83_FR_4347 83 FR 4327 - 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

83 FR 4327 - 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

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 20 (January 30, 2018)

Page Range4327-4340
FR Document2018-01690

Federal Register, Volume 83 Issue 20 (Tuesday, January 30, 2018)
[Federal Register Volume 83, Number 20 (Tuesday, January 30, 2018)]
[Notices]
[Pages 4327-4340]
From the Federal Register Online  [www.thefederalregister.org]
[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.
---------------------------------------------------------------------------

    \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\
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    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \77\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \78\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \79\ Proposed NSCC Rule 60 (Market Disruption and Force 
Majeure).
    \80\ See supra note 8.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \83\ See supra note 2 (concerning the clearing agency's related 
proposed rule change).
---------------------------------------------------------------------------

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



                                                                             Federal Register / Vol. 83, No. 20 / Tuesday, January 30, 2018 / Notices                                             4327

                                               that you wish to make available                         and (2) amend NSCC’s Rules &                           (B) Advance Notice Filed Pursuant to
                                               publicly.                                               Procedures (‘‘Rules’’) 4 in order to adopt             Section 806(e) of the Clearing
                                                 All submissions should refer to File                  Rule 41 (Corporation Default), Rule 42                 Supervision Act
                                               Number SR–OCC–2018–001 and should                       (Wind-down of the Corporation), and
                                                                                                                                                              Description of Proposed Changes
                                               be submitted on or before February 14,                  Rule 60 (Market Disruption and Force
                                               2018.                                                   Majeure) (each a ‘‘Proposed Rule’’ and,                   NSCC is proposing to adopt the R&W
                                                 For the Commission, by the Division of                collectively, the ‘‘Proposed Rules’’). The             Plan to be used by the Board and
                                               Trading and Markets, pursuant to delegated              advance notice would also propose to                   management of NSCC in the event
                                               authority.15                                            re-number the current Rule 42 (Wind-                   NSCC encounters scenarios that could
                                               Eduardo A. Aleman,                                      down of a Member, Fund Member or                       potentially prevent it from being able to
                                               Assistant Secretary.                                    Insurance Carrier/Retirement Services                  provide its critical services as a going
                                               [FR Doc. 2018–01676 Filed 1–29–18; 8:45 am]
                                                                                                       Member) to Rule 40, which is currently                 concern. The R&W Plan would identify
                                                                                                       reserved for future use.                               (i) the recovery tools available to NSCC
                                               BILLING CODE 8011–01–P
                                                                                                          The R&W Plan would be maintained                    to address the risks of (a) uncovered
                                                                                                       by NSCC in compliance with Rule                        losses or liquidity shortfalls resulting
                                               SECURITIES AND EXCHANGE                                 17Ad–22(e)(3)(ii) under the Act by                     from the default of one or more
                                               COMMISSION                                              providing plans for the recovery and                   Members, and (b) losses arising from
                                                                                                       orderly wind-down of NSCC                              non-default events, such as damage to
                                               [Release No. 34–82581; File No. SR–NSCC–                necessitated by credit losses, liquidity               its physical assets, a cyber-attack, or
                                               2017–805]                                               shortfalls, losses from general business               custody and investment losses, and (ii)
                                               Self-Regulatory Organizations;                          risk, or any other losses, as described                the strategy for implementation of such
                                               National Securities Clearing                            below.5 The Proposed Rules are                         tools. The R&W Plan would also
                                               Corporation; Notice of Filing and                       designed to (1) facilitate the                         establish the strategy and framework for
                                               Extension of the Review Period of an                    implementation of the R&W Plan when                    the orderly wind-down of NSCC and the
                                               Advance Notice To Adopt a Recovery                      necessary and, in particular, allow                    transfer of its business in the remote
                                               & Wind-down Plan and Related Rules                      NSCC to effectuate its strategy for                    event the implementation of the
                                                                                                       winding down and transferring its                      available recovery tools does not
                                               January 24, 2018.                                       business; (2) provide Members and                      successfully return NSCC to financial
                                                  Pursuant to Section 806(e)(1) of Title               Limited Members with transparency                      viability.
                                               VIII of the Dodd-Frank Wall Street                      around critical provisions of the R&W                     As discussed in greater detail below,
                                               Reform and Consumer Protection Act                      Plan that relate to their rights,                      the R&W Plan would provide, among
                                               entitled the Payment, Clearing, and                     responsibilities and obligations; and (3)              other matters, (i) an overview of the
                                               Settlement Supervision Act of 2010                      provide NSCC with the legal basis to                   business of NSCC and its parent, The
                                               (‘‘Clearing Supervision Act’’) and Rule                 implement those provisions of the R&W                  Depository Trust & Clearing Corporation
                                               19b–4(n)(1)(i) under the Securities                     Plan when necessary, as described                      (‘‘DTCC’’); (ii) an analysis of NSCC’s
                                               Exchange Act of 1934 (‘‘Act’’),1 notice is              below.                                                 intercompany arrangements and critical
                                               hereby given that on December 18, 2017,                 II. Clearing Agency’s Statement of the                 links to other financial market
                                               National Securities Clearing Corporation                Purpose of, and Statutory Basis for, the               infrastructures (‘‘FMIs’’); (iii) a
                                               (‘‘NSCC’’) filed with the Securities and                Advance Notice                                         description of NSCC’s services, and the
                                               Exchange Commission (‘‘Commission’’)                                                                           criteria used to determine which
                                               advance notice SR–NSCC–2017–805                            In its filing with the Commission, the              services are considered critical; (iv) a
                                               (‘‘Advance Notice’’) as described in                    clearing agency included statements                    description of the NSCC and DTCC
                                               Items I and II below, which Items have                  concerning the purpose of and basis for                governance structure; (v) a description
                                               been prepared by the clearing agency.2                  the Advance Notice and discussed any                   of the governance around the overall
                                               The Commission is publishing this                       comments it received on the Advance                    recovery and wind-down program; (vi) a
                                               notice to solicit comments on the                       Notice. The text of these statements may               discussion of tools available to NSCC to
                                               Advance Notice from interested persons                  be examined at the places specified in                 mitigate credit/market and liquidity
                                               and to extend the review period of the                  Item IV below. The clearing agency has                 risks, including recovery indicators and
                                               Advance Notice for an additional 60                     prepared summaries, set forth in                       triggers, and the governance around
                                               days pursuant to Section 806(e)(1)(H) of                sections A and B below, of the most                    management of a stress event along a
                                               the Clearing Supervision Act.3                          significant aspects of such statements.                ‘‘Crisis Continuum’’ timeline; (vii) a
                                               I. Clearing Agency’s Statement of the                   (A) Clearing Agency’s Statement on                     discussion of potential non-default
                                               Terms of Substance of the Advance                       Comments on the Advance Notice                         losses and the resources available to
                                               Notice                                                  Received from Members, Participants or                 NSCC to address such losses, including
                                                                                                       Others                                                 recovery triggers and tools to mitigate
                                                 The advance notice of NSCC proposes                                                                          such losses; (viii) an analysis of the
                                               to (1) adopt the Recovery & Wind-down                     While NSCC has not solicited or                      recovery tools’ characteristics, including
                                               Plan of NSCC (‘‘R&W Plan’’ or ‘‘Plan’’);                received any written comments relating                 how they are comprehensive, effective,
                                                                                                       to this proposal, NSCC has conducted                   and transparent, how the tools provide
                                                 15 17 CFR 200.30–3(a)(12).                            outreach to Members in order to provide                appropriate incentives to Members to,
                                                 1 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b–            them with notice of the proposal. NSCC                 among other things, control and monitor
daltland on DSKBBV9HB2PROD with NOTICES




                                               4(n)(1)(i), respectively.                               will notify the Commission of any
                                                 2 On December 18, 2017, NSCC filed the Advance                                                               the risks they may present to NSCC, and
                                                                                                       written comments received by NSCC.                     how NSCC seeks to minimize the
                                               Notice as a proposed rule change (SR–NSCC–2017–
                                               017) with the Commission pursuant to Section                                                                   negative consequences of executing its
                                               19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule        4 Capitalized terms used herein and not otherwise
                                                                                                                                                              recovery tools; and (ix) the framework
                                               19b–4 thereunder, 17 CFR 240.19b–4. A copy of the       defined herein are defined in the Rules, available
                                               proposed rule change is available at http://            at www.dtcc.com/∼/media/Files/Downloads/legal/         and approach for the orderly wind-
                                               www.dtcc.com/legal/sec-rule-filings.                    rules/nscc_rules.pdf.                                  down and transfer of NSCC’s business,
                                                 3 12 U.S.C. 5465(e)(1)(H).                              5 17 CFR 240.17Ad–22(e)(3)(ii).                      including an estimate of the time and


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                                               4328                          Federal Register / Vol. 83, No. 20 / Tuesday, January 30, 2018 / Notices

