83 FR 12986 - Self-Regulatory Organizations; National Securities Clearing Corporation; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Adopt a Recovery & Wind-Down Plan and Related Rules

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 58 (March 26, 2018)

[Federal Register Volume 83, Number 58 (Monday, March 26, 2018)]
[Notices]
[Pages 12986-12988]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-06022]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82908; File No. SR-NSCC-2017-017]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change To Adopt a Recovery & 
Wind-Down Plan and Related Rules

March 20, 2018.

I. Introduction

    On December 18, 2017, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
proposed rule change SR-NSCC-2017-017 to adopt a recovery and wind-down 
plan and related rules (``Proposed Rule Change'').\3\ The Proposed Rule 
Change was published for comment in the Federal Register on January 8, 
2018.\4\ The Commission did not receive any comments on the Proposed 
Rule Change. On February 8, 2018, pursuant to Section 
19(b)(2)(A)(ii)(I) of the Act,\5\ the Commission designated a longer 
period within which to approve, disapprove, or institute proceedings to 
determine whether to approve or disapprove the Proposed Rule Change.\6\ 
This order institutes proceedings, pursuant to Section 19(b)(2)(B) of 
the Act,\7\ to determine whether to approve or disapprove the Proposed 
Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On December 18, 2017, NSCC filed this proposal as an advance 
notice (SR-NSCC-2017-805) with the Commission pursuant to Section 
806(e)(1) of the Payment, Clearing, and Settlement Supervision Act 
of 2010 (``Clearing Supervision Act'') and Rule 19b-4(n)(1)(i) of 
the Act (``Advance Notice''). On January 24, 2018, the Commission 
extended the review period of the Advance Notice for an additional 
60 days pursuant to Section 806(e)(1)(H) of the Clearing Supervision 
Act. See 12 U.S.C. 5465(e)(1); 17 CFR 240.19b-4(n)(1)(i); 12 U.S.C. 
5465(e)(1)(H); and Securities Exchange Act Release No. 82581 
(January 24, 2018), 83 FR 4327 (January 30, 2018) (SR-NSCC-2017-
805).
    \4\ Securities Exchange Act Release No. 82430 (January 2, 2018), 
83 FR 841 (January 8, 2018) (SR-NSCC-2017-017) (``Notice'').
    \5\ 15 U.S.C. 78s(b)(2)(A)(ii)(I).
    \6\ Securities Exchange Act Release No. 82669 (February 8, 
2018), 83 FR 6653 (February 14, 2018) (SR-DTC-2017-021; SR-FICC-
2017-021; SR-NSCC-2017-017).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change

    As described in the Notice,\8\ NSCC proposes to adopt a Recovery & 
Wind-down Plan (``R&W Plan'') and three proposed rules that would 
facilitate the implementation of the R&W Plan: (i) Proposed Rule 41 
(Corporation Default) (``Corporation Default Rule''), (ii) proposed 
Rule 42 (Wind-down of the Corporation) (``Wind-down Rule''), and (iii) 
proposed Rule 60 (Market Disruption and Force Majeure) (``Force Majeure 
Rule''). Additionally, NSCC proposes to re-number existing 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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    \8\ The description of the Proposed Rule Change is based on the 
statements prepared by NSCC in the Notice. See Notice, supra note 4. 
Capitalized terms used herein and not otherwise defined herein are 
defined in NSCC's Rules & Procedures, available at www.dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
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    NSCC states that the R&W Plan is intended to be used by NSCC's 
Board of Directors and management in the event that NSCC encounters 
scenarios that could potentially prevent it from being able to provide 
its critical services as a going concern.\9\ 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 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.\10\ The R&W Plan would include tools that are provided for 
in NSCC's existing rules, policies, procedures, and contractual 
arrangements,\11\ as well as the proposed Corporation Default Rule, the 
proposed Wind-down Rule, and the proposed Force Majeure Rule.\12\
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    \9\ See Notice, supra note 4, at 842.
    \10\ Id. at 843.
    \11\ Contractual arrangements include, for example, NSCC's 
existing committed or pre-arranged liquidity arrangements.
    \12\ See Notice, supra note 4, at 842.
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    NSCC states that the proposed Corporation Default Rule, proposed 
Wind-down Rule, and proposed Force Majeure Rule are designed to (i) 
facilitate the implementation of the R&W Plan when necessary; (ii) 
provide Members and Limited Members with transparency around critical 
provisions of the R&W Plan that relate to their rights, 
responsibilities and obligations; and (iii) provide NSCC with the legal 
basis to implement the provisions of the R&W Plan that concern the 
proposed Corporation Default Rule, the proposed Wind-down Rule, and the 
proposed Force Majeure Rule, when necessary.\13\
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    \13\ Id. at 841.
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    NSCC states that it is proposing to re-number existing Rule 42 
(Wind-down of a Member, Fund Member or Insurance Carrier/Retirement 
Services Member) to Rule 40 to align the order of NSCC's proposed rules 
with the order of comparable rules in the rulebooks of The Depository 
Trust Company and Fixed Income Clearing Corporation,\14\ which, 
together with NSCC, are subsidiaries of The Depository Trust & Clearing 
Corporation (``DTCC''), a user-owned and user-governed holding 
company.\15\
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    \14\ Id. at 851.
    \15\ Id. at 843.
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    As an overview, the R&W Plan would provide, among other matters, 
(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 financial market infrastructures; (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

