide whether to terminate its 
membership, provided that the Member complies with the requirements of 
the proposed withdrawal process.\28\
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    \26\ Id.
    \27\ Id. at 900 and 905.
    \28\ Id. at 900.
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B. Loss Allocation Governance for Declared Non-Default Loss Events

    NSCC proposes to enhance the governance around Declared Non-Default 
Loss Events that would trigger a loss allocation by specifying that the 
Board of Directors would have to determine that there is a non-default 
loss that (i) may present a significant and substantial loss or 
liability, so as to materially impair the ability of NSCC to provide 
clearance and settlement services in an orderly manner, and (ii) will 
potentially generate losses to be mutualized among Members in order to 
ensure that NSCC may continue to offer clearance and settlement 
services in an orderly manner.\29\ NSCC would then be required to 
promptly notify Members of this determination.\30\
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    \29\ Id. at 901.
    \30\ Id.
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C. Retention Time for the Actual Deposit of a Former Participant

    NSCC proposes that if a Member gives notice to NSCC of its election 
to withdraw from membership, NSCC would return the Member's Actual 
Deposit in the form of cash or securities within 30 calendar days and 
Eligible Letters of Credit within 90 calendar days.\31\ The return 
would be made after all of the Member's transactions have settled, and 
all matured and contingent obligations to NSCC for which the Member was 
responsible while a Member have been satisfied, except NSCC may retain 
for up to two years the Actual Deposits from Members who have sponsored 
Accounts at DTC.\32\ This proposed rule would reduce the period in 
which NSCC may retain a Member's Actual Deposit pursuant to the current 
rule.\33\
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    \31\ Id. at 901-902.
    \32\ Id.
    \33\ Id. at 907.
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III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \34\ to determine whether the Proposed Rule 
Change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the Proposed Rule Change. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
and provide the Commission with arguments to support the Commission's 
analysis as to whether to approve or disapprove the Proposed Rule 
Change.
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    \34\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\35\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the Proposed 
Rule Change's consistency with Section 17A of the Act,\36\ and the 
rules thereunder, including the following provisions:
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    \35\ Id.
    \36\ 15 U.S.C. 78q-1.
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     Section 17A(b)(3)(F) of the Act,\37\ which requires, among 
other things, that the rules of a clearing agency, such as NSCC, must 
be designed to promote the prompt and accurate clearance and settlement 
of securities transactions, 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, and to protect investors and the public 
interest;
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    \37\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17Ad-22(e)(13) under the Act,\38\ which requires, in 
general, a covered clearing agency, such as NSCC, to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to ensure the covered clearing agency has the 
authority and operational capacity to take timely action to contain 
losses and liquidity demands and continue to meet its obligations.
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    \38\ 17 CFR 240.17Ad-22(e)(13).
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     Rule 17Ad-22(e)(23)(i) under the Act,\39\ which requires a 
covered clearing agency, such as NSCC, to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to publicly disclose all relevant rules and material 
procedures, including key aspects of its default rules and procedures.
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    \39\ 17 CFR 240.17Ad-22(e)(23)(i).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and

[[Page 12970]]

arguments with respect to the issues identified above, as well as any 
other concerns they may have with the Proposed Rule Change. In 
particular, the Commission invites the written views of interested 
persons concerning whether the Proposed Rule Change is consistent with 
Section 17A(b)(3)(F) of the Act,\40\ Rule 17Ad-22(e)(13) under the 
Act,\41\ Rule 17Ad-22(e)(23)(i) under the Act,\42\ or any other 
provision of the Act, or the rules and regulations thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4(g) under the Act,\43\ any request for an opportunity to make an 
oral presentation.\44\
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    \40\ 15 U.S.C. 78q-1(b)(3)(F).
    \41\ 17 CFR 240.17Ad-22(e)(13).
    \42\ 17 CFR 240.17Ad-22(e)(23)(i).
    \43\ 17 CFR 240.19b-4(g).
    \44\ Section 19(b)(2) of the Act grants to the Commission 
flexibility to determine what type of proceeding--either oral or 
notice and opportunity for written comments--is appropriate for 
consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Proposed Rule Change should be approved 
or disapproved by April 16, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
April 30, 2018.
    The Commission asks that commenters address the sufficiency of 
NSCC's statements in support of the Proposed Rule Change, which are set 
forth in the Notice,\45\ in addition to any other comments they may 
wish to submit about the Proposed Rule Change.
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    \45\ See Notice, supra note 4.
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    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 [email protected]. Please include 
File Number SR-NSCC-2017-018 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NSCC-2017-018. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the Proposed Rule Change that are filed with 
the Commission, and all written communications relating to the Proposed 
Rule Change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of NSCC and on The Depository Trust 
& Clearing Corporation's website (http://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-2017-018 and should be 
submitted on or before April 16, 2018. Rebuttal comments should be 
submitted by April 30, 2018.
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    \46\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-06016 Filed 3-23-18; 8:45 am]
 BILLING CODE 8011-01-P