                                               costs to effect a recovery or orderly                   would provide governance around the                    ‘‘Recovery Plan’’) or (ii) wind-down its
                                               wind-down of NSCC.                                      selection and implementation of the                    business in a manner designed to permit
                                                  The R&W Plan would be structured as                  recovery tool or tools most relevant to                the continuation of its critical services
                                               a roadmap, and would identify and                       mitigate a stress scenario and any                     in the event that such recovery efforts
                                               describe the tools that NSCC may use to                 applicable loss or liquidity shortfall.                are not successful (such strategies and
                                               effect a recovery from the events and                      The development of the R&W Plan is                  tools referred to herein as the ‘‘Wind-
                                               scenarios described therein. Certain                    facilitated by the Office of Recovery &                down Plan’’). The description of the
                                               recovery tools that would be identified                 Resolution Planning (‘‘R&R Team’’) of                  R&W Plan below is intended to
                                               in the R&W Plan are based in the Rules                  DTCC.9 The R&R Team reports to the                     highlight the purpose and expected
                                               (including the Proposed Rules) and, as                  DTCC Management Committee                              effects of the material aspects of the
                                               such, descriptions of those tools would                 (‘‘Management Committee’’) and is                      R&W Plan, and to provide Members and
                                               include descriptions of, and reference                  responsible for maintaining the R&W                    Limited Members with appropriate
                                               to, the applicable Rules and any related                Plan and for the development and                       transparency into these features.
                                               internal policies and procedures. Other                 ongoing maintenance of the overall
                                                                                                                                                              Business Overview, Critical Services,
                                               recovery tools that would be identified                 recovery and wind-down planning
                                                                                                                                                              and Governance
                                               in the R&W Plan are based in                            process. The Board, or such committees
                                               contractual arrangements to which                       as may be delegated authority by the                      The introduction to the R&W Plan
                                               NSCC is a party, including, for example,                Board from time to time pursuant to its                would identify the document’s purpose
                                               existing committed or pre-arranged                      charter, would review and approve the                  and its regulatory background, and
                                               liquidity arrangements. Further, the                    R&W Plan biennially, and would also                    would outline a summary of the Plan.
                                               R&W Plan would state that NSCC may                      review and approve any changes that                    The stated purpose of the R&W Plan is
                                               develop further supporting internal                     are proposed to the R&W Plan outside                   that it is to be used by the Board and
                                               guidelines and materials that may                       of the biennial review.                                NSCC management in the event NSCC
                                               provide operationally for matters                          As discussed in greater detail below,               encounters scenarios that could
                                               described in the Plan, and that such                    the Proposed Rules would define the                    potentially prevent it from being able to
                                               documents would be supplemental and                     procedures that may be employed in the                 provide its critical services as a going
                                               subordinate to the Plan.                                event of NSCC’s default and its wind-                  concern. The R&W Plan would be
                                                  Key factors considered in developing                 down, and would provide for NSCC’s                     maintained by NSCC in compliance
                                               the R&W Plan and the types of tools                     authority to take certain actions on the               with Rule 17Ad–22(e)(3)(ii) under the
                                               available to NSCC were its governance                   occurrence of a ‘‘Market Disruption                    Act 10 by providing plans for the
                                               structure and the nature of the markets                 Event,’’ as defined therein.                           recovery and orderly wind-down of
                                               within which NSCC operates. As a                        Significantly, the Proposed Rules would                NSCC.
                                                                                                       provide Members and Limited Members                       The R&W Plan would describe
                                               result of these considerations, many of
                                                                                                       with transparency and certainty with                   DTCC’s business profile, provide a
                                               the tools available to NSCC that would
                                                                                                       respect to these matters. The Proposed                 summary of NSCC’s services, and
                                               be described in the R&W Plan are
                                                                                                       Rules would facilitate the                             identify the intercompany arrangements
                                               NSCC’s existing, business-as-usual risk
                                                                                                       implementation of the R&W Plan,                        and links between NSCC and other
                                               management and default management
                                                                                                       particularly NSCC’s strategy for winding               entities, including other FMIs. This
                                               tools, which would continue to be
                                                                                                       down and transferring its business, and                overview section would provide a
                                               applied in scenarios of increasing stress.
                                                                                                       would provide NSCC with the legal                      context for the R&W Plan by describing
                                               In addition to these existing, business-
                                                                                                       basis to implement those aspects of the                NSCC’s business, organizational
                                               as-usual tools, the R&W Plan would
                                                                                                       R&W Plan.                                              structure and critical links to other
                                               describe NSCC’s other principal
                                                                                                                                                              entities. By providing this context, this
                                               recovery tools, which include, for                      NSCC R&W Plan                                          section would facilitate the analysis of
                                               example, (i) identifying, monitoring and
                                                                                                          The R&W Plan is intended to be used                 the potential impact of utilizing the
                                               managing general business risk and
                                                                                                       by the Board and NSCC’s management                     recovery tools set forth in later sections
                                               holding sufficient liquid net assets
                                                                                                       in the event NSCC encounters scenarios                 of the Recovery Plan, and the analysis
                                               funded by equity (‘‘LNA’’) to cover
                                                                                                       that could potentially prevent it from                 of the factors that would be addressed
                                               potential general business losses
                                                                                                       being able to provide its critical services            in implementing the Wind-down Plan.
                                               pursuant to the Clearing Agency Policy                                                                            DTCC is a user-owned and user-
                                               on Capital Requirements (‘‘Capital                      as a going concern. The R&W Plan
                                                                                                       would be structured to provide a                       governed holding company and is the
                                               Policy’’),6 (ii) maintaining the Clearing                                                                      parent company of NSCC and its
                                               Agency Capital Replenishment Plan                       roadmap, define the strategy, and
                                                                                                       identify the tools available to NSCC to                affiliates, The Depository Trust
                                               (‘‘Replenishment Plan’’) as a viable plan                                                                      Company (‘‘DTC’’) and Fixed Income
                                               for the replenishment of capital should                 either (i) recover in the event it
                                                                                                       experiences losses that exceed its                     Clearing Corporation (‘‘FICC’’, and,
                                               NSCC’s equity fall close to or below the                                                                       together with NSCC and DTC, the
                                               amount being held pursuant to the                       prefunded resources (such strategies
                                                                                                       and tools referred to herein as the                    ‘‘Clearing Agencies’’). The Plan would
                                               Capital Policy,7 and (iii) the process for                                                                     describe how corporate support services
                                               the allocation of losses among Members,                                                                        are provided to NSCC from DTCC and
                                                                                                       2017–806, referred to collectively herein as the
                                               as provided in Rule 4.8 The R&W Plan                    ‘‘Loss Allocation Filing’’). NSCC expects the          DTCC’s other subsidiaries through
                                                                                                       Commission to review both proposals together, and,     intercompany agreements under a
                                                  6 See Securities Exchange Act Release No. 81105
                                                                                                       as such, the proposal described in this filing
                                                                                                                                                              shared services model.
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                                               (July 7, 2017), 82 FR 32399 (July 13, 2017) (SR–        anticipates the approval and implementation of
                                               DTC–2017–003, SR–FICC–2017–007, SR–NSCC–                those proposed changes to the Rules.                      The Plan would provide a description
                                               2017–004).                                                 9 DTCC operates on a shared services model with     of established links between NSCC and
                                                  7 See id.
                                                                                                       respect to NSCC and its other subsidiaries. Most       other FMIs, including The Options
                                                  8 See Rule 4 (Clearing Fund), supra note 4. NSCC     corporate functions are established and managed on     Clearing Corporation (‘‘OCC’’), CDS
                                               is proposing changes to Rule 4 and other related        an enterprise-wide basis pursuant to intercompany
                                               rules regarding allocation of losses in a separate      agreements under which it is generally DTCC that       Clearing and Depository Services Inc.
                                               filing submitted simultaneously with this filing        provides a relevant service to a subsidiary,
                                               (File Nos. SR–NSCC–2017–018 and SR–NSCC–                including NSCC.                                          10 17   CFR 240.17Ad–22(e)(3)(ii).



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                                                                             Federal Register / Vol. 83, No. 20 / Tuesday, January 30, 2018 / Notices                                                     4329

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



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                                               4330                          Federal Register / Vol. 83, No. 20 / Tuesday, January 30, 2018 / Notices

                                               of governance to address that loss,                     cease to act for a Member or Affiliated                  internal management staff and
                                               including the escalation path to                        Family of Members,22 and (4) a recovery                  committees, or to the Board. The
                                               authorize those actions. As described                   phase. This section of the Recovery Plan                 Recovery Plan would make clear that
                                               further below, both the Recovery Plan                   would address conditions and                             these tools and escalation protocols
                                               and the Wind-down Plan would                            circumstances relating to NSCC’s                         would be calibrated across each phase
                                               describe the governance of escalations,                 decision to cease to act for a Member                    of the Crisis Continuum. The Recovery
                                               decisions, and actions under each of                    (referred to in the R&W Plan as a                        Plan would also establish that NSCC
                                               those plans.                                            ‘‘defaulting Member,’’ and the event as                  would retain the flexibility to deploy
                                                 Finally, the Plan would describe the                  a ‘‘Member default’’) pursuant to the                    such tools either separately or in a
                                               role of the R&R Team in managing the                    Rules.23                                                 coordinated approach, and to use other
                                               overall recovery and wind-down                             The Recovery Plan would provide                       alternatives to these actions and tools as
                                               program and plans for each of the                       context to its roadmap through this                      necessitated by the circumstances of a
                                               Clearing Agencies.                                      Crisis Continuum by describing NSCC’s                    particular Member default, in
                                               NSCC Recovery Plan                                      ongoing management of credit, market                     accordance with the Rules. Therefore,
                                                                                                       and liquidity risk, and its existing                     the Recovery Plan would both provide
                                                  The Recovery Plan is intended to be                  process for measuring and reporting its                  NSCC with a roadmap to follow within
                                               a roadmap of those actions that NSCC                    risks as they align with established                     each phase of the Crisis Continuum, and
                                               may employ to monitor and, as needed,                   thresholds for its tolerance of those                    would permit it to adjust its risk
                                               stabilize its financial condition. As each              risks. The Recovery Plan would discuss                   management measures to address the
                                               event that could lead to a financial loss               the management of credit/market risk                     unique circumstances of each event.
                                               could be unique in its circumstances,                   and liquidity exposures together,                           The Recovery Plan would describe the
                                               the Recovery Plan would not be                          because the tools that address these                     conditions that mark each phase of the
                                               prescriptive and would permit NSCC to                                                                            Crisis Continuum, and would identify
                                                                                                       risks can be deployed either separately
                                               maintain flexibility in its use of                                                                               actions that NSCC could take as it
                                                                                                       or in a coordinated approach in order to
                                               identified tools and in the sequence in                                                                          transitions through each phase in order
                                                                                                       address both exposures. NSCC manages
                                               which such tools are used, subject to                                                                            to both prevent losses from
                                                                                                       these risk exposures collectively to limit
                                               any conditions in the Rules or the                                                                               materializing through active risk
                                                                                                       their overall impact on NSCC and its
                                               contractual arrangement on which such                                                                            management, and to restore the
                                                                                                       membership. As part of its market risk
                                               tool is based. NSCC’s Recovery Plan                                                                              financial health of NSCC during a
                                                                                                       management strategy, NSCC manages its
                                               would consist of (1) a description of the                                                                        period of stress.
                                                                                                       credit exposure to Members by
                                               risk management surveillance, tools,                                                                                The ‘‘stable market phase’’ of the
                                                                                                       determining the appropriate Required
                                               and governance that NSCC would                                                                                   Crisis Continuum would describe active
                                               employ across evolving stress scenarios                 Deposits to the Clearing Fund and
                                                                                                       monitoring its sufficiency, as provided                  risk management activities in the
                                               that it may face as it transitions through                                                                       normal course of business. These
                                               a ‘‘Crisis Continuum,’’ described below;                for in the Rules.24 NSCC manages its
                                                                                                       liquidity risks with an objective of                     activities would include (1) routine
                                               (2) a description of NSCC’s risk of losses                                                                       monitoring of margin adequacy through
                                               that may result from non-default events,                maintaining sufficient resources to be
                                                                                                       able to fulfill obligations that have been               daily review of back testing and stress
                                               and the financial resources and recovery                                                                         testing results that review the adequacy
                                               tools available to NSCC to manage those                 guaranteed by NSCC in the event of a
                                                                                                       Member default that presents the largest                 of NSCC’s margin calculations, and
                                               risks and any resulting losses; and (3) an
                                                                                                       aggregate liquidity exposure to NSCC                     escalation of those results to internal
                                               evaluation of the characteristics of the
                                                                                                       over the settlement cycle.25                             and Board committees; 26 and (2) routine
                                               recovery tools that may be used in
                                                                                                          The Recovery Plan would outline the                   monitoring of liquidity adequacy
                                               response to either default losses or non-
                                                                                                       metrics and indicators that NSCC has                     through review of daily liquidity studies
                                               default losses, as described in greater
                                                                                                       developed to evaluate a stress situation                 that measure sufficiency of available
                                               detail below. In all cases, NSCC would
                                                                                                       against established risk tolerance                       liquidity resources to meet cash
                                               act in accordance with the Rules, within
                                                                                                       thresholds. Each risk mitigation tool                    settlement obligations of the Member
                                               the governance structure described in
                                                                                                       identified in the Recovery Plan would                    that would generate the largest aggregate
                                               the R&W Plan, and in accordance with
                                                                                                       include a description of the escalation                  payment obligation.27
                                               applicable regulatory oversight to
                                                                                                       thresholds that allow for effective and                     The Recovery Plan would describe
                                               address each situation in order to best
                                                                                                       timely reporting to the appropriate                      some of the indicators of the ‘‘stressed
                                               protect NSCC, Members, and the
                                                                                                                                                                market phase’’ of the Crisis Continuum,
                                               markets in which it operates.
                                                  Managing Member Default Losses and
                                                                                                          22 The Plan would define an ‘‘Affiliated Family’’     which would include, for example,
                                               Liquidity Needs Through the Crisis
                                                                                                       of Members as a number of affiliated entities that       volatility in market prices of certain
                                                                                                       are all Members of NSCC.                                 assets where there is increased
                                               Continuum. The Recovery Plan would                         23 See Rule 46 (Restrictions on Access to

                                               describe the risk management                            Services), supra note 4.
                                                                                                                                                                uncertainty among market participants
                                               surveillance, tools, and governance that                   24 See Rule 4 (Clearing Fund) and Procedure XV        about the fundamental value of those
                                               NSCC may employ across an increasing                    (Clearing Fund Formula and Other Matters), supra         assets. This phase would involve
                                               stress environment, which is referred to
                                                                                                       note 4. NSCC’s market risk management strategy is        general market stresses, when no
                                                                                                       designed to comply with Rule 17Ad–22(e)(4) under         Member default would be imminent.
                                               as the ‘‘Crisis Continuum.’’ This                       the Act, where these risks are referred to as ‘‘credit
                                               description would identify those tools                  risks.’’ See also 17 CFR 240.17Ad–22(e)(4).              Within the description of this phase, the
                                                                                                          25 NSCC’s liquidity risk management strategy,
                                               that can be employed to mitigate losses,
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                                                                                                                                                                  26 NSCC’s stress testing practices are described in
                                                                                                       including the manner in which NSCC utilizes its
                                               and mitigate or minimize liquidity                      liquidity tools, is described in the Clearing Agency     the Clearing Agency Stress Testing Framework
                                               needs, as the market environment                        Liquidity Risk Management Framework. See                 (Market Risk). See Securities Exchange Act Release
                                               becomes increasingly stressed. The                      Securities Exchange Act Release Nos. 80489 (April        Nos. 80485 (April 19, 2017), 82 FR 19131 (April 25,
                                               phases of the Crisis Continuum would                    19, 2017), 82 FR 19120 (April 25, 2017) (SR–DTC–         2017) (SR–DTC–2017–005, SR–FICC–2017–009,
                                                                                                       2017–004, SR–NSCC–2017–005, SR–FICC–2017–                SR–NSCC–2017–006); 81192 (July 24, 2017), 82 FR
                                               include (1) a stable market phase, (2) a                008); 81194 (July 24, 2017), 82 FR 35241 (July 28,       35245 (July 28, 2017) (SR–DTC–2017–005, SR–
                                               stressed market phase, (3) a phase                      2017) (SR–DTC–2017–004, SR–NSCC–2017–005,                FICC–2017–009, SR–NSCC–2017–006).
                                               commencing with NSCC’s decision to                      SR–FICC–2017–008).                                         27 See supra note 25.




