82 FR 46329 - National Securities Clearing Corporation
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 191 (October 4, 2017)
Federal Register Volume 82, Issue 191 (October 4, 2017)
| Page Range | 46329-46332 | |
| FR Document | 2017-21282 |
[Federal Register Volume 82, Number 191 (Wednesday, October 4, 2017)] [Notices] [Pages 46329-46332] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-21282] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Investment Company Act Release No. 32839; File No. 812-14818] National Securities Clearing Corporation September 28, 2017. AGENCY: Securities and Exchange Commission (``Commission''). ACTION: Notice. Notice of application for an order under section 3(b)(2) of the Investment Company Act of 1940 (``Act''). ----------------------------------------------------------------------- Applicant: National Securities Clearing Corporation (``NSCC''). Summary of Application: Applicant seeks an order under Section 3(b)(2) of the Act declaring it to be primarily engaged in a business other than that of investing, reinvesting, owning, holding or trading in securities. Applicant is primarily in the business of providing clearing, settlement, risk management, central counterparty (``CCP'') and ancillary services to the registered broker-dealers, banks and other market participants that are its ``Members'', as such term is defined in the rules and procedures of Applicant (``NSCC Rules''). Filing Date: The application was filed on September 8, 2017. Hearing or Notification of Hearing: An order granting the requested relief will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission's Secretary and serving applicant with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on October 23, 2017, and should be accompanied by proof of service on applicant, in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Commission's Secretary. ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. Applicant, c/o David F. Freeman, Jr., Arnold & Porter LLP, 601 Massachusetts Avenue NW., Washington, DC 20001. FOR FURTHER INFORMATION CONTACT: Jennifer O. Palmer, Senior Counsel, at (202) 551-5786, or Nadya B. Roytblat, Assistant Chief Counsel, at (202) 551-6825 (Division of Investment Management, Chief Counsel's Office). SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application may be obtained via the Commission's Web site by searching for the file number, or applicant using the Company name box, at http://www.sec.gov/search/search.htm or by calling (202) 551-8090. Applicant's Representations 1. Formed in 1976, Applicant is organized under the Business Corporation Law of the State of New York and is registered as a clearing agency under the Securities and Exchange Act of 1934, as amended (``Exchange Act''), and the rules and regulations thereunder (``Exchange Act Rules''). Applicant is also designated as a systemically important financial market utility (``SIFMU'') by the Financial Stability Oversight Council (``FSOC'') under Title VIII of The Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd- Frank Act''). As a registered clearing agency, Applicant is regulated by the Commission. As a SIFMU, Applicant is subject to enhanced supervision by the Commission in consultation with the Board of Governors of the Federal Reserve System (``FRB'').\1\ --------------------------------------------------------------------------- \1\ See Securities Exchange Act Release No. 34-78961 (Sep. 28, 2016), 81 FR 70786, 70788 (Oct. 13, 2016). --------------------------------------------------------------------------- 2. Applicant is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (``DTCC''). Applicant has one authorized class of stock, which is common stock. All issued and outstanding shares of Applicant's common stock are held by DTCC and there are no plans to alter this wholly-owned subsidiary structure. There is no trading market in Applicant's shares. 3. Applicant provides clearing, settlement, risk management and CCP services to its Members for broker-to-broker trades in the United States involving equities, corporate and municipal debt, American depositary receipts, exchange traded funds and unit investment trusts. In addition to these core services, Applicant also offers ancillary, non-guaranteed services, including wealth management services (``WMS'') and insurance and retirement services (``I&RS''), which automate manual processes in the mutual funds, insurance and alternative investment products areas. Applicant's operations are national. 4. Applicant operates a continuous net settlement (``CNS'') system, through which the trades in CNS-eligible securities are processed. Applicant acts as a CCP in respect of such CNS trades, becoming the buyer to every seller and the seller to every buyer, thereby guaranteeing the completion of such trades and eliminating counterparty risk among its Members. As a result, Applicant has obligations to and claims against its Members on opposite sides of guaranteed netted transactions. Applicant also provides a trade guarantee with respect to balance order transactions. 5. Due to the nature of Applicant's operations and the large volume and dollar value of trades that it guarantees, Applicant maintains a large clearing fund (``Clearing Fund'') and a large amount of other cash on hand. The Clearing Fund consists of deposits (i.e., margin and other contributions) posted by Members in the form of cash and [[Page 46330]] eligible securities. Pursuant to the NSCC Rules, Members are required to maintain deposits in the Clearing Fund. The amount of each Member's required deposit is calculated by Applicant using a risk-based margin methodology. 