[Federal Register Volume 83, Number 20 (Tuesday, January 30, 2018)]
[Notices]
[Pages 4377-4393]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01693]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82584; File No. SR-NSCC-2017-806]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing and Extension of the Review Period of an 
Advance Notice To Amend the Loss Allocation Rules and Make Other 
Changes

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-2017-806 (``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-2017-018) 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.aspx.
    \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

    This Advance Notice consists of proposed modifications to NSCC's 
Rules and Procedures (``Rules'') in order to amend provisions in the 
Rules regarding loss allocation as well as make other changes, as 
described in greater detail below.\4\
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    \4\ Capitalized terms not defined herein are defined in the 
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
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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

[[Page 4378]]

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

    Written comments relating to this proposal have not been solicited 
or received. 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

Nature of the Proposed Change
    The primary purpose of this proposed rule change is to amend NSCC's 
loss allocation rules in order to enhance the resiliency of NSCC's loss 
allocation process so that NSCC can take timely action to address 
multiple loss events that occur in succession during a short period of 
time (defined and explained in detail below). In connection therewith, 
the proposed rule change would (i) align the loss allocation rules of 
the three clearing agencies of The Depository Trust & Clearing 
Corporation (``DTCC''), namely The Depository Trust Company (``DTC''), 
Fixed Income Clearing Corporation (``FICC'') (including the Government 
Securities Division (``FICC/GSD'') and the Mortgage-Backed Securities 
Division (``FICC/MBSD'')), and NSCC (collectively, the ``DTCC Clearing 
Agencies''), so as to provide consistent treatment, to the extent 
practicable and appropriate, especially for firms that are participants 
of two or more DTCC Clearing Agencies, (ii) increase transparency and 
accessibility of the loss allocation rules by enhancing their 
readability and clarity, (iii) reduce the time within which NSCC is 
required to return a former Member's Clearing Fund deposit, and (iv) 
make conforming and technical changes.
(i) Background
    Central counterparties (``CCPs'') play a key role in financial 
markets by mitigating counterparty credit risk on transactions between 
market participants. CCPs achieve this by providing guaranties to 
participants and, as a consequence, are typically exposed to credit 
risks that could lead to default losses. In addition, in performing its 
critical functions, a CCP could be exposed to non-default losses that 
are otherwise incident to the CCP's clearance and settlement business.
    A CCP's rulebook should provide a complete description of how 
losses would be allocated to participants if the size of the losses 
exceeded the CCP's pre-funded resources. Doing so provides for an 
orderly allocation of losses, and potentially allows the CCP to 
continue providing critical services to the market and thereby results 
in significant financial stability benefits. In addition, a clear 
description of the loss allocation process offers transparency and 
accessibility to the CCP's participants.
Current NSCC Loss Allocation Process
    As a CCP, NSCC's loss allocation process is a key component of its 
risk management process. Risk management is the foundation of NSCC's 
ability to guarantee settlement, as well as the means by which NSCC 
protects itself and its Members from the risks inherent in the 
clearance and settlement process. NSCC's risk management process must 
account for the fact that, in certain extreme circumstances, the 
collateral and other financial resources that secure NSCC's risk 
exposures may not be sufficient to fully cover losses resulting from 
the liquidation of the portfolio of a Member for whom NSCC has ceased 
to act.\5\
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    \5\ When NSCC restricts a Member's access to services generally, 
NSCC is said to have ``ceased to act'' for the Member. Rule 46 
(Restrictions on Access to Services) sets out the circumstances 
under which NSCC may cease to act for a Member and the types of 
actions it may take. Supra note 4.
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    The Rules currently provide for a loss allocation process through 
which both NSCC (by applying no less than 25% of its retained earnings 
in accordance with Addendum E) and its Members would share in the 
allocation of a loss resulting from the default of a Member for whom 
NSCC has ceased to act pursuant to the Rules. The Rules also recognize 
that NSCC may incur losses outside the context of a defaulting Member 
that are otherwise incident to NSCC's clearance and settlement 
business.
    NSCC's loss allocation rules currently provide that in the event 
NSCC ceases to act for a Member, the amounts on deposit to the Clearing 
Fund from the defaulting Member, along with any other resources of, or 
attributable to, the defaulting Member that NSCC may access under the 
Rules (e.g., payments from Clearing Agency Cross-Guaranty Agreements), 
are the first source of funds NSCC would use to cover any losses that 
may result from the closeout of the defaulting Member's guaranteed 
positions. If these amounts are not sufficient to cover all losses 
incurred, then NSCC will apply the following available resources, in 
the following loss allocation waterfall order:

    First, as provided in Addendum E, NSCC's corporate contribution 
of at least 25 percent of NSCC's retained earnings existing at the 
time of a Member impairment, or such greater amount as the Board of 
Directors may determine; and
    Second, if a loss still remains, as and in the manner provided 
in Rule 4, the required Clearing Fund deposits of Members who are 
non-defaulting Members on the date of default.

    Pursuant to current Section 5 of Rule 4, if, as a result of 
applying the Clearing Fund deposit of a Member, the Member's actual 
Clearing Fund deposit is less than its Required Deposit, it will be 
required to eliminate such deficiency in order to satisfy its Required 
Deposit amount. Pursuant to current Section 4 of Rule 4, Members can 
also be assessed for non-default losses incident to the operation of 
the clearance and settlement business of NSCC. Pursuant to current 
Section 8 of Rule 4, Members may withdraw from membership within 
specified timeframes after a loss allocation charge to limit their 
obligation for future assessments.
Overview of the Proposed Rule Changes
A. Changes To Enhance Resiliency of NSCC's Loss Allocation Process
    In order to enhance the resiliency of NSCC's loss allocation 
process, NSCC proposes to change the manner in which each of the 
aspects of the loss allocation waterfall described above would be 
employed. NSCC would retain the current core loss allocation process 
following the application of the defaulting Member's resources, i.e., 
first, by applying NSCC's corporate contribution, and second, by pro 
rata allocations to Members. However, NSCC would clarify or adjust 
certain elements and introduce certain new loss allocation concepts, as 
further discussed below. In addition, the proposed rule change would 
address the loss allocation process as it relates to losses arising 
from or relating to multiple default or non-default events in a short 
period of time, also as described below.
    Accordingly, NSCC is proposing five (5) key changes to enhance 
NSCC's loss allocation process:
(1) Changing the Calculation and Application of NSCC's Corporate 
Contribution
    As stated above, Addendum E currently provides that NSCC will 
contribute no less than 25% of its retained earnings (or such higher 
amount as the Board of Directors shall determine) to a loss or 
liability that is not satisfied by the impaired Member's Clearing Fund 
deposit. Under the proposal, NSCC would amend the

[[Page 4379]]