[[Page 12987]]

mitigate credit/market \16\ 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; \17\ (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,\18\ including an 
estimate of the time and costs to effect a recovery or orderly wind-
down of NSCC.\19\
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    \16\ NSCC states that NSCC manages its credit exposure to 
Members as part of its market risk management strategy. Id. at 844.
    \17\ As described in more detail in the Notice, this section of 
the R&W Plan would describe the proposed Force Majeure Rule, which 
would govern how NSCC would address extraordinary events that may 
occur outside its control. See Notice, supra note 4, at 851. 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. Id. Under the 
proposed Force Majeure Rule, during the pendency of a Market 
Disruption Event, NSCC would be entitled to (i) suspend the 
provision of any or all services; and (ii) 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. Id.
    \18\ This section of the R&W Plan would refer to the proposed 
Wind-down Rule and the proposed Corporation Default Rule. See 
Notice, supra note 4, at 847-49 (discussing wind-down), 849-51 
(discussing the proposed Corporation Default Rule and the proposed 
Wind-down Rule). The proposed Wind-down Rule would provide a 
mechanism to implement the framework and approach for an orderly 
wind-down if recovery tools do not successfully return NSCC to 
financial viability. Id. at 847-51. As described more fully in the 
Notice, the proposed Corporation Default Rule would provide a 
mechanism for the termination, valuation, and netting of unsettled, 
guaranteed Continuous Net Settlement (``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 
(``Corporation Default''). Id. at 849. Upon 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, the Board of Directors 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 Corporation Default Rule. Id.
    \19\ See Notice, supra note 4, at 842.
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    The framework and approach for orderly wind-down would provide (i) 
for the transfer of NSCC's business, assets, and membership to another 
legal entity; (ii) that NSCC would effectuate the transfer in 
connection with proceedings under Chapter 11 of the U.S. Bankruptcy 
Code; \20\ and (iii) that after effectuating this transfer, NSCC would 
liquidate any remaining assets in an orderly manner in bankruptcy 
proceedings.\21\ NSCC states that it believes that the proposed 
transfer approach to a wind-down would meet its objectives of (i) 
assuring that NSCC's critical services will be available to the market 
as long as there are Members in good standing, and (ii) minimizing 
disruption to the operations of Members and financial markets generally 
that might be caused by NSCC's failure.\22\
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    \20\ 11 U.S.C. 101 et seq.
    \21\ See Notice, supra note 4, at 847.
    \22\ Id.
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III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \23\ to determine whether the Proposed Rule 
Change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the Proposed Rule Change. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
and provide the Commission with arguments to support the Commission's 
analysis as to whether to approve or disapprove the Proposed Rule 
Change.
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    \23\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\24\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the Proposed 
Rule Change's consistency with Section 17A of the Act,\25\ and the 
rules thereunder, including the following provisions:
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    \24\ Id.
    \25\ 15 U.S.C. 78q-1.
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     Section 17A(b)(3)(F) of the Act,\26\ which requires, among 
other things, that the rules of a clearing agency, such as NSCC, must 
be designed to assure the safeguarding of securities and funds which 
are in the custody or control of the clearing agency or for which it is 
responsible and to protect investors and the public interest; and
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    \26\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17Ad-22(e)(3)(ii) under the Act,\27\ which requires a 
covered clearing agency,\28\ such as NSCC, to, among other things, 
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.
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    \27\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \28\ See 17 CFR 240.17Ad-22(a)(5) for the definition of a 
covered clearing agency.
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Rule Change. In particular, the Commission invites 
the written views of interested persons concerning whether the Proposed 
Rule Change is consistent with Section 17A(b)(3)(F) of the Act,\29\ 
Rule 17Ad-22(e)(3)(ii) under the Act,\30\ or any other provision of the 
Act, or the rules and regulations thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval that would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4(g) under the 
Act,\31\ any request for an opportunity to make an oral 
presentation.\32\
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    \29\ 15 U.S.C. 78q-1(b)(3)(F).
    \30\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \31\ 17 CFR 240.19b-4(g).
    \32\ Section 19(b)(2) of the Act grants to the Commission 
flexibility to determine what type of proceeding--either oral or 
notice and opportunity for written comments--is appropriate for 
consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Proposed Rule Change should be approved 
or disapproved by April 16, 2018. Any person who wishes to file a 
rebuttal to any other person's

[[Page 12988]]

submission must file that rebuttal by April 30, 2018.
    The Commission asks that commenters address the sufficiency of 
NSCC's statements in support of the Proposed Rule Change, which are set 
forth in the Notice,\33\ in addition to any other comments they may 
wish to submit about the Proposed Rule Change.
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    \33\ See Notice, supra note 4.
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    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NSCC-2017-017 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-2017-017. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the Proposed Rule Change that are filed with 
the Commission, and all written communications relating to the Proposed 
Rule Change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of NSCC and on 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-2017-017 and should be submitted on 
or before April 16, 2018. Rebuttal comments should be submitted by 
April 30, 2018.
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    \34\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-06022 Filed 3-23-18; 8:45 am]
 BILLING CODE 8011-01-P