Document ID: SEC-2018-0190-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Securities Clearing Corporation
Posted Date: 2018-01-30T05:00Z

[Federal Register Volume 83, Number 20 (Tuesday, January 30, 2018)]
[Notices]
[Pages 4327-4340]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01690]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82581; File No. SR-NSCC-2017-805]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing and Extension of the Review Period of an 
Advance Notice To Adopt a Recovery & Wind-down Plan and Related Rules

January 24, 2018.
    Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act'') and Rule 19b-4(n)(1)(i) under the Securities 
Exchange Act of 1934 (``Act''),\1\ notice is hereby given that on 
December 18, 2017, National Securities Clearing Corporation (``NSCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-NSCC-2017-805 (``Advance Notice'') as described in 
Items I and II below, which Items have been prepared by the clearing 
agency.\2\ The Commission is publishing this notice to solicit comments 
on the Advance Notice from interested persons and to extend the review 
period of the Advance Notice for an additional 60 days pursuant to 
Section 806(e)(1)(H) of the Clearing Supervision Act.\3\
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    \1\ 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i), 
respectively.
    \2\ On December 18, 2017, NSCC filed the Advance Notice as a 
proposed rule change (SR-NSCC-2017-017) with the Commission pursuant 
to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4 
thereunder, 17 CFR 240.19b-4. A copy of the proposed rule change is 
available at http://www.dtcc.com/legal/sec-rule-filings.
    \3\ 12 U.S.C. 5465(e)(1)(H).
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    The advance notice of NSCC proposes to (1) adopt the Recovery & 
Wind-down Plan of NSCC (``R&W Plan'' or ``Plan''); and (2) amend NSCC's 
Rules & Procedures (``Rules'') \4\ in order to adopt Rule 41 
(Corporation Default), Rule 42 (Wind-down of the Corporation), and Rule 
60 (Market Disruption and Force Majeure) (each a ``Proposed Rule'' and, 
collectively, the ``Proposed Rules''). The advance notice would also 
propose to re-number the current Rule 42 (Wind-down of a Member, Fund 
Member or Insurance Carrier/Retirement Services Member) to Rule 40, 
which is currently reserved for future use.
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    \4\ Capitalized terms used herein and not otherwise defined 
herein are defined in the Rules, available at www.dtcc.com/~/media/
Files/Downloads/legal/rules/nscc_rules.pdf.
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    The R&W Plan would be maintained by NSCC in compliance with Rule 
17Ad-22(e)(3)(ii) under the Act by providing plans for the recovery and 
orderly wind-down of NSCC necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses, as 
described below.\5\ The Proposed Rules are designed to (1) facilitate 
the implementation of the R&W Plan when necessary and, in particular, 
allow NSCC to effectuate its strategy for winding down and transferring 
its business; (2) provide Members and Limited Members with transparency 
around critical provisions of the R&W Plan that relate to their rights, 
responsibilities and obligations; and (3) provide NSCC with the legal 
basis to implement those provisions of the R&W Plan when necessary, as 
described below.
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    \5\ 17 CFR 240.17Ad-22(e)(3)(ii).
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the Advance Notice 
and discussed any comments it received on the Advance Notice. The text 
of these statements may be examined at the places specified in Item IV 
below. The clearing agency has prepared summaries, set forth in 
sections A and B below, of the most significant aspects of such 
statements.

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

    While NSCC has not solicited or received any written comments 
relating to this proposal, NSCC has conducted outreach to Members in 
order to provide them with notice of the proposal. NSCC will notify the 
Commission of any written comments received by NSCC.

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

Description of Proposed Changes
    NSCC is proposing to adopt the R&W Plan to be used by the Board and 
management of NSCC in the event NSCC encounters scenarios that could 
potentially prevent it from being able to provide its critical services 
as a going concern. The R&W Plan would identify (i) the recovery tools 
available to NSCC to address the risks of (a) uncovered losses or 
liquidity shortfalls resulting from the default of one or more Members, 
and (b) losses arising from non-default events, such as damage to its 
physical assets, a cyber-attack, or custody and investment losses, and 
(ii) the strategy for implementation of such tools. The R&W Plan would 
also establish the strategy and framework for the orderly wind-down of 
NSCC and the transfer of its business in the remote event the 
implementation of the available recovery tools does not successfully 
return NSCC to financial viability.
    As discussed in greater detail below, the R&W Plan would provide, 
among other matters, (i) an overview of the business of NSCC and its 
parent, The Depository Trust & Clearing Corporation (``DTCC''); (ii) an 
analysis of NSCC's intercompany arrangements and critical links to 
other financial market infrastructures (``FMIs''); (iii) a description 
of NSCC's services, and the criteria used to determine which services 
are considered critical; (iv) a description of the NSCC and DTCC 
governance structure; (v) a description of the governance around the 
overall recovery and wind-down program; (vi) a discussion of tools 
available to NSCC to mitigate credit/market and liquidity risks, 
including recovery indicators and triggers, and the governance around 
management of a stress event along a ``Crisis Continuum'' timeline; 
(vii) a discussion of potential non-default losses and the resources 
available to NSCC to address such losses, including recovery triggers 
and tools to mitigate such losses; (viii) an analysis of the recovery 
tools' characteristics, including how they are comprehensive, 
effective, and transparent, how the tools provide appropriate 
incentives to Members to, among other things, control and monitor the 
risks they may present to NSCC, and how NSCC seeks to minimize the 
negative consequences of executing its recovery tools; and (ix) the 
framework and approach for the orderly wind-down and transfer of NSCC's 
business, including an estimate of the time and

[[Page 4328]]

costs to effect a recovery or orderly wind-down of NSCC.
    The R&W Plan would be structured as a roadmap, and would identify 
and describe the tools that NSCC may use to effect a recovery from the 
events and scenarios described therein. Certain recovery tools that 
would be identified in the R&W Plan are based in the Rules (including 
the Proposed Rules) and, as such, descriptions of those tools would 
include descriptions of, and reference to, the applicable Rules and any 
related internal policies and procedures. Other recovery tools that 
would be identified in the R&W Plan are based in contractual 
arrangements to which NSCC is a party, including, for example, existing 
committed or pre-arranged liquidity arrangements. Further, the R&W Plan 
would state that NSCC may develop further supporting internal 
guidelines and materials that may provide operationally for matters 
described in the Plan, and that such documents would be supplemental 
and subordinate to the Plan.
    Key factors considered in developing the R&W Plan and the types of 
tools available to NSCC were its governance structure and the nature of 
the markets within which NSCC operates. As a result of these 
considerations, many of the tools available to NSCC that would be 
described in the R&W Plan are NSCC's existing, business-as-usual risk 
management and default management tools, which would continue to be 
applied in scenarios of increasing stress. In addition to these 
existing, business-as-usual tools, the R&W Plan would describe NSCC's 
other principal recovery tools, which include, for example, (i) 
identifying, monitoring and managing general business risk and holding 
sufficient liquid net assets funded by equity (``LNA'') to cover 
potential general business losses pursuant to the Clearing Agency 
Policy on Capital Requirements (``Capital Policy''),\6\ (ii) 
maintaining the Clearing Agency Capital Replenishment Plan 
(``Replenishment Plan'') as a viable plan for the replenishment of 
capital should NSCC's equity fall close to or below the amount being 
held pursuant to the Capital Policy,\7\ and (iii) the process for the 
allocation of losses among Members, as provided in Rule 4.\8\ The R&W 
Plan would provide governance around the selection and implementation 
of the recovery tool or tools most relevant to mitigate a stress 
scenario and any applicable loss or liquidity shortfall.
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    \6\ See Securities Exchange Act Release No. 81105 (July 7, 
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003, SR-FICC-2017-
007, SR-NSCC-2017-004).
    \7\ See id.
    \8\ See Rule 4 (Clearing Fund), supra note 4. NSCC is proposing 
changes to Rule 4 and other related rules regarding allocation of 
losses in a separate filing submitted simultaneously with this 
filing (File Nos. SR-NSCC-2017-018 and SR-NSCC-2017-806, referred to 
collectively herein as the ``Loss Allocation Filing''). NSCC expects 
the Commission to review both proposals together, and, as such, the 
proposal described in this filing anticipates the approval and 
implementation of those proposed changes to the Rules.
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    The development of the R&W Plan is facilitated by the Office of 
Recovery & Resolution Planning (``R&R Team'') of DTCC.\9\ The R&R Team 
reports to the DTCC Management Committee (``Management Committee'') and 
is responsible for maintaining the R&W Plan and for the development and 
ongoing maintenance of the overall recovery and wind-down planning 
process. The Board, or such committees as may be delegated authority by 
the Board from time to time pursuant to its charter, would review and 
approve the R&W Plan biennially, and would also review and approve any 
changes that are proposed to the R&W Plan outside of the biennial 
review.
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    \9\ DTCC operates on a shared services model with respect to 
NSCC and its other subsidiaries. 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 subsidiary, including NSCC.
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    As discussed in greater detail below, the Proposed Rules would 
define the procedures that may be employed in the event of NSCC's 
default and its wind-down, and would provide for NSCC's authority to 
take certain actions on the occurrence of a ``Market Disruption 
Event,'' as defined therein. Significantly, the Proposed Rules would 
provide Members and Limited Members with transparency and certainty 
with respect to these matters. The Proposed Rules would facilitate the 
implementation of the R&W Plan, particularly NSCC's strategy for 
winding down and transferring its business, and would provide NSCC with 
the legal basis to implement those aspects of the R&W Plan.
NSCC R&W Plan
    The R&W Plan is intended to be used by the Board and NSCC's 
management in the event NSCC encounters scenarios that could 
potentially prevent it from being able to provide its critical services 
as a going concern. The R&W Plan would be structured to provide a 
roadmap, define the strategy, and identify the tools available to NSCC 
to either (i) recover in the event it experiences losses that exceed 
its prefunded resources (such strategies and tools referred to herein 
as the ``Recovery Plan'') or (ii) wind-down its business in a manner 
designed to permit the continuation of its critical services in the 
event that such recovery efforts are not successful (such strategies 
and tools referred to herein as the ``Wind-down Plan''). The 
description of the R&W Plan below is intended to highlight the purpose 
and expected effects of the material aspects of the R&W Plan, and to 
provide Members and Limited Members with appropriate transparency into 
these features.
Business Overview, Critical Services, and Governance
    The introduction to the R&W Plan would identify the document's 
purpose and its regulatory background, and would outline a summary of 
the Plan. The stated purpose of the R&W Plan is that it is to be used 
by the Board and NSCC management in the event NSCC encounters scenarios 
that could potentially prevent it from being able to provide its 
critical services as a going concern. The R&W Plan would be maintained 
by NSCC in compliance with Rule 17Ad-22(e)(3)(ii) under the Act \10\ by 
providing plans for the recovery and orderly wind-down of NSCC.
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    \10\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The R&W Plan would describe DTCC's business profile, provide a 
summary of NSCC's services, and identify the intercompany arrangements 
and links between NSCC and other entities, including other FMIs. This 
overview section would provide a context for the R&W Plan by describing 
NSCC's business, organizational structure and critical links to other 
entities. By providing this context, this section would facilitate the 
analysis of the potential impact of utilizing the recovery tools set 
forth in later sections of the Recovery Plan, and the analysis of the 
factors that would be addressed in implementing the Wind-down Plan.
    DTCC is a user-owned and user-governed holding company and is the 
parent company of NSCC and its affiliates, The Depository Trust Company 
(``DTC'') and Fixed Income Clearing Corporation (``FICC'', and, 
together with NSCC and DTC, the ``Clearing Agencies''). The Plan would 
describe how corporate support services are provided to NSCC from DTCC 
and DTCC's other subsidiaries through intercompany agreements under a 
shared services model.
    The Plan would provide a description of established links between 
NSCC and other FMIs, including The Options Clearing Corporation 
(``OCC''), CDS Clearing and Depository Services Inc.