calculation of its corporate contribution from a percentage of its 
retained earnings to a mandatory amount equal to 50% of the NSCC 
General Business Risk Capital Requirement.\6\ NSCC's General Business 
Risk Capital Requirement, as defined in NSCC's Clearing Agency Policy 
on Capital Requirements,\7\ is, at a minimum, equal to the regulatory 
capital that NSCC is required to maintain in compliance with Rule 17Ad-
22(e)(15) under the Act.\8\ The proposed Corporate Contribution (as 
defined in the proposed rule change) would be held in addition to 
NSCC's General Business Risk Capital Requirement.
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    \6\ NSCC calculates its General Business Risk Capital 
Requirement as the amount equal to the greatest of (i) an amount 
determined based on its general business profile, (ii) an amount 
determined based on the time estimated to execute a recovery or 
orderly wind-down of NSCC's critical operations, and (iii) an amount 
determined based on an analysis of NSCC's estimated operating 
expenses for a six (6) month period.
    \7\ See Securities Exchange Act Release No. 81105 (July 7, 
2017), 82 FR 32399 (July 13, 2017) (SR-NSCC-2017-004).
    \8\ 17 CFR 240.17Ad-22(e)(15).
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    Currently, the Rules do not require NSCC to contribute its retained 
earnings to losses and liabilities other than those from Member 
impairments. Under the proposal, NSCC would apply its corporate 
contribution to non-default losses as well. The proposed Corporate 
Contribution would apply to losses arising from Defaulting Member 
Events and Declared Non-Default Loss Events (as such terms are defined 
below and in the proposed rule change), and would be a mandatory 
contribution by NSCC prior to any allocation of the loss among NSCC's 
Members.\9\ As proposed, if the Corporate Contribution is fully or 
partially used against a loss or liability relating to an Event Period 
(as defined below and in the proposed rule change), the Corporate 
Contribution would be reduced to the remaining unused amount, if any, 
during the following two hundred fifty (250) business days \10\ in 
order to permit NSCC to replenish the Corporate Contribution.\11\ To 
ensure transparency, Members would receive notice of any such reduction 
to the Corporate Contribution.
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    \9\ The proposed rule change would not require a Corporate 
Contribution with respect to the use of the Clearing Fund as a 
liquidity resource; however, if NSCC uses the Clearing Fund as a 
liquidity resource for more than 30 calendar days, as set forth in 
proposed Section 2 of Rule 4, then NSCC would have to consider the 
amount used as a loss to the Clearing Fund incurred as a result of a 
Defaulting Member Event and allocate the loss pursuant to proposed 
Section 4 of Rule 4, which would then require the application of a 
Corporate Contribution.
    \10\ Rule 1 defines ``business day'' as ``any day on which the 
Corporation is open for business. However, on any business day that 
banks or transfer agencies in New York State are closed or a 
Qualified Securities Depository is closed, no deliveries of 
securities and no payments of money shall be made through the 
facilities of the Corporation.'' Supra note 4.
    \11\ NSCC believes that two hundred and fifty (250) business 
days would be a reasonable estimate of the time frame that NSCC 
would require to replenish the Corporate Contribution by equity in 
accordance with NSCC's Clearing Agency Policy on Capital 
Requirements, including a conservative additional period to account 
for any potential delays and/or unknown exigencies in times of 
distress.
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    As compared to the current approach of applying ``no less than'' a 
percentage of retained earnings to defaulting Member losses, the 
proposed Corporate Contribution would be a fixed percentage of NSCC's 
General Business Risk Capital Requirement, which would provide greater 
transparency and accessibility to Members. The proposed Corporate 
Contribution would apply not only towards losses and liabilities 
arising out of or relating to Defaulting Member Events but also those 
arising out of or relating to Declared Non-Default Loss Events, which 
is consistent with the current industry guidance that ``a CCP should 
identify the amount of its own resources to be applied towards losses 
arising from custody and investment risk, to bolster confidence that 
participants' assets are prudently safeguarded.'' \12\
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    \12\ See Resilience of central counterparties (CCPs): Further 
guidance on the PFMI, issued by the Committee on Payments and Market 
Infrastructures and the International Organization of Securities 
Commissions, at 42 (July 2017), available at www.bis.org/cpmi/publ/d163.pdf.
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    Under the current Addendum E, NSCC has the discretion to contribute 
amounts higher than the specified percentage of retained earnings, as 
determined by the Board of Directors, to any loss or liability incurred 
by NSCC as result of a Member's impairment. This option would be 
retained and expanded under the proposal so that it would be clear that 
NSCC can voluntarily apply amounts greater than the Corporate 
Contribution against any loss or liability (including non-default 
losses) of NSCC, if the Board of Directors, in its sole discretion, 
believes such to be appropriate under the factual situation existing at 
the time.
    The proposed rule changes relating to the calculation and 
application of the Corporate Contribution are set forth in proposed 
Sections 4 and 5 of Rule 4, as further described below.
(2) Introducing an Event Period
    In order to clearly define the obligations of NSCC and its Members 
regarding loss allocation and to balance the need to manage the risk of 
sequential loss events against Members' need for certainty concerning 
their maximum loss allocation exposures, NSCC is proposing to introduce 
the concept of an ``Event Period'' to the Rules to address the losses 
and liabilities that may arise from or relate to multiple Defaulting 
Member Events and/or Declared Non-Default Loss Events that arise in 
quick succession. Specifically, the proposal would group Defaulting 
Member Events and Declared Non-Default Loss Events occurring in a 
period of ten (10) business days (``Event Period'') for purposes of 
allocating losses to Members in one or more rounds (as described 
below), subject to the limitations of loss allocation set forth in the 
proposed rule change and as explained below.\13\ In the case of a loss 
or liability arising from or relating to a Defaulting Member Event, an 
Event Period would begin on the day NSCC notifies Members that it has 
ceased to act \14\ for a Defaulting Member (as defined below and in the 
proposed rule change) (or the next business day, if such day is not a 
business day). In the case of a loss or liability arising from or 
relating to a Declared Non-Default Loss Event, an Event Period would 
begin on the day that NSCC notifies Members of the determination by the 
Board of Directors that the applicable loss or liability may be a 
significant and substantial loss or liability that may materially 
impair the ability of NSCC to provide clearance and settlement services 
in an orderly manner and will potentially generate losses to be 
mutualized among Members in order to ensure that NSCC may continue to 
offer clearance and settlement services in an orderly manner (or the 
next business day, if such day is not a business day). If a subsequent 
Defaulting Member Event or Declared Non-Default Loss Event occurs 
during an Event Period, any losses or liabilities arising out of or 
relating to any such subsequent event would be resolved as losses or 
liabilities that are part of the same Event Period, without extending 
the duration of such Event Period. An Event Period may include both 
Defaulting Member Events and Declared Non-Default Loss Events, and 
there would not be separate Event Periods for Defaulting Member Events 
or Declared Non-Default Loss Events occurring during overlapping ten 
(10) business day periods.
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    \13\ NSCC believes that having a ten (10) business day Event 
Period would provide a reasonable period of time to encompass 
potential sequential Defaulting Member Events or Declared Non-
Default Loss Events that are likely to be closely linked to an 
initial event and/or a severe market dislocation episode, while 
still providing appropriate certainty for Members concerning their 
maximum exposure to mutualized losses with respect to such events.
    \14\ Supra note 5.

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[[Page 4380]]

    The amount of losses that may be allocated by NSCC, subject to the 
required Corporate Contribution, and to which a Loss Allocation Cap (as 
defined below and in the proposed rule change) would apply for any 
withdrawing Member, would include any and all losses from any 
Defaulting Member Events and any Declared Non-Default Loss Events 
during the Event Period, regardless of the amount of time, during or 
after the Event Period, required for such losses to be crystallized and 
allocated.
    The proposed rule changes relating to the implementation of an 
Event Period are set forth in proposed Section 4 of Rule 4, as further 
described below.
(3) Introducing the Concept of ``Rounds'' and Loss Allocation Notice
    Pursuant to the proposed rule change, a loss allocation ``round'' 
would mean a series of loss allocations relating to an Event Period, 
the aggregate amount of which is limited by the sum of the Loss 
Allocation Caps of affected Members (a ``round cap''). When the 
aggregate amount of losses allocated in a round equals the round cap, 
any additional losses relating to the applicable Event Period would be 
allocated in one or more subsequent rounds, in each case subject to a 
round cap for that round. NSCC may continue the loss allocation process 
in successive rounds until all losses from the Event Period are 
allocated among Members that have not submitted a Loss Allocation 
Withdrawal Notice in accordance with proposed Section 6 of Rule 4.
    Each loss allocation would be communicated to Members by the 
issuance of a Loss Allocation Notice (as defined below and in the 
proposed rule change). Each Loss Allocation Notice would specify the 
relevant Event Period and the round to which it relates. The first Loss 
Allocation Notice in any first, second, or subsequent round would 
expressly state that such Loss Allocation Notice reflects the beginning 
of the first, second, or subsequent round, as the case may be, and that 
each Member in that round has five (5) business days from the issuance 
of such first Loss Allocation Notice for the round to notify NSCC of 
its election to withdraw from membership with NSCC pursuant to proposed 
Section 6 of Rule 4, and thereby benefit from its Loss Allocation 
Cap.\15\
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    \15\ Pursuant to the current Section 8 of Rule 4, the time 
period for a participant to give notice of its election to terminate 
its business with NSCC in respect of a pro rata charge is ten (10) 
business days after receiving notice of a pro rata charge. Supra 
note 4.
    NSCC believes that it is appropriate to shorten such time period 
from ten (10) business days to five (5) business days because NSCC 
needs timely notice of which Members would remain in its membership 
for purposes of calculating the loss allocation for any subsequent 
round. NSCC believes that five (5) business days would provide 
Members with sufficient time to decide whether to cap their loss 
allocation obligations by withdrawing from their membership in NSCC.
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    The amount of any second or subsequent round cap may differ from 
the first or preceding round cap because there may be fewer Members in 
a second or subsequent round if Members elect to withdraw from 
membership with NSCC as provided in proposed Section 6 of Rule 4 
following the first Loss Allocation Notice in any round.
    For example, for illustrative purposes only, after the required 
Corporate Contribution, if NSCC has a $5 billion loss determined with 
respect to an Event Period and the sum of Loss Allocation Caps for all 
Members subject to the loss allocation is $4 billion, the first round 
would begin when NSCC issues the first Loss Allocation Notice for that 
Event Period. NSCC could issue one or more Loss Allocation Notices for 
the first round until the sum of losses allocated equals $4 billion. 
Once the $4 billion is allocated, the first round would end and NSCC 
would need a second round in order to allocate the remaining $1 billion 
of loss. NSCC would then issue a Loss Allocation Notice for the $1 
billion and this notice would be the first Loss Allocation Notice for 
the second round. The issuance of the Loss Allocation Notice for the $1 
billion would begin the second round.
    The proposed rule change would link the Loss Allocation Cap to a 
round in order to provide Members the option to limit their loss 
allocation exposure at the beginning of each round. As proposed and as 
described further below, a Member could limit its loss allocation 
exposure to its Loss Allocation Cap by providing notice of its election 
to withdraw from membership within five (5) business days after the 
issuance of the first Loss Allocation Notice in any round.
    The proposed rule changes relating to the implementation of 
``rounds'' and Loss Allocation Notices are set forth in proposed 
Section 4 of Rule 4, as further described below.
(4) Implementing a ``Look-Back'' Period To Calculate a Member's Loss 
Allocation Pro Rata Share and Its Loss Allocation Cap
    Currently, the Rules calculate a Member's pro rata share for 
purposes of loss allocation based on the Member's ``allocation for a 
System,'' which in turn is based on settlement dollar amounts. 
Therefore, a Member's loss allocation obligations are currently based 
on the Member's activity in each of the various services or ``Systems'' 
offered by NSCC.\16\ The Rules do not anticipate the possibility of 
more than one Defaulting Member Event or Declared Non-Default Loss 
Event in quick succession.
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    \16\ NSCC's current loss allocation rules pre-date NSCC's move 
to a risk-based margining methodology.
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    Given NSCC's risk-based margining methodology, NSCC believes that 
it would be more appropriate to determine a Member's pro rata share of 
losses and liabilities based on the amount of risk that the Member 
brings to NSCC, which is represented by the Member's Required Deposit 
(NSCC is proposing that ``Required Deposits'' be renamed ``Required 
Fund Deposits,'' as described below). Accordingly, NSCC is proposing to 
calculate each Member's pro rata share of losses and liabilities to be 
allocated in any round (as described below and in the proposed rule 
change) to be equal to (i) the average of a Member's Required Fund 
Deposit for the seventy (70) business days prior to the first day of 
the applicable Event Period (or such shorter period of time that the 
Member has been a Member) (``Average RFD'') divided by (ii) the sum of 
Average RFD amounts for all Members that are subject to loss allocation 
in such round.
    Additionally, NSCC is proposing that each Member's maximum payment 
obligation with respect to any loss allocation round (the Member's Loss 
Allocation Cap) be equal to the greater of (i) its Required Fund 
Deposit on the first day of the applicable Event Period or (ii) its 
Average RFD.
    NSCC believes that employing a backward-looking average to 
calculate a Member's loss allocation pro rata share and Loss Allocation 
Cap would disincentivize Member behavior that could heighten volatility 
or reduce liquidity in markets in the midst of a financial crisis. 
Specifically, the proposed look-back period would discourage a Member 
from reducing its settlement activity during a time of stress primarily 
to limit its loss allocation pro rata share, which, as proposed, would 
now be based on the Member's average settlement activity over the look-
back period rather than its settlement activity at a point in time that 
the Member may not be able to estimate. Similarly, NSCC believes that 
taking a backward-looking average into consideration when determining a 
Member's Loss Allocation Cap would also deter a Member from reducing 
its