6. Applicant uses the Clearing Fund, among other resources, to manage its risks related to its trade guarantee. Specifically, deposits in the Clearing Fund, among other resources, are available to Applicant to facilitate settlement in the event of a Member default and to cover potential losses due to such an event. Additionally, Applicant uses its liquid assets to meet the requirements imposed on it as a registered clearing agency and SIFMU and to generate revenue to the extent such assets are not otherwise being put to productive use. 7. To more efficiently utilize Clearing Fund cash and other cash on hand, Applicant seeks to prudently invest part of the Clearing Fund cash and other cash on hand in bank certificates of deposit (``CDs'') and other investment securities. The managed investment of cash on hand also provides a measure of protection against inflationary factors and bolsters and protects NSCC's financial position over time. 8. Applicant is permitted under the NSCC Rules to invest Clearing Fund cash in accordance with an investment policy approved by Applicant's board of directors (``Board of Directors''). Applicant is also permitted to invest other cash on hand in accordance with such investment policy (``Clearing Agency Investment Policy''). 9. The Clearing Agency Investment Policy is designed to comply with the laws, rules and regulations applicable to Applicant as a registered clearing agency and SIFMU, including, without limitation, Exchange Act Section 17A and Exchange Act Rule 17Ad-22.\2\ The Clearing Agency Investment Policy was approved by the Commission pursuant to delegated authority.\3\ Any material changes to the Clearing Agency Investment Policy must be approved by the Board of Directors. Any changes to the Clearing Agency Investment Policy, regardless of materiality, will be submitted to the Commission pursuant to Exchange Act Rule 19b-4, with confidential treatment requested. --------------------------------------------------------------------------- \2\ Exchange Act Rule 17 Ad-22 requires, among other things, that Applicant hold assets in a way that minimizes risk of loss or delay in access to them and to invest assets in instruments with minimal credit, market, and liquidity risks. \3\ See Securities Exchange Act Release No. 34-75730 (August 19, 2015), 80 FR 51638 (August 25, 2015) (SR-NSCC-2015-802) (Notice of Filing of Amendment No. 1 and No Objection to Advance Notice Filing, as Modified by Amendment No. 1, to Establish a Prefunded Liquidity Program As Part of NSCC's Liquidity Risk Management). --------------------------------------------------------------------------- Applicant's Legal Analysis 1. Section 3(a)(l)(A) of the Act defines the term ``investment company'' to include an issuer that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Section 3(a)(l)(C) of the Act further defines an investment company as an issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities, and owns or proposes to acquire investment securities having a value in excess of 40 percent of the value of the issuer's total assets (exclusive of Government securities and cash items) on an unconsolidated basis. Applicant states that it does not hold itself out as being engaged primarily in the business of investing, reinvesting or trading in securities within the meaning of Section 3(a)(l)(A) of the Act. Applicant states that it does not currently hold, but has previously held \4\ and may again wish to hold, more than 40 percent of its total assets, exclusive of Government securities and cash items, in bank CDs and other investment securities. Upon such change in composition of its assets, Applicant might fall within the definition of investment company under Section 3(a)(l)(C) of the Act. --------------------------------------------------------------------------- \4\ Applicant has previously held greater than 40% of the value of its total assets, exclusive of Government securities and cash items, in bank CDs and other investment securities. Applicant has relied on Rule 3a-3 under the Act, which provides an exemption from the definition of investment company for wholly-owned subsidiaries of a company that is not itself an investment company. However, that exemption does not apply if the wholly-owned subsidiary has issued paper (other than short-term paper) to other holders. On September 10, 2015, Applicant launched a commercial paper and extendible note program (``CP Program'') under which Applicant could issue paper other than short-term paper. Out of an abundance of caution, (a) prior to the launch of the CP Program, Applicant reduced its holdings of investment securities to less than 40% of the value of Applicant's total assets, exclusive of Government securities and cash items, and (b) pending the application, Applicant has maintained its holdings of investment securities below the 40% threshold. --------------------------------------------------------------------------- 2. Rule 3a-1 under the Act provides an exemption from the definition of investment company if no more than 45 percent of a company's total assets consist of, and not more than 45 percent of its net income over the last four quarters is derived from, securities other than Government securities and securities of majority-owned subsidiaries and companies primarily controlled by it. Applicant states that it cannot rely on Rule 3a-1 because it may again wish to hold more than 45 percent of its total assets in bank CDs and other investment securities and, upon such change in composition of its assets, it will not meet the requirements of Rule 3a-1. 3. Section 3(b)(2) of the Act provides that, notwithstanding Section 3(a)(l)(C) of the Act, the Commission may issue an order declaring an issuer to be primarily engaged in a business other than that of investing, reinvesting, owning, holding, or trading in securities directly, through majority-owned subsidiaries, or controlled companies conducting similar types of businesses. Applicant requests an order under Section 3(b)(2) of the Act declaring that it is primarily engaged in a business other than that of investing, reinvesting, owning, holding or trading in securities, and therefore is not an investment company as defined in the Act. In determining whether an issuer is ``primarily engaged'' in a non-investment company business under Section 3(b)(2) of the Act, the Commission considers the following factors: (a) The company's historical development, (b) its public representations of policy, (c) the activities of its officers and directors, (d) the nature of its present assets, and (e) the sources of its present income.