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                                                                             Federal Register / Vol. 83, No. 20 / Tuesday, January 30, 2018 / Notices                                                       4331

                                               Recovery Plan would provide that NSCC                      The ‘‘recovery phase’’ of the Crisis                Plan, relate directly to conditions that
                                               may take targeted, routine risk                         Continuum would describe actions that                  may require NSCC to adjust its strategy
                                               management measures as necessary and                    NSCC may take to avoid entering into a                 for hedging and liquidating a defaulting
                                               as permitted by the Rules.                              wind-down of its business. In order to                 Member’s portfolio, and any such
                                                  Within the ‘‘Member default phase’’                  provide for an effective and timely                    changes would include an assessment of
                                               of the Crisis Continuum, the Recovery                   recovery, the Recovery Plan would                      the status of the Corridor Indicators.
                                               Plan would provide a roadmap for the                    describe two stages of this phase: (1) A               Corridor Indicators would include, for
                                               existing procedures that NSCC would                     recovery corridor, during which NSCC                   example, effectiveness and speed of
                                               follow in the event of a Member default                 may experience stress events or observe                NSCC’s efforts to close out the portfolio
                                               and any decision by NSCC to cease to                    early warning indicators that allow it to              of the defaulting Member, and an
                                               act for that Member.28 The Recovery                     evaluate its options and prepare for the               impediment to the availability of its
                                               Plan would provide that the objectives                  recovery phase; and (2) the recovery                   financial resources. For each Corridor
                                               of NSCC’s actions upon a Member or                      phase, which would begin on the date                   Indicator, the Recovery Plan would
                                               Affiliated Family default are to (1)                    that NSCC issues the first Loss                        identify (1) measures of the indicator,
                                               minimize losses and market exposure of                  Allocation Notice of the second loss                   (2) evaluations of the status of the
                                               the affected Members and NSCC’s non-                    allocation round with respect to a given               indicator, (3) metrics for determining
                                               defaulting Members; and (2), to the                     ‘‘Event Period.’’ 30                                   the status of the deterioration or
                                               extent practicable, minimize                               NSCC expects that significant                       improvement of the indicator, and (4)
                                               disturbances to the affected markets.                   deterioration of liquidity resources                   ‘‘Corridor Actions,’’ which are steps that
                                               The Recovery Plan would describe                        would cause it to enter the recovery                   may be taken to improve the status of
                                               tools, actions, and related governance                  corridor stage of this phase, and, as                  the indicator,31 as well as management
                                               for both market risk monitoring and                     such, the actions it may take at this                  escalations required to authorize those
                                               liquidity risk monitoring through this                  stage would be aimed at replenishing                   steps. Because NSCC has never
                                               phase. For example, in connection with                  those resources. Circumstances that                    experienced the default of multiple
                                               managing its market risk during this                    could cause it to enter the recovery                   Members, it has not, historically,
                                               phase, NSCC would, pursuant to the                      corridor may include, for example, a                   measured the deterioration or
                                               Rules, (1) monitor and assess the                       rapid and material change in market                    improvements metrics of the Corridor
                                               adequacy of Clearing Fund resources;                    prices or substantial intraday activity                Indicators. As such, these metrics were
                                               (2), when necessary and appropriate                     volume by the defaulting Member,                       chosen based on the business judgment
                                               pursuant to the Rules, assess and collect               neither of which are mitigated by                      of NSCC management.
                                               additional margin requirements; and (3)                 intraday margin calls, or subsequent                      The Recovery Plan would also
                                               follow its operational procedures to                    defaults by other Members or Affiliated                describe the reporting and escalation of
                                               liquidate the defaulting Member’s                       Families during a compressed time                      the status of the Corridor Indicators
                                               portfolio. Management of liquidity risk                 period. Throughout the recovery                        throughout the recovery corridor.
                                               through this phase would involve                        corridor, NSCC would monitor the                       Significant deterioration of a Corridor
                                               ongoing monitoring of the adequacy of                   adequacy of its resources and the                      Indicator, as measured by the metrics
                                               NSCC’s liquidity resources, and the                     expected timing of replenishment of                    set out in the Recovery Plan, would be
                                               Recovery Plan would identify certain                    those resources, and would do so                       escalated to the Board. NSCC
                                               actions NSCC may deploy as it deems                     through the monitoring of certain                      management would review the Corridor
                                               necessary to mitigate a potential                                                                              Indicators and the related metrics at
                                                                                                       metrics referred to as ‘‘Corridor
                                               liquidity shortfall, which would                                                                               least annually, and would modify these
                                                                                                       Indicators.’’
                                               include, for example, adjusting its                                                                            metrics as necessary in light of
                                                                                                          The majority of the Corridor
                                               strategy for closing out the defaulting                                                                        observations from simulations of
                                                                                                       Indicators, as identified in the Recovery
                                               Member’s portfolio or seeking                                                                                  Member defaults and other analyses.
                                               additional liquidity resources. The                     as the ‘‘Corporate Contribution.’’ This amount         Any proposed modifications would be
                                               Recovery Plan would state that,                         would be 50 percent (50%) of the ‘‘General             reviewed by the Management Risk
                                               throughout this phase, relevant                         Business Risk Capital Requirement,’’ which is          Committee and the Board Risk
                                               information would be escalated and                      calculated pursuant to the Capital Policy and is an
                                                                                                       amount sufficient to cover potential general
                                                                                                                                                              Committee. The Recovery Plan would
                                               reported to both internal management                    business losses so that NSCC can continue              estimate that NSCC may remain in the
                                               committees and the Board Risk                           operations and services as a going concern if those    recovery corridor stage between one day
                                               Committee.                                              losses materialize, in compliance with Rule 17Ad–      and two weeks. This estimate is based
                                                  The Recovery Plan would also                         22(e)(15) under the Act. See also supra note 6; 17
                                                                                                                                                              on historical data observed in past
                                               identify financial resources available to               CFR 240.17Ad–22(e)(15).
                                                                                                          30 The Loss Allocation Filing proposes to amend     Member defaults, the results of
                                               NSCC, pursuant to the Rules, to address                 Rule 4 to introduce the concept of an ‘‘Event          simulations of Member defaults, and
                                               losses arising out of a Member default.                 Period’’ as the ten (10) Business Days beginning on    periodic liquidity analyses conducted
                                               Specifically, Rule 4, as proposed to be                 (i) with respect to a Member default, the day on       by NSCC. The actual length of a
                                               amended by the Loss Allocation Filing,                  which NSCC notifies Members that it has ceased to
                                                                                                       act for a Member under the Rules, or (ii) with         recovery corridor would vary based on
                                               would provide that losses be satisfied                  respect to a non-default loss, the day that NSCC       actual market conditions observed on
                                               first by applying a ‘‘Corporate                         notifies Members of the determination by the Board     the date and time NSCC enters the
                                               Contribution,’’ and then, if necessary, by              that there is a non-default loss event, as described   recovery corridor stage of the Crisis
                                               allocating remaining losses to non-                     in greater detail in that filing. The proposed Rule
                                                                                                       4 would define a ‘‘round’’ as a series of loss         Continuum, and NSCC would expect
                                               defaulting Members.29
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                                                                                                       allocations relating to an Event Period, and would
                                                                                                       provide that the first Loss Allocation Notice in a       31 The Corridor Actions that would be identified
                                                 28 See  Rule 18 (Procedures for When the              first, second, or subsequent round shall expressly     in the Plan are indicative, but not prescriptive;
                                               Corporation Declines or Ceases to Act) and Rule 46      state that such notice reflects the beginning of a     therefore, if NSCC needs to consider alternative
                                               (Restrictions on Access to Services), supra note 4.     first, second, or subsequent round. The maximum        actions due to the applicable facts and
                                                  29 See supra note 8. The Loss Allocation Filing      allocable loss amount of a round is equal to the sum   circumstances, the escalation of those alternative
                                               proposes to amend Rule 4 to define the amount           of the ‘‘Loss Allocation Caps’’ (as defined in the     actions would follow the same escalation protocol
                                               NSCC would contribute to address a loss resulting       proposed Rule 4) of those Members included in the      identified in the Plan for the Corridor Indicator to
                                               from either a Member default or a non-default event     round. See supra note 8.                               which the action relates.



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                                               4332                           Federal Register / Vol. 83, No. 20 / Tuesday, January 30, 2018 / Notices

                                               the recovery corridor to be shorter in                   continue and, as needed, enhance, the                  which includes a ‘‘three lines of
                                               market conditions of increased stress.                   monitoring and remedial actions already                defense’’ approach to risk management
                                                  The Recovery Plan would outline                       described in connection with previous                  that allows for comprehensive
                                               steps by which NSCC may allocate its                     phases of the Crisis Continuum, and                    management of risk across the
                                               losses, and would state that the                         would remain in the recovery phase                     organization.35 The Recovery Plan
                                               available tools related to allocation of                 until its financial resources are expected             would also describe NSCC’s approach to
                                               losses would only be used in this and                    to be or are fully replenished, or until               financial risk and capital management.
                                               subsequent phases of the Crisis                          the Wind-down Plan is triggered, as                    The Plan would identify key aspects of
                                               Continuum.32 The Recovery Plan would                     described below.                                       this approach, including, for example,
                                               also identify tools that may be used to                     The Recovery Plan would describe                    an annual budget process, business line
                                               address foreseeable shortfalls of NSCC’s                 governance for the actions and tools that              performance reviews with management,
                                               liquidity resources following a Member                   may be employed within the Crisis                      and regular review of capital
                                               default, and would provide that these                    Continuum, which would be dictated by                  requirements against LNA. These risk
                                               tools may be used throughout the Crisis                  the facts and circumstances applicable                 management strategies are collectively
                                               Continuum to address liquidity                           to the situation being addressed. Such                 intended to allow NSCC to effectively
                                               shortfalls if they arise. The goal in                    facts and circumstances would be                       identify, monitor, and manage risks of
                                               managing NSCC’s qualified liquidity                      measured by the Corridor Indicators                    non-default losses.
                                               resources is to maximize resource                        applicable to that phase of the Crisis                    The Plan would identify the two
                                               availability in an evolving stress                       Continuum, and, in most cases, by the                  categories of financial resources NSCC
                                               situation, to maintain flexibility in the                measures and metrics that are assigned                 maintains to cover losses and expenses
                                               order and use of sources of liquidity,                   to those Corridor Indicators, as                       arising from non-default risks or events
                                               and to repay any third party lenders of                  described above. Each of these                         as (1) LNA, maintained, monitored, and
                                               liquidity in a timely manner. These                      indicators would have a defined review                 managed pursuant to the Capital Policy,
                                               liquidity tools include, for example,                    period and escalation protocol that                    which include (a) amounts held in
                                               NSCC’s committed 364-day credit                          would be described in the Recovery                     satisfaction of the General Business Risk
                                               facility,33 and the issuance and private                 Plan. The Recovery Plan would also                     Capital Requirement,36 (b) the Corporate
                                               placement of additional short-term                       describe the governance procedures                     Contribution,37 and (c) other amounts
                                               promissory notes (‘‘commercial paper’’)                  around a decision to cease to act for a                held in excess of NSCC’s capital
                                               and extendible notes, the cash proceeds                  Member, pursuant to the Rules, and                     requirements pursuant to the Capital
                                               of which provide NSCC with prefunded                     around the management and oversight                    Policy; and (2) resources available
                                               liquidity.34 Additional voluntary or                     of the subsequent liquidation of the                   pursuant to the loss allocation
                                               uncommitted tools to address potential                   defaulting Member’s portfolio. The                     provisions of Rule 4.38
                                               liquidity shortfalls, for example                        Recovery Plan would state that, overall,                  The Plan would address the process
                                               uncommitted bank loans, which may                        NSCC would retain flexibility in                       by which the CFO and the DTCC
                                               supplement NSCC’s other liquid                           accordance with the Rules, its                         Treasury group would determine which
                                               resources described herein, would also                   governance structure, and its regulatory               available LNA resources are most
                                               be identified in the Recovery Plan. The                  oversight, to address a particular                     appropriate to cover a loss that is caused
                                               Recovery Plan would state that, due to                   situation in order to best protect NSCC                by a non-default event. This
                                               the extreme nature of a stress event that                and the Members, and to meet the                       determination involves an evaluation of
                                               would cause NSCC to consider the use                     primary objectives, throughout the                     a number of factors, including the
                                               of these liquidity tools, the availability               Crisis Continuum, of minimizing losses                 current and expected size of the loss,
                                               and capacity of these liquidity tools,                   and, where consistent and practicable,                 the expected time horizon over when
                                               and the willingness of counterparties to                 minimizing disturbance to affected                     the loss or additional expenses would
                                               lend, cannot be accurately predicted                     markets.                                               materialize, the current and projected
                                               and are dependent on the circumstances                      Non-Default Losses. The Recovery                    available LNA, and the likelihood LNA
                                               of the applicable stress period,                         Plan would outline how NSCC may                        could be successfully replenished
                                               including market price volatility, actual                address losses that result from events                 pursuant to the Replenishment Plan, if
                                               or perceived disruptions in financial                    other than a Member default. While
                                                                                                                                                               triggered.39 Finally the Plan would
                                               markets, the costs to NSCC of utilizing                  these matters are addressed in greater
                                                                                                                                                               discuss how NSCC would apply its
                                               these tools, and any potential impact on                 detail in other documents, this section
                                                                                                                                                               resources to address losses resulting
                                               NSCC’s credit rating.                                    of the Plan would provide a roadmap to
                                                  As stated above, the Recovery Plan                    those documents and an outline for                        35 The Clearing Agency Risk Management
                                               would state that NSCC will have entered                  NSCC’s approach to monitoring and                      Framework includes a description of this ‘‘three
                                               the recovery phase on the date that it                   managing losses that could result from                 lines of defense’’ approach to risk management, and
                                               issues the first Loss Allocation Notice of               a non-default event. The Plan would                    addresses how NSCC comprehensively manages
                                               the second loss allocation round with                    first identify some of the risks NSCC                  various risks, including operational, general
                                                                                                                                                               business, investment, custody, and other risks that
                                               respect to a given Event Period. The                     faces that could lead to these losses,                 arise in or are borne by it. See Securities Exchange
                                               Recovery Plan would provide that,                        which include, for example, the                        Act Release No. 81635 (September 15, 2017), 82 FR
                                               during the recovery phase, NSCC would                    business and profit/loss risks of                      44224 (September 21, 2017) (SR–DTC–2017–013,
                                                                                                        unexpected declines in revenue or                      SR–FICC–2017–016, SR–NSCC–2017–012). The
                                                                                                                                                               Clearing Agency Operational Risk Management
                                                  32 As these matters are described in greater detail
                                                                                                        growth of expenses; the operational                    Framework describes the manner in which NSCC
                                               in the Loss Allocation Filing and in the proposed        risks of disruptions to systems or                     manages operational risks, as defined therein. See
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                                               amendments to Rule 4,described therein, reference
                                               is made to that filing and the details are not           processes that could lead to large losses,             Securities Exchange Act Release No. 81745
                                               repeated here. See supra note 8.                         including those resulting from, for                    (September 28, 2017), 82 FR 46332 (October 4,
                                                                                                                                                               2017) (SR–DTC–2017–014, SR–FICC–2017–017,
                                                  33 See Securities Exchange Act Release No. 80605      example, a cyber-attack; and custody or                SR–NSCC–2017–013).
                                               (May 5, 2017), 82 FR 21850 (May 10, 2017) (SR–           investment risks that could lead to                       36 See supra note 29.
                                               DTC–2017–802, SR–NSCC–2017–802).
                                                  34 See Securities Exchange Act Release No. 75730
                                                                                                        financial losses. The Recovery Plan                       37 See supra note 29.