[[Page 4381]]

settlement activity during a time of stress primarily to limit its Loss 
Allocation Cap.
    NSCC believes that having a look-back period of seventy (70) 
business days is appropriate, because it would be long enough to enable 
NSCC to capture a full calendar quarter of a Member's activities, 
including quarterly option expirations, and smooth out the impact from 
any abnormalities and/or arbitrariness that may have occurred, but not 
too long that the Member's business strategy and outlook could have 
shifted significantly, resulting in material changes to the size of its 
portfolios.
    The proposed rule changes relating to the implementation of a look-
back period are set forth in proposed Section 4 of Rule 4, as further 
described below.
(5) Capping Withdrawing Members' Loss Allocation Exposure and Related 
Changes
    NSCC's current loss allocation rules allow a Member to withdraw if 
the Member notifies NSCC, within ten (10) business days after receipt 
of notice of a pro rata charge, of its election to terminate its 
membership and thereby avail itself of a cap on loss allocation, which 
is its Required Deposit as fixed immediately prior to the time of the 
pro rata charge. As discussed above, the proposed rule change would 
continue providing Members the opportunity to limit their loss 
allocation exposure by offering withdrawal options; however, the cap on 
loss allocation would be calculated differently and the associated 
withdrawal process would also be modified as it relates to withdrawals 
associated with the loss allocation process. In particular, the 
proposed rule change would shorten the withdrawal notification period 
from ten (10) business days to five (5) business days, and would also 
change the beginning of such notification period from the receipt of 
the notice of a pro rata charge to the issuance of the notice, as 
further described below.
    As proposed, if a Member provides notice of its withdrawal from 
membership, the maximum amount of losses it would be responsible for 
would be its Loss Allocation Cap,\17\ provided that the Member complies 
with the requirements of the withdrawal process in proposed Section 6 
of Rule 4.\18\
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    \17\ If a Member's Loss Allocation Cap exceeds the Member's 
then-current Required Fund Deposit, it must still cover the excess 
amount.
    \18\ For the avoidance of doubt, pursuant to Section 13(d) of 
Rule 4(A) (Supplemental Liquidity Deposits), a Special Activity 
Supplemental Deposit of a Member may not be used to calculate or be 
applied to satisfy any pro rata charge pursuant to Section 4 of Rule 
4. Supra note 4.
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    Currently, NSCC's loss allocation provisions provide that if a pro 
rata charge is made against a Member's actual Clearing Fund deposit, 
and as result thereof the Member's deposit is less than its Required 
Deposit, the Member will, upon demand by NSCC, be required to replenish 
its deposit to eliminate the deficiency within such time as NSCC shall 
require. To increase transparency of the timeframe under which NSCC 
would require funds from Members to satisfy their loss allocation 
obligations, NSCC is proposing that Members would receive two (2) 
business days' notice of a loss allocation, and Members would be 
required to pay the requisite amount no later than the second business 
day following issuance of such notice.\19\ Members would have five (5) 
business days \20\ from the issuance of the first Loss Allocation 
Notice in any round of an Event Period to decide whether to withdraw 
from membership.\21\
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    \19\ NSCC believes that allowing Members two (2) business days 
to satisfy their loss allocation obligations would provide Members 
sufficient notice to arrange funding, if necessary, while allowing 
NSCC to address losses in a timely manner.
    \20\ Supra note 15.
    \21\ NSCC believes that setting the start date of the withdrawal 
notification period to the date of issuance of a notice would 
provide a single withdrawal timeframe that would be consistent 
across the Members.
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    Each round would allow a Member the opportunity to notify NSCC of 
its election to withdraw from membership after satisfaction of the 
losses allocated in such round. Multiple Loss Allocation Notices may be 
issued with respect to each round to allocate losses up to the round 
cap.
    Specifically, the first round and each subsequent round of loss 
allocation would allocate losses up to a round cap of the aggregate of 
all Loss Allocation Caps of those Members included in the round. If a 
Member provides notice of its election to withdraw from membership, it 
would be subject to loss allocation in that round, up to its Loss 
Allocation Cap. If the first round of loss allocation does not fully 
cover NSCC's losses, a second round will be noticed to those Members 
that did not elect to withdraw from membership in the previous round; 
however, as noted above, the amount of any second or subsequent round 
cap may differ from the first or preceding round cap because there may 
be fewer Members in a second or subsequent round if Members elect to 
withdraw from membership with NSCC as provided in proposed Section 6 of 
Rule 4 following the first Loss Allocation Notice in any round.
    Pursuant to the proposed rule change, in order to avail itself of 
its Loss Allocation Cap, a Member would need to follow the requirements 
in proposed Section 6 of Rule 4, which would provide that the Member 
must: (i) Specify in its Loss Allocation Withdrawal Notice (as defined 
below and in the proposed rule change) an effective date of withdrawal, 
which date shall be no later than ten (10) business days following the 
last day of the applicable Loss Allocation Withdrawal Notification 
Period (as defined below and in the proposed rule change) (i.e., no 
later than ten (10) business days after the 5th business day following 
the first Loss Allocation Notice in that round of loss allocation),\22\ 
(ii) cease all activity that would result in transactions being 
submitted to NSCC for clearance and settlement for which such Member 
would be obligated to perform, where the scheduled final settlement 
date would be later than the effective date of the Member's withdrawal, 
and (iii) ensure that all clearance and settlement activity for which 
such Member is obligated to NSCC is fully and finally settled by the 
effective date of the Member's withdrawal, including, without 
limitation, by resolving by such date all fails and buy-in obligations.
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    \22\ NSCC believes that having an effective date of withdrawal 
that is not later than ten (10) business days following the last day 
of the Loss Allocation Withdrawal Notification Period would provide 
Members with a reasonable period of time to wind down their 
activities at NSCC while minimizing any uncertainty typically 
associated with a longer withdrawal period.
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    The proposed rule changes are designed to enable NSCC to continue 
the loss allocation process in successive rounds until all of NSCC's 
losses are allocated. To the extent that a Member's Loss Allocation Cap 
exceeds the Member's Required Fund Deposit on the first day of the 
applicable Event Period, NSCC may in its discretion retain any excess 
amounts on deposit from the Member, up to the Member's Loss Allocation 
Cap.
    The proposed rule changes relating to capping withdrawing Members' 
loss allocation exposure and related changes to the withdrawal process 
are set forth in proposed Sections 4 and 6 of Rule 4, as further 
described below.
B. Changes To Align Loss Allocation Rules
    The proposed rule changes would align the loss allocation rules, to 
the extent practicable and appropriate, of the three DTCC Clearing 
Agencies so as to provide consistent treatment,

[[Page 4382]]

especially for firms that are participants of two or more DTCC Clearing 
Agencies. As proposed, the loss allocation waterfall and certain 
related provisions, e.g., returning a former Member's Clearing Fund, 
would be consistent across the DTCC Clearing Agencies to the extent 
practicable and appropriate. The proposed rule changes of NSCC that 
would align loss allocation rules of the DTCC Clearing Agencies are set 
forth in proposed Sections 1, 2, 7, and 12 of Rule 4, as further 
described below.
C. Clarifying Changes Relating to Loss Allocation
    The proposed rule changes are intended to make the provisions in 
the Rules governing loss allocation more transparent and accessible to 
Members. In particular, NSCC is proposing the following changes 
relating to loss allocation to clarify Members' obligations for 
Declared Non-Default Loss Events.
    Aside from losses that NSCC might face as a result of a Defaulting 
Member Event, NSCC could incur non-default losses incident to its 
clearance and settlement business.\23\ The Rules currently permit NSCC 
to apply Clearing Fund to non-default losses. Specifically, pursuant to 
Section 2(b) of Rule 4,\24\ NSCC can use the Clearing Fund to satisfy 
losses or liabilities of NSCC incident to the operation of the 
clearance and settlement business of NSCC. Section II of Addendum K 
provides additional details regarding the application of the Clearing 
Fund to losses outside of a System.
---------------------------------------------------------------------------

    \23\ Non-default losses may arise from events such as damage to 
physical assets, a cyber-attack, or custody and investment losses.
    \24\ Section 2(b) of Rule 4 provides that ``the use of the 
Clearing Fund . . . shall be limited to satisfaction of losses or 
liabilities of the Corporation incident to the operation of the 
clearance and settlement business of the Corporation other than 
losses and liabilities of a System.'' Supra note 4.
---------------------------------------------------------------------------