[[Page 4329]]

(``CDS''), and DTC. For example, the arrangement between NSCC and OCC 
governs the process by which OCC submits transactions to NSCC for 
settlement, and sets the time when the settlement obligations and the 
central counterparty trade guaranty shifts from OCC to NSCC with 
respect to these transactions.\11\ The arrangement with CDS enables 
participants of CDS to clear and settle OTC trades with U.S. broker-
dealers through subaccounts maintained by CDS through its own 
membership with NSCC.\12\ The interface between DTC and NSCC permits 
transactions to flow between DTC's system and NSCC's Continuous Net 
Settlement (``CNS'') system in a collateralized environment.\13\ NSCC's 
CNS relies on this interface with DTC for the book-entry movement of 
securities to settle transactions. This section of the Plan, 
identifying and briefly describing NSCC's established links, would 
provide a mapping of critical connections and dependencies that may 
need to be relied on or otherwise addressed in connection with the 
implementation of either the Recovery Plan or the Wind-down Plan.
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    \11\ See Securities Exchange Act Release Nos. 81266 (July 31, 
2017), 82 FR 36484 (August 4, 2017) (SR-NSCC-2017-007, SR-OCC-2017-
013); 81260 (July 31, 2017), 82 FR 36476 (August 4, 2017) (SR-NSCC-
2017-803, SR-OCC-2017-804); Procedure III (Trade Recording Service 
(Interface with Qualified Clearing Agencies)), supra note 4.
    \12\ See Rule 61 (International Links), supra note 4.
    \13\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting 
Operation), supra note 4.
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    The Plan would define the criteria for classifying certain of 
NSCC's services as ``critical,'' and would identify those critical 
services and the rationale for their classification. This section would 
provide an analysis of the potential systemic impact from a service 
disruption, and is important for evaluating how the recovery tools and 
the wind-down strategy would facilitate and provide for the 
continuation of NSCC's critical services to the markets it serves. The 
criteria that would be used to identify an NSCC service or function as 
critical would include consideration as to (1) whether there is a lack 
of alternative providers or products; (2) whether failure of the 
service could impact NSCC's ability to perform its central counterparty 
services; (3) whether failure of the service could impact NSCC's 
ability to perform its netting services, and, as such, the availability 
of market liquidity; and (4) the service is interconnected with other 
participants and processes within the U.S. financial system, for 
example, with other FMIs, settlement banks, broker-dealers, and 
exchanges. The Plan would then list each of those services, functions 
or activities that NSCC has identified as ``critical'' based on the 
applicability of these four criteria. Such critical services would 
include, for example, trade capture and recording through the Universal 
Trade Capture system,\14\ services supporting Correspondent Clearing 
relationships,\15\ the CNS system,\16\ the Balance Order Netting 
system,\17\ Mutual Funds Services,\18\ and the settlement of money 
payments with respect to transactions processed by NSCC.\19\ The R&W 
Plan would also include a non-exhaustive list of NSCC services that are 
not deemed critical.
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    \14\ See Rule 7 (Comparison and Trade Recording Operation) and 
Procedure II (Trade Comparison and Recording Service), supra note 4.
    \15\ See Procedure IV (Special Representative Service), supra 
note 4.
    \16\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting 
Operation), supra note 4.
    \17\ See Rule 8 (Balance Order and Foreign Security Systems) and 
Procedure V (Balance Order Accounting Operation), supra note 4.
    \18\ See Rule 52 (Mutual Funds Services), supra note 4.
    \19\ See Rule 12 (Settlement) and Procedure VIII (Money 
Settlement Service), supra note 4.
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    The evaluation of which services provided by NSCC are deemed 
critical is important for purposes of determining how the R&W Plan 
would facilitate the continuity of those services. As discussed further 
below, while NSCC's Wind-down Plan would provide for the transfer of 
all critical services to a transferee in the event NSCC's wind-down is 
implemented, it would anticipate that any non-critical services that 
are ancillary and beneficial to a critical service, or that otherwise 
have substantial user demand from the continuing membership, would also 
be transferred.
    The Plan would describe the governance structure of both DTCC and 
NSCC. This section of the Plan would identify the ownership and 
governance model of these entities at both the Board of Directors and 
management levels. The Plan would state that the stages of escalation 
required to manage recovery under the Recovery Plan or to invoke NSCC's 
wind-down under the Wind-down Plan would range from relevant business 
line managers up to the Board through NSCC's governance structure. The 
Plan would then identify the parties responsible for certain activities 
under both the Recovery Plan and the Wind-down Plan, and would describe 
their respective roles. The Plan would identify the Risk Committee of 
the Board (``Board Risk Committee'') as being responsible for oversight 
of risk management activities at NSCC, which include focusing on both 
oversight of risk management systems and processes designed to identify 
and manage various risks faced by NSCC, and, due to NSCC's critical 
role in the markets in which it operates, oversight of NSCC's efforts 
to mitigate systemic risks that could impact those markets and the 
broader financial system.\20\ The Plan would identify the DTCC 
Management Risk Committee (``Management Risk Committee'') as primarily 
responsible for general, day-to-day risk management through delegated 
authority from the Board Risk Committee. The Plan would state that the 
Management Risk Committee has delegated specific day-to-day risk 
management, including management of risks addressed through margining 
systems and related activities, to the DTCC Group Chief Risk Office 
(``GCRO''), which works with staff within the DTCC Financial Risk 
Management group. Finally, the Plan would describe the role of the 
Management Committee, which provides overall direction for all aspects 
of NSCC's business, technology, and operations and the functional areas 
that support these activities.
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    \20\ The charter of the Board Risk Committee is available at 
http://www.dtcc.com/~/media/Files/Downloads/legal/policy-and-
compliance/DTCC-BOD-Risk-Committee-Charter.pdf.
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    The Plan would describe the governance of recovery efforts in 
response to both default losses and non-default losses under the 
Recovery Plan, identifying the groups responsible for those recovery 
efforts. Specifically, the Plan would state that the Management Risk 
Committee provides oversight of actions relating to the default of a 
Member, which would be reported and escalated to it through the GCRO, 
and the Management Committee provides oversight of actions relating to 
non-default events that could result in a loss, which would be reported 
and escalated to it from the DTCC Chief Financial Officer (``CFO'') and 
the DTCC Treasury group that reports to the CFO, and from other 
relevant subject matter experts based on the nature and circumstances 
of the non-default event.\21\ More generally, the Plan would state that 
the type of loss and the nature and circumstances of the events that 
lead to the loss would dictate the components

[[Page 4330]]

of governance to address that loss, including the escalation path to 
authorize those actions. As described further below, both the Recovery 
Plan and the Wind-down Plan would describe the governance of 
escalations, decisions, and actions under each of those plans.
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    \21\ The Plan would state that these groups would be involved to 
address how to mitigate the financial impact of non-default losses, 
and in recommending mitigating actions, the Management Committee 
would consider information and recommendations from relevant subject 
matter experts based on the nature and circumstances of the non-
default event. Any necessary operational response to these events, 
however, would be managed in accordance with applicable incident 
response/business continuity process; for example, processes 
established by the DTCC Technology Risk Management group would be 
followed in response to a cyber event.
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    Finally, the Plan would describe the role of the R&R Team in 
managing the overall recovery and wind-down program and plans for each 
of the Clearing Agencies.
NSCC Recovery Plan
    The Recovery Plan is intended to be a roadmap of those actions that 
NSCC may employ to monitor and, as needed, stabilize its financial 
condition. As each event that could lead to a financial loss could be 
unique in its circumstances, the Recovery Plan would not be 
prescriptive and would permit NSCC to maintain flexibility in its use 
of identified tools and in the sequence in which such tools are used, 
subject to any conditions in the Rules or the contractual arrangement 
on which such tool is based. NSCC's Recovery Plan would consist of (1) 
a description of the risk management surveillance, tools, and 
governance that NSCC would employ across evolving stress scenarios that 
it may face as it transitions through a ``Crisis Continuum,'' described 
below; (2) a description of NSCC's risk of losses that may result from 
non-default events, and the financial resources and recovery tools 
available to NSCC to manage those risks and any resulting losses; and 
(3) an evaluation of the characteristics of the recovery tools that may 
be used in response to either default losses or non-default losses, as 
described in greater detail below. In all cases, NSCC would act in 
accordance with the Rules, within the governance structure described in 
the R&W Plan, and in accordance with applicable regulatory oversight to 
address each situation in order to best protect NSCC, Members, and the 
markets in which it operates.
    Managing Member Default Losses and Liquidity Needs Through the 
Crisis Continuum. The Recovery Plan would describe the risk management 
surveillance, tools, and governance that NSCC may employ across an 
increasing stress environment, which is referred to as the ``Crisis 
Continuum.'' This description would identify those tools that can be 
employed to mitigate losses, and mitigate or minimize liquidity needs, 
as the market environment becomes increasingly stressed. The phases of 
the Crisis Continuum would include (1) a stable market phase, (2) a 
stressed market phase, (3) a phase commencing with NSCC's decision to 
cease to act for a Member or Affiliated Family of Members,\22\ and (4) 
a recovery phase. This section of the Recovery Plan would address 
conditions and circumstances relating to NSCC's decision to cease to 
act for a Member (referred to in the R&W Plan as a ``defaulting 
Member,'' and the event as a ``Member default'') pursuant to the 
Rules.\23\
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    \22\ The Plan would define an ``Affiliated Family'' of Members 
as a number of affiliated entities that are all Members of NSCC.
    \23\ See Rule 46 (Restrictions on Access to Services), supra 
note 4.
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    The Recovery Plan would provide context to its roadmap through this 
Crisis Continuum by describing NSCC's ongoing management of credit, 
market and liquidity risk, and its existing process for measuring and 
reporting its risks as they align with established thresholds for its 
tolerance of those risks. The Recovery Plan would discuss the 
management of credit/market risk and liquidity exposures together, 
because the tools that address these risks can be deployed either 
separately or in a coordinated approach in order to address both 
exposures. NSCC manages these risk exposures collectively to limit 
their overall impact on NSCC and its membership. As part of its market 
risk management strategy, NSCC manages its credit exposure to Members 
by determining the appropriate Required Deposits to the Clearing Fund 
and monitoring its sufficiency, as provided for in the Rules.\24\ NSCC 
manages its liquidity risks with an objective of maintaining sufficient 
resources to be able to fulfill obligations that have been guaranteed 
by NSCC in the event of a Member default that presents the largest 
aggregate liquidity exposure to NSCC over the settlement cycle.\25\
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    \24\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund 
Formula and Other Matters), supra note 4. NSCC's market risk 
management strategy is designed to comply with Rule 17Ad-22(e)(4) 
under the Act, where these risks are referred to as ``credit 
risks.'' See also 17 CFR 240.17Ad-22(e)(4).
    \25\ NSCC's liquidity risk management strategy, including the 
manner in which NSCC utilizes its liquidity tools, is described in 
the Clearing Agency Liquidity Risk Management Framework. See 
Securities Exchange Act Release Nos. 80489 (April 19, 2017), 82 FR 
19120 (April 25, 2017) (SR-DTC-2017-004, SR-NSCC-2017-005, SR-FICC-
2017-008); 81194 (July 24, 2017), 82 FR 35241 (July 28, 2017) (SR-
DTC-2017-004, SR-NSCC-2017-005, SR-FICC-2017-008).
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    The Recovery Plan would outline the metrics and indicators that 
NSCC has developed to evaluate a stress situation against established 
risk tolerance thresholds. Each risk mitigation tool identified in the 
Recovery Plan would include a description of the escalation thresholds 
that allow for effective and timely reporting to the appropriate 
internal management staff and committees, or to the Board. The Recovery 
Plan would make clear that these tools and escalation protocols would 
be calibrated across each phase of the Crisis Continuum. The Recovery 
Plan would also establish that NSCC would retain the flexibility to 
deploy such tools either separately or in a coordinated approach, and 
to use other alternatives to these actions and tools as necessitated by 
the circumstances of a particular Member default, in accordance with 
the Rules. Therefore, the Recovery Plan would both provide NSCC with a 
roadmap to follow within each phase of the Crisis Continuum, and would 
permit it to adjust its risk management measures to address the unique 
circumstances of each event.
    The Recovery Plan would describe the conditions that mark each 
phase of the Crisis Continuum, and would identify actions that NSCC 
could take as it transitions through each phase in order to both 
prevent losses from materializing through active risk management, and 
to restore the financial health of NSCC during a period of stress.
    The ``stable market phase'' of the Crisis Continuum would describe 
active risk management activities in the normal course of business. 
These activities would include (1) routine monitoring of margin 
adequacy through daily review of back testing and stress testing 
results that review the adequacy of NSCC's margin calculations, and 
escalation of those results to internal and Board committees; \26\ and 
(2) routine monitoring of liquidity adequacy through review of daily 
liquidity studies that measure sufficiency of available liquidity 
resources to meet cash settlement obligations of the Member that would 
generate the largest aggregate payment obligation.\27\
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    \26\ NSCC's stress testing practices are described in the 
Clearing Agency Stress Testing Framework (Market Risk). See 
Securities Exchange Act Release Nos. 80485 (April 19, 2017), 82 FR 
19131 (April 25, 2017) (SR-DTC-2017-005, SR-FICC-2017-009, SR-NSCC-
2017-006); 81192 (July 24, 2017), 82 FR 35245 (July 28, 2017) (SR-
DTC-2017-005, SR-FICC-2017-009, SR-NSCC-2017-006).
    \27\ See supra note 25.
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    The Recovery Plan would describe some of the indicators of the 
``stressed market phase'' of the Crisis Continuum, which would include, 
for example, volatility in market prices of certain assets where there 
is increased uncertainty among market participants about the 
fundamental value of those assets. This phase would involve general 
market stresses, when no Member default would be imminent. Within the 
description of this phase, the