                                               (August 19, 2015), 80 FR 51638 (August 25, 2015)         would describe NSCC’s overall strategy                    38 See supra note 8.

                                               (SR–NSCC–2015–802).                                      for the management of these risks,                        39 See supra note 6.




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                                                                               Federal Register / Vol. 83, No. 20 / Tuesday, January 30, 2018 / Notices                                                     4333

                                               from a non-default event, including the                   under the Act.41 NSCC’s analysis and                   on the severity of the market stress at
                                               order of resources it would apply if the                  the conclusions set forth in this section              that time, for these tools to be effective
                                               loss or liability exceeds NSCC’s excess                   of the Recovery Plan are described in                  or for NSCC to realize a loss sufficient
                                               LNA amounts, or is large relative                         greater detail in Item 3(b) of this filing,            to cause it to be unable to effectuate
                                               thereto, and the Board has declared the                   below.                                                 settlements and repay its obligations.43
                                               event a ‘‘Declared Non-Default Loss                                                                              The Wind-down Plan would identify
                                                                                                         NSCC Wind-Down Plan
                                               Event’’ pursuant to Rule 4.40                                                                                    some of the indicators that it has
                                                  The Plan would also describe                              The Wind-down Plan would provide                    entered this Runway Period, which
                                               proposed Rule 60 (Market Disruption                       the framework and strategy for the                     would include, for example, successive
                                               and Force Majeure), which NSCC is                         orderly wind-down of NSCC if the use                   Member defaults, significant Member
                                               proposing to adopt in the Rules. This                     of the recovery tools described in the                 retirements thereafter, and NSCC’s
                                               Proposed Rule would provide                               Recovery Plan do not successfully                      inability to replenish its financial
                                               transparency around how NSCC would                        return NSCC to financial viability.                    resources following the liquidation of
                                               address extraordinary events that may                     While NSCC believes that, given the                    the portfolio of the defaulting
                                               occur outside its control. Specifically,                  comprehensive nature of the recovery                   Member(s).
                                               the Proposed Rule would define a                          tools, such event is extremely unlikely,                  The trigger for implementing the
                                               ‘‘Market Disruption Event’’ and the                       as described in greater detail below,                  Wind-down Plan would be a
                                               governance around a determination that                    NSCC is proposing a wind-down                          determination by the Board that
                                               such an event has occurred. The                           strategy that provides for (1) the transfer            recovery efforts have not been, or are
                                               Proposed Rule would also describe                         of NSCC’s business, assets and                         unlikely to be, successful in returning
                                               NSCC’s authority to take actions during                   membership to another legal entity, (2)                NSCC to viability as a going concern. As
                                               the pendency of a Market Disruption                       such transfer being effected in                        described in the Plan, NSCC believes
                                               Event that it deems appropriate to                        connection with proceedings under                      this is an appropriate trigger because it
                                               address such an event and facilitate the                  Chapter 11 of the U.S. Federal                         is both broad and flexible enough to
                                               continuation of its services, if                          Bankruptcy Code,42 and (3) after                       cover a variety of scenarios, and would
                                               practicable, as described in greater                      effectuating this transfer, NSCC                       align incentives of NSCC and the
                                               detail below.                                             liquidating any remaining assets in an                 Members to avoid actions that might
                                                  The Plan would describe the                            orderly manner in bankruptcy                           undermine NSCC’s recovery efforts.
                                               interaction between the Proposed Rule                     proceedings. NSCC believes that the                    Additionally, this approach takes into
                                               and NSCC’s existing processes and                         proposed transfer approach to a wind-                  account the characteristics of NSCC’s
                                               procedures addressing business                            down would meet its objectives of (1)                  recovery tools and enables the Board to
                                               continuity management and disaster                        assuring that NSCC’s critical services                 consider (1) the presence of indicators
                                               recovery (generally, the ‘‘BCM/DR                         will be available to the market as long                of a successful or unsuccessful recovery,
                                               procedures’’), making clear that the                      as there are Members in good standing,                 and (2) potential for knock-on effects of
                                               Proposed Rule is designed to support                      and (2) minimizing disruption to the                   continued iterative application of
                                               those BCM/DR procedures and to                            operations of Members and financial                    NSCC’s recovery tools.
                                               address circumstances that may be                         markets generally that might be caused                    The Wind-down Plan would describe
                                               exogenous to NSCC and not necessarily                     by NSCC’s failure.                                     the general objectives of the transfer
                                               addressed by the BCM/DR procedures.                          In describing the transfer approach to              strategy, and would address
                                               Finally, the Plan would describe that,                    NSCC’s Wind-down Plan, the Plan                        assumptions regarding the transfer of
                                               because the operation of the Proposed                     would identify the factors that NSCC                   NSCC’s critical services, business, assets
                                               Rule is specific to each applicable                       considered in developing this approach,                and membership, and the assignment of
                                               Market Disruption Event, the Proposed                     including the fact that NSCC does not                  NSCC’s links with other FMIs, to
                                               Rule does not define a time limit on its                  own material assets that are unrelated to              another legal entity that is legally,
                                               application. However, the Plan would                      its clearance and settlement activities.               financially, and operationally able to
                                               note that actions authorized by the                       As such, a business reorganization or                  provide NSCC’s critical services to
                                               Proposed Rule would be limited to the                     ‘‘bail-in’’ of debt approach would be                  entities that wish to continue their
                                               pendency of the applicable Market                         unlikely to mitigate significant losses.               membership following the transfer
                                               Disruption Event, as made clear in the                    Additionally, NSCC’s approach was                      (‘‘Transferee’’). The Wind-down Plan
                                               Proposed Rule. Overall, the Proposed                      developed in consideration of its critical             would provide that the Transferee
                                               Rule is designed to mitigate risks caused                 and unique position in the U.S. markets,               would be either (1) a third party legal
                                               by Market Disruption Events and,                          which precludes any approach that                      entity, which may be an existing or
                                               thereby, minimize the risk of financial                   would cause NSCC’s critical services to                newly established legal entity or a
                                               loss that may result from such events.                    no longer be available.                                bridge entity formed to operate the
                                                  Recovery Tool Characteristics. The                        First, the Wind-down Plan would
                                                                                                                                                                business on an interim basis to enable
                                               Recovery Plan would describe NSCC’s                       describe the potential scenarios that
                                                                                                                                                                the business to be transferred
                                               evaluation of the tools identified within                 could lead to the wind-down of NSCC,
                                                                                                                                                                subsequently (‘‘Third Party
                                               the Recovery Plan, and its rationale for                  and the likelihood of such scenarios.
                                                                                                                                                                Transferee’’); or (2) an existing, debt-free
                                               concluding that such tools are                            The Wind-down Plan would identify
                                                                                                                                                                failover legal entity established ex-ante
                                               comprehensive, effective, and                             the time period leading up to a decision
                                                                                                         to wind-down NSCC as the ‘‘Runway                      by DTCC (‘‘Failover Transferee’’) to be
                                               transparent, and that such tools provide                                                                         used as an alternative Transferee in the
                                               appropriate incentives to Members and                     Period.’’ This period would follow the
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                                               minimize negative impact on Members                       implementation of any recovery tools, as                  43 The Wind-down Plan would state that, given
                                               and the financial system, in compliance                   it may take a period of time, depending                NSCC’s position as a user-governed financial
                                               with guidance published by the                                                                                   market utility, it is possible that Members might
                                                                                                           41 Standards for Covered Clearing Agencies,          voluntarily elect to provide additional support
                                               Commission in connection with the
                                                                                                         Securities Exchange Act Release No. 78961              during the recovery phase leading up to a potential
                                               adoption of Rule 17Ad–22(e)(3)(ii)                        (September 28, 2016), 81 FR 70786 (October 13,         trigger of the Wind-down Plan, but would also
                                                                                                         2016) (S7–03–14).                                      make clear that NSCC cannot predict the
                                                 40 See   supra note 8.                                    42 11 U.S.C. 1101 et seq.                            willingness of Members to do so.