    If there is a failure of NSCC following a non-default loss, such 
occurrence would affect Members in much the same way as a failure of 
NSCC following a Defaulting Member Event. Accordingly, NSCC is 
proposing rule changes to enhance the provisions relating to non-
default losses by clarifying Members' obligations for such losses.
    Specifically, NSCC is proposing enhancement of the governance 
around non-default losses that would trigger loss allocation to Members 
by specifying that the Board of Directors would have to determine that 
there is a non-default loss that may be a significant and substantial 
loss or liability that may materially impair the ability of NSCC to 
provide clearance and settlement services in an orderly manner and will 
potentially generate losses to be mutualized among the Members in order 
to ensure that NSCC may continue to offer clearance and settlement 
services in an orderly manner. The proposed rule change would provide 
that NSCC would then be required to promptly notify Members of this 
determination, which is referred to in the proposed rule as a Declared 
Non-Default Loss Event. In addition, NSCC is proposing to better align 
the interests of NSCC with those of its Members by stipulating a 
mandatory Corporate Contribution apply to a Declared Non-Default Loss 
Event prior to any allocation of the loss among Members, as described 
above. Additionally, NSCC is proposing language to clarify Members' 
obligations for Declared Non-Default Loss Events.
    The proposed rule changes relating to Declared Non-Default Loss 
Events and Members' obligations for such events are set forth in 
proposed Section 4 of Rule 4, as further described below.
D. Reduce the Time Within Which NSCC Is Required To Return a Former 
Member's Clearing Fund Deposit
    The proposed rule change would reduce the time period in which NSCC 
may retain a Member's Clearing Fund deposit. Specifically, NSCC 
proposes that if a Member gives notice to NSCC of its election to 
withdraw from membership, NSCC will return the Member's Actual Deposit 
in the form of (i) cash or securities within thirty (30) calendar days 
and (ii) Eligible Letters of Credit within ninety (90) calendar days, 
after all of the Member's transactions have settled and all matured and 
contingent obligations to NSCC for which the Member was responsible 
while a Member have been satisfied, except NSCC may retain for up to 
two (2) years the Actual Deposits from Members who have Sponsored 
Accounts at DTC.
    NSCC believes that shortening the time period for the return of a 
Member's Clearing Fund deposit would be helpful to firms who have 
exited NSCC so that they could have use of the deposits sooner than 
under the current Rules while at the same time protecting NSCC because 
such return would only occur if all obligations of the terminating 
Member to NSCC have been satisfied, which would include both matured as 
well as contingent obligations.
    The proposed rule changes relating to the reduced time period in 
which NSCC is required to return the Clearing Fund deposit of a former 
Member are set forth in proposed Section 7 of Rule 4, as further 
described below.
    The foregoing changes as well as other changes (including a number 
of conforming and technical changes) that NSCC is proposing in order to 
improve the transparency and accessibility of the Rules are described 
in detail below.
(ii) Detailed Description of the Proposed Rule Changes Related to Loss 
Allocation
A. Proposed Changes to Rule 4 (Clearing Fund)
Overview of Rule 4 (Clearing Fund)
    Rule 4 currently addresses Clearing Fund requirements and loss 
allocation obligations. While Procedure XV addresses the various 
Clearing Fund calculations, Rule 4 sets forth rights, obligations and 
other aspects associated with the Clearing Fund, as well as the loss 
allocation process. Rule 4 is currently organized into 12 sections. 
NSCC is proposing changes to each section, and consolidating provisions 
in Rule 4 relating to Mutual Fund Services and Insurance and Retirement 
Processing Services into new sections, as described below.
Section 1
    Section 1 of Rule 4 currently sets forth the requirement that each 
Member and Mutual Fund/Insurance Services Member shall, and each Fund 
Member and Insurance Carrier/Retirement Services Member may, be 
required to make a deposit to the Clearing Fund. Section 1 currently 
provides that each participant's Required Deposit is based on one or 
more formulas specified by NSCC's Board of Directors. The basis of each 
such formula is participants' usage of NSCC's facilities. Section 1 
also currently sets forth the minimum amount of each participant 
category's Required Deposit.
    Current Section 1 allows a portion of a participant's Clearing Fund 
deposit to be evidenced by an open account indebtedness secured by 
Eligible Clearing Fund Securities, subject to certain limitations set 
forth in Procedure XV, and sets forth the various requirements 
associated with the deposit of Eligible Clearing Fund Securities. 
Current Section 1 also permits NSCC to require participants to post a 
letter of credit where NSCC believes the participants present legal 
risk.
    Current Section 1 also provides that NSCC allocate the Clearing 
Fund by types of service (e.g., Mutual Fund Services) as well as by 
Systems (e.g., CNS), and divide the Clearing Fund into separate 
``Allocations'' for each such service and separate ``Funds'' for each 
such System.

[[Page 4383]]

    Under the proposed rule change, NSCC is proposing to add a 
subheading of ``Required Fund Deposits'' to Section 1 and restructure 
Section 1 so that it applies to Members only and delete references to 
Mutual Fund/Insurance Services Members, Fund Members and Insurance 
Carrier/Retirement Services Members from Section 1.\25\ Provisions of 
Rule 4 regarding Mutual Fund/Insurance Services Members and Fund 
Members would be covered in a new proposed Section 13 to Rule 4, 
discussed below. Provisions of Rule 4 regarding Insurance Carrier/
Retirement Services Members would be covered in a new proposed Section 
14 to Rule 4, discussed below.
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    \25\ In addition to Section 1 of Rule 4, NSCC is proposing to 
delete references to Mutual Fund/Insurance Services Members, Fund 
Members and Insurance Carrier/Retirement Services Members from 
Sections 2, 3, 4, 5, 6, 7, 8, 9, and 12 of Rule 4.
---------------------------------------------------------------------------

    Under the proposed rule change, Section 1 would continue to have 
the same provisions as they relate to Members except for the following: 
(i) The language throughout the section would be reorganized, 
streamlined and clarified, (ii) ``Required Deposits'' would be renamed 
``Required Fund Deposits,'' \26\ which is a more descriptive term to 
refer to Members' deposits required for the Clearing Fund, and would 
harmonize with the rules of FICC/GSD and FICC/MBSD \27\ and the term 
used in such rules,\28\ (iii) a sentence would be added regarding 
additional deposits maintained by the Members at NSCC, and (iv) the 
provision regarding the Clearing Fund being allocated by Systems and 
services would be deleted.\29\
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    \26\ In addition to Section 1 of Rule 4, NSCC is proposing to 
rename ``Required Deposits'' to ``Required Fund Deposits'' in 
Sections 2, 3, 4, 8, 9, and 11 of Rule 4.
    \27\ FICC/GSD Rulebook (``FICC/GSD Rules''), available at http:/
/dtcc.com/~/media/Files/Downloads/legal/rules/ficc_gov_rules.pdf and 
FICC/MBSD Clearing Rules (``FICC/MBSD Rules''), available at http://
dtcc.com/~/media/Files/Downloads/legal/rules/ficc_mbsd_rules.pdf.
    \28\ See FICC/GSD Rule 1 (Definitions) and FICC/MBSD Rule 1 
(Definitions), supra note 27.
    \29\ In addition to Section 1 of Rule 4, NSCC is proposing to 
delete references to the Clearing Fund being allocated by Systems 
and services from Sections 2, 3, and 4 of Rule 4.
---------------------------------------------------------------------------

    The proposed sentence regarding additional deposits to the Clearing 
Fund would permit Members to post such additional deposits at their 
discretion and would make clear that such additional deposits would be 
deemed to be part of the Clearing Fund and the Member's Actual Deposit 
(as discussed below and as defined in the proposed rule change) but 
would not be deemed to be part of the Member's Required Fund Deposit.
    NSCC proposes to add language in Section 1 to make it clear that 
each Member would grant NSCC a first priority perfected security 
interest in its right, title and interest in and to any Eligible 
Clearing Fund Securities, funds and assets pledged to NSCC to secure 
the Member's open account indebtedness or placed by the Member in 
NSCC's possession (or its agents acting on its behalf) to secure all 
such Member's obligations to NSCC, and that NSCC would be entitled to 
exercise the rights of a pledgee under common law and a secured party 
under Articles 8 and 9 of the New York Uniform Commercial Code with 
respect to such assets. The additional language would further harmonize 
the Rules with language used in the FICC/GSD Rules and FICC/MBSD 
Rules,\30\ thus providing consistent treatment of pledged resources for 
firms that are members of both NSCC and FICC.
---------------------------------------------------------------------------

    \30\ See Section 4 of FICC/GSD Rule 4 and Section 4 of FICC/MBSD 
Rule 4, supra note 27.
---------------------------------------------------------------------------

    NSCC proposes to clarify the language in footnote 2 of Section 1. 
In addition, NSCC proposes to add ``Eligible Letter of Credit'' as a 
defined term to refer to letters of credit posted by participants if 
required by NSCC,\31\ which would harmonize the term with the term used 
in the FICC/GSD Rules and FICC/MBSD Rules,\32\ thus providing 
consistent terminology for firms that are members of both NSCC and 
FICC.
---------------------------------------------------------------------------

    \31\ In addition to Section 1 of Rule 4, NSCC is also proposing 
to rename ``Letter of Credit'' to ``Eligible Letter of Credit'' in 
Sections 2 and 12 of Rule 4.
    \32\ See FICC/GSD Rule 1 (Definitions) and FICC/MBSD Rule 1 
(Definitions), supra note 27.
---------------------------------------------------------------------------