\5\ --------------------------------------------------------------------------- \5\ Tonopah Mining Company of Nevada, 26 SEC 426, 427 (1947). --------------------------------------------------------------------------- 4. Applicant submits that it satisfies the criteria for issuance of an order under Section 3(b)(2) of the Act because the facts show that Applicant is primarily engaged in the business of providing clearing, settlement, risk management, CCP and ancillary services to its Members, and not in the business of investing, reinvesting, owning, holding or trading in securities. a. Historical Development. Applicant states that its origins date back to the back-office crisis of the late 1960s and early 1970s and the enactment of the Securities Acts Amendments of 1975, which enabled the development of a national securities market system and a national clearance and settlement system and their regulation.\6\ Applicant was formed in 1976 and now operates as a wholly-owned subsidiary of DTCC. --------------------------------------------------------------------------- \6\ See Securities Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 (1975). --------------------------------------------------------------------------- Applicant states that it (a) is a clearing agency registered under the Exchange Act and, as such, is subject to comprehensive regulation by the Commission and (b) has been designated by FSOC as a SIFMU under Title VIII of the Dodd-Frank Act and, as such, is subject to enhanced supervision by the Commission in consultation with the FRB. Applicant states that both the [[Page 46331]] Commission and the FRB, among other federal agencies, have previously indicated that they believe FMUs such as securities clearing agencies generally engage in activities other than those of an investment company.\7\ --------------------------------------------------------------------------- \7\ Specifically, Applicant asserts that in the notice of final rulemaking issued by the Commission and the FRB (among other federal agencies) to implement the Volcker Rule, the agencies supported their decision not to expressly exclude FMUs from the definition of ``covered funds'' for purposes of the Volcker Rule by (a) stating that ``[they] believe that FMUs are not investment vehicles of the type [the Volcker Rule] was designed to address, but rather entities that generally engage in other activities, including acting as central counterparties that reduce counterparty risk in clearing and settlement activities'' and (b) noting that ``if the FMU is primarily engaged in transferring, clearing, or settling payments, securities, or other financial transactions among or between financial institutions, the FMU could rely on the exclusion to the definition of investment company provided by section 3(b)(1)'' of the Act. See 79 FR 5536, 5700 (Jan. 31, 2014). --------------------------------------------------------------------------- Applicant represents that substantially all of its activities since its formation have been devoted to providing clearing, settlement, risk management, CCP and ancillary services to its Members, and Applicant intends to continue to be primarily engaged in providing such services. Applicant further represents that all of its issued and outstanding shares are held by DTCC. Applicant states that its shares have not been, and will not be, held out as a financial investment for profit to the public. b. Public Representations of Policy. Applicant states that it has never made any public representations that would indicate that it is in any business other than providing clearing, settlement, risk management, CCP and ancillary services. Applicant represents that it has never held itself out as an investment company within the meaning of the Act. Applicant provides that all annual reports, web postings, press releases and written communications issued by Applicant have related to its business of providing clearing, settlement, risk management, CCP and ancillary services. Applicant states that no press release or advertising or promotional piece has been issued by Applicant concerning its holdings of investment securities or its capital investment policies, or concerning any potential for profit or appreciation in value relating to its own shares. c. Activities of Officers and Directors. Applicant represents that all of its directors and officers devote substantially all of their time spent on Applicant's matters to its business of providing clearing, settlement, risk management, CCP and ancillary services. Applicant states that its directors and officers receive no extra or separate compensation for any services that may directly or indirectly involve Applicant's investment securities. Applicant states that the composition of its Board of Directors is designed to comply with the fair representation requirement for clearing agencies set forth in Exchange Act Section 17A and the governance standards for registered clearing agencies set forth in Exchange Act Rule 17Ad-22. d. Nature of Assets. Applicant states that, as a service organization and a wholly-owned subsidiary of DTCC, Applicant owns very few fixed assets and the vast majority of its assets consist of cash and securities. Applicant states that, as of March 31, 2017, it had about $7.85 billion in total assets, of which cash and cash equivalents accounted for about $2.89 billion (36.84%), Members' segregated cash accounted for about $29.59 million (0.38%), receivables accounted for about $32.82 million (0.42%), other current assets accounted for about $5.19 million (0.07%) and Clearing Fund accounted for about $4.84 billion (61.65%). Applicant states that, as of March 31, 2017, it owned Government securities valued at $201.60 million (2.57% of total assets) but did not own investment securities (as defined in Section 3(a)(2) of the Act). Applicant states that it has previously held greater than 40% of the value of its total assets, exclusive of Government securities and cash items, in bank CDs and other investment securities (as defined in Section 3(a)(2) of the Act), and Applicant may wish to do so again. Applicant believes that the fact that it has held, and may again wish to hold, investment securities in excess of the 40% threshold should not preclude a finding that it is engaged primarily in a business other than that of investing, reinvesting, owning, holding or trading in securities, provided that it uses its investment securities for bona fide purposes relating to its clearing, settlement, risk