[[Page 4331]]

Recovery Plan would provide that NSCC may take targeted, routine risk 
management measures as necessary and as permitted by the Rules.
    Within the ``Member default phase'' of the Crisis Continuum, the 
Recovery Plan would provide a roadmap for the existing procedures that 
NSCC would follow in the event of a Member default and any decision by 
NSCC to cease to act for that Member.\28\ The Recovery Plan would 
provide that the objectives of NSCC's actions upon a Member or 
Affiliated Family default are to (1) minimize losses and market 
exposure of the affected Members and NSCC's non-defaulting Members; and 
(2), to the extent practicable, minimize disturbances to the affected 
markets. The Recovery Plan would describe tools, actions, and related 
governance for both market risk monitoring and liquidity risk 
monitoring through this phase. For example, in connection with managing 
its market risk during this phase, NSCC would, pursuant to the Rules, 
(1) monitor and assess the adequacy of Clearing Fund resources; (2), 
when necessary and appropriate pursuant to the Rules, assess and 
collect additional margin requirements; and (3) follow its operational 
procedures to liquidate the defaulting Member's portfolio. Management 
of liquidity risk through this phase would involve ongoing monitoring 
of the adequacy of NSCC's liquidity resources, and the Recovery Plan 
would identify certain actions NSCC may deploy as it deems necessary to 
mitigate a potential liquidity shortfall, which would include, for 
example, adjusting its strategy for closing out the defaulting Member's 
portfolio or seeking additional liquidity resources. The Recovery Plan 
would state that, throughout this phase, relevant information would be 
escalated and reported to both internal management committees and the 
Board Risk Committee.
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    \28\ See Rule 18 (Procedures for When the Corporation Declines 
or Ceases to Act) and Rule 46 (Restrictions on Access to Services), 
supra note 4.
---------------------------------------------------------------------------

    The Recovery Plan would also identify financial resources available 
to NSCC, pursuant to the Rules, to address losses arising out of a 
Member default. Specifically, Rule 4, as proposed to be amended by the 
Loss Allocation Filing, would provide that losses be satisfied first by 
applying a ``Corporate Contribution,'' and then, if necessary, by 
allocating remaining losses to non-defaulting Members.\29\
---------------------------------------------------------------------------

    \29\ See supra note 8. The Loss Allocation Filing proposes to 
amend Rule 4 to define the amount NSCC would contribute to address a 
loss resulting from either a Member default or a non-default event 
as the ``Corporate Contribution.'' This amount would be 50 percent 
(50%) of the ``General Business Risk Capital Requirement,'' which is 
calculated pursuant to the Capital Policy and is an amount 
sufficient to cover potential general business losses so that NSCC 
can continue operations and services as a going concern if those 
losses materialize, in compliance with Rule 17Ad-22(e)(15) under the 
Act. See also supra note 6; 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------

    The ``recovery phase'' of the Crisis Continuum would describe 
actions that NSCC may take to avoid entering into a wind-down of its 
business. In order to provide for an effective and timely recovery, the 
Recovery Plan would describe two stages of this phase: (1) A recovery 
corridor, during which NSCC may experience stress events or observe 
early warning indicators that allow it to evaluate its options and 
prepare for the recovery phase; and (2) the recovery phase, which would 
begin on the date that NSCC issues the first Loss Allocation Notice of 
the second loss allocation round with respect to a given ``Event 
Period.'' \30\
---------------------------------------------------------------------------

    \30\ The Loss Allocation Filing proposes to amend Rule 4 to 
introduce the concept of an ``Event Period'' as the ten (10) 
Business Days beginning on (i) with respect to a Member default, the 
day on which NSCC notifies Members that it has ceased to act for a 
Member under the Rules, or (ii) with respect to a non-default loss, 
the day that NSCC notifies Members of the determination by the Board 
that there is a non-default loss event, as described in greater 
detail in that filing. The proposed Rule 4 would define a ``round'' 
as a series of loss allocations relating to an Event Period, and 
would provide that the first Loss Allocation Notice in a first, 
second, or subsequent round shall expressly state that such notice 
reflects the beginning of a first, second, or subsequent round. The 
maximum allocable loss amount of a round is equal to the sum of the 
``Loss Allocation Caps'' (as defined in the proposed Rule 4) of 
those Members included in the round. See supra note 8.
---------------------------------------------------------------------------

    NSCC expects that significant deterioration of liquidity resources 
would cause it to enter the recovery corridor stage of this phase, and, 
as such, the actions it may take at this stage would be aimed at 
replenishing those resources. Circumstances that could cause it to 
enter the recovery corridor may include, for example, a rapid and 
material change in market prices or substantial intraday activity 
volume by the defaulting Member, neither of which are mitigated by 
intraday margin calls, or subsequent defaults by other Members or 
Affiliated Families during a compressed time period. Throughout the 
recovery corridor, NSCC would monitor the adequacy of its resources and 
the expected timing of replenishment of those resources, and would do 
so through the monitoring of certain metrics referred to as ``Corridor 
Indicators.''
    The majority of the Corridor Indicators, as identified in the 
Recovery Plan, relate directly to conditions that may require NSCC to 
adjust its strategy for hedging and liquidating a defaulting Member's 
portfolio, and any such changes would include an assessment of the 
status of the Corridor Indicators. Corridor Indicators would include, 
for example, effectiveness and speed of NSCC's efforts to close out the 
portfolio of the defaulting Member, and an impediment to the 
availability of its financial resources. For each Corridor Indicator, 
the Recovery Plan would identify (1) measures of the indicator, (2) 
evaluations of the status of the indicator, (3) metrics for determining 
the status of the deterioration or improvement of the indicator, and 
(4) ``Corridor Actions,'' which are steps that may be taken to improve 
the status of the indicator,\31\ as well as management escalations 
required to authorize those steps. Because NSCC has never experienced 
the default of multiple Members, it has not, historically, measured the 
deterioration or improvements metrics of the Corridor Indicators. As 
such, these metrics were chosen based on the business judgment of NSCC 
management.
---------------------------------------------------------------------------

    \31\ The Corridor Actions that would be identified in the Plan 
are indicative, but not prescriptive; therefore, if NSCC needs to 
consider alternative actions due to the applicable facts and 
circumstances, the escalation of those alternative actions would 
follow the same escalation protocol identified in the Plan for the 
Corridor Indicator to which the action relates.
---------------------------------------------------------------------------

    The Recovery Plan would also describe the reporting and escalation 
of the status of the Corridor Indicators throughout the recovery 
corridor. Significant deterioration of a Corridor Indicator, as 
measured by the metrics set out in the Recovery Plan, would be 
escalated to the Board. NSCC management would review the Corridor 
Indicators and the related metrics at least annually, and would modify 
these metrics as necessary in light of observations from simulations of 
Member defaults and other analyses. Any proposed modifications would be 
reviewed by the Management Risk Committee and the Board Risk Committee. 
The Recovery Plan would estimate that NSCC may remain in the recovery 
corridor stage between one day and two weeks. This estimate is based on 
historical data observed in past Member defaults, the results of 
simulations of Member defaults, and periodic liquidity analyses 
conducted by NSCC. The actual length of a recovery corridor would vary 
based on actual market conditions observed on the date and time NSCC 
enters the recovery corridor stage of the Crisis Continuum, and NSCC 
would expect