    Similarly, NSCC proposes to add ``Actual Deposit'' as a defined 
term in Section 1 to refer to Eligible Clearing Fund Securities, funds 
and assets pledged to NSCC to secure a Member's open account 
indebtedness or placed by a Member in the possession of NSCC (or its 
agents acting on its behalf) and any Eligible Letters of Credit issued 
on behalf of a Member in favor of NSCC.
    Instead of requiring participants to pledge Eligible Clearing Fund 
Securities to NSCC's account at a Qualified Securities Depository 
designated by the participants, NSCC proposes to clarify and streamline 
Section 1 of proposed Rule 4 to provide that Eligible Clearing Fund 
Securities pledged to secure a Member's open account indebtedness would 
be delivered to NSCC's account at DTC.
    NSCC would delete the provision regarding allocation of the 
Clearing Fund by Systems and services, as this provision is no longer 
relevant under the proposed rule change. Provisions relating to Mutual 
Fund Services and Insurance and Retirement Processing Services in 
Section 1 (as well as other sections in Rule 4) would be consolidated 
in the proposed new Sections 13 and 14, entitled ``Mutual Fund 
Deposits'' and ``Insurance Deposits,'' respectively.
    To consolidate provisions regarding the maintenance, investment and 
permitted use of Clearing Fund, NSCC would move the last paragraph of 
Section 1 about segregation and maintenance of Clearing Fund (again, in 
terms of ``Fund,'' ``System,'' and ``Allocation,'' as discussed above) 
to Section 2.
    In addition, NSCC proposes to correct a typographical error in the 
reference to a footnote in Section 1 of Rule 4. Specifically, there is 
an incorrect reference to footnote 22 in the second paragraph of 
Section 1 in current Rule 4. NSCC is proposing to change this reference 
to reflect the correct footnote, which is footnote 2.
Section 2
    Section 2 of Rule 4 currently covers the permitted uses of the 
Clearing Fund (again by ``Fund'' and ``Allocation,'' as set forth in 
current Section 1), including the investment of Clearing Fund Cash and 
Cash Receipts, as well as participants' rights to any interest earned 
or paid on pledged Eligible Clearing Fund Securities or cash deposits.
    NSCC is proposing to add a subheading of ``Permitted Use, 
Investment, and Maintenance of Clearing Fund Assets'' to Section 2 and 
restructure Section 2 so that it applies to Members only. NSCC is also 
proposing to restructure Section 2 so that the permitted use of 
Clearing Fund appears first, then the investment of Clearing Fund, 
followed by maintenance of Clearing Fund.
    Under the proposed rule change, the permitted use of Clearing Fund 
paragraph would continue to have the same provisions as they relate to 
how the Clearing Fund can be used by NSCC, except the provisions would 
be streamlined and clarified. Specifically, in order to be consistent 
with the proposed change in Section 4 (as described below) regarding 
NSCC requiring Members to pay their loss allocation amounts (leaving 
their Required Fund Deposits intact), NSCC is proposing to modify the 
permitted use of Clearing Fund to make it clear that the Clearing Fund 
can be used by NSCC to secure each Member's performance of obligations 
to NSCC, including each Member's obligations with respect to any loss 
allocations as set forth in Section 4 of Rule 4. NSCC is also

[[Page 4384]]

proposing to delete the defined term of Cash Receipts and related 
provisions from Rule 4 because, unlike the Clearing Fund, Cash Receipts 
are money payments received from participants and payable to others; 
therefore, NSCC believes that continuing to include Cash Receipts in 
Rule 4 is no longer necessary and may cause confusion among Members.
    NSCC is proposing to add a paragraph that provides that each time 
NSCC uses any part of the Clearing Fund to provide liquidity to NSCC to 
meet its settlement obligations, including, without limitation, through 
the direct use of cash in the Clearing Fund or through the pledge or 
rehypothecation of pledged Eligible Clearing Fund Securities in order 
to secure liquidity for more than thirty (30) calendar days, NSCC, at 
the close of business on the 30th calendar day (or on the first 
business day thereafter) from the day of such use, would consider the 
amount used but not yet repaid as a loss to the Clearing Fund incurred 
as a result of a Defaulting Member Event and immediately allocate such 
loss in accordance with proposed Section 4 of Rule 4. NSCC believes 
that this proposed change would increase transparency and accessibility 
of the Rules for Members by specifying a point in time by which NSCC 
would need to replenish the Clearing Fund through loss allocation if 
NSCC uses the Clearing Fund to provide or secure liquidity to NSCC to 
meet its settlement obligations. NSCC believes that a period of thirty 
(30) calendar days would be appropriate because it would provide 
sufficient time for NSCC to determine whether it would be able to 
obtain the necessary funds from liquidation of the portfolio of the 
Defaulting Member to repay the used Clearing Fund amount. In addition, 
this proposed change would also harmonize this section with the 
comparable section in the FICC/GSD Rules and FICC/MBSD Rules,\33\ so as 
to provide consistent treatment for firms that are members of both NSCC 
and FICC.
---------------------------------------------------------------------------

    \33\ See Section 5 of FICC/GSD Rule 4 and Section 5 of FICC/MBSD 
Rule 4, supra note 27.
---------------------------------------------------------------------------

    Proposed Section 2 would continue to have the same provisions 
concerning the investment and maintenance of the Clearing Fund, except 
these provisions would also be streamlined and clarified. Specifically, 
NSCC is proposing language to make it clear that it may invest cash in 
the Clearing Fund in accordance with the Clearing Agency Investment 
Policy adopted by NSCC.\34\ NSCC would revise the relocated sentence 
from Section 1 which provides that NSCC shall not be required to 
segregate any Clearing Fund (again, in terms of ``Fund,'' ``System,'' 
and ``Allocation,'' as discussed above) in order to (i) conform to the 
proposed deletions in Section 1 and use the newly defined term of 
``Actual Deposit'' as set forth in Section 1 and (ii) make clear that 
NSCC would not be required to segregate a Member's Actual Deposit but 
that NSCC would maintain books and records concerning the assets that 
constitute each Member's Actual Deposit.
---------------------------------------------------------------------------

    \34\ See Securities Exchange Act Release No. 79528 (December 12, 
2016), 81 FR 91232 (December 16, 2016) (SR-NSCC-2016-003).
---------------------------------------------------------------------------

    Under the proposed rule change, Members would continue to be 
entitled to any interest earned or paid on Clearing Fund cash deposits 
and pledged Eligible Clearing Fund Securities; however, NSCC is 
proposing additional language to make it clear that interest on pledged 
Eligible Clearing Fund Securities that is received by NSCC would be 
credited to a Member's cash deposits to the Clearing Fund, except in 
the event of a default by such Member on any obligations to NSCC, in 
which case NSCC may exercise its rights under proposed Section 3 of 
Rule 4.
Section 3
    Section 3 of Rule 4 currently provides that NSCC may apply a 
participant's actual deposit to any obligation the participant has to 
NSCC that the participant has failed to satisfy and to any Cross-
Guaranty Obligation. Participants are required to eliminate any 
resulting deficiencies in their Required Deposits within such time as 
NSCC requires. Section 3 also currently provides for the manner in 
which loss allocation would apply with respect to Off-the-Market 
Transactions.
    Under the proposed rule change, NSCC is proposing to add a 
subheading of ``Application of Clearing Fund Deposits and Other Amounts 
to Members' Obligations'' and to delete provisions that do not apply to 
Members and/or that reference the Clearing Fund being allocated into 
Funds/Allocations by Systems and services. Under the proposed rule 
change, NSCC would retain the provisions in Section 3 regarding 
applying the Member's Actual Deposit to satisfy an obligation to NSCC 
that a Member fails to satisfy and the requirement to replenish the 
Required Fund Deposit as necessary, but NSCC proposes to add clarifying 
language that, in addition to a Member's Actual Deposit, NSCC will also 
apply any amounts available under a Clearing Agency Cross-Guaranty 
Agreement and any proceeds therefrom to satisfy the obligation. NSCC 
also proposes to add language making it clear that NSCC may take any 
and all actions with respect to the assets and amounts referenced in 
the prior sentence, including assignment, transfer, and sale of any 
Eligible Clearing Fund Securities, that NSCC determines is appropriate.
    Under the proposed rule change, NSCC would move the provision 
regarding allocation of losses from Off-the-Market Transactions to 
proposed Section 4 of Rule 4, which addresses allocation of losses to 
Members. NSCC would streamline and clarify the remaining provisions for 
transparency and accessibility.
Section 4 and Section 5
    Current Section 4 of Rule 4 contains NSCC's current loss allocation 
waterfall, which would be initiated if NSCC incurs a loss or liability 
in a System that is not satisfied pursuant to current Section 3. 
Section 4 currently provides for the following loss allocation 
waterfall:
    (i) Application of NSCC's existing retained earnings or such lesser 
part \35\ of the existing retained earnings unless the Board of 
Directors elects to apply the Fund/Allocation for a particular System 
or service.
---------------------------------------------------------------------------

    \35\ Addendum E provides that NSCC ``will apply no less than 
twenty-five percent (25%) of its retained earnings, existing at the 
time of a Member impairment which gives rise to a loss or liability 
not satisfied by the impaired Member's Clearing Fund deposit, to 
such loss or liability.'' Supra note 4.
---------------------------------------------------------------------------

    (ii) If a loss or liability remains after the application of the 
retained earnings, NSCC would apply the Clearing Fund (this application 
is subject to the current structure where the Rules provide that the 
Clearing Fund is allocated to different Systems/services).
    a. NSCC is required to provide participants and the Commission with 
5 business days' prior notice before applying the Clearing Fund.
    b. Participants (other than those responsible for causing the loss 
or liability) would be charged pro rata based upon their allocation to 
the applicable Fund, less any amounts that participants were required 
to deposit pursuant to Rule 15.
    Section 5 of Rule 4 currently states that if a pro rata charge is 
made pursuant to Rule 4 against a participant's actual Clearing Fund 
deposit, and as a consequence thereof the participant's remaining 
deposit is less than its Required Deposit, the participant would, upon 
demand by NSCC, be required to replenish its deposit to eliminate the 
deficiency within such time as NSCC shall require. Current Section 5 
further provides that if the participant does not take this required 
action, NSCC may take