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                                               4334                          Federal Register / Vol. 83, No. 20 / Tuesday, January 30, 2018 / Notices

                                               event that no viable or preferable Third                down Rule and Corporation Default                        Finally, the Wind-down Plan would
                                               Party Transferee timely commits to                      Rule, as defined and described below,                  include an analysis of the estimated
                                               acquire NSCC’s business. NSCC would                     and that the Transferee would not                      time and costs to effectuate the plan,
                                               seek to identify the proposed                           acquire any pending or open                            and would provide that this estimate be
                                               Transferee, and negotiate and enter into                transactions with the transfer of the                  reviewed and approved by the Board
                                               transfer arrangements during the                        business. The Wind-down Plan would                     annually. In order to estimate the length
                                               Runway Period and prior to making any                   anticipate that the Transferee would                   of time it might take to achieve a
                                               filings under Chapter 11 of the U.S.                    accept transactions for processing with                recovery or orderly wind-down of
                                               Federal Bankruptcy Code.44 As stated                    a trade date from and after the effective              NSCC’s critical operations, as
                                               above, the Wind-down Plan would                         time of the transfer.                                  contemplated by the R&W Plan, the
                                               anticipate that the transfer to the                        The Wind-down Plan would provide                    Wind-down Plan would include an
                                               Transferee be effected in connection                    that, following the effectiveness of the               analysis of the possible sequencing and
                                               with proceedings under Chapter 11 of                    transfer to the Transferee, the wind-                  length of time it might take to complete
                                               the U.S. Federal Bankruptcy Code, and                   down of NSCC would involve                             an orderly wind-down and transfer of
                                               pursuant to a bankruptcy court order                    addressing any residual claims against                 critical operations, as described in
                                               under Section 363 of the Bankruptcy                     NSCC through the bankruptcy process                    earlier sections of the R&W Plan. The
                                               Code, such that the transfer would be                   and liquidating the legal entity. As such,             Wind-down Plan would also include in
                                               free and clear of claims against, and                   and as stated above, the Wind-down                     this analysis consideration of other
                                               interests in, NSCC, except to the extent                Plan does not contemplate NSCC                         factors, including the time it might take
                                               expressly provided in the court’s                       continuing to provide services in any                  to complete any further attempts at
                                               order.45                                                capacity following the transfer time, and              recovery under the Recovery Plan. The
                                                  In order to effect a timely transfer of              any services not transferred would be                  Wind-down Plan would then multiply
                                               its services and minimize the market                    terminated.                                            this estimated length of time by NSCC’s
                                               and operational disruption of such                         The Wind-down Plan would also                       average monthly operating expenses,
                                               transfer, NSCC would expect to transfer                 identify the key dependencies for the                  including adjustments to account for
                                               all of its critical services and any non-               effectiveness of the transfer, which                   changes to NSCC’s profit and expense
                                               critical services that are ancillary and                include regulatory approvals that would                profile during these circumstances, over
                                               beneficial to a critical service, or that               permit the Transferee to be legally                    the previous twelve months to
                                               otherwise have substantial user demand                  qualified to provide the transferred                   determine the amount of LNA that it
                                               from the continuing membership.                         services from and after the transfer, and              should hold to achieve a recovery or
                                               Following the transfer, the Wind-down                   approval by the applicable bankruptcy                  orderly wind-down of NSCC’s critical
                                               Plan would anticipate that the                          court of, among other things, the                      operations. The estimated wind-down
                                               Transferee and its continuing                           proposed sale, assignments, and                        costs would constitute the ‘‘Recovery/
                                               membership would determine whether                      transfers to the Transferee.                           Wind-down Capital Requirement’’
                                               to continue to provide any transferred                     The Wind-down Plan would address                    under the Capital Policy.47 Under that
                                               non-critical service on an ongoing basis,               governance matters related to the                      policy, the General Business Risk
                                               or terminate the non-critical service                   execution of the transfer of NSCC’s                    Capital Requirement is calculated as the
                                               following some transition period.                       business and its wind-down. The Wind-                  greatest of three estimated amounts, one
                                               NSCC’s Wind-down Plan would                             down Plan would address the duties of                  of which is this Recovery/Wind-down
                                               anticipate that the Transferee would                    the Board to execute the wind-down of                  Capital Requirement.48
                                               enter into a transition services                                                                                 The R&W Plan is designed as a
                                                                                                       NSCC in conformity with (1) the Rules,
                                               agreement with DTCC so that DTCC                                                                               roadmap, and the types of actions that
                                                                                                       (2) the Board’s fiduciary duties, which
                                               would continue to provide the shared                                                                           may be taken both leading up to and in
                                                                                                       mandate that it exercise reasonable
                                               services it currently provides to NSCC,                                                                        connection with implementation of the
                                                                                                       business judgment in performing these
                                               including staffing, infrastructure and                                                                         Wind-down Plan would be primarily
                                                                                                       duties, and (3) NSCC’s regulatory
                                               operational support. The Wind-down                                                                             addressed in other supporting
                                                                                                       obligations under the Act as a registered
                                               Plan would also anticipate the                                                                                 documentation referred to therein.
                                                                                                       clearing agency. The Wind-down Plan                      The Wind-down Plan would address
                                               assignment of NSCC’s link                               would also identify certain factors the
                                               arrangements, including those with                                                                             proposed Rule 41 (Corporation Default)
                                                                                                       Board may consider in making these                     and proposed Rule 42 (Wind-down of
                                               DTC, CDS and OCC, described above, to                   decisions, which would include, for
                                               the Transferee.46 The Wind-down Plan                                                                           the Corporation), which would be
                                                                                                       example, whether NSCC could safely                     adopted to facilitate the implementation
                                               would provide that Members’ open                        stabilize the business and protect its
                                               positions existing prior to the effective                                                                      of the Wind-down Plan, and are
                                                                                                       value without seeking bankruptcy                       discussed below.
                                               time of the transfer would be addressed                 protection, and NSCC’s ability to
                                               by the provisions of the proposed Wind-                 continue to meet its regulatory                        Proposed Rules
                                                                                                       requirements.                                             In connection with the adoption of
                                                 44 See 11 U.S.C. 1101 et seq.
                                                 45 See
                                                                                                          The Wind-down Plan would describe                   the R&W Plan, NSCC is proposing to
                                                        id. at 363.
                                                  46 The proposed transfer arrangements outlined in    (1) actions NSCC or DTCC may take to                   adopt the Proposed Rules, each
                                               the Wind-down Plan do not contemplate the               prepare for wind-down in the period                    described below. The Proposed Rules
                                               transfer of any credit or funding agreements, which     before NSCC experiences any financial                  would facilitate the execution of the
                                               are generally not assignable by NSCC. However, to       distress, (2) actions NSCC would take                  R&W Plan and would provide Members
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                                               the extent the Transferee adopts rules substantially
                                               identical to those NSCC has in effect prior to the
                                                                                                       both during the recovery phase and the                 and Limited Members with
                                               transfer, it would have the benefit of any rules-       Runway Period to prepare for the                       transparency as to critical aspects of the
                                               based liquidity funding. The Wind-down Plan             execution of the Wind-down Plan, and                   Plan, particularly as they relate to the
                                               contemplates that no Clearing Fund would be             (3) actions NSCC would take upon
                                               transferred to the Transferee, as it is not held in a
                                                                                                                                                              rights and responsibilities of both NSCC
                                               bankruptcy remote manner and it is the primary
                                                                                                       commencement of bankruptcy
                                               prefunded liquidity resource to be accessed in the      proceedings to effectuate the Wind-                      47 See   supra note 6.
                                               recovery phase.                                         down Plan.                                               48 See   supra note 6.



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                                                                               Federal Register / Vol. 83, No. 20 / Tuesday, January 30, 2018 / Notices                                                 4335

                                               and Members. The Proposed Rules also                      Settlement Date, and (ii) the Current                     Wind-down Plan and in the proposed
                                               provide a legal basis to these aspects of                 Market Price in the CNS System on the                     Wind-down Rule, the Board would
                                               the Plan.                                                 Default Date for its fail positions. To                   initiate the Plan if, in the exercise of its
                                                                                                         determine each Member’s ‘‘CNS Close-                      business judgment and subject to its
                                               Rule 41 (Corporation Default)
                                                                                                         out Value,’’ (i) the Net Contract Value                   fiduciary duties, it has determined that
                                                  The proposed Rule 41 (‘‘Corporation                    for each CUSIP would be subtracted                        the execution of the Recovery Plan has
                                               Default Rule’’) would provide a                           from the CNS Market Value for such                        not or is not likely to restore NSCC to
                                               mechanism for the termination,                            CUSIP, and (ii) the resulting difference                  viability as a going concern, and the
                                               valuation and netting of unsettled,                       for all CUSIPS in which the Member                        implementation of the Wind-down Plan,
                                               guaranteed CNS transactions in the                        had a net long or short position would                    including the transfer of NSCC’s
                                               event NSCC is unable to perform its                       be summed, and would be netted and                        business, is in the best interests of
                                               obligations or otherwise suffers a                        offset against any other amounts that                     NSCC, Members and Limited Members,
                                               defined event of default, such as                         may be due to or owing from the                           its shareholders and creditors, and the
                                               entering insolvency proceedings. The                      Member under the Rules. The proposed                      U.S. financial markets.
                                               proposed Corporation Default Rule                         Corporation Default Rule would provide                       Identification of Critical Services;
                                               would provide Members with                                for notification to each Member of its                    Designation of Dates and Times for
                                               transparency and certainty regarding                      CNS Close-out Value, and would also                       Specific Actions. The Proposed Rule
                                               what would happen if NSCC were to fail                    address interpretation of the Rules in                    would provide that, upon making a
                                               (defined in the proposed Rule as a                        relation to certain terms that are defined                determination to initiate the Wind-
                                               ‘‘Corporation Default’’).                                 in the Federal Deposit Insurance                          down Plan, the Board would identify
                                                  The proposed rule would define the                     Corporation Improvement Act of 1991                       the critical and non-critical services that
                                               events that would constitute a                            (‘‘FDICIA’’).50                                           would be transferred to the Transferee at
                                               Corporation Default, which would                             NSCC believes this valuation                           the Transfer Time (as defined below and
                                               generally include (1) the failure of NSCC                 approach, which is comparable to the                      in the Proposed Rule), as well as any
                                               to make any undisputed payment or                         approach adopted by other central                         non-critical services that would not be
                                               delivery to a Member if such failure is                   counterparties, is appropriate for NSCC                   transferred to the Transferee. The
                                               not remedied within seven days after                      given the market in which NSCC                            proposed Wind-down Rule would
                                               notice of such failure is given to NSCC;                  operates and the volumes of                               establish that any services transferred to
                                               (2) NSCC is dissolved; (3) NSCC                           transactions it processes in CNS,                         the Transferee will only be provided by
                                               institutes a proceeding seeking a                         because it would provide for a common,                    the Transferee as of the Transfer Time,
                                               judgment of insolvency or bankruptcy,                     clear and transparent valuation                           and that any non-critical services that
                                               or a proceeding is instituted against it                  methodology and price per CUSIP                           are not transferred to the Transferee
                                               seeking a judgment of bankruptcy or                       applicable to all affected Members.                       would be terminated at the Transfer
                                               insolvency and such judgment is                                                                                     Time. The Proposed Rule would also
                                               entered; or (4) NSCC seeks or becomes                     Rule 42 (Wind-Down of the
                                                                                                                                                                   provide that the Board would establish
                                               subject to the appointment of a receiver,                 Corporation)
                                                                                                                                                                   (1) an effective time for the transfer of
                                               trustee or similar official pursuant to the                  The proposed Rule 42 (‘‘Wind-down                      NSCC’s business to a Transferee
                                               federal securities laws or Title II of the                Rule’’) would be adopted to facilitate                    (‘‘Transfer Time’’), (2) the last day that
                                               Dodd-Frank Wall Street Reform and                         the execution of the Wind-down Plan.                      transactions may be submitted to NSCC
                                               Consumer Protection Act 49 for it or for                  The Wind-down Rule would include a                        for processing (‘‘Last Transaction
                                               all or substantially all of its assets.                   proposed set of defined terms that                        Acceptance Date’’), and (3) the last day
                                                  Upon a Corporation Default, the                        would be applicable only to the                           that transactions submitted to NSCC
                                               proposed Corporation Default Rule                         provisions of this Proposed Rule. The                     will be settled (‘‘Last Settlement Date’’).
                                               would provide that all unsettled,                         Wind-down Rule would make clear that                         Treatment of Pending Transactions.
                                               guaranteed CNS transactions would be                      a wind-down of NSCC’s business would                      The Wind-down Rule would also
                                               terminated and, no later than forty-five                  occur (1) after a decision is made by the                 authorize the Board to provide for the
                                               days from the date on which the event                     Board, and (2) in connection with the                     settlement of pending transactions prior
                                               that constitutes a Corporation Default                    transfer of NSCC’s services to a                          to the Transfer Time, so long as the
                                               occurred (or ‘‘Default Date’’), the Board                 Transferee, as described therein.                         Corporation Default Rule has not been
                                               would determine a single net amount                       Generally, the proposed Wind-down                         triggered. For example, the Proposed
                                               owed by or to each Member with respect                    Rule is designed to create clear                          Rule would provide the Board with the
                                               to such transactions pursuant to the                      mechanisms for the transfer of Eligible                   ability to, if it deems practicable, based
                                               valuation procedures set forth in the                     Members, Eligible Limited Members,                        on NSCC’s resources at that time, allow
                                               Proposed Rule. Essentially, for each                      and Settling Banks (as these terms                        pending transactions to complete prior
                                               affected position in a CNS Security, the                  would be defined in the Wind-down                         to the transfer of NSCC’s business to a
                                               ‘‘CNS Market Value’’ would be                             Rule), and NSCC’s business, in order to                   Transferee. The Board would also have
                                               determined by using the Current Market                    provide for continued access to critical                  the ability to allow Members to only
                                               Price for that security as determined in                  services and to minimize disruption to                    submit trades that would effectively
                                               the CNS System as of the close of                         the markets in the event the Wind-down                    offset pending positions or provide that
                                               business on the next Business Day                         Plan is initiated.                                        transactions will be processed in
                                               following the Default Date. NSCC would                       Wind-down Trigger. First, the                          accordance with special or exception
                                               determine a ‘‘Net Contract Value’’ for                    Proposed Rule would make clear that                       processing procedures. The Proposed
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                                               each Member’s net unsettled long or                       the Board is responsible for initiating                   Rule is designed to enable these actions
                                               short position in a CNS Security by                       the Wind-down Plan, and would                             in order to facilitate settlement of
                                               netting the Member’s (i) contract price                   identify the criteria the Board would                     pending transactions and reduce claims
                                               for such net position that, as of the                     consider when making this                                 against NSCC that would have to be
                                               Default Date, has not yet passed the                      determination. As provided for in the                     satisfied after the transfer has been
                                                                                                                                                                   effected. If none of these actions are
                                                 49 12   U.S.C. 5381–5394.                                 50 12   U.S.C. 1811 et seq.                             deemed practicable (or if the