[[Page 4332]]

the recovery corridor to be shorter in market conditions of increased 
stress.
    The Recovery Plan would outline steps by which NSCC may allocate 
its losses, and would state that the available tools related to 
allocation of losses would only be used in this and subsequent phases 
of the Crisis Continuum.\32\ The Recovery Plan would also identify 
tools that may be used to address foreseeable shortfalls of NSCC's 
liquidity resources following a Member default, and would provide that 
these tools may be used throughout the Crisis Continuum to address 
liquidity shortfalls if they arise. The goal in managing NSCC's 
qualified liquidity resources is to maximize resource availability in 
an evolving stress situation, to maintain flexibility in the order and 
use of sources of liquidity, and to repay any third party lenders of 
liquidity in a timely manner. These liquidity tools include, for 
example, NSCC's committed 364-day credit facility,\33\ and the issuance 
and private placement of additional short-term promissory notes 
(``commercial paper'') and extendible notes, the cash proceeds of which 
provide NSCC with prefunded liquidity.\34\ Additional voluntary or 
uncommitted tools to address potential liquidity shortfalls, for 
example uncommitted bank loans, which may supplement NSCC's other 
liquid resources described herein, would also be identified in the 
Recovery Plan. The Recovery Plan would state that, due to the extreme 
nature of a stress event that would cause NSCC to consider the use of 
these liquidity tools, the availability and capacity of these liquidity 
tools, and the willingness of counterparties to lend, cannot be 
accurately predicted and are dependent on the circumstances of the 
applicable stress period, including market price volatility, actual or 
perceived disruptions in financial markets, the costs to NSCC of 
utilizing these tools, and any potential impact on NSCC's credit 
rating.
---------------------------------------------------------------------------

    \32\ As these matters are described in greater detail in the 
Loss Allocation Filing and in the proposed amendments to Rule 
4,described therein, reference is made to that filing and the 
details are not repeated here. See supra note 8.
    \33\ See Securities Exchange Act Release No. 80605 (May 5, 
2017), 82 FR 21850 (May 10, 2017) (SR-DTC-2017-802, SR-NSCC-2017-
802).
    \34\ See Securities Exchange Act Release No. 75730 (August 19, 
2015), 80 FR 51638 (August 25, 2015) (SR-NSCC-2015-802).
---------------------------------------------------------------------------

    As stated above, the Recovery Plan would state that NSCC will have 
entered the recovery phase on the date that it issues the first Loss 
Allocation Notice of the second loss allocation round with respect to a 
given Event Period. The Recovery Plan would provide that, during the 
recovery phase, NSCC would continue and, as needed, enhance, the 
monitoring and remedial actions already described in connection with 
previous phases of the Crisis Continuum, and would remain in the 
recovery phase until its financial resources are expected to be or are 
fully replenished, or until the Wind-down Plan is triggered, as 
described below.
    The Recovery Plan would describe governance for the actions and 
tools that may be employed within the Crisis Continuum, which would be 
dictated by the facts and circumstances applicable to the situation 
being addressed. Such facts and circumstances would be measured by the 
Corridor Indicators applicable to that phase of the Crisis Continuum, 
and, in most cases, by the measures and metrics that are assigned to 
those Corridor Indicators, as described above. Each of these indicators 
would have a defined review period and escalation protocol that would 
be described in the Recovery Plan. The Recovery Plan would also 
describe the governance procedures around a decision to cease to act 
for a Member, pursuant to the Rules, and around the management and 
oversight of the subsequent liquidation of the defaulting Member's 
portfolio. The Recovery Plan would state that, overall, NSCC would 
retain flexibility in accordance with the Rules, its governance 
structure, and its regulatory oversight, to address a particular 
situation in order to best protect NSCC and the Members, and to meet 
the primary objectives, throughout the Crisis Continuum, of minimizing 
losses and, where consistent and practicable, minimizing disturbance to 
affected markets.
    Non-Default Losses. The Recovery Plan would outline how NSCC may 
address losses that result from events other than a Member default. 
While these matters are addressed in greater detail in other documents, 
this section of the Plan would provide a roadmap to those documents and 
an outline for NSCC's approach to monitoring and managing losses that 
could result from a non-default event. The Plan would first identify 
some of the risks NSCC faces that could lead to these losses, which 
include, for example, the business and profit/loss risks of unexpected 
declines in revenue or growth of expenses; the operational risks of 
disruptions to systems or processes that could lead to large losses, 
including those resulting from, for example, a cyber-attack; and 
custody or investment risks that could lead to financial losses. The 
Recovery Plan would describe NSCC's overall strategy for the management 
of these risks, which includes a ``three lines of defense'' approach to 
risk management that allows for comprehensive management of risk across 
the organization.\35\ The Recovery Plan would also describe NSCC's 
approach to financial risk and capital management. The Plan would 
identify key aspects of this approach, including, for example, an 
annual budget process, business line performance reviews with 
management, and regular review of capital requirements against LNA. 
These risk management strategies are collectively intended to allow 
NSCC to effectively identify, monitor, and manage risks of non-default 
losses.
---------------------------------------------------------------------------

    \35\ The Clearing Agency Risk Management Framework includes a 
description of this ``three lines of defense'' approach to risk 
management, and addresses how NSCC comprehensively manages various 
risks, including operational, general business, investment, custody, 
and other risks that arise in or are borne by it. See Securities 
Exchange Act Release No. 81635 (September 15, 2017), 82 FR 44224 
(September 21, 2017) (SR-DTC-2017-013, SR-FICC-2017-016, SR-NSCC-
2017-012). The Clearing Agency Operational Risk Management Framework 
describes the manner in which NSCC manages operational risks, as 
defined therein. See Securities Exchange Act Release No. 81745 
(September 28, 2017), 82 FR 46332 (October 4, 2017) (SR-DTC-2017-
014, SR-FICC-2017-017, SR-NSCC-2017-013).
---------------------------------------------------------------------------

    The Plan would identify the two categories of financial resources 
NSCC maintains to cover losses and expenses arising from non-default 
risks or events as (1) LNA, maintained, monitored, and managed pursuant 
to the Capital Policy, which include (a) amounts held in satisfaction 
of the General Business Risk Capital Requirement,\36\ (b) the Corporate 
Contribution,\37\ and (c) other amounts held in excess of NSCC's 
capital requirements pursuant to the Capital Policy; and (2) resources 
available pursuant to the loss allocation provisions of Rule 4.\38\
---------------------------------------------------------------------------

    \36\ See supra note 29.
    \37\ See supra note 29.
    \38\ See supra note 8.
---------------------------------------------------------------------------

    The Plan would address the process by which the CFO and the DTCC 
Treasury group would determine which available LNA resources are most 
appropriate to cover a loss that is caused by a non-default event. This 
determination involves an evaluation of a number of factors, including 
the current and expected size of the loss, the expected time horizon 
over when the loss or additional expenses would materialize, the 
current and projected available LNA, and the likelihood LNA could be 
successfully replenished pursuant to the Replenishment Plan, if 
triggered.\39\ Finally the Plan would discuss how NSCC would apply its 
resources to address losses resulting

[[Page 4333]]

from a non-default event, including the order of resources it would 
apply if the loss or liability exceeds NSCC's excess LNA amounts, or is 
large relative thereto, and the Board has declared the event a 
``Declared Non-Default Loss Event'' pursuant to Rule 4.\40\
---------------------------------------------------------------------------

    \39\ See supra note 6.
    \40\ See supra note 8.
---------------------------------------------------------------------------

    The Plan would also describe proposed Rule 60 (Market Disruption 
and Force Majeure), which NSCC is proposing to adopt in the Rules. This 
Proposed Rule would provide transparency around how NSCC would address 
extraordinary events that may occur outside its control. Specifically, 
the Proposed Rule would define a ``Market Disruption Event'' and the 
governance around a determination that such an event has occurred. The 
Proposed Rule would also describe NSCC's authority to take actions 
during the pendency of a Market Disruption Event that it deems 
appropriate to address such an event and facilitate the continuation of 
its services, if practicable, as described in greater detail below.
    The Plan would describe the interaction between the Proposed Rule 
and NSCC's existing processes and procedures addressing business 
continuity management and disaster recovery (generally, the ``BCM/DR 
procedures''), making clear that the Proposed Rule is designed to 
support those BCM/DR procedures and to address circumstances that may 
be exogenous to NSCC and not necessarily addressed by the BCM/DR 
procedures. Finally, the Plan would describe that, because the 
operation of the Proposed Rule is specific to each applicable Market 
Disruption Event, the Proposed Rule does not define a time limit on its 
application. However, the Plan would note that actions authorized by 
the Proposed Rule would be limited to the pendency of the applicable 
Market Disruption Event, as made clear in the Proposed Rule. Overall, 
the Proposed Rule is designed to mitigate risks caused by Market 
Disruption Events and, thereby, minimize the risk of financial loss 
that may result from such events.
    Recovery Tool Characteristics. The Recovery Plan would describe 
NSCC's evaluation of the tools identified within the Recovery Plan, and 
its rationale for concluding that such tools are comprehensive, 
effective, and transparent, and that such tools provide appropriate 
incentives to Members and minimize negative impact on Members and the 
financial system, in compliance with guidance published by the 
Commission in connection with the adoption of Rule 17Ad-22(e)(3)(ii) 
under the Act.\41\ NSCC's analysis and the conclusions set forth in 
this section of the Recovery Plan are described in greater detail in 
Item 3(b) of this filing, below.
---------------------------------------------------------------------------

    \41\ Standards for Covered Clearing Agencies, Securities 
Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786 
(October 13, 2016) (S7-03-14).
---------------------------------------------------------------------------

NSCC Wind-Down Plan
    The Wind-down Plan would provide the framework and strategy for the 
orderly wind-down of NSCC if the use of the recovery tools described in 
the Recovery Plan do not successfully return NSCC to financial 
viability. While NSCC believes that, given the comprehensive nature of 
the recovery tools, such event is extremely unlikely, as described in 
greater detail below, NSCC is proposing a wind-down strategy that 
provides for (1) the transfer of NSCC's business, assets and membership 
to another legal entity, (2) such transfer being effected in connection 
with proceedings under Chapter 11 of the U.S. Federal Bankruptcy 
Code,\42\ and (3) after effectuating this transfer, NSCC liquidating 
any remaining assets in an orderly manner in bankruptcy proceedings. 
NSCC believes that the proposed transfer approach to a wind-down would 
meet its objectives of (1) assuring that NSCC's critical services will 
be available to the market as long as there are Members in good 
standing, and (2) minimizing disruption to the operations of Members 
and financial markets generally that might be caused by NSCC's failure.
---------------------------------------------------------------------------

    \42\ 11 U.S.C. 1101 et seq.
---------------------------------------------------------------------------

    In describing the transfer approach to NSCC's Wind-down Plan, the 
Plan would identify the factors that NSCC considered in developing this 
approach, including the fact that NSCC does not own material assets 
that are unrelated to its clearance and settlement activities. As such, 
a business reorganization or ``bail-in'' of debt approach would be 
unlikely to mitigate significant losses. Additionally, NSCC's approach 
was developed in consideration of its critical and unique position in 
the U.S. markets, which precludes any approach that would cause NSCC's 
critical services to no longer be available.
    First, the Wind-down Plan would describe the potential scenarios 
that could lead to the wind-down of NSCC, and the likelihood of such 
scenarios. The Wind-down Plan would identify the time period leading up 
to a decision to wind-down NSCC as the ``Runway Period.'' This period 
would follow the implementation of any recovery tools, as it may take a 
period of time, depending on the severity of the market stress at that 
time, for these tools to be effective or for NSCC to realize a loss 
sufficient to cause it to be unable to effectuate settlements and repay 
its obligations.\43\ The Wind-down Plan would identify some of the 
indicators that it has entered this Runway Period, which would include, 
for example, successive Member defaults, significant Member retirements 
thereafter, and NSCC's inability to replenish its financial resources 
following the liquidation of the portfolio of the defaulting Member(s).
---------------------------------------------------------------------------