[[Page 4385]]

disciplinary action against the participant, and any disciplinary 
action taken against the participant or the voluntary or involuntary 
termination of the participant's membership will not affect the 
obligations of the participant to NSCC or any remedy to which NSCC may 
be entitled under applicable law.
    Under the proposed rule change, NSCC is proposing to add a 
subheading of ``Loss Allocation Waterfall, Off-the-Market 
Transactions'' to Section 4 and delete provisions that do not apply to 
Members and/or that reference the Clearing Fund being allocated into 
Funds/Allocations by System or service. In addition, NSCC is proposing 
to restructure its loss allocation waterfall as described below.
    Under the proposal, Section 4 would make clear that the loss 
allocation waterfall applies to losses and liabilities (i) relating to 
or arising out of a default of a Member for whom NSCC has ceased to act 
pursuant to Rule 46 (such Member being referred to as a ``Defaulting 
Member'') that is not satisfied pursuant to proposed Sections 3, 13 or 
14 of Rule 4 (a ``Defaulting Member Event'' or (ii) otherwise incident 
to the clearance and settlement business of NSCC, as determined below 
(a ``Declared Non-Default Loss Event'').
    Proposed Section 4 would establish the concept of an ``Event 
Period'' to provide for a clear and transparent way of handling 
multiple loss events occurring in a period of ten (10) business days, 
which would be grouped into an Event Period.\36\ As stated above, both 
Defaulting Member Events or Declared Non-Default Loss Events could 
occur within the same Event Period.
---------------------------------------------------------------------------

    \36\ Supra note 13.
---------------------------------------------------------------------------

    Under the proposal, an Event Period with respect to a Defaulting 
Member Event would begin on the day NSCC notifies participants that it 
has ceased to act for a Defaulting Member (or the next business day, if 
such day is not a business day). In the case of a Declared Non-Default 
Loss Event, an Event Period would begin on the day that NSCC notifies 
Members of the determination by the Board of Directors that the 
applicable loss or liability incident to the clearance and settlement 
business of NSCC may be a significant and substantial loss or liability 
that may materially impair the ability of NSCC to provide clearance and 
settlement services in an orderly manner and will potentially generate 
losses to be mutualized among Members in order to ensure that NSCC may 
continue to offer clearance and settlement services in an orderly 
manner (or the next business day, if such day is not a business day). 
If a subsequent Defaulting Member Event or Declared Non-Default Loss 
Event occurs during an Event Period, any losses or liabilities arising 
out of or relating to any such subsequent event would be resolved as 
losses or liabilities that are part of the same Event Period, without 
extending the duration of such Event Period.
    Under proposed Section 4, the loss allocation waterfall would begin 
with a corporate contribution from NSCC (``Corporate Contribution''), 
as is the case under the current Rules, but in a different form than 
under the current Section 4 of Rule 4. Today, pursuant to Addendum E, 
in the event of a Member impairment, NSCC is required to apply at least 
25% of its retained earnings existing at the time of a Member 
impairment; however, no corporate contribution from NSCC is currently 
required for losses resulting other than those from Member impairments. 
Under the proposal, NSCC would amend Section 5 to add a subheading of 
``Corporate Contribution'' and define NSCC's Corporate Contribution 
with respect to any loss allocation pursuant to proposed Section 4 of 
Rule 4, whether arising out of or relating to a Defaulting Member Event 
or a Declared Non-Default Loss Event, as an amount that is equal to 
fifty (50) percent of the amount calculated by NSCC in respect of its 
General Business Risk Capital Requirement as of the end of the calendar 
quarter immediately preceding the Event Period.\37\ The proposed rule 
change would specify that NSCC's General Business Risk Capital 
Requirement, as defined in NSCC's Clearing Agency Policy on Capital 
Requirements,\38\ is, at a minimum, equal to the regulatory capital 
that NSCC is required to maintain in compliance with Rule 17Ad-
22(e)(15) under the Act.\39\
---------------------------------------------------------------------------

    \37\ Supra note 6.
    \38\ Supra note 7.
    \39\ Supra note 8.
---------------------------------------------------------------------------

    As proposed, if NSCC applies the Corporate Contribution to a loss 
or liability arising out of or relating to one or more Defaulting 
Member Events or Declared Non-Default Loss Events relating to an Event 
Period, then for any subsequent Event Periods that occur during the two 
hundred fifty (250) business days thereafter,\40\ the Corporate 
Contribution would be reduced to the remaining unused portion of the 
Corporate Contribution amount that was applied for the first Event 
Period. Proposed Section 5 would require NSCC to notify Members of any 
such reduction to the Corporate Contribution.
---------------------------------------------------------------------------

    \40\ Supra note 11.
---------------------------------------------------------------------------

    Currently, the Rules do not require NSCC to contribute its retained 
earnings to losses and liabilities other than from Member impairments. 
Under the proposal, NSCC would expand the application of its corporate 
contribution beyond losses and liabilities from Member impairments. The 
proposed Corporate Contribution would apply to losses or liabilities 
relating to or arising out of Defaulting Member Events and Declared 
Non-Default Loss Events, and would be a mandatory loss contribution by 
NSCC prior to any allocation of the loss among Members.
    Addendum E currently provides NSCC the option to contribute amounts 
higher than the specified percentage of retained earnings, as 
determined by the Board of Directors, to any loss or liability incurred 
by NSCC as the result of a Member's impairment. This option would be 
retained and expanded under the proposal to also cover non-default 
losses. Proposed Section 5 would provide that nothing in the Rules 
would prevent NSCC from voluntarily applying amounts greater than the 
Corporate Contribution against any NSCC loss or liability, whether a 
Defaulting Member Event or a Declared Non-Default Loss Event, if the 
Board of Directors, in its sole discretion, believes such to be 
appropriate under the factual situation existing at the time.
    Proposed Section 4 of Rule 4 would provide that NSCC shall apply 
the Corporate Contribution to losses and liabilities that arise out of 
or relate to one or more Defaulting Member Events and/or Declared Non-
Default Loss Events that occur within an Event Period. The proposed 
rule change also provides that if losses and liabilities with respect 
to such Event Period remain unsatisfied following application of the 
Corporate Contribution, NSCC would allocate such losses and liabilities 
to Members, as described below.
    The proposed rule change to Section 4 of Rule 4 would clarify that 
all Members would be subject to loss allocation for losses and 
liabilities relating to or arising out of a Declared Non-Default Loss 
Event; however, in the case of losses and liabilities relating to or 
arising out of a Defaulting Member Event, only non-defaulting Members 
would be subject to loss allocation. In addition, NSCC is proposing to 
clarify that after a first round of loss allocations with respect to an 
Event Period, only Members that have not submitted a Loss Allocation 
Withdrawal Notice in accordance with proposed Section 6 of Rule 4 would 
be subject to further loss allocations with respect to that Event 
Period. NSCC is also proposing that

[[Page 4386]]

NSCC would notify Members subject to loss allocation of the amounts 
being allocated to them (``Loss Allocation Notice'') in successive 
rounds of loss allocations.
    Under the proposed rule change, a loss allocation ``round'' would 
mean a series of loss allocations relating to an Event Period, the 
aggregate amount of which is limited by the round cap. When the 
aggregate amount of losses allocated in a round equals the round cap, 
any additional losses relating to the applicable Event Period would be 
allocated in one or more subsequent rounds, in each case subject to a 
round cap for that round. NSCC may continue the loss allocation process 
in successive rounds until all losses from the Event Period are 
allocated among Members that have not submitted a Loss Allocation 
Withdrawal Notice in accordance with proposed Section 6 of Rule 4.
    As proposed, each loss allocation would be communicated to Members 
by the issuance of a Loss Allocation Notice. Each Loss Allocation 
Notice would specify the relevant Event Period and the round to which 
it relates. The first Loss Allocation Notice in any first, second, or 
subsequent round would expressly state that such Loss Allocation Notice 
reflects the beginning of the first, second, or subsequent round, as 
the case may be, and that each Member in that round has five (5) 
business days from the issuance of such first Loss Allocation Notice 
for the round (such period, a ``Loss Allocation Withdrawal Notification 
Period'') to notify NSCC of its election to withdraw from membership 
with NSCC pursuant to proposed Section 6 of Rule 4, and thereby benefit 
from its Loss Allocation Cap.\41\
---------------------------------------------------------------------------

    \41\ Supra note 15.
---------------------------------------------------------------------------

    Proposed Section 4 of Rule 4 would also retain the requirement of 
loss allocation among Members if a loss or liability remains after the 
application of the Corporate Contribution, as described above. In 
contrast to the current Section 4 where NSCC would apply Members' 
Required Deposits to the mutualized loss allocation amounts, under the 
proposal, NSCC would require Members to pay their loss allocation 
amounts (leaving their Required Fund Deposits intact).\42\ Loss 
allocation obligations would continue to be calculated based upon a 
Member's pro rata share of losses and liabilities (although the pro 
rata share would be calculated differently than it is today), and 
Members would still retain the ability to voluntarily withdraw from 
membership and cap their loss allocation obligation (although the loss 
allocation obligation would also be calculated differently than it is 
today).
---------------------------------------------------------------------------

    \42\ NSCC believes that shifting from the two-step methodology 
of applying the Clearing Fund and then requiring Members to 
immediately replenish it to requiring direct payment would increase 
efficiency, while preserving the right to charge the Member's 
Clearing Fund deposits in the event the Member does not timely pay. 
Such a failure to pay would trigger recourse to the Clearing Fund 
deposits of the Member under proposed Section 3 of Rule 4. In 
addition, this change would provide greater stability for NSCC in 
times of stress by allowing NSCC to retain the Clearing Fund, its 
critical pre-funded resource, while charging loss allocations.
---------------------------------------------------------------------------