management, CCP and ancillary services, and that it does not invest or trade in securities for speculative purposes. Applicant states that it provides CCP services and certain trade guarantees to its Members and requires Members that utilize such services to make required deposits to the Clearing Fund. Applicant notes that it is a clearing agency registered under the Exchange Act and, as such, is subject to comprehensive regulation by the Commission. Applicant further notes that it is a SIFMU designated by FSOC under Title VIII of the Dodd-Frank Act and, as such, is subject to enhanced supervision by the Commission in consultation with the FRB. Applicant represents that its allocation, management and use of investment securities is consistent with its business of providing CCP and trade guaranty services to its Members. Applicant represents that all of its investments are and will be managed in accordance with the Clearing Agency Investment Policy. Applicant states that it bears the entire counterparty risk for the obligations of Members to each other with respect to all trades guaranteed by Applicant. Applicant explains that it manages this risk by, among other things, requiring Members to maintain deposits in the Clearing Fund; however, that does not transfer the risk from Applicant. Accordingly, Applicant submits that its primary business for purposes of Section 3(b)(2) of the Act may be determined without regard to the nature of its assets. e. Sources of Income. Applicant represents that it has always received the vast majority of its revenues from the provision of clearing, settlement, risk management, CCP and ancillary services to its Members and not from interest on investment securities. Applicant states that, for the quarter ended March 31, 2017, it derived about $70.56 million of its total revenues from the provision of clearing services, about $27.21 million from ancillary services (WMS and I&RS), and $0.79 million from settlement and asset services. Applicant states that it realized interest income of about $5.87 million for the quarter ended March 31, 2017. Applicant further provides that, for the year ended December 31, 2016, it had total revenues of $378,943,000 and interest income of $11,325,000. Applicant states that it currently invests its cash in Government securities and bank deposits. Applicant notes that total revenues as presented in the application and the Applicant's financial statements reflect revenues from operations and do not include interest income (Applicant's financial statements account for interest income as a separate line item). Applicant further states that it does not break out its expenses using a cost allocation method such that a net income after taxes figure is available for each category of services or interest income. Accordingly, Applicant submits that its revenues, not net income, should be used as the basis for evaluating its investment company status. Applicant projects that its interest income will increase over the next three years, reaching an estimated $55,700,000 in 2019. Applicant represents that the projected increase in interest income will mostly be driven by growth in Applicant's CP Program and [[Page 46332]] rising interest rates. Applicant states that this projection also reflects anticipated increases in its holdings of investment securities should the Commission grant the requested Order; however, Applicant does not anticipate that its interest income from investment securities would ever represent other than a small amount as compared to its total revenues. Applicant further states that its projected increase in interest income will not result in any material increase in net income for Applicant because (a) it passes through to its Members substantially all of its earnings on Clearing Fund cash and (b) its earnings on CP Program proceeds are substantially offset by its interest expense on the commercial paper notes and extendible notes that are issued to holders. 5. Applicant asserts that its historical development, its public representations of policy, the activities of its officers and directors and its sources of revenue, as discussed in the application, demonstrate that it is engaged primarily in the business of providing clearing, settlement, risk management, CCP and ancillary services to its Members, and not in an investment business. Applicant thus asserts that it satisfies the criteria for issuing an order under Section 3(b)(2) of the Act. For the Commission, by the Division of Investment Management, under delegated authority. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-21282 Filed 10-3-17; 8:45 am] BILLING CODE 8011-01-P
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subject line if email is used. To help the the Act declaring it to be primarily market utility (‘‘SIFMU’’) by the
Commission process and review your engaged in a business other than that of Financial Stability Oversight Council
comments more efficiently, please use investing, reinvesting, owning, holding (‘‘FSOC’’) under Title VIII of The Dodd-
only one method. The Commission will or trading in securities. Applicant is Frank Wall Street Reform and Consumer
post all comments on the Commission’s primarily in the business of providing Protection Act (‘‘Dodd-Frank Act’’). As
Internet Web site (http://www.sec.gov/ clearing, settlement, risk management, a registered clearing agency, Applicant
rules/sro.shtml). Copies of the central counterparty (‘‘CCP’’) and is regulated by the Commission. As a
submission, all subsequent ancillary services to the registered SIFMU, Applicant is subject to
amendments, all written statements broker-dealers, banks and other market enhanced supervision by the
with respect to the proposed rule participants that are its ‘‘Members’’, as Commission in consultation with the
change that are filed with the such term is defined in the rules and Board of Governors of the Federal
Commission, and all written procedures of Applicant (‘‘NSCC Reserve System (‘‘FRB’’).1
communications relating to the Rules’’). 2. Applicant is a wholly-owned
proposed rule change between the FILING DATE: The application was filed subsidiary of The Depository Trust &
Commission and any person, other than on September 8, 2017. Clearing Corporation (‘‘DTCC’’).