    \43\ The Wind-down Plan would state that, given NSCC's position 
as a user-governed financial market utility, it is possible that 
Members might voluntarily elect to provide additional support during 
the recovery phase leading up to a potential trigger of the Wind-
down Plan, but would also make clear that NSCC cannot predict the 
willingness of Members to do so.
---------------------------------------------------------------------------

    The trigger for implementing the Wind-down Plan would be a 
determination by the Board that recovery efforts have not been, or are 
unlikely to be, successful in returning NSCC to viability as a going 
concern. As described in the Plan, NSCC believes this is an appropriate 
trigger because it is both broad and flexible enough to cover a variety 
of scenarios, and would align incentives of NSCC and the Members to 
avoid actions that might undermine NSCC's recovery efforts. 
Additionally, this approach takes into account the characteristics of 
NSCC's recovery tools and enables the Board to consider (1) the 
presence of indicators of a successful or unsuccessful recovery, and 
(2) potential for knock-on effects of continued iterative application 
of NSCC's recovery tools.
    The Wind-down Plan would describe the general objectives of the 
transfer strategy, and would address assumptions regarding the transfer 
of NSCC's critical services, business, assets and membership, and the 
assignment of NSCC's links with other FMIs, to another legal entity 
that is legally, financially, and operationally able to provide NSCC's 
critical services to entities that wish to continue their membership 
following the transfer (``Transferee''). The Wind-down Plan would 
provide that the Transferee would be either (1) a third party legal 
entity, which may be an existing or newly established legal entity or a 
bridge entity formed to operate the business on an interim basis to 
enable the business to be transferred subsequently (``Third Party 
Transferee''); or (2) an existing, debt-free failover legal entity 
established ex-ante by DTCC (``Failover Transferee'') to be used as an 
alternative Transferee in the

[[Page 4334]]

event that no viable or preferable Third Party Transferee timely 
commits to acquire NSCC's business. NSCC would seek to identify the 
proposed Transferee, and negotiate and enter into transfer arrangements 
during the Runway Period and prior to making any filings under Chapter 
11 of the U.S. Federal Bankruptcy Code.\44\ As stated above, the Wind-
down Plan would anticipate that the transfer to the Transferee be 
effected in connection with proceedings under Chapter 11 of the U.S. 
Federal Bankruptcy Code, and pursuant to a bankruptcy court order under 
Section 363 of the Bankruptcy Code, such that the transfer would be 
free and clear of claims against, and interests in, NSCC, except to the 
extent expressly provided in the court's order.\45\
---------------------------------------------------------------------------

    \44\ See 11 U.S.C. 1101 et seq.
    \45\ See id. at 363.
---------------------------------------------------------------------------

    In order to effect a timely transfer of its services and minimize 
the market and operational disruption of such transfer, NSCC would 
expect to transfer all of its critical services and any non-critical 
services that are ancillary and beneficial to a critical service, or 
that otherwise have substantial user demand from the continuing 
membership. Following the transfer, the Wind-down Plan would anticipate 
that the Transferee and its continuing membership would determine 
whether to continue to provide any transferred non-critical service on 
an ongoing basis, or terminate the non-critical service following some 
transition period. NSCC's Wind-down Plan would anticipate that the 
Transferee would enter into a transition services agreement with DTCC 
so that DTCC would continue to provide the shared services it currently 
provides to NSCC, including staffing, infrastructure and operational 
support. The Wind-down Plan would also anticipate the assignment of 
NSCC's link arrangements, including those with DTC, CDS and OCC, 
described above, to the Transferee.\46\ The Wind-down Plan would 
provide that Members' open positions existing prior to the effective 
time of the transfer would be addressed by the provisions of the 
proposed Wind-down Rule and Corporation Default Rule, as defined and 
described below, and that the Transferee would not acquire any pending 
or open transactions with the transfer of the business. The Wind-down 
Plan would anticipate that the Transferee would accept transactions for 
processing with a trade date from and after the effective time of the 
transfer.
---------------------------------------------------------------------------

    \46\ The proposed transfer arrangements outlined in the Wind-
down Plan do not contemplate the transfer of any credit or funding 
agreements, which are generally not assignable by NSCC. However, to 
the extent the Transferee adopts rules substantially identical to 
those NSCC has in effect prior to the transfer, it would have the 
benefit of any rules-based liquidity funding. The Wind-down Plan 
contemplates that no Clearing Fund would be transferred to the 
Transferee, as it is not held in a bankruptcy remote manner and it 
is the primary prefunded liquidity resource to be accessed in the 
recovery phase.
---------------------------------------------------------------------------

    The Wind-down Plan would provide that, following the effectiveness 
of the transfer to the Transferee, the wind-down of NSCC would involve 
addressing any residual claims against NSCC through the bankruptcy 
process and liquidating the legal entity. As such, and as stated above, 
the Wind-down Plan does not contemplate NSCC continuing to provide 
services in any capacity following the transfer time, and any services 
not transferred would be terminated.
    The Wind-down Plan would also identify the key dependencies for the 
effectiveness of the transfer, which include regulatory approvals that 
would permit the Transferee to be legally qualified to provide the 
transferred services from and after the transfer, and approval by the 
applicable bankruptcy court of, among other things, the proposed sale, 
assignments, and transfers to the Transferee.
    The Wind-down Plan would address governance matters related to the 
execution of the transfer of NSCC's business and its wind-down. The 
Wind-down Plan would address the duties of the Board to execute the 
wind-down of NSCC in conformity with (1) the Rules, (2) the Board's 
fiduciary duties, which mandate that it exercise reasonable business 
judgment in performing these duties, and (3) NSCC's regulatory 
obligations under the Act as a registered clearing agency. The Wind-
down Plan would also identify certain factors the Board may consider in 
making these decisions, which would include, for example, whether NSCC 
could safely stabilize the business and protect its value without 
seeking bankruptcy protection, and NSCC's ability to continue to meet 
its regulatory requirements.
    The Wind-down Plan would describe (1) actions NSCC or DTCC may take 
to prepare for wind-down in the period before NSCC experiences any 
financial distress, (2) actions NSCC would take both during the 
recovery phase and the Runway Period to prepare for the execution of 
the Wind-down Plan, and (3) actions NSCC would take upon commencement 
of bankruptcy proceedings to effectuate the Wind-down Plan.
    Finally, the Wind-down Plan would include an analysis of the 
estimated time and costs to effectuate the plan, and would provide that 
this estimate be reviewed and approved by the Board annually. In order 
to estimate the length of time it might take to achieve a recovery or 
orderly wind-down of NSCC's critical operations, as contemplated by the 
R&W Plan, the Wind-down Plan would include an analysis of the possible 
sequencing and length of time it might take to complete an orderly 
wind-down and transfer of critical operations, as described in earlier 
sections of the R&W Plan. The Wind-down Plan would also include in this 
analysis consideration of other factors, including the time it might 
take to complete any further attempts at recovery under the Recovery 
Plan. The Wind-down Plan would then multiply this estimated length of 
time by NSCC's average monthly operating expenses, including 
adjustments to account for changes to NSCC's profit and expense profile 
during these circumstances, over the previous twelve months to 
determine the amount of LNA that it should hold to achieve a recovery 
or orderly wind-down of NSCC's critical operations. The estimated wind-
down costs would constitute the ``Recovery/Wind-down Capital 
Requirement'' under the Capital Policy.\47\ Under that policy, the 
General Business Risk Capital Requirement is calculated as the greatest 
of three estimated amounts, one of which is this Recovery/Wind-down 
Capital Requirement.\48\
---------------------------------------------------------------------------

    \47\ See supra note 6.
    \48\ See supra note 6.
---------------------------------------------------------------------------

    The R&W Plan is designed as a roadmap, and the types of actions 
that may be taken both leading up to and in connection with 
implementation of the Wind-down Plan would be primarily addressed in 
other supporting documentation referred to therein.
    The Wind-down Plan would address proposed Rule 41 (Corporation 
Default) and proposed Rule 42 (Wind-down of the Corporation), which 
would be adopted to facilitate the implementation of the Wind-down 
Plan, and are discussed below.
Proposed Rules
    In connection with the adoption of the R&W Plan, NSCC is proposing 
to adopt the Proposed Rules, each described below. The Proposed Rules 
would facilitate the execution of the R&W Plan and would provide 
Members and Limited Members with transparency as to critical aspects of 
the Plan, particularly as they relate to the rights and 
responsibilities of both NSCC

[[Page 4335]]

and Members. The Proposed Rules also provide a legal basis to these 
aspects of the Plan.
Rule 41 (Corporation Default)
    The proposed Rule 41 (``Corporation Default Rule'') would provide a 
mechanism for the termination, valuation and netting of unsettled, 
guaranteed CNS transactions in the event NSCC is unable to perform its 
obligations or otherwise suffers a defined event of default, such as 
entering insolvency proceedings. The proposed Corporation Default Rule 
would provide Members with transparency and certainty regarding what 
would happen if NSCC were to fail (defined in the proposed Rule as a 
``Corporation Default'').
    The proposed rule would define the events that would constitute a 
Corporation Default, which would generally include (1) the failure of 
NSCC to make any undisputed payment or delivery to a Member if such 
failure is not remedied within seven days after notice of such failure 
is given to NSCC; (2) NSCC is dissolved; (3) NSCC institutes a 
proceeding seeking a judgment of insolvency or bankruptcy, or a 
proceeding is instituted against it seeking a judgment of bankruptcy or 
insolvency and such judgment is entered; or (4) NSCC seeks or becomes 
subject to the appointment of a receiver, trustee or similar official 
pursuant to the federal securities laws or Title II of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act \49\ for it or for all 
or substantially all of its assets.
---------------------------------------------------------------------------

    \49\ 12 U.S.C. 5381-5394.
---------------------------------------------------------------------------

    Upon a Corporation Default, the proposed Corporation Default Rule 
would provide that all unsettled, guaranteed CNS transactions would be 
terminated and, no later than forty-five days from the date on which 
the event that constitutes a Corporation Default occurred (or ``Default 
Date''), the Board would determine a single net amount owed by or to 
each Member with respect to such transactions pursuant to the valuation 
procedures set forth in the Proposed Rule. Essentially, for each 
affected position in a CNS Security, the ``CNS Market Value'' would be 
determined by using the Current Market Price for that security as 
determined in the CNS System as of the close of business on the next 
Business Day following the Default Date. NSCC would determine a ``Net 
Contract Value'' for each Member's net unsettled long or short position 
in a CNS Security by netting the Member's (i) contract price for such 
net position that, as of the Default Date, has not yet passed the 
Settlement Date, and (ii) the Current Market Price in the CNS System on 
the Default Date for its fail positions. To determine each Member's 
``CNS Close-out Value,'' (i) the Net Contract Value for each CUSIP 
would be subtracted from the CNS Market Value for such CUSIP, and (ii) 
the resulting difference for all CUSIPS in which the Member had a net 
long or short position would be summed, and would be netted and offset 
against any other amounts that may be due to or owing from the Member 
under the Rules. The proposed Corporation Default Rule would provide 
for notification to each Member of its CNS Close-out Value, and would 
also address interpretation of the Rules in relation to certain terms 
that are defined in the Federal Deposit Insurance Corporation 
Improvement Act of 1991 (``FDICIA'').\50\
---------------------------------------------------------------------------