    As proposed, each Member's pro rata share of losses and liabilities 
to be allocated in any round would be equal to (i) the Member's Average 
RFD, divided by (ii) the sum of the Average RFD amounts of all Members 
subject to loss allocation in such round. Each Member would have a 
maximum payment obligation with respect to any loss allocation round 
that would be equal to the greater of (x) its Required Fund Deposit on 
the first day of the applicable Event Period or (y) its Average RFD 
(such amount would be each Member's ``Loss Allocation Cap''). 
Therefore, the sum of the Loss Allocation Caps of the Members subject 
to loss allocation would constitute the maximum amount that NSCC would 
be permitted to allocate in each round.
    As proposed, Members would have two (2) business days after NSCC 
issues a first round Loss Allocation Notice to pay the amount specified 
in any such notice.\43\ On a subsequent round (i.e., if the first round 
did not cover the entire loss of the Event Period because NSCC was only 
able to allocate up to the round cap), Members would also have two (2) 
business days after notice by NSCC to pay their loss allocation amounts 
(again subject to their Loss Allocation Caps), unless Members have 
notified (or will timely notify) NSCC of their election to withdraw 
from membership with respect to a prior loss allocation round pursuant 
to proposed Section 6 of Rule 4.
---------------------------------------------------------------------------

    \43\ Supra note 19.
---------------------------------------------------------------------------

    As proposed, Section 4 would also provide that, to the extent that 
a Member's Loss Allocation Cap exceeds the Member's Required Fund 
Deposit on the first day of the applicable Event Period, NSCC may in 
its discretion retain any excess amounts on deposit from the Member, up 
to the Member's Loss Allocation Cap.
    Under the proposal, if a Member fails to make its required payment 
in respect of a Loss Allocation Notice by the time such payment is due, 
NSCC would have the right to proceed against such Member as a Member 
that has failed to satisfy an obligation in accordance with proposed 
Section 3 of Rule 4 described above. Members who wish to withdraw would 
be required to comply with the requirements in proposed Section 6 of 
Rule 4, described further below. Specifically, proposed Section 4 of 
Rule 4 would provide that if, after notifying NSCC of its election to 
withdraw from membership pursuant to proposed Section 6 of Rule 4, the 
Member fails to comply with the provisions of proposed Section 6 of 
Rule 4, its notice of withdrawal would be deemed void and any further 
losses resulting from the applicable Event Period may be allocated 
against it as if it had not given such notice.
    Under the proposal, NSCC would delete the provision in current 
Section 4 of Rule 4 that requires NSCC to provide Members and the 
Commission with 5 business days' prior notice before applying the 
Clearing Fund to a loss or liability because such requirement would no 
longer be relevant under the proposed rule change. Under the proposed 
rule change, NSCC would notify Members subject to loss allocation of 
the amounts being allocated to them in one or more Loss Allocation 
Notices. As proposed, instead of applying the Clearing Fund, NSCC would 
require Members to pay their loss allocation amounts (leaving their 
Clearing Fund deposits intact). In order to conform to these proposed 
rule changes, NSCC is proposing to eliminate the required notification 
to Members regarding the application of Clearing Fund in current 
Section 4 of Rule 4. NSCC is also proposing to delete the required 
notification to the Commission regarding the application of Clearing 
Fund in the same section. While as a practical matter, NSCC would 
notify the Commission of a decision to loss allocate, NSCC does not 
believe such notification needs to be specified in the Rules.
    Under the proposed rule change, NSCC would move the provision 
related to Off-the-Market Transactions from current Section 3 of Rule 4 
to proposed Section 4 of Rule 4 and clarify that (i) a loss or 
liability of NSCC in connection with the close-out or liquidation of an 
Off-the-Market Transaction would be allocated to the Member that was 
the counterparty to such transaction and (ii) no allocation would be 
made if the Defaulting Member satisfied all applicable intraday mark-
to-market margin charges assessed by NSCC with

[[Page 4387]]

respect to the Off-the-Market Transaction prior to its default.\44\
---------------------------------------------------------------------------

    \44\ See Securities Exchange Act Release No. 79598 (December 19, 
2016), 81 FR 94462 (December 23, 2016) (SR-NSCC-2016-005), at 94465, 
and Securities Exchange Act Release No. 79592 (December 19, 2016), 
81 FR 94448 (December 23, 2016) (SR-NSCC-2016-803), at 94452.
---------------------------------------------------------------------------

Section 6
    Proposed Section 6 of Rule 4 would include the provisions regarding 
withdrawal from membership currently covered by Section 8 of Rule 4. 
NSCC believes that relocating the provisions on withdrawal from 
membership as it pertains to loss allocation, so that it comes right 
after the section on the loss allocation waterfall, would provide for 
the better organization of Rule 4. As proposed, the subheading for 
Section 6 would read ``Withdrawal Following Loss Allocation.''
    Currently, Section 8 of Rule 4 provides that participants may 
notify NSCC within ten (10) business days after receipt of notice of a 
pro rata charge that they have elected to terminate their membership 
and thereby avail themselves of a cap on loss allocation, which is 
currently their Required Deposit as fixed immediately prior to the time 
of the pro rata charge.
    As stated above, under the proposed rule change, a Member who 
wishes to withdraw from membership in respect of a loss allocation must 
provide notice of its election to withdraw (``Loss Allocation 
Withdrawal Notice'') within five (5) business days from the issuance of 
the first Loss Allocation Notice in any round.\45\ In order to avail 
itself of its Loss Allocation Cap, the Member would need to follow the 
requirements in proposed Section 6 of Rule 4, which would provide that 
the Member must: (i) Specify in its Loss Allocation Withdrawal Notice 
an effective date for withdrawal from membership, which date shall not 
be later than ten (10) business days following the last day of the Loss 
Allocation Withdrawal Notification Period (i.e., no later than ten (10) 
business days after the 5th business day following the first Loss 
Allocation Notice in that round of loss allocation),\46\ (ii) cease all 
activity that would result in transactions being submitted to NSCC for 
clearance and settlement for which such Member would be obligated to 
perform, where the scheduled final settlement date would be later than 
the effective date of the Member's withdrawal, and (iii) ensure that 
all clearance and settlement activity for which such Member is 
obligated to NSCC is fully and finally settled by the effective date of 
the Member's withdrawal, including, without limitation, by resolving by 
such date all fails and buy-in obligations.
---------------------------------------------------------------------------

    \45\ Supra note 15.
    \46\ Supra note 22.
---------------------------------------------------------------------------

    NSCC is proposing to include a sentence in proposed Section 6 of 
Rule 4 to make it clear that if the Member fails to comply with the 
requirements set forth in that section, its Loss Allocation Withdrawal 
Notice will be deemed void, and the Member will remain subject to 
further loss allocations pursuant to proposed Section 4 of Rule 4 as if 
it had not given such notice.
    Currently, Section 8 also contains provisions regarding additional 
pro rata charges that may be made by NSCC for the same loss or 
liability under the existing loss allocation process and the applicable 
caps that participants wishing to voluntarily terminate their 
membership after such additional pro rata charges are noticed may avail 
themselves of. These provisions would be replaced by the loss 
allocation process contained in proposed Section 4 described above.
Section 7
    As proposed, Section 7 would cover the provisions on the return of 
a Member's Clearing Fund deposit that are currently covered by Section 
6 of Rule 4. Proposed Section 7's subheading would be ``Return of 
Members' Clearing Fund Deposits'' and would apply only to Members.
    Currently, with respect to the return of Clearing Fund deposits, 
Section 6 of Rule 4 states that NSCC will return a participant's 
Clearing Fund deposit 90 days after 3 conditions are met: (i) The 
participant ceases to be a participant, (ii) all transactions open at 
the time the participant ceases to be a participant which could result 
in a charge to the Clearing Fund have been closed, and (iii) all 
obligations of the participant to NSCC have been satisfied or have been 
deducted from the participant's Clearing Fund deposit by NSCC, provided 
that the participant has provided NSCC with satisfactory indemnities or 
guarantees or another participant has been substituted on all 
transactions and obligations of the participant.
    Current Section 6 provides further that in the absence of an 
acceptable guarantee, indemnity or substitution, NSCC will retain the 
entire Clearing Fund deposit of a participant if such deposit is less 
than $100,000 for two (2) years (or four (4) years for Members who have 
Sponsored Accounts at a Qualified Securities Depository) after 
conditions described in (i), (ii) and (iii) of the paragraph above have 
occurred. If the participant's Clearing Fund deposit is equal to or 
greater than $100,000, NSCC will retain the greater of twenty-five (25) 
percent of a participant's average Clearing Fund requirement over the 
twelve (12) months immediately prior to the date the participant ceased 
to be a participant, or $100,000 for two (2) years (or four (4) years 
for Members who have Sponsored Accounts at a Qualified Securities 
Depository) after conditions described in (i), (ii) and (iii) of the 
paragraph above have occurred.
    Current Section 6 states that if a participant made a deposit with 
respect to the Mutual Fund Services or Insurance and Retirement 
Processing Services, the participant will be entitled to the return of 
this deposit ninety (90) days after all associated transactions in 
these services have been satisfied.
    Finally, Section 6 currently provides that any obligation of a 
participant to NSCC unsatisfied at the time the participant ceases to 
be a participant will not be affected by such cessation of membership.
    Proposed Section 7 would reduce the period in which NSCC may retain 
a Member's Clearing Fund deposit. Specifically, NSCC proposes that if a 
Member gives notice to NSCC of its election to withdraw from 
membership, NSCC will return the Member's Actual Deposit in the form of 
(i) cash or securities within thirty (30) calendar days and (ii) 
Eligible Letters of Credit within ninety (90) calendar days, after all 
of the Member's transactions have settled and all matured and 
contingent obligations to NSCC for which the Member was responsible 
while a Member have been satisfied, except NSCC may retain for up to 
two (2) years the Actual Deposits from Members who have Sponsored 
Accounts at DTC. NSCC believes that shortening the time periods for the 
return of a Member's Clearing Fund deposit would be helpful to firms 
who have exited NSCC so that they could have use of the deposits sooner 
than under the current Rules, while at the same time protecting NSCC 
because such return would only occur if all obligations of the 
terminating Member to NSCC have been satisfied. Proposed Section 7 
would also harmonize the retention period for a Member's deposits to 
the Clearing Fund with the FICC/GSD Rules,\47\ thus