those that may be withheld from the HEARING OR NOTIFICATION OF HEARING: An Applicant has one authorized class of
public in accordance with the order granting the requested relief will stock, which is common stock. All
provisions of 5 U.S.C. 552, will be be issued unless the Commission orders issued and outstanding shares of
available for Web site viewing and a hearing. Interested persons may Applicant’s common stock are held by
printing in the Commission’s Public request a hearing by writing to the DTCC and there are no plans to alter
Reference Room, 100 F Street NE., Commission’s Secretary and serving this wholly-owned subsidiary structure.
Washington, DC 20549 on official applicant with a copy of the request, There is no trading market in
business days between the hours of personally or by mail. Hearing requests Applicant’s shares.
10:00 a.m. and 3:00 p.m. Copies of the should be received by the Commission 3. Applicant provides clearing,
filing also will be available for by 5:30 p.m. on October 23, 2017, and settlement, risk management and CCP
inspection and copying at the principal should be accompanied by proof of services to its Members for broker-to-
office of the Exchange. All comments service on applicant, in the form of an broker trades in the United States
received will be posted without change; affidavit or, for lawyers, a certificate of involving equities, corporate and
the Commission does not edit personal service. Hearing requests should state municipal debt, American depositary
identifying information from the nature of the writer’s interest, the receipts, exchange traded funds and
submissions. You should submit only reason for the request, and the issues unit investment trusts. In addition to
information that you wish to make contested. Persons who wish to be these core services, Applicant also offers
available publicly. All submissions notified of a hearing may request ancillary, non-guaranteed services,
should refer to File Number SR– notification by writing to the including wealth management services
NYSEAMER–2017–19, and should be Commission’s Secretary. (‘‘WMS’’) and insurance and retirement
submitted on or before October 25, ADDRESSES: Secretary, Securities and services (‘‘I&RS’’), which automate
2017. Exchange Commission, 100 F Street NE., manual processes in the mutual funds,
Washington, DC 20549–1090. insurance and alternative investment
For the Commission, by the Division of
Trading and Markets, pursuant to delegated Applicant, c/o David F. Freeman, Jr., products areas. Applicant’s operations
authority.34 Arnold & Porter LLP, 601 Massachusetts are national.
Avenue NW., Washington, DC 20001. 4. Applicant operates a continuous
Eduardo A. Aleman,
net settlement (‘‘CNS’’) system, through
Assistant Secretary. FOR FURTHER INFORMATION CONTACT:
which the trades in CNS-eligible
[FR Doc. 2017–21280 Filed 10–3–17; 8:45 am] Jennifer O. Palmer, Senior Counsel, at securities are processed. Applicant acts
BILLING CODE 8011–01–P (202) 551–5786, or Nadya B. Roytblat, as a CCP in respect of such CNS trades,
Assistant Chief Counsel, at (202) 551– becoming the buyer to every seller and
6825 (Division of Investment the seller to every buyer, thereby
SECURITIES AND EXCHANGE Management, Chief Counsel’s Office). guaranteeing the completion of such
COMMISSION SUPPLEMENTARY INFORMATION: The trades and eliminating counterparty risk
[Investment Company Act Release No. following is a summary of the among its Members. As a result,
32839; File No. 812–14818] application. The complete application Applicant has obligations to and claims
may be obtained via the Commission’s against its Members on opposite sides of
National Securities Clearing Web site by searching for the file guaranteed netted transactions.
Corporation number, or applicant using the Applicant also provides a trade
Company name box, at http:// guarantee with respect to balance order
September 28, 2017. www.sec.gov/search/search.htm or by
AGENCY: Securities and Exchange transactions.
calling (202) 551–8090. 5. Due to the nature of Applicant’s
Commission (‘‘Commission’’).