    \50\ 12 U.S.C. 1811 et seq.
---------------------------------------------------------------------------

    NSCC believes this valuation approach, which is comparable to the 
approach adopted by other central counterparties, is appropriate for 
NSCC given the market in which NSCC operates and the volumes of 
transactions it processes in CNS, because it would provide for a 
common, clear and transparent valuation methodology and price per CUSIP 
applicable to all affected Members.
Rule 42 (Wind-Down of the Corporation)
    The proposed Rule 42 (``Wind-down Rule'') would be adopted to 
facilitate the execution of the Wind-down Plan. The Wind-down Rule 
would include a proposed set of defined terms that would be applicable 
only to the provisions of this Proposed Rule. The Wind-down Rule would 
make clear that a wind-down of NSCC's business would occur (1) after a 
decision is made by the Board, and (2) in connection with the transfer 
of NSCC's services to a Transferee, as described therein. Generally, 
the proposed Wind-down Rule is designed to create clear mechanisms for 
the transfer of Eligible Members, Eligible Limited Members, and 
Settling Banks (as these terms would be defined in the Wind-down Rule), 
and NSCC's business, in order to provide for continued access to 
critical services and to minimize disruption to the markets in the 
event the Wind-down Plan is initiated.
    Wind-down Trigger. First, the Proposed Rule would make clear that 
the Board is responsible for initiating the Wind-down Plan, and would 
identify the criteria the Board would consider when making this 
determination. As provided for in the Wind-down Plan and in the 
proposed Wind-down Rule, the Board would initiate the Plan if, in the 
exercise of its business judgment and subject to its fiduciary duties, 
it has determined that the execution of the Recovery Plan has not or is 
not likely to restore NSCC to viability as a going concern, and the 
implementation of the Wind-down Plan, including the transfer of NSCC's 
business, is in the best interests of NSCC, Members and Limited 
Members, its shareholders and creditors, and the U.S. financial 
markets.
    Identification of Critical Services; Designation of Dates and Times 
for Specific Actions. The Proposed Rule would provide that, upon making 
a determination to initiate the Wind-down Plan, the Board would 
identify the critical and non-critical services that would be 
transferred to the Transferee at the Transfer Time (as defined below 
and in the Proposed Rule), as well as any non-critical services that 
would not be transferred to the Transferee. The proposed Wind-down Rule 
would establish that any services transferred to the Transferee will 
only be provided by the Transferee as of the Transfer Time, and that 
any non-critical services that are not transferred to the Transferee 
would be terminated at the Transfer Time. The Proposed Rule would also 
provide that the Board would establish (1) an effective time for the 
transfer of NSCC's business to a Transferee (``Transfer Time''), (2) 
the last day that transactions may be submitted to NSCC for processing 
(``Last Transaction Acceptance Date''), and (3) the last day that 
transactions submitted to NSCC will be settled (``Last Settlement 
Date'').
    Treatment of Pending Transactions. The Wind-down Rule would also 
authorize the Board to provide for the settlement of pending 
transactions prior to the Transfer Time, so long as the Corporation 
Default Rule has not been triggered. For example, the Proposed Rule 
would provide the Board with the ability to, if it deems practicable, 
based on NSCC's resources at that time, allow pending transactions to 
complete prior to the transfer of NSCC's business to a Transferee. The 
Board would also have the ability to allow Members to only submit 
trades that would effectively offset pending positions or provide that 
transactions will be processed in accordance with special or exception 
processing procedures. The Proposed Rule is designed to enable these 
actions in order to facilitate settlement of pending transactions and 
reduce claims against NSCC that would have to be satisfied after the 
transfer has been effected. If none of these actions are deemed 
practicable (or if the

[[Page 4336]]

Corporation Default Rule has been triggered), then the provisions of 
the proposed Corporation Default Rule would apply to the treatment of 
open, pending transactions.
    The Proposed Rule would make clear, however, that NSCC would not 
accept any transactions for processing after the Last Transaction 
Acceptance Date or which are designated to settle after the Last 
Settlement Date. Any transactions to be processed and/or settled after 
the Transfer Time would be required to be submitted to the Transferee, 
and would not be NSCC's responsibility.
    Notice Provisions. The proposed Wind-down Rule would provide that, 
upon a decision to implement the Wind-down Plan, NSCC would provide 
Members and Limited Members and its regulators with a notice that 
includes material information relating to the Wind-down Plan and the 
anticipated transfer of NSCC's membership and business, including, for 
example, (1) a brief statement of the reasons for the decision to 
implement the Wind-down Plan; (2) identification of the Transferee and 
information regarding the transaction by which the transfer of NSCC's 
business would be effected; (3) the Transfer Time, Last Transaction 
Acceptance Date, and Last Settlement Date; and (4) identification of 
Eligible Members and Eligible Limited Members, and the critical and 
non-critical services that would be transferred to the Transferee at 
the Transfer Time, as well as those Non-Eligible Members and Non-
Eligible Limited Members (as defined in the Proposed Rule), and any 
non-critical services that would not be included in the transfer. NSCC 
would also make available the rules and procedures and membership 
agreements of the Transferee.
    Transfer of Membership. The proposed Wind-down Rule would address 
the expected transfer of NSCC's membership to the Transferee, which 
NSCC would seek to effectuate by entering into an arrangement with a 
Failover Transferee, or by using commercially reasonable efforts to 
enter into such an arrangement with a Third Party Transferee. 
Therefore, the Wind-down Rule would provide Members, Limited Members 
and Settling Banks with notice that, in connection with the 
implementation of the Wind-down Plan and with no further action 
required by any party, (1) their membership with NSCC would transfer to 
the Transferee, (2) they would become party to a membership agreement 
with such Transferee, and (3) they would have all of the rights and be 
subject to all of the obligations applicable to their membership status 
under the rules of the Transferee. These provisions would not apply to 
any Member or Limited Member that is either in default of an obligation 
to NSCC or has provided notice of its election to withdraw from 
membership. Further, the proposed Wind-down Rule would make clear that 
it would not prohibit (1) Members and Limited Members that are not 
transferred by operation of the Wind-down Rule from applying for 
membership with the Transferee, or (2) Members, Limited Members, and 
Settling Banks that would be transferred to the Transferee from 
withdrawing from membership with the Transferee.\51\
---------------------------------------------------------------------------

    \51\ The Members and Limited Members whose membership is 
transferred to the Transferee pursuant to the proposed Wind-down 
Rule would submit transactions to be processed and settled subject 
to the rules and procedures of the Transferee, including any 
applicable margin charges or other financial obligations.
---------------------------------------------------------------------------

    Comparability Period. The proposed automatic mechanism for the 
transfer of NSCC's membership is intended to provide NSCC's membership 
with continuous access to critical services in the event of NSCC's 
wind-down, and to facilitate the continued prompt and accurate 
clearance and settlement of securities transactions. Further to this 
goal, the proposed Wind-down Rule would provide that NSCC would enter 
into arrangements with a Failover Transferee, or would use commercially 
reasonable efforts to enter into arrangements with a Third Party 
Transferee, providing that, in either case, with respect to the 
critical services and any non-critical services that are transferred 
from NSCC to the Transferee, for at least a period of time to be agreed 
upon (``Comparability Period''), the business transferred from NSCC to 
the Transferee would be operated in a manner that is comparable to the 
manner in which the business was previously operated by NSCC. 
Specifically, the proposed Wind-down Rule would provide that: (1) The 
rules of the Transferee and terms of membership agreements would be 
comparable in substance and effect to the analogous Rules and 
membership agreements of NSCC; (2) the rights and obligations of any 
Members, Limited Members and Settling Banks that are transferred to the 
Transferee would be comparable in substance and effect to their rights 
and obligations as to NSCC; and (3) the Transferee would operate the 
transferred business and provide any services that are transferred in a 
comparable manner to which such services were provided by NSCC. The 
purpose of these provisions and the intended effect of the proposed 
Wind-down Rule is to facilitate a smooth transition of NSCC's business 
to a Transferee and to provide that, for at least the Comparability 
Period, the Transferee (1) would operate the transferred business in a 
manner that is comparable in substance and effect to the manner in 
which the business was operated by NSCC, and (2) would not require 
sudden and disruptive changes in the systems, operations and business 
practices of the new members of the Transferee.
    Subordination of Claims Provisions and Miscellaneous Matters. The 
proposed Wind-down Rule would also include a provision addressing the 
subordination of unsecured claims against NSCC of Members and Limited 
Members who fail to participate in NSCC's recovery efforts (i.e., such 
firms are delinquent in their obligations to NSCC or elect to retire 
from NSCC in order to minimize their obligations with respect to the 
allocation of losses, pursuant to the Rules). This provision is 
designed to incentivize Members to participate in NSCC's recovery 
efforts.\52\
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    \52\ Nothing in the proposed Wind-down Rule would seek to 
prevent a Member, Limited Member or Settling Bank that retired its 
membership at NSCC from applying for membership with the Transferee. 
Once its NSCC membership is terminated, however, such firm would not 
be able to benefit from the membership assignment that would be 
effected by this proposed Wind-down Rule, and it would have to apply 
for membership directly with the Transferee, subject to its 
membership application and review process.
---------------------------------------------------------------------------

    The proposed Wind-down Rule would address other ex-ante matters 
including provisions providing that Members, Limited Members and 
Settling Banks (1) will assist and cooperate with NSCC to effectuate 
the transfer of NSCC's business to a Transferee, (2) consent to the 
provisions of the rule, and (3) grant NSCC power of attorney to execute 
and deliver on their behalf documents and instruments that may be 
requested by the Transferee. Finally, the Proposed Rule would include a 
limitation of liability for any actions taken or omitted to be taken by 
NSCC pursuant to the Proposed Rule.
Rule 60 (Market Disruption and Force Majeure)
    The proposed Rule 60 (``Force Majeure Rule'') would address NSCC's 
authority to take certain actions upon the occurrence, and during the 
pendency, of a ``Market Disruption Event,'' as defined therein. The 
Proposed Rule is designed to clarify NSCC's ability to take actions to 
address extraordinary events outside of the control of NSCC and of its 
membership, and to mitigate the effect of such events by facilitating 
the continuity of services (or, if deemed necessary, the temporary