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                                               4336                          Federal Register / Vol. 83, No. 20 / Tuesday, January 30, 2018 / Notices

                                               Corporation Default Rule has been                       the Transferee. These provisions would                 transition of NSCC’s business to a
                                               triggered), then the provisions of the                  not apply to any Member or Limited                     Transferee and to provide that, for at
                                               proposed Corporation Default Rule                       Member that is either in default of an                 least the Comparability Period, the
                                               would apply to the treatment of open,                   obligation to NSCC or has provided                     Transferee (1) would operate the
                                               pending transactions.                                   notice of its election to withdraw from                transferred business in a manner that is
                                                  The Proposed Rule would make clear,                  membership. Further, the proposed                      comparable in substance and effect to
                                               however, that NSCC would not accept                     Wind-down Rule would make clear that                   the manner in which the business was
                                               any transactions for processing after the               it would not prohibit (1) Members and                  operated by NSCC, and (2) would not
                                               Last Transaction Acceptance Date or                     Limited Members that are not                           require sudden and disruptive changes
                                               which are designated to settle after the                transferred by operation of the Wind-                  in the systems, operations and business
                                               Last Settlement Date. Any transactions                  down Rule from applying for                            practices of the new members of the
                                               to be processed and/or settled after the                membership with the Transferee, or (2)                 Transferee.
                                               Transfer Time would be required to be                   Members, Limited Members, and                             Subordination of Claims Provisions
                                               submitted to the Transferee, and would                  Settling Banks that would be transferred               and Miscellaneous Matters. The
                                               not be NSCC’s responsibility.                           to the Transferee from withdrawing                     proposed Wind-down Rule would also
                                                  Notice Provisions. The proposed                      from membership with the Transferee.51                 include a provision addressing the
                                               Wind-down Rule would provide that,                         Comparability Period. The proposed                  subordination of unsecured claims
                                               upon a decision to implement the Wind-                  automatic mechanism for the transfer of                against NSCC of Members and Limited
                                               down Plan, NSCC would provide                           NSCC’s membership is intended to                       Members who fail to participate in
                                               Members and Limited Members and its                     provide NSCC’s membership with                         NSCC’s recovery efforts (i.e., such firms
                                               regulators with a notice that includes                  continuous access to critical services in              are delinquent in their obligations to
                                               material information relating to the                    the event of NSCC’s wind-down, and to                  NSCC or elect to retire from NSCC in
                                               Wind-down Plan and the anticipated                      facilitate the continued prompt and                    order to minimize their obligations with
                                               transfer of NSCC’s membership and                       accurate clearance and settlement of                   respect to the allocation of losses,
                                               business, including, for example, (1) a                 securities transactions. Further to this               pursuant to the Rules). This provision is
                                               brief statement of the reasons for the                  goal, the proposed Wind-down Rule                      designed to incentivize Members to
                                               decision to implement the Wind-down                     would provide that NSCC would enter                    participate in NSCC’s recovery efforts.52
                                               Plan; (2) identification of the Transferee              into arrangements with a Failover                         The proposed Wind-down Rule
                                               and information regarding the                           Transferee, or would use commercially                  would address other ex-ante matters
                                               transaction by which the transfer of                    reasonable efforts to enter into                       including provisions providing that
                                               NSCC’s business would be effected; (3)                  arrangements with a Third Party                        Members, Limited Members and
                                               the Transfer Time, Last Transaction                     Transferee, providing that, in either                  Settling Banks (1) will assist and
                                               Acceptance Date, and Last Settlement                    case, with respect to the critical services            cooperate with NSCC to effectuate the
                                               Date; and (4) identification of Eligible                and any non-critical services that are                 transfer of NSCC’s business to a
                                               Members and Eligible Limited Members,                   transferred from NSCC to the                           Transferee, (2) consent to the provisions
                                               and the critical and non-critical services              Transferee, for at least a period of time              of the rule, and (3) grant NSCC power
                                               that would be transferred to the                        to be agreed upon (‘‘Comparability                     of attorney to execute and deliver on
                                               Transferee at the Transfer Time, as well                Period’’), the business transferred from               their behalf documents and instruments
                                               as those Non-Eligible Members and                       NSCC to the Transferee would be                        that may be requested by the Transferee.
                                               Non-Eligible Limited Members (as                        operated in a manner that is comparable                Finally, the Proposed Rule would
                                               defined in the Proposed Rule), and any                  to the manner in which the business                    include a limitation of liability for any
                                               non-critical services that would not be                 was previously operated by NSCC.                       actions taken or omitted to be taken by
                                               included in the transfer. NSCC would                    Specifically, the proposed Wind-down                   NSCC pursuant to the Proposed Rule.
                                               also make available the rules and                       Rule would provide that: (1) The rules                 Rule 60 (Market Disruption and Force
                                               procedures and membership agreements                    of the Transferee and terms of                         Majeure)
                                               of the Transferee.                                      membership agreements would be
                                                  Transfer of Membership. The                          comparable in substance and effect to                    The proposed Rule 60 (‘‘Force
                                               proposed Wind-down Rule would                           the analogous Rules and membership                     Majeure Rule’’) would address NSCC’s
                                               address the expected transfer of NSCC’s                 agreements of NSCC; (2) the rights and                 authority to take certain actions upon
                                               membership to the Transferee, which                     obligations of any Members, Limited                    the occurrence, and during the
                                               NSCC would seek to effectuate by                        Members and Settling Banks that are                    pendency, of a ‘‘Market Disruption
                                               entering into an arrangement with a                     transferred to the Transferee would be                 Event,’’ as defined therein. The
                                               Failover Transferee, or by using                        comparable in substance and effect to                  Proposed Rule is designed to clarify
                                               commercially reasonable efforts to enter                their rights and obligations as to NSCC;               NSCC’s ability to take actions to address
                                               into such an arrangement with a Third                   and (3) the Transferee would operate the               extraordinary events outside of the
                                               Party Transferee. Therefore, the Wind-                  transferred business and provide any                   control of NSCC and of its membership,
                                               down Rule would provide Members,                        services that are transferred in a                     and to mitigate the effect of such events
                                               Limited Members and Settling Banks                      comparable manner to which such                        by facilitating the continuity of services
                                               with notice that, in connection with the                services were provided by NSCC. The                    (or, if deemed necessary, the temporary
                                               implementation of the Wind-down Plan                    purpose of these provisions and the
                                               and with no further action required by                  intended effect of the proposed Wind-                    52 Nothing in the proposed Wind-down Rule

                                               any party, (1) their membership with                                                                           would seek to prevent a Member, Limited Member
                                                                                                       down Rule is to facilitate a smooth
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                                                                                                                                                              or Settling Bank that retired its membership at
                                               NSCC would transfer to the Transferee,                                                                         NSCC from applying for membership with the
                                               (2) they would become party to a                          51 The Members and Limited Members whose             Transferee. Once its NSCC membership is
                                               membership agreement with such                          membership is transferred to the Transferee            terminated, however, such firm would not be able
                                               Transferee, and (3) they would have all                 pursuant to the proposed Wind-down Rule would          to benefit from the membership assignment that
                                                                                                       submit transactions to be processed and settled        would be effected by this proposed Wind-down
                                               of the rights and be subject to all of the              subject to the rules and procedures of the             Rule, and it would have to apply for membership
                                               obligations applicable to their                         Transferee, including any applicable margin            directly with the Transferee, subject to its
                                               membership status under the rules of                    charges or other financial obligations.                membership application and review process.



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                                                                             Federal Register / Vol. 83, No. 20 / Tuesday, January 30, 2018 / Notices                                             4337

                                               suspension of services). To that end,                   currently reserved for future use, as                  utilities.53 Section 805(a)(2) of the
                                               under the proposed Force Majeure Rule,                  shown on Exhibit 5b, hereto.                           Clearing Supervision Act 54 also
                                               NSCC would be entitled, during the                                                                             authorizes the Commission to prescribe
                                                                                                       Expected Effect on and Management of
                                               pendency of a Market Disruption Event,                                                                         risk management standards for the
                                                                                                       Risk
                                               to (1) suspend the provision of any or                                                                         payment, clearing, and settlement
                                               all services, and (2) take, or refrain from                NSCC believes the proposal to adopt                 activities of designated clearing entities,
                                               taking, or require Members and Limited                  the R&W Plan and the Proposed Rules                    like NSCC, for which the Commission is
                                               Members to take, or refrain from taking,                would enable it to better manage its                   the supervisory agency. Section 805(b)
                                               any actions it considers appropriate to                 risks. As described above, the Recovery                of the Clearing Supervision Act 55 states
                                               address, alleviate, or mitigate the event               Plan would identify the recovery tools                 that the objectives and principles for
                                               and facilitate the continuation of                      and the risk management activities that                risk management standards prescribed
                                               NSCC’s services as may be practicable.                  NSCC may use to address risks of                       under Section 805(a) shall be to promote
                                                  The proposed Force Majeure Rule                      uncovered losses or shortfalls resulting               robust risk management, promote safety
                                               would identify the events or                            from a Member default and losses                       and soundness, reduce systemic risks,
                                               circumstances that would be considered                  arising from non-default events. By                    and support the stability of the broader
                                               a ‘‘Market Disruption Event,’’ including,               creating a framework for its                           financial system.
                                               for example, events that lead to the                    management of risks across an evolving                    NSCC believes that the proposal is
                                               suspension or limitation of trading or                  stress scenario and providing a roadmap                consistent with Section 805(b) of the
                                               banking in the markets in which NSCC                    for actions it may employ to monitor                   Clearing Supervision Act because it is
                                               operates, or the unavailability or failure              and, as needed, stabilize its financial                designed to address each of these
                                               of any material payment, bank transfer,                 condition, the Recovery Plan would                     objectives. The Recovery Plan and the
                                               wire or securities settlement systems.                  strengthen NSCC’s ability to manage                    proposed Force Majeure Rule would
                                               The proposed Force Majeure Rule                         risk. The Wind-down Plan would also                    promote robust risk management and
                                               would define the governance                             enable NSCC to better manage its risks                 would reduce systemic risks by
                                               procedures for how NSCC would                           by establishing the strategy and                       providing NSCC with a roadmap for
                                               determine whether, and how, to                          framework for its orderly wind-down                    actions it may employ to monitor and
                                               implement the provisions of the rule. A                 and the transfer of NSCC’s business                    manage its risks, and, as needed, to
                                               determination that a Market Disruption                  when the Wind-down Plan is triggered.                  stabilize its financial condition in the
                                               Event has occurred would generally be                   By creating clear mechanisms for the                   event those risks materialize. Further,
                                               made by the Board, but the Proposed                     transfer of NSCC’s membership and                      the Recovery Plan would identify the
                                               Rule would provide for limited, interim                 business, the Wind-down Plan would                     triggers of recovery tools, but would not
                                               delegation of authority to a specified                  facilitate continued access to NSCC’s                  provide that those triggers necessitate
                                               officer or management committee if the                  critical services and minimize market                  the use of those tools. Instead, the
                                               Board would not be able to take timely                  impact of the transfer and enable NSCC                 Recovery Plan would provide that the
                                               action. In the event such delegated                     to better manage risks related to its                  triggers of these tools lead to escalation
                                               authority is exercised, the proposed                    wind-down.                                             to an appropriate management body,
                                               Force Majeure Rule would require that                                                                          which would have the authority and
                                                                                                          NSCC believes the Proposed Rules
                                               the Board be convened as promptly as                                                                           flexibility to respond appropriately to
                                                                                                       would enable it to better manage its
                                               practicable, no later than five Business                                                                       the situation. Essentially, the Recovery
                                                                                                       risks by facilitating, and providing a
                                               Days after such determination has been                                                                         Plan and the proposed Force Majeure
                                                                                                       legal basis for, the implementation of
                                               made, to ratify, modify, or rescind the                                                                        Rule are designed to minimize losses to
                                                                                                       critical aspects of the R&W Plan. The
                                               action. The proposed Force Majeure                                                                             both NSCC and Members by giving
                                                                                                       Proposed Rules would provide Members
                                               Rule would also provide for prompt                                                                             NSCC the ability to determine the most
                                                                                                       and Limited Members with
                                               notification to the Commission, and                                                                            appropriate way to address each stress
                                                                                                       transparency around those provisions of
                                               advance consultation with Commission                                                                           situation. This approach would allow
                                               staff, when practicable. The Proposed                   the R&W Plan that relate to their and
                                                                                                                                                              for proper evaluation of the situation
                                               Rule would require Members and                          NSCC’s rights, responsibilities and
                                                                                                                                                              and the possible impacts of the use of
                                               Limited Members to notify NSCC                          obligations. Therefore, NSCC believes
                                                                                                                                                              the available recovery tools in order to
                                               immediately upon becoming aware of a                    the Proposed Rules would enable it to
                                                                                                                                                              minimize the negative effects of the
                                               Market Disruption Event, and, likewise,                 better manage its risks by providing this
                                                                                                                                                              stress situation, and would reduce
                                               would require NSCC to notify Members                    transparency and creating certainty, to
                                                                                                                                                              systemic risks related to the
                                               and Limited Members if it has triggered                 the extent practicable, around the
                                                                                                                                                              implementation of the Recovery Plan
                                               the Proposed Rule.                                      occurrence of a Market Disruption Event
                                                                                                                                                              and the underlying recovery tools.
                                                  Finally, the Proposed Rule would                     or a Corporation Default (as such terms                   The Wind-down Plan and the
                                               address other related matters, including                are defined in the respective Proposed                 proposed Corporation Default Rule and
                                               a limitation of liability for any failure or            Rules), and around the implementation                  Wind-down Rule, which would
                                               delay in performance, in whole or in                    of the Wind-down Plan.                                 facilitate the implementation of the
                                               part, arising out of the Market                         Consistency With the Clearing                          Wind-down Plan, would promote safety
                                               Disruption Event.                                       Supervision Act                                        and soundness and would support the
                                               Proposed Change to the Rule Numbers                                                                            stability of the broader financial system,
                                                                                                          The stated purpose of the Clearing
                                                                                                                                                              because they would establish a
                                                 In order to align the order of the                    Supervision Act is to mitigate systemic
                                                                                                                                                              framework for the orderly wind-down of
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                                               Proposed Rules with the order of                        risk in the financial system and promote
                                                                                                                                                              NSCC’s business and would set forth
                                               comparable rules in the rulebooks of the                financial stability by, among other
                                                                                                                                                              clear mechanics for the transfer of its
                                               other Clearing Agencies, NSCC is also                   things, promoting uniform risk
                                                                                                                                                              critical services and membership, as
                                               proposing to re-number the current Rule                 management standards for systemically
                                               42 (Wind-down of a Member, Fund                         important financial market utilities and                 53 12  U.S.C. 5461(b).
                                               Member or Insurance Carrier/Retirement                  strengthening the liquidity of                           54 Id. at 5464(a)(2).
                                               Services Member) to Rule 40, which is                   systemically important financial market                  55 Id. at 5464(b).