Applicant’s Representations operations and the large volume and
ACTION: Notice. Notice of application for
dollar value of trades that it guarantees,
an order under section 3(b)(2) of the 1. Formed in 1976, Applicant is Applicant maintains a large clearing
Investment Company Act of 1940 organized under the Business fund (‘‘Clearing Fund’’) and a large
Corporation Law of the State of New
sradovich on DSK3GMQ082PROD with NOTICES
(‘‘Act’’). amount of other cash on hand. The
York and is registered as a clearing Clearing Fund consists of deposits (i.e.,
APPLICANT: National Securities Clearing agency under the Securities and margin and other contributions) posted
Corporation (‘‘NSCC’’). Exchange Act of 1934, as amended by Members in the form of cash and
SUMMARY OF APPLICATION: Applicant (‘‘Exchange Act’’), and the rules and
seeks an order under Section 3(b)(2) of regulations thereunder (‘‘Exchange Act 1 See Securities Exchange Act Release No. 34–
Rules’’). Applicant is also designated as 78961 (Sep. 28, 2016), 81 FR 70786, 70788 (Oct. 13,
34 17 CFR 200.30–3(a)(12). a systemically important financial 2016).
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Commission and the FRB, among other separate compensation for any services represents that its allocation,
federal agencies, have previously that may directly or indirectly involve management and use of investment
indicated that they believe FMUs such Applicant’s investment securities. securities is consistent with its business
as securities clearing agencies generally Applicant states that the composition of of providing CCP and trade guaranty
engage in activities other than those of its Board of Directors is designed to services to its Members. Applicant
an investment company.7 comply with the fair representation represents that all of its investments are
Applicant represents that requirement for clearing agencies set and will be managed in accordance with
substantially all of its activities since its forth in Exchange Act Section 17A and the Clearing Agency Investment Policy.
formation have been devoted to the governance standards for registered Applicant states that it bears the entire
providing clearing, settlement, risk clearing agencies set forth in Exchange counterparty risk for the obligations of
management, CCP and ancillary services Act Rule 17Ad–22. Members to each other with respect to
to its Members, and Applicant intends d. Nature of Assets. Applicant states all trades guaranteed by Applicant.
to continue to be primarily engaged in that, as a service organization and a Applicant explains that it manages this
providing such services. wholly-owned subsidiary of DTCC, risk by, among other things, requiring
Applicant further represents that all Applicant owns very few fixed assets Members to maintain deposits in the
of its issued and outstanding shares are and the vast majority of its assets consist Clearing Fund; however, that does not
held by DTCC. Applicant states that its of cash and securities. Applicant states transfer the risk from Applicant.
shares have not been, and will not be, that, as of March 31, 2017, it had about Accordingly, Applicant submits that its
held out as a financial investment for $7.85 billion in total assets, of which primary business for purposes of
profit to the public. cash and cash equivalents accounted for Section 3(b)(2) of the Act may be
b. Public Representations of Policy. about $2.89 billion (36.84%), Members’ determined without regard to the nature
Applicant states that it has never made segregated cash accounted for about of its assets.
any public representations that would $29.59 million (0.38%), receivables e. Sources of Income. Applicant
indicate that it is in any business other accounted for about $32.82 million represents that it has always received
than providing clearing, settlement, risk (0.42%), other current assets accounted the vast majority of its revenues from
management, CCP and ancillary for about $5.19 million (0.07%) and the provision of clearing, settlement,
services. Applicant represents that it has Clearing Fund accounted for about risk management, CCP and ancillary
never held itself out as an investment $4.84 billion (61.65%). Applicant states services to its Members and not from
company within the meaning of the Act. that, as of March 31, 2017, it owned interest on investment securities.
Applicant provides that all annual Government securities valued at Applicant states that, for the quarter
reports, web postings, press releases and $201.60 million (2.57% of total assets) ended March 31, 2017, it derived about
written communications issued by but did not own investment securities $70.56 million of its total revenues from
Applicant have related to its business of (as defined in Section 3(a)(2) of the Act). the provision of clearing services, about
providing clearing, settlement, risk Applicant states that it has previously $27.21 million from ancillary services
management, CCP and ancillary held greater than 40% of the value of its (WMS and I&RS), and $0.79 million
services. Applicant states that no press total assets, exclusive of Government from settlement and asset services.
release or advertising or promotional securities and cash items, in bank CDs Applicant states that it realized interest
piece has been issued by Applicant and other investment securities (as income of about $5.87 million for the
concerning its holdings of investment defined in Section 3(a)(2) of the Act), quarter ended March 31, 2017.
securities or its capital investment and Applicant may wish to do so again. Applicant further provides that, for the
policies, or concerning any potential for Applicant believes that the fact that it year ended December 31, 2016, it had
profit or appreciation in value relating has held, and may again wish to hold, total revenues of $378,943,000 and
to its own shares. investment securities in excess of the interest income of $11,325,000.
c. Activities of Officers and Directors. 40% threshold should not preclude a Applicant states that it currently invests
Applicant represents that all of its finding that it is engaged primarily in a its cash in Government securities and
directors and officers devote business other than that of investing, bank deposits. Applicant notes that total
substantially all of their time spent on reinvesting, owning, holding or trading revenues as presented in the application
Applicant’s matters to its business of in securities, provided that it uses its and the Applicant’s financial statements
providing clearing, settlement, risk investment securities for bona fide reflect revenues from operations and do
management, CCP and ancillary purposes relating to its clearing, not include interest income (Applicant’s
services. Applicant states that its settlement, risk management, CCP and financial statements account for interest
directors and officers receive no extra or ancillary services, and that it does not income as a separate line item).