[[Page 4337]]

suspension of services). To that end, under the proposed Force Majeure 
Rule, NSCC would be entitled, during the pendency of a Market 
Disruption Event, to (1) suspend the provision of any or all services, 
and (2) take, or refrain from taking, or require Members and Limited 
Members to take, or refrain from taking, any actions it considers 
appropriate to address, alleviate, or mitigate the event and facilitate 
the continuation of NSCC's services as may be practicable.
    The proposed Force Majeure Rule would identify the events or 
circumstances that would be considered a ``Market Disruption Event,'' 
including, for example, events that lead to the suspension or 
limitation of trading or banking in the markets in which NSCC operates, 
or the unavailability or failure of any material payment, bank 
transfer, wire or securities settlement systems. The proposed Force 
Majeure Rule would define the governance procedures for how NSCC would 
determine whether, and how, to implement the provisions of the rule. A 
determination that a Market Disruption Event has occurred would 
generally be made by the Board, but the Proposed Rule would provide for 
limited, interim delegation of authority to a specified officer or 
management committee if the Board would not be able to take timely 
action. In the event such delegated authority is exercised, the 
proposed Force Majeure Rule would require that the Board be convened as 
promptly as practicable, no later than five Business Days after such 
determination has been made, to ratify, modify, or rescind the action. 
The proposed Force Majeure Rule would also provide for prompt 
notification to the Commission, and advance consultation with 
Commission staff, when practicable. The Proposed Rule would require 
Members and Limited Members to notify NSCC immediately upon becoming 
aware of a Market Disruption Event, and, likewise, would require NSCC 
to notify Members and Limited Members if it has triggered the Proposed 
Rule.
    Finally, the Proposed Rule would address other related matters, 
including a limitation of liability for any failure or delay in 
performance, in whole or in part, arising out of the Market Disruption 
Event.
Proposed Change to the Rule Numbers
    In order to align the order of the Proposed Rules with the order of 
comparable rules in the rulebooks of the other Clearing Agencies, NSCC 
is also proposing to re-number the current Rule 42 (Wind-down of a 
Member, Fund Member or Insurance Carrier/Retirement Services Member) to 
Rule 40, which is currently reserved for future use, as shown on 
Exhibit 5b, hereto.
Expected Effect on and Management of Risk
    NSCC believes the proposal to adopt the R&W Plan and the Proposed 
Rules would enable it to better manage its risks. As described above, 
the Recovery Plan would identify the recovery tools and the risk 
management activities that NSCC may use to address risks of uncovered 
losses or shortfalls resulting from a Member default and losses arising 
from non-default events. By creating a framework for its management of 
risks across an evolving stress scenario and providing a roadmap for 
actions it may employ to monitor and, as needed, stabilize its 
financial condition, the Recovery Plan would strengthen NSCC's ability 
to manage risk. The Wind-down Plan would also enable NSCC to better 
manage its risks by establishing the strategy and framework for its 
orderly wind-down and the transfer of NSCC's business when the Wind-
down Plan is triggered. By creating clear mechanisms for the transfer 
of NSCC's membership and business, the Wind-down Plan would facilitate 
continued access to NSCC's critical services and minimize market impact 
of the transfer and enable NSCC to better manage risks related to its 
wind-down.
    NSCC believes the Proposed Rules would enable it to better manage 
its risks by facilitating, and providing a legal basis for, the 
implementation of critical aspects of the R&W Plan. The Proposed Rules 
would provide Members and Limited Members with transparency around 
those provisions of the R&W Plan that relate to their and NSCC's 
rights, responsibilities and obligations. Therefore, NSCC believes the 
Proposed Rules would enable it to better manage its risks by providing 
this transparency and creating certainty, to the extent practicable, 
around the occurrence of a Market Disruption Event or a Corporation 
Default (as such terms are defined in the respective Proposed Rules), 
and around the implementation of the Wind-down Plan.
Consistency With the Clearing Supervision Act
    The stated purpose of the Clearing Supervision Act is to mitigate 
systemic risk in the financial system and promote financial stability 
by, among other things, promoting uniform risk management standards for 
systemically important financial market utilities and strengthening the 
liquidity of systemically important financial market utilities.\53\ 
Section 805(a)(2) of the Clearing Supervision Act \54\ also authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing, and settlement activities of designated clearing entities, 
like NSCC, for which the Commission is the supervisory agency. Section 
805(b) of the Clearing Supervision Act \55\ states that the objectives 
and principles for risk management standards prescribed under Section 
805(a) shall be to promote robust risk management, promote safety and 
soundness, reduce systemic risks, and support the stability of the 
broader financial system.
---------------------------------------------------------------------------

    \53\ 12 U.S.C. 5461(b).
    \54\ Id. at 5464(a)(2).
    \55\ Id. at 5464(b).
---------------------------------------------------------------------------

    NSCC believes that the proposal is consistent with Section 805(b) 
of the Clearing Supervision Act because it is designed to address each 
of these objectives. The Recovery Plan and the proposed Force Majeure 
Rule would promote robust risk management and would reduce systemic 
risks by providing NSCC with a roadmap for actions it may employ to 
monitor and manage its risks, and, as needed, to stabilize its 
financial condition in the event those risks materialize. Further, the 
Recovery Plan would identify the triggers of recovery tools, but would 
not provide that those triggers necessitate the use of those tools. 
Instead, the Recovery Plan would provide that the triggers of these 
tools lead to escalation to an appropriate management body, which would 
have the authority and flexibility to respond appropriately to the 
situation. Essentially, the Recovery Plan and the proposed Force 
Majeure Rule are designed to minimize losses to both NSCC and Members 
by giving NSCC the ability to determine the most appropriate way to 
address each stress situation. This approach would allow for proper 
evaluation of the situation and the possible impacts of the use of the 
available recovery tools in order to minimize the negative effects of 
the stress situation, and would reduce systemic risks related to the 
implementation of the Recovery Plan and the underlying recovery tools.
    The Wind-down Plan and the proposed Corporation Default Rule and 
Wind-down Rule, which would facilitate the implementation of the Wind-
down Plan, would promote safety and soundness and would support the 
stability of the broader financial system, because they would establish 
a framework for the orderly wind-down of NSCC's business and would set 
forth clear mechanics for the transfer of its critical services and 
membership, as

[[Page 4338]]

well as clear provisions concerning the treatment of open, guaranteed 
CNS transactions in the event of NSCC's default. By designing the Wind-
down Plan and these Proposed Rules to enable the continuity of NSCC's 
critical services and membership, NSCC believes they would promote 
safety and soundness and would support stability in the broader 
financial system in the event the Wind-down Plan is implemented.
    By assisting NSCC to promote robust risk management, promote safety 
and soundness, reduce systemic risks, and support the stability of the 
broader financial system, as described above, NSCC believes the 
proposal is consistent with Section 805(b) of the Clearing Supervision 
Act.\56\
---------------------------------------------------------------------------

    \56\ Id.
---------------------------------------------------------------------------

    NSCC also believes that the proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. In particular, NSCC 
believes that the R&W Plan, each of the Proposed Rules, and the 
proposed change to Rule numbers are consistent with Section 
17A(b)(3)(F) of the Act,\57\ the R&W Plan and each of the Proposed 
Rules are consistent with Rule 17Ad-22(e)(3)(ii) under the Act,\58\ and 
the R&W Plan is consistent with Rule 17Ad-22(e)(15)(ii) under the 
Act,\59\ for the reasons described below.
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78q-1(b)(3)(F).
    \58\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \59\ Id. at 240.17Ad-22(e)(15)(ii).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of NSCC be designed to promote the prompt and accurate clearance and 
settlement of securities transactions, and to assure the safeguarding 
of securities and funds which are in the custody or control of NSCC or 
for which it is responsible.\60\ The Recovery Plan and the proposed 
Force Majeure Rule would promote the prompt and accurate clearance and 
settlement of securities transactions by providing NSCC with a roadmap 
for actions it may employ to mitigate losses, and monitor and, as 
needed, stabilize, its financial condition, which would allow it to 
continue its critical clearance and settlement services in stress 
situations. Further, as described above, the Recovery Plan is designed 
to identify the actions and tools NSCC may use to address and minimize 
losses to both NSCC and Members. The Recovery Plan and the proposed 
Force Majeure Rule would provide NSCC's management and the Board with 
guidance in this regard by identifying the indicators and governance 
around the use and application of such tools to enable them to address 
stress situations in a manner most appropriate for the circumstances. 
Therefore, the Recovery Plan and the proposed Force Majeure Rule would 
also contribute to the safeguarding of securities and funds which are 
in the custody or control of NSCC or for which it is responsible by 
enabling actions that would address and minimize losses.
---------------------------------------------------------------------------

    \60\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Wind-down Plan and the proposed Corporation Default Rule and 
Wind-down Rule, which would both facilitate the implementation of the 
Wind-down Plan, would also promote the prompt and accurate clearance 
and settlement of securities transactions and assure the safeguarding 
of securities and funds which are in the custody or control of NSCC or 
for which it is responsible. The Wind-down Plan and the proposed 
Corporation Default Rule and Wind-down Rule would collectively 
establish a framework for the transfer and orderly wind-down of NSCC's 
business. These proposals would establish clear mechanisms for the 
transfer of NSCC's critical services and membership, and for the 
treatment of open, guaranteed CNS transactions in the event of NSCC's 
default. By doing so, the Wind-down Plan and these Proposed Rules are 
designed to facilitate the continuity of NSCC's critical services and 
enable Members and Limited Members to maintain access to NSCC's 
services through the transfer of its membership in the event NSCC 
defaults or the Wind-down Plan is triggered by the Board. Therefore, by 
facilitating the continuity of NSCC's critical clearance and settlement 
services, NSCC believes the proposals would promote the prompt and 
accurate clearance and settlement of securities transactions. Further, 
by creating a framework for the transfer and orderly wind-down of 
NSCC's business, NSCC believes the proposals would enhance the 
safeguarding of securities and funds which are in the custody or 
control of NSCC or for which it is responsible.
    Finally, the proposed change to the Rule numbers would align the 
order of the Proposed Rules with the order of comparable rules in the 
rulebooks of the other Clearing Agencies. Therefore, NSCC believes the 
proposed change would create ease of reference, particularly for 
Members that are also participants of the other Clearing Agencies, and, 
as such, would assist in promoting the prompt and accurate clearance 
and settlement of securities transactions.
    Therefore, NSCC believes the R&W Plan, each of the Proposed Rules, 
and the proposed change to Rule numbers are consistent with the 
requirements of Section 17A(b)(3)(F) of the Act.\61\
---------------------------------------------------------------------------

    \61\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(3)(ii) under the Act requires NSCC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to maintain a sound risk management framework for 
comprehensively managing legal, credit, liquidity, operational, general 
business, investment, custody, and other risks that arise in or are 
borne by the covered clearing agency, which includes plans for the 
recovery and orderly wind-down of the covered clearing agency 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses.\62\ The R&W Plan and the 
Proposed Rules are designed to meet the requirements of Rule 17Ad-
22(e)(3)(ii).\63\
---------------------------------------------------------------------------

    \62\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \63\ Id.
---------------------------------------------------------------------------

    The R&W Plan would be maintained by NSCC in compliance with Rule 
17Ad-22(e)(3)(ii) in that it provides plans for the recovery and 
orderly wind-down of NSCC necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses, as 
described above.\64\ Specifically, the Recovery Plan would define the 
risk management activities, stress conditions and indicators, and tools 
that NSCC may use to address stress scenarios that could eventually 
prevent it from being able to provide its critical services as a going 
concern. Through the framework of the Crisis Continuum, the Recovery 
Plan would address measures that NSCC may take to address risks of 
credit losses and liquidity shortfalls, and other losses that could 
arise from a Member default. The Recovery Plan would also address the 
management of general business risks and other non-default risks that 
could lead to losses.
---------------------------------------------------------------------------

    \64\ Id.
---------------------------------------------------------------------------

    The Wind-down Plan would be triggered by a determination by the 
Board that recovery efforts have not been, or are unlikely to be, 
successful in returning NSCC to viability as a going concern. Once 
triggered, the Wind-down Plan would set forth clear mechanisms for the 
transfer of NSCC's membership and business, and would be designed to 
facilitate continued access to NSCC's critical services and to minimize 
market impact of the transfer. By establishing the framework and 
strategy for the execution of the transfer and wind-down of NSCC in 
order to facilitate continuous access to NSCC's critical services, the 
Wind-down Plan establishes a plan for the orderly wind-