[[Page 4388]]

providing consistent treatment for firms that are members of both NSCC 
and FICC. Similarly, the Clearing Fund deposit retention for Members 
who have Sponsored Accounts at DTC would be reduced in order to stay 
consistent with the proposed retention period in the rules of DTC.\48\ 
In addition, NSCC proposes to make it clear that a Member's obligations 
to NSCC would include both matured as well as contingent obligations.
---------------------------------------------------------------------------

    \47\ Section 10 of FICC/GSD Rule 4, in relevant part, states 
that ``If a Netting Member gives notice to the Corporation pursuant 
to Rule 3 of its election to terminate its membership in the Netting 
System, the Member's deposits to the Clearing Fund in the form of 
cash or securities shall be returned to it within 30 calendar days 
thereafter . . . provided that all amounts owing to the Corporation 
by the Member have been paid to the Corporation prior to such return 
and the Member has no remaining open Net Settlement Position, Fail 
Net Settlement Position, or Forward Net Settlement Position.'' Supra 
note 27.
    \48\ On December 18, 2017, DTC submitted a proposed rule change 
and an advance notice to enhance its rules regarding allocation of 
losses. See SR-DTC-2017-022 and SR-DTC-2017-804, which were filed 
with the Commission but have not yet been published in the Federal 
Register. Copies of the proposed rule change and the advance notice 
are available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------

Section 8
    Proposed Section 8 of Rule 4 would cover the subject matter 
currently covered in Section 7 of Rule 4. Proposed Section 8's 
subheading would be ``Changes in Members' Required Fund Deposits'' and 
would apply only to Members.
    Currently, Section 7 of Rule 4 requires participants to satisfy any 
increase in their Required Deposit within such time as NSCC requires. 
At the time the increase becomes effective, the participant's 
obligations to NSCC will be determined in accordance with the increased 
Required Deposit whether or not the Member has so increased its 
deposit. NSCC is not proposing any substantive changes to this 
provision, which will be renumbered as Section 8 of Rule 4 under the 
proposed rule change, except for streamlining the provision and 
limiting its application to Members as stated above.
Section 9
    Currently, Section 9 of Rule 4 addresses situations where a 
participant has excess deposits in the Clearing Fund (i.e., amounts 
above its Required Deposit). The current provision provides that NSCC 
will, on any day that NSCC has determined and provided notification 
that an excess deposit exists with respect to a participant, return an 
excess amount requested by a participant that follows the formats and 
timeframe established by NSCC for such request. The current provision 
makes clear that NSCC will not return the requested excess amount (i) 
until any amount required to be charged against the participant's 
Required Deposit is paid by the participant to NSCC and/or (ii) if NSCC 
determines that the participant's current month's use of one or more 
services is materially different than the previous month's use upon 
which such excess is based. Section 9 currently makes clear that, 
notwithstanding any of the foregoing, NSCC may, in its discretion, 
withhold any or all of a participant's excess deposit if the 
participant has been placed on the Watch List.\49\ Current Section 9 
also makes clear that nothing in this section limits NSCC's rights 
under Rule 15.\50\
---------------------------------------------------------------------------

    \49\ Pursuant to Section 4 of Rule 2B, a Member could be placed 
on the Watch List either based on its credit rating of 5, 6 or 7, 
which can either be generated by the Credit Risk Rating Matrix or 
from a manual downgrade, or when NSCC deems such placement as 
necessary to protect NSCC and its Members. Supra note 4.
    \50\ Rule 15 permits NSCC to require a Member, Limited Member or 
any applicant to become either to furnish NSCC adequate assurances 
of the entity's financial responsibility and operational capability 
as NSCC may deem necessary. Supra note 4.
---------------------------------------------------------------------------

    Proposed Section 9 would add a subheading ``Excess Clearing Fund 
Deposits'' and would apply only to Members. NSCC is not proposing any 
substantive changes to this provision, except for streamlining the 
provisions in this section and eliminating the condition described in 
clause (i) of the paragraph above that limits participants' ability to 
request the return of excess amounts on deposit in the Clearing Fund 
and replacing clause (ii) of the paragraph above with a clause that 
provides NSCC may, in its discretion, withhold any or all of a 
participant's excess deposit if NSCC determines that the Member's 
anticipated activities in NSCC in the near future may reasonably be 
expected to be materially different than its activities of the recent 
past. NSCC believes that the proposed additional clause would protect 
NSCC and its participants because the clause would allow NSCC to retain 
excess deposits to cover an expected near-term increase in a Member's 
Required Fund Deposit amount due to the anticipated change in the 
Member's activities. The proposed additional clause would also align 
NSCC's Rules with that of FICC/GSD and FICC/MBSD,\51\ thus providing 
consistent treatment for firms that are members of both NSCC and FICC.
---------------------------------------------------------------------------

    \51\ See Section 9 of FICC/GSD Rule 4 (Clearing Fund and Loss 
Allocation) and Section 9 of FICC/MBSD Rule 4 (Clearing Fund and 
Loss Allocation). Supra note 27.
---------------------------------------------------------------------------

Section 10
    Current Section 10 of Rule 4 provides for crediting persons against 
whom losses are charged pursuant to Rule 4 if there is a subsequent 
recovery of such losses by NSCC. NSCC is not proposing any changes to 
this section other than adding a subheading ``Subsequent Recovery 
Against Loss Amounts'' and replacing ``persons'' with ``Persons,'' 
which is currently defined in Rule 1 (Definitions and Descriptions) to 
mean ``a partnership, corporation, limited liability corporation or 
other organization, entity or an individual.'' Given that NSCC is a 
corporation, NSCC believes that the term ``Person'' already includes 
NSCC; however, for increased clarity, NSCC is proposing to add 
``including the Corporation'' to make it clear to Members that if there 
is a subsequent recovery of losses charged pursuant to Rule 4, the net 
amount of the recovery would be credited to Persons, including NSCC, 
against whom the loss was charged in proportion to the amounts charged 
against them.
Section 11
    Current Section 11 of Rule 4 provides that a participant may 
withdraw Eligible Clearing Fund Securities from pledge, provided that 
the participant has deposited cash with, or pledged additional Eligible 
Clearing Fund Securities to, NSCC that, in the aggregate, secure the 
open account indebtedness of the participant and/or satisfy the 
participant's Required Deposit. Proposed Section 11 would add a 
subheading ``Substitution or Withdrawal of Pledged Securities'' and 
would apply only to Members. NSCC is not proposing any substantive 
changes to this provision, except for changes to improve the 
transparency and accessibility of this section.
Section 12
    Current Section 12 of Rule 4 makes it clear that NSCC has certain 
rights with respect to the Clearing Fund. Proposed Section 12 would add 
a subheading ``Authority of Corporation'' and would apply only to 
Members. NSCC is not proposing any substantive changes to this 
provision, except to clarify that a reference to 30 days in current 
Section 12 would mean 30 calendar days.
Section 13
    NSCC is proposing to add a new Section 13 to Rule 4 that would be 
entitled ``Mutual Fund Deposits.'' Under the proposal, NSCC would 
consolidate provisions from various sections in the current Rule 4 
concerning Mutual Fund/Insurance Services Members and Fund Members and 
group them into proposed Section 13. Aside from the consolidation, NSCC 
is not proposing any substantive changes to these provisions, except 
for changes to (i) reduce NSCC's retention period of Mutual Fund 
Deposits when a Mutual Fund Participant (as defined below and in the 
proposed rule change) elects to withdraw from membership, in order to

[[Page 4389]]

harmonize it with the proposed change in Section 7, as described above, 
and (ii) improve the transparency and accessibility of the provisions.
    Proposed Section 13 would provide that each Member that uses the 
Mutual Fund Services to submit mutual fund purchases, redemptions, or 
exchanges to any Fund Member or another Member and each Mutual Fund/
Insurance Services Member would, and each Fund Member (collectively 
with such Members and Mutual Fund/Insurance Services Members, ``Mutual 
Fund Participants'') may, be required to make a cash deposit to the 
Clearing Fund in the amounts determined in accordance with Procedure XV 
and other applicable Rules (its ``Mutual Fund Deposit'' and, unless 
specified otherwise, for the purposes of the Rules, Required Fund 
Deposits shall include Mutual Fund Deposits). In the case of a Member, 
its Mutual Fund Deposit would be a separate and additional component of 
such Member's deposit to the Clearing Fund but not part of the Member's 
Required Fund Deposit for purposes of calculating pro rata loss 
allocations pursuant to proposed Section 4 of Rule 4.
    As in the current Rules, proposed Section 13 would also provide 
that if any Mutual Fund Participant fails to satisfy any obligation to 
NSCC relating to Mutual Fund Services, notwithstanding NSCC's right to 
reverse in whole or in part any credit previously given to the contra 
side to any outstanding Mutual Fund Services transaction of the Mutual 
Fund/Insurance Services Member, NSCC would first apply such Mutual Fund 
Participant's Mutual Fund Deposit. If after such application any loss 
or liability remains and if such Mutual Fund Participant is a Member 
that is not otherwise obligated to NSCC, NSCC would apply such Member's 
Actual Deposit in accordance with proposed Section 3 of Rule 4. NSCC 
would next allocate any further remaining loss or liability to the 
other Mutual Fund Participants in successive rounds of loss allocations 
in each case up to the aggregate of Mutual Fund Deposits from non-
defaulting Mutual Fund Participants, and after the first such round, 
Mutual Fund Participants that have not submitted a Loss Allocation 
Withdrawal Notice in accordance with proposed Section 6 of