invest or trade in securities for Applicant further states that it does not
7 Specifically, Applicant asserts that in the notice
speculative purposes. break out its expenses using a cost
of final rulemaking issued by the Commission and Applicant states that it provides CCP
the FRB (among other federal agencies) to allocation method such that a net
implement the Volcker Rule, the agencies services and certain trade guarantees to income after taxes figure is available for
supported their decision not to expressly exclude its Members and requires Members that each category of services or interest
FMUs from the definition of ‘‘covered funds’’ for utilize such services to make required income. Accordingly, Applicant submits
purposes of the Volcker Rule by (a) stating that deposits to the Clearing Fund.
‘‘[they] believe that FMUs are not investment that its revenues, not net income,
vehicles of the type [the Volcker Rule] was designed Applicant notes that it is a clearing should be used as the basis for
to address, but rather entities that generally engage agency registered under the Exchange evaluating its investment company
in other activities, including acting as central Act and, as such, is subject to
sradovich on DSK3GMQ082PROD with NOTICES
status.
counterparties that reduce counterparty risk in
clearing and settlement activities’’ and (b) noting
comprehensive regulation by the Applicant projects that its interest
that ‘‘if the FMU is primarily engaged in Commission. Applicant further notes income will increase over the next three
transferring, clearing, or settling payments, that it is a SIFMU designated by FSOC years, reaching an estimated
securities, or other financial transactions among or under Title VIII of the Dodd-Frank Act $55,700,000 in 2019. Applicant
between financial institutions, the FMU could rely
on the exclusion to the definition of investment
and, as such, is subject to enhanced represents that the projected increase in
company provided by section 3(b)(1)’’ of the Act. supervision by the Commission in interest income will mostly be driven by
See 79 FR 5536, 5700 (Jan. 31, 2014). consultation with the FRB. Applicant growth in Applicant’s CP Program and
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![46332 Federal Register / Vol. 82, No. 191 / Wednesday, October 4, 2017 / Notices
rising interest rates. Applicant states SR–DTC–2017–014, SR–NSCC–2017– Risk, and set metrics to categorize such
that this projection also reflects 013, and SR–FICC–2017–017, risks (e.g., from ‘‘no impact’’ to ‘‘severe
anticipated increases in its holdings of respectively, pursuant to Section impact’’) through ‘‘Risk Tolerance
investment securities should the 19(b)(1) of the Securities Exchange Act Statements.’’ 8 The Framework would
Commission grant the requested Order; of 1934 (‘‘Act’’) 1 and Rule 19b–4 describe how the Risk Tolerance
however, Applicant does not anticipate thereunder.2 The proposed rule changes Statements identify the overall risk
that its interest income from investment were published for comment in the reduction or mitigation objectives of the
securities would ever represent other Federal Register on August 14, 2017.3 Clearing Agencies, with respect to
than a small amount as compared to its The Commission did not receive any identified risks to the Clearing
total revenues. Applicant further states comment letters on the proposed rule Agencies.9 The Framework would also
that its projected increase in interest changes. For the reasons discussed explain how the Risk Tolerance
income will not result in any material below, the Commission approves the Statements document the risk controls
increase in net income for Applicant proposed rule changes. and other measures the Clearing
because (a) it passes through to its Agencies would use to manage such
II. Description of the Proposed Rule
Members substantially all of its earnings identified risks (including escalation
Changes
on Clearing Fund cash and (b) its requirements in the event of risk metric
earnings on CP Program proceeds are The proposed rule changes would breaches). The Framework would state
substantially offset by its interest adopt the Clearing Agency Operational that ORM would annually review,
expense on the commercial paper notes Risk Management Framework revise, update, and/or create, as
and extendible notes that are issued to (‘‘Framework’’) of the Clearing necessary, each Risk Tolerance
holders. Agencies, as described below. Statement.10
5. Applicant asserts that its historical A. Overview of the Framework The Framework would also describe
development, its public representations how the Clearing Agencies monitor key
of policy, the activities of its officers The Framework would describe how risks, including Operational Risk,
and directors and its sources of revenue, each of Clearing Agency manages through ‘‘Risk Profiles.’’ 11 The
as discussed in the application, operational risk. Operational risk is Framework would state that ‘‘Risk
demonstrate that it is engaged primarily defined by the Clearing Agencies in the Profiles’’ identify how risk is assessed
in the business of providing clearing, Framework as the risk of direct or for each of the Clearing Agencies’
settlement, risk management, CCP and indirect loss or reputational harm businesses and support areas (each a
ancillary services to its Members, and resulting from an event, internal or ‘‘Clearing Agency Business’’ and/or
not in an investment business. external, that is the result of inadequate ‘‘Clearing Agency Support Area’’).12 The
Applicant thus asserts that it satisfies or failed processes, people, and systems Framework would explain that the risk
the criteria for issuing an order under (‘‘Operational Risk’’).4 More assessment documented in these
Section 3(b)(2) of the Act. specifically, the Framework would profiles includes (1) assessment of
describe how the Clearing Agencies (i) inherent risk (i.e., risk without any
For the Commission, by the Division of manage Operational Risk; (ii) manage
Investment Management, under delegated mitigating controls); (2) evaluation of
authority. their information technology risks; and existing controls and, as appropriate,
Eduardo A. Aleman,
(iii) manage their business continuity any new additional controls, as well as
risks.5 The DTCC Operational Risk the evaluation of the same risk against
Assistant Secretary.