[[Page 4339]]

down of NSCC. Therefore, NSCC believes the R&W Plan would provide plans 
for the recovery and orderly wind-down of the covered clearing agency 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses, and, as such, meets the 
requirements of Rule 17Ad-22(e)(3)(ii).\65\
---------------------------------------------------------------------------

    \65\ Id.
---------------------------------------------------------------------------

    As described in greater detail above, the Proposed Rules are 
designed to facilitate the execution of the R&W Plan, provide Members 
and Limited Members with transparency regarding the material provisions 
of the Plan, and provide NSCC with a legal basis for implementation of 
those provisions. As such, NSCC also believes the Proposed Rules meet 
the requirements of Rule 17Ad-22(e)(3)(ii).\66\
---------------------------------------------------------------------------

    \66\ Id.
---------------------------------------------------------------------------

    NSCC has evaluated the recovery tools that would be identified in 
the Recovery Plan and has determined that these tools are 
comprehensive, effective, and transparent, and that such tools provide 
appropriate incentives to NSCC's Members to manage the risks they 
present. The recovery tools, as outlined in the Recovery Plan and in 
the proposed Force Majeure Rule, provide NSCC with a comprehensive set 
of options to address its material risks and support the resiliency of 
its critical services under a range of stress scenarios. NSCC also 
believes the recovery tools are effective, as NSCC has both legal basis 
and operational capability to execute these tools in a timely and 
reliable manner. Many of the recovery tools are provided for in the 
Rules; Members are bound by the Rules through their membership 
agreements with NSCC, and the Rules are adopted pursuant to a framework 
established by Rule 19b-4 under the Act,\67\ providing a legal basis 
for the recovery tools found therein. Other recovery tools have legal 
basis in contractual arrangements to which NSCC is a party, as 
described above. Further, as many of the tools are embedded in NSCC's 
ongoing risk management practices or are embedded into its predefined 
default-management procedures, NSCC is able to execute these tools, in 
most cases, when needed and without material operational or 
organizational delay.
---------------------------------------------------------------------------

    \67\ Id. at 240.19b-4.
---------------------------------------------------------------------------

    The majority of the recovery tools are also transparent, as they 
are, or are proposed to be, included in the Rules, which are publicly 
available. NSCC believes the recovery tools also provide appropriate 
incentives to the Members, as they are designed to control the amount 
of risk they present to NSCC's clearance and settlement system. 
Members' financial obligations to NSCC, particularly their Required 
Deposits to the Clearing Fund, are measured by the risk posed by the 
Members' activity in NSCC's systems, which incentivizes them to manage 
that risk which would correspond to lower financial obligations. 
Finally, NSCC's Recovery Plan provides for a continuous evaluation of 
the systemic consequences of executing its recovery tools, with the 
goal of minimizing their negative impact. The Recovery Plan would 
outline various indicators over a timeline of increasing stress, the 
Crisis Continuum, with escalation triggers to NSCC management or the 
Board, as appropriate. This approach would allow for timely evaluation 
of the situation and the possible impacts of the use of a recovery tool 
in order to minimize the negative effects of the stress scenario. 
Therefore, NSCC believes that the recovery tools that would be 
identified and described in its Recovery Plan, including the authority 
provided to it in the proposed Force Majeure Rule, would meet the 
criteria identified within guidance published by the Commission in 
connection with the adoption of Rule 17Ad-22(e)(3)(ii).\68\
---------------------------------------------------------------------------

    \68\ Supra note 41.
---------------------------------------------------------------------------

    Therefore, NSCC believes the R&W Plan and each of the Proposed 
Rules are consistent with Rule 17Ad-22(e)(3)(ii).\69\
---------------------------------------------------------------------------

    \69\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(15)(ii) under the Act requires NSCC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to identify, monitor, and manage its general 
business risk and hold sufficient LNA to cover potential general 
business losses so that NSCC can continue operations and services as a 
going concern if those losses materialize, including by holding LNA 
equal to the greater of either (x) six months of the covered clearing 
agency's current operating expenses, or (y) the amount determined by 
the board of directors to be sufficient to ensure a recovery or orderly 
wind-down of critical operations and services of the covered clearing 
agency.\70\ While the Capital Policy addresses how NSCC holds LNA in 
compliance with these requirements, the Wind-down Plan would include an 
analysis that would estimate the amount of time and the costs to 
achieve a recovery or orderly wind-down of NSCC's critical operations 
and services, and would provide that the Board review and approve this 
analysis and estimation annually. The Wind-down Plan would also provide 
that the estimate would be the ``Recovery/Wind-down Capital 
Requirement'' under the Capital Policy. Under that policy, the General 
Business Risk Capital Requirement, which is the sufficient amount of 
LNA that NSCC should hold to cover potential general business losses so 
that it can continue operations and services as a going concern if 
those losses materialize, is calculated as the greatest of three 
estimated amounts, one of which is this Recovery/Wind-down Capital 
Requirement. Therefore, NSCC believes the R&W Plan, as it interrelates 
with the Capital Policy, is consistent with Rule 17Ad-
22(e)(15)(ii).\71\
---------------------------------------------------------------------------

    \70\ Id. at 240.17Ad-22(e)(15)(ii).
    \71\ Id.
---------------------------------------------------------------------------

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

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received,\72\ unless extended as described below. The clearing agency 
shall not implement the proposed change if the Commission has any 
objection to the proposed change.\73\
---------------------------------------------------------------------------

    \72\ 12 U.S.C. 5465(e)(1)(G).
    \73\ 12 U.S.C. 5465(e)(1)(F).
---------------------------------------------------------------------------

    Pursuant to Section 806(e)(1)(H) of the Clearing Supervision 
Act,\74\ the Commission may extend the review period of an advance 
notice for an additional 60 days, if the changes proposed in the 
advance notice raise novel or complex issues, subject to the Commission 
providing the clearing agency with prompt written notice of the 
extension.
---------------------------------------------------------------------------

    \74\ 12 U.S.C. 5465(e)(1)(H).
---------------------------------------------------------------------------

    Here, as the Commission has not requested any additional 
information, the date that is 60 days after NSCC filed the Advance 
Notice with the Commission is February 16, 2018. However, the 
Commission is extending the review period of the Advance Notice for an 
additional 60 days under Section 806(e)(1)(H) of the Clearing 
Supervision Act \75\ because the Commission finds the Advance Notice is 
both novel and complex, as discussed below.
---------------------------------------------------------------------------

    \75\ Id.
---------------------------------------------------------------------------

    The Advance Notice is novel because it concerns a matter of first 
impression for the Commission. Specifically, it concerns a recovery and 
wind-down plan that has not been part of the Commission's regulatory 
framework for registered clearing agencies until the

[[Page 4340]]

recent adoption of Rule 17Ad-22(e)(3)(ii) under the Act.\76\
---------------------------------------------------------------------------

    \76\ Securities Exchange Act Release 78961 (September 28, 2016), 
81 FR 70786 (October 13, 2017) (S7-03-14).
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    Rule 17Ad-22(e)(3)(ii) under the Act \77\ requires NSCC to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable, maintain a sound risk 
management framework for comprehensively managing legal, credit, 
liquidity, operational, general business, investment, custody, and 
other risks that arise in or are borne by NSCC, which includes plans 
for the recovery and orderly wind-down of NSCC necessitated by credit 
losses, liquidity shortfalls, losses from general business risk, or any 
other losses. The Commission has not yet considered such a plan 
pursuant to Rule 17Ad-22(e)(3)(ii) under the Act.\78\
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    \77\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \78\ Id.
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    The Advance Notice is complex because the proposed changes are 
substantial, detailed, and interrelated with other risk management 
practices at the clearing agency. The Advance Notice is substantial 
because it is designed to comprehensively address how the clearing 
agency would implement a recovery or wind-down plan. For example, 
according to the clearing agency, the R&W Plan would provide, among 
other things, (i) an overview of the business of NSCC and its parent, 
DTCC; (ii) an analysis of NSCC's intercompany arrangements and critical 
links to other FMIs; (iii) a description of NSCC's services, and the 
criteria used to determine which services are considered critical; (iv) 
a description of the NSCC and DTCC governance structure; (v) a 
description of the governance around the overall recovery and wind-down 
program; (vi) a discussion of tools available to NSCC to mitigate 
certain risks, including recovery indicators and triggers, and the 
governance around management of a stress event along a ``Crisis 
Continuum'' timeline; (vii) a discussion of potential non-default 
losses and the resources available to NSCC to address such losses, 
including recovery triggers and tools to mitigate such losses; (viii) 
an analysis of the recovery tools' characteristics, including how they 
are comprehensive, effective, and transparent, how the tools provide 
appropriate incentives to Members to, among other things, control and 
monitor the risks they may present to NSCC, and how NSCC seeks to 
minimize the negative consequences of executing its recovery tools; and 
(ix) the framework and approach for the orderly wind-down and transfer 
of NSCC's business, including an estimate of the time and costs to 
effect a recovery or orderly wind-down of NSCC.
    The Advance Notice is detailed because it articulates the step-by-
step process the clearing agency would undertake to implement a 
recovery or wind-down plan.
    The Advance Notice is interrelated with other risk management 
practices at the clearing agency because the R&W Plan concerns some 
existing rules that address risk management as well as proposed rules 
that would further address risk management. For example, according to 
the clearing agency, many of the tools available to the clearing agency 
that would be described in the R&W Plan are the clearing agency's 
existing, business-as-usual risk management and default management 
tools, which would continue to be applied in scenarios of increasing 
stress. The Advance Notice also proposes new rules, such as the 
proposed market disruption and force majeure rule,\79\ and contemplates 
application of the rules proposed in the Loss Allocation Filing as an 
integral part of the operation of the R&W Plan.\80\
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    \79\ Proposed NSCC Rule 60 (Market Disruption and Force 
Majeure).
    \80\ See supra note 8.
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    Accordingly, pursuant to Section 806(e)(1)(H) of the Clearing 
Supervision Act,\81\ the Commission is extending the review period of 
the Advance Notice to April 17, 2018 which is the date by which the 
Commission shall notify the clearing agency of any objection regarding 
the Advance Notice, unless the Commission requests further information 
for consideration of the Advance Notice (SR-NSCC-2017-805).\82\
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    \81\ 12 U.S.C. 5465(e)(1)(H).
    \82\ This extension extends the time periods under Sections 
806(e)(1)(E) and (G) of the Clearing Supervision Act. 12 U.S.C. 
5465(e)(1)(E) and (G).
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    The clearing agency shall post notice on its website of proposed 
changes that are implemented.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.\83\
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    \83\ See supra note 2 (concerning the clearing agency's related 
proposed rule change).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. 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-2017-805 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-2017-805. 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 Advance Notice that are filed with the 
Commission, and all written communications relating to the Advance 
Notice between the Commission and any person, other than those that may 
be withheld from the public in accordance with the provisions of 5 
U.S.C. 552, will be available for website viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of NSCC and on DTCC's website 
(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-2017-805 and should be submitted on 
or before February 14, 2018.

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-01690 Filed 1-29-18; 8:45 am]
 BILLING CODE 8011-01-P