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                                               4338                          Federal Register / Vol. 83, No. 20 / Tuesday, January 30, 2018 / Notices

                                               well as clear provisions concerning the                 the use and application of such tools to               are consistent with the requirements of
                                               treatment of open, guaranteed CNS                       enable them to address stress situations               Section 17A(b)(3)(F) of the Act.61
                                               transactions in the event of NSCC’s                     in a manner most appropriate for the                      Rule 17Ad–22(e)(3)(ii) under the Act
                                               default. By designing the Wind-down                     circumstances. Therefore, the Recovery                 requires NSCC to establish, implement,
                                               Plan and these Proposed Rules to enable                 Plan and the proposed Force Majeure                    maintain and enforce written policies
                                               the continuity of NSCC’s critical                       Rule would also contribute to the                      and procedures reasonably designed to
                                               services and membership, NSCC                           safeguarding of securities and funds                   maintain a sound risk management
                                               believes they would promote safety and                  which are in the custody or control of                 framework for comprehensively
                                               soundness and would support stability                   NSCC or for which it is responsible by                 managing legal, credit, liquidity,
                                               in the broader financial system in the                  enabling actions that would address and                operational, general business,
                                               event the Wind-down Plan is                             minimize losses.                                       investment, custody, and other risks
                                               implemented.                                               The Wind-down Plan and the                          that arise in or are borne by the covered
                                                  By assisting NSCC to promote robust                  proposed Corporation Default Rule and                  clearing agency, which includes plans
                                               risk management, promote safety and                     Wind-down Rule, which would both                       for the recovery and orderly wind-down
                                               soundness, reduce systemic risks, and                   facilitate the implementation of the                   of the covered clearing agency
                                               support the stability of the broader                    Wind-down Plan, would also promote                     necessitated by credit losses, liquidity
                                               financial system, as described above,                   the prompt and accurate clearance and                  shortfalls, losses from general business
                                               NSCC believes the proposal is                           settlement of securities transactions and              risk, or any other losses.62 The R&W
                                               consistent with Section 805(b) of the                   assure the safeguarding of securities and              Plan and the Proposed Rules are
                                               Clearing Supervision Act.56                             funds which are in the custody or                      designed to meet the requirements of
                                                  NSCC also believes that the proposal                 control of NSCC or for which it is                     Rule 17Ad–22(e)(3)(ii).63
                                               is consistent with the requirements of                  responsible. The Wind-down Plan and                       The R&W Plan would be maintained
                                               the Act and the rules and regulations                   the proposed Corporation Default Rule                  by NSCC in compliance with Rule
                                               thereunder applicable to a registered                   and Wind-down Rule would                               17Ad–22(e)(3)(ii) in that it provides
                                               clearing agency. In particular, NSCC                    collectively establish a framework for                 plans for the recovery and orderly wind-
                                               believes that the R&W Plan, each of the                 the transfer and orderly wind-down of                  down of NSCC necessitated by credit
                                               Proposed Rules, and the proposed                        NSCC’s business. These proposals                       losses, liquidity shortfalls, losses from
                                               change to Rule numbers are consistent                   would establish clear mechanisms for                   general business risk, or any other
                                               with Section 17A(b)(3)(F) of the Act,57                 the transfer of NSCC’s critical services               losses, as described above.64
                                               the R&W Plan and each of the Proposed                   and membership, and for the treatment                  Specifically, the Recovery Plan would
                                               Rules are consistent with Rule 17Ad–                    of open, guaranteed CNS transactions in                define the risk management activities,
                                               22(e)(3)(ii) under the Act,58 and the                   the event of NSCC’s default. By doing                  stress conditions and indicators, and
                                               R&W Plan is consistent with Rule                        so, the Wind-down Plan and these                       tools that NSCC may use to address
                                               17Ad–22(e)(15)(ii) under the Act,59 for                 Proposed Rules are designed to facilitate              stress scenarios that could eventually
                                               the reasons described below.                            the continuity of NSCC’s critical                      prevent it from being able to provide its
                                                  Section 17A(b)(3)(F) of the Act                      services and enable Members and                        critical services as a going concern.
                                               requires, in part, that the rules of NSCC               Limited Members to maintain access to                  Through the framework of the Crisis
                                               be designed to promote the prompt and                   NSCC’s services through the transfer of                Continuum, the Recovery Plan would
                                               accurate clearance and settlement of                    its membership in the event NSCC                       address measures that NSCC may take to
                                               securities transactions, and to assure the              defaults or the Wind-down Plan is                      address risks of credit losses and
                                               safeguarding of securities and funds                    triggered by the Board. Therefore, by                  liquidity shortfalls, and other losses that
                                               which are in the custody or control of                  facilitating the continuity of NSCC’s                  could arise from a Member default. The
                                               NSCC or for which it is responsible.60                  critical clearance and settlement                      Recovery Plan would also address the
                                               The Recovery Plan and the proposed                      services, NSCC believes the proposals                  management of general business risks
                                               Force Majeure Rule would promote the                    would promote the prompt and accurate                  and other non-default risks that could
                                               prompt and accurate clearance and                       clearance and settlement of securities                 lead to losses.
                                               settlement of securities transactions by                transactions. Further, by creating a                      The Wind-down Plan would be
                                               providing NSCC with a roadmap for                       framework for the transfer and orderly                 triggered by a determination by the
                                               actions it may employ to mitigate losses,               wind-down of NSCC’s business, NSCC                     Board that recovery efforts have not
                                               and monitor and, as needed, stabilize,                  believes the proposals would enhance                   been, or are unlikely to be, successful in
                                               its financial condition, which would                    the safeguarding of securities and funds               returning NSCC to viability as a going
                                               allow it to continue its critical clearance             which are in the custody or control of                 concern. Once triggered, the Wind-
                                               and settlement services in stress                       NSCC or for which it is responsible.                   down Plan would set forth clear
                                               situations. Further, as described above,                   Finally, the proposed change to the                 mechanisms for the transfer of NSCC’s
                                               the Recovery Plan is designed to                        Rule numbers would align the order of                  membership and business, and would
                                               identify the actions and tools NSCC may                 the Proposed Rules with the order of                   be designed to facilitate continued
                                               use to address and minimize losses to                   comparable rules in the rulebooks of the               access to NSCC’s critical services and to
                                               both NSCC and Members. The Recovery                     other Clearing Agencies. Therefore,                    minimize market impact of the transfer.
                                               Plan and the proposed Force Majeure                     NSCC believes the proposed change                      By establishing the framework and
                                               Rule would provide NSCC’s                               would create ease of reference,                        strategy for the execution of the transfer
                                               management and the Board with                           particularly for Members that are also                 and wind-down of NSCC in order to
                                               guidance in this regard by identifying                  participants of the other Clearing                     facilitate continuous access to NSCC’s
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                                               the indicators and governance around                    Agencies, and, as such, would assist in                critical services, the Wind-down Plan
                                                                                                       promoting the prompt and accurate                      establishes a plan for the orderly wind-
                                                 56 Id.                                                clearance and settlement of securities
                                                 57 15  U.S.C. 78q–1(b)(3)(F).                         transactions.                                            61 Id.
                                                 58 17  CFR 240.17Ad–22(e)(3)(ii).                        Therefore, NSCC believes the R&W                      62 17    CFR 240.17Ad–22(e)(3)(ii).
                                                 59 Id. at 240.17Ad–22(e)(15)(ii).                     Plan, each of the Proposed Rules, and                    63 Id.
                                                 60 15 U.S.C. 78q–1(b)(3)(F).                          the proposed change to Rule numbers                      64 Id.




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                                                                                Federal Register / Vol. 83, No. 20 / Tuesday, January 30, 2018 / Notices                                             4339

                                               down of NSCC. Therefore, NSCC                              clearance and settlement system.                       Plan would also provide that the
                                               believes the R&W Plan would provide                        Members’ financial obligations to NSCC,                estimate would be the ‘‘Recovery/Wind-
                                               plans for the recovery and orderly wind-                   particularly their Required Deposits to                down Capital Requirement’’ under the
                                               down of the covered clearing agency                        the Clearing Fund, are measured by the                 Capital Policy. Under that policy, the
                                               necessitated by credit losses, liquidity                   risk posed by the Members’ activity in                 General Business Risk Capital
                                               shortfalls, losses from general business                   NSCC’s systems, which incentivizes                     Requirement, which is the sufficient
                                               risk, or any other losses, and, as such,                   them to manage that risk which would                   amount of LNA that NSCC should hold
                                               meets the requirements of Rule 17Ad–                       correspond to lower financial                          to cover potential general business
                                               22(e)(3)(ii).65                                            obligations. Finally, NSCC’s Recovery                  losses so that it can continue operations
                                                  As described in greater detail above,                   Plan provides for a continuous                         and services as a going concern if those
                                               the Proposed Rules are designed to                         evaluation of the systemic consequences                losses materialize, is calculated as the
                                               facilitate the execution of the R&W Plan,                  of executing its recovery tools, with the              greatest of three estimated amounts, one
                                               provide Members and Limited Members                        goal of minimizing their negative                      of which is this Recovery/Wind-down
                                               with transparency regarding the                            impact. The Recovery Plan would                        Capital Requirement. Therefore, NSCC
                                               material provisions of the Plan, and                       outline various indicators over a                      believes the R&W Plan, as it interrelates
                                               provide NSCC with a legal basis for                        timeline of increasing stress, the Crisis              with the Capital Policy, is consistent
                                               implementation of those provisions. As                     Continuum, with escalation triggers to                 with Rule 17Ad–22(e)(15)(ii).71
                                               such, NSCC also believes the Proposed                      NSCC management or the Board, as
                                               Rules meet the requirements of Rule                        appropriate. This approach would allow                 III. Date of Effectiveness of the Advance
                                               17Ad–22(e)(3)(ii).66                                       for timely evaluation of the situation                 Notice and Timing for Commission
                                                  NSCC has evaluated the recovery                         and the possible impacts of the use of                 Action
                                               tools that would be identified in the                      a recovery tool in order to minimize the                  The proposed change may be
                                               Recovery Plan and has determined that                      negative effects of the stress scenario.               implemented if the Commission does
                                               these tools are comprehensive, effective,                  Therefore, NSCC believes that the                      not object to the proposed change
                                               and transparent, and that such tools                       recovery tools that would be identified                within 60 days of the later of (i) the date
                                               provide appropriate incentives to                          and described in its Recovery Plan,                    that the proposed change was filed with
                                               NSCC’s Members to manage the risks                         including the authority provided to it in              the Commission or (ii) the date that any
                                               they present. The recovery tools, as                       the proposed Force Majeure Rule,                       additional information requested by the
                                               outlined in the Recovery Plan and in the                   would meet the criteria identified                     Commission is received,72 unless
                                               proposed Force Majeure Rule, provide                       within guidance published by the                       extended as described below. The
                                               NSCC with a comprehensive set of                           Commission in connection with the                      clearing agency shall not implement the
                                               options to address its material risks and                  adoption of Rule 17Ad–22(e)(3)(ii).68                  proposed change if the Commission has
                                               support the resiliency of its critical                        Therefore, NSCC believes the R&W                    any objection to the proposed change.73
                                               services under a range of stress                           Plan and each of the Proposed Rules are
                                               scenarios. NSCC also believes the                          consistent with Rule 17Ad–                                Pursuant to Section 806(e)(1)(H) of the
                                               recovery tools are effective, as NSCC has                  22(e)(3)(ii).69                                        Clearing Supervision Act,74 the
                                               both legal basis and operational                              Rule 17Ad–22(e)(15)(ii) under the Act               Commission may extend the review
                                               capability to execute these tools in a                     requires NSCC to establish, implement,                 period of an advance notice for an
                                               timely and reliable manner. Many of the                    maintain and enforce written policies                  additional 60 days, if the changes
                                               recovery tools are provided for in the                     and procedures reasonably designed to                  proposed in the advance notice raise
                                               Rules; Members are bound by the Rules                      identify, monitor, and manage its                      novel or complex issues, subject to the
                                               through their membership agreements                        general business risk and hold sufficient              Commission providing the clearing
                                               with NSCC, and the Rules are adopted                       LNA to cover potential general business                agency with prompt written notice of
                                               pursuant to a framework established by                     losses so that NSCC can continue                       the extension.
                                               Rule 19b–4 under the Act,67 providing                      operations and services as a going                        Here, as the Commission has not
                                               a legal basis for the recovery tools found                 concern if those losses materialize,                   requested any additional information,
                                               therein. Other recovery tools have legal                   including by holding LNA equal to the                  the date that is 60 days after NSCC filed
                                               basis in contractual arrangements to                       greater of either (x) six months of the                the Advance Notice with the
                                               which NSCC is a party, as described                        covered clearing agency’s current                      Commission is February 16, 2018.
                                               above. Further, as many of the tools are                   operating expenses, or (y) the amount                  However, the Commission is extending
                                               embedded in NSCC’s ongoing risk                            determined by the board of directors to                the review period of the Advance Notice
                                               management practices or are embedded                       be sufficient to ensure a recovery or                  for an additional 60 days under Section
                                               into its predefined default-management                     orderly wind-down of critical                          806(e)(1)(H) of the Clearing Supervision
                                               procedures, NSCC is able to execute                        operations and services of the covered                 Act 75 because the Commission finds the
                                               these tools, in most cases, when needed                    clearing agency.70 While the Capital                   Advance Notice is both novel and
                                               and without material operational or                        Policy addresses how NSCC holds LNA                    complex, as discussed below.
                                               organizational delay.                                      in compliance with these requirements,                    The Advance Notice is novel because
                                                  The majority of the recovery tools are                  the Wind-down Plan would include an                    it concerns a matter of first impression
                                               also transparent, as they are, or are                      analysis that would estimate the amount                for the Commission. Specifically, it
                                               proposed to be, included in the Rules,                     of time and the costs to achieve a                     concerns a recovery and wind-down
                                               which are publicly available. NSCC                         recovery or orderly wind-down of                       plan that has not been part of the
                                               believes the recovery tools also provide                   NSCC’s critical operations and services,               Commission’s regulatory framework for
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                                               appropriate incentives to the Members,                     and would provide that the Board                       registered clearing agencies until the
                                               as they are designed to control the                        review and approve this analysis and
                                               amount of risk they present to NSCC’s                      estimation annually. The Wind-down                       71 Id.
                                                                                                                                                                   72 12  U.S.C. 5465(e)(1)(G).
                                                 65 Id.                                                     68 Supra   note 41.                                    73 12  U.S.C. 5465(e)(1)(F).
                                                 66 Id.                                                     69 17 CFR 240.17Ad–22(e)(3)(ii).                       74 12 U.S.C. 5465(e)(1)(H).
                                                 67 Id.   at 240.19b-4.                                     70 Id. at 240.17Ad–22(e)(15)(ii).                      75 Id.




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                                               4340                           Federal Register / Vol. 83, No. 20 / Tuesday, January 30, 2018 / Notices

                                               recent adoption of Rule 17Ad–                            recovery tools; and (ix) the framework                 Electronic Comments
                                               22(e)(3)(ii) under the Act.76                            and approach for the orderly wind-
                                                  Rule 17Ad–22(e)(3)(ii) under the                      down and transfer of NSCC’s business,                    • Use the Commission’s internet
                                               Act 77 requires NSCC to establish,                       including an estimate of the time and                  comment form (http://www.sec.gov/
                                               implement, maintain and enforce                          costs to effect a recovery or orderly                  rules/sro.shtml); or
                                               written policies and procedures                          wind-down of NSCC.                                       • Send an email to rule-comments@
                                               reasonably designed to, as applicable,                     The Advance Notice is detailed                       sec.gov. Please include File Number SR–
                                               maintain a sound risk management                         because it articulates the step-by-step                NSCC–2017–805 on the subject line.
                                               framework for comprehensively                            process the clearing agency would
                                               managing legal, credit, liquidity,                       undertake to implement a recovery or                   Paper Comments
                                               operational, general business,                           wind-down plan.
                                               investment, custody, and other risks                                                                              • Send paper comments in triplicate
                                                                                                          The Advance Notice is interrelated                   to Secretary, Securities and Exchange
                                               that arise in or are borne by NSCC,                      with other risk management practices at
                                               which includes plans for the recovery                                                                           Commission, 100 F Street NE,
                                                                                                        the clearing agency because the R&W
                                               and orderly wind-down of NSCC                                                                                   Washington, DC 20549–1090.
                                                                                                        Plan concerns some existing rules that
                                               necessitated by credit losses, liquidity                 address risk management as well as                     All submissions should refer to File
                                               shortfalls, losses from general business                 proposed rules that would further                      Number SR–NSCC–2017–805. This file
                                               risk, or any other losses. The                           address risk management. For example,                  number should be included on the
                                               Commission has not yet considered                        according to the clearing agency, many                 subject line if email is used. To help the
                                               such a plan pursuant to Rule 17Ad–                       of the tools available to the clearing                 Commission process and review your
                                               22(e)(3)(ii) under the Act.78                            agency that would be described in the                  comments more efficiently, please use
                                                  The Advance Notice is complex                         R&W Plan are the clearing agency’s                     only one method. The Commission will
                                               because the proposed changes are                         existing, business-as-usual risk
                                               substantial, detailed, and interrelated                                                                         post all comments on the Commission’s
                                                                                                        management and default management                      internet website (http://www.sec.gov/
                                               with other risk management practices at                  tools, which would continue to be
                                               the clearing agency. The Advance                                                                                rules/sro.shtml). Copies of the
                                                                                                        applied in scenarios of increasing stress.             submission, all subsequent
                                               Notice is substantial because it is                      The Advance Notice also proposes new
                                               designed to comprehensively address                                                                             amendments, all written statements
                                                                                                        rules, such as the proposed market
                                               how the clearing agency would                                                                                   with respect to the Advance Notice that
                                                                                                        disruption and force majeure rule,79 and
                                               implement a recovery or wind-down                                                                               are filed with the Commission, and all
                                                                                                        contemplates application of the rules
                                               plan. For example, according to the                      proposed in the Loss Allocation Filing                 written communications relating to the
                                               clearing agency, the R&W Plan would                      as an integral part of the operation of the            Advance Notice between the
                                               provide, among other things, (i) an                      R&W Plan.80                                            Commission and any person, other than
                                               overview of the business of NSCC and                       Accordingly, pursuant to Section                     those that may be withheld from the
                                               its parent, DTCC; (ii) an analysis of                    806(e)(1)(H) of the Clearing Supervision               public in accordance with the
                                               NSCC’s intercompany arrangements and                     Act,81 the Commission is extending the                 provisions of 5 U.S.C. 552, will be
                                               critical links to other FMIs; (iii) a                    review period of the Advance Notice to                 available for website viewing and
                                               description of NSCC’s services, and the                  April 17, 2018 which is the date by                    printing in the Commission’s Public
                                               criteria used to determine which                         which the Commission shall notify the                  Reference Room, 100 F Street NE,
                                               services are considered critical; (iv) a                 clearing agency of any objection                       Washington, DC 20549 on official
                                               description of the NSCC and DTCC                         regarding the Advance Notice, unless                   business days between the hours of
                                               governance structure; (v) a description                  the Commission requests further                        10:00 a.m. and 3:00 p.m. Copies of the
                                               of the governance around the overall                     information for consideration of the                   filing also will be available for
                                               recovery and wind-down program; (vi) a                   Advance Notice (SR–NSCC–2017–                          inspection and copying at the principal
                                               discussion of tools available to NSCC to                 805).82                                                office of NSCC and on DTCC’s website
                                               mitigate certain risks, including                          The clearing agency shall post notice                (http://dtcc.com/legal/sec-rule-
                                               recovery indicators and triggers, and the                on its website of proposed changes that                filings.aspx). All comments received
                                               governance around management of a                        are implemented.                                       will be posted without change. Persons
                                               stress event along a ‘‘Crisis Continuum’’
                                                                                                          The proposal shall not take effect                   submitting comments are cautioned that
                                               timeline; (vii) a discussion of potential
                                                                                                        until all regulatory actions required                  we do not redact or edit personal
                                               non-default losses and the resources
                                                                                                        with respect to the proposal are                       identifying information from comment
                                               available to NSCC to address such
                                                                                                        completed.83                                           submissions. You should submit only
                                               losses, including recovery triggers and
                                               tools to mitigate such losses; (viii) an                 IV. Solicitation of Comments                           information that you wish to make
                                               analysis of the recovery tools’                                                                                 available publicly. All submissions
                                                                                                          Interested persons are invited to                    should refer to File Number SR–NSCC–
                                               characteristics, including how they are
                                                                                                        submit written data, views and                         2017–805 and should be submitted on
                                               comprehensive, effective, and
                                                                                                        arguments concerning the foregoing.
                                               transparent, how the tools provide                                                                              or before February 14, 2018.
                                                                                                        Comments may be submitted by any of
                                               appropriate incentives to Members to,                                                                             By the Commission.
                                                                                                        the following methods:
                                               among other things, control and monitor
                                                                                                                                                               Eduardo A. Aleman,
                                               the risks they may present to NSCC, and                    79 Proposed NSCC Rule 60 (Market Disruption
                                                                                                                                                               Assistant Secretary.
daltland on DSKBBV9HB2PROD with NOTICES




                                               how NSCC seeks to minimize the                           and Force Majeure).
                                               negative consequences of executing its                     80 See supra note 8.
                                                                                                                                                               [FR Doc. 2018–01690 Filed 1–29–18; 8:45 am]
                                                                                                          81 12 U.S.C. 5465(e)(1)(H).                          BILLING CODE 8011–01–P
                                                 76 Securities
                                                             Exchange Act Release 78961                   82 This extension extends the time periods under
                                               (September 28, 2016), 81 FR 70786 (October 13,           Sections 806(e)(1)(E) and (G) of the Clearing
                                               2017) (S7–03–14).                                        Supervision Act. 12 U.S.C. 5465(e)(1)(E) and (G).
                                                 77 17 CFR 240.17Ad–22(e)(3)(ii).                         83 See supra note 2 (concerning the clearing
                                                 78 Id.                                                 agency’s related proposed rule change).



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Document Created: 2018-10-26 10:12:44
Document Modified: 2018-10-26 10:12:44
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation83 FR 4327 

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