Management group (‘‘ORM’’) would the strength of such controls; and (3)
[FR Doc. 2017–21282 Filed 10–3–17; 8:45 am]
maintain the Framework, on behalf of identification of any residual risk and a
BILLING CODE 8011–01–P the Clearing Agencies.6 determination to either further mitigate
B. Operational Risk Management such risk or accept such risk by the
SECURITIES AND EXCHANGE applicable Clearing Agency Business or
The Framework would describe how Clearing Agency Support Area.13
COMMISSION ORM is charged with establishing The Framework would then describe
[Release No. 34–81745; File Nos. SR–DTC– appropriate systems, policies, generally the responsibilities of ORM,
2017–014; SR–NSCC–2017–013; SR–FICC– procedures, and controls to enable the which is part of the second line of
2017–017] Clearing Agencies to identify plausible defense within the Clearing Agencies’
sources of Operational Risk.7 ‘‘Three Lines of Defense’’ approach to
Self-Regulatory Organizations; The Specifically, the Framework would risk management.14 The Framework
Depository Trust Company; National describe how the Clearing Agencies would identify ORM responsibilities
Securities Clearing Corporation; Fixed identify key risks, including Operational
Income Clearing Corporation; Order 8 Id.
Approving Proposed Rule Changes To 1 15 U.S.C. 78s(b)(1). 9 Id.
Adopt the Clearing Agency Operational 2 17 CFR 240.19b–4. 10 Id.
Risk Management Framework 3 Securities Exchange Act Release No. 81338 11 Id.
(August 8, 2017), 82 FR 36049 (August 14, 2017) 12 Id.
September 28, 2017. (SR–DTC–2017–014, SR–NSCC–2017–013, SR– 13 Id.
FICC–2017–017) (‘‘Notice’’). 14 Id. The Three Lines of Defense approach to risk
I. Introduction 4 Notice, 82 FR at 37943.
management identifies the roles and responsibilities
5 Id.
On July 25, 2017, The Depository of different Clearing Agency Businesses or Clearing
6 Id. The parent company of the Clearing
Trust Company (‘‘DTC’’), Fixed Income Agency Support Areas in identifying, assessing,
sradovich on DSK3GMQ082PROD with NOTICES
Agencies is The Depository Trust & Clearing measuring, monitoring, mitigating, and reporting
Clearing Corporation (‘‘FICC’’), and Corporation (‘‘DTCC’’). DTCC operates on a shared certain key risks faced by the Clearing Agencies.
National Securities Clearing Corporation services model with respect to the Clearing The Three Lines of Defense approach is more fully
(‘‘NSCC,’’ each a ‘‘Clearing Agency,’’ Agencies. Most corporate functions are established described in a separate framework, the Clearing
and collectively with DTC and FICC, the and managed on an enterprise-wide basis pursuant Agency Risk Management Framework. See
to intercompany agreements under which it is Securities Exchange Act Release No. 81635
‘‘Clearing Agencies’’), filed with the generally DTCC that provides a relevant service to (September 15, 2017), 82 FR 44224 (September 21,
Securities and Exchange Commission a Clearing Agency. 2017)(SR–DTC–2017–013, SR–NSCC–2017–012,
(‘‘Commission’’) proposed rule changes 7 Notice, 82 FR at 37943. SR–FICC–2017–016).
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Document Created: 2018-10-25 09:52:56
Document Modified: 2018-10-25 09:52:56
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| Action | Notice. Notice of application for an order under section 3(b)(2) of the Investment Company Act of 1940 (``Act''). | |
| Dates | The application was filed on September 8, 2017. | |
| Contact | Jennifer O. Palmer, Senior Counsel, at (202) 551-5786, or Nadya B. Roytblat, Assistant Chief Counsel, at (202) 551-6825 (Division of Investment Management, Chief Counsel's Office). | |
| FR Citation | 82 FR 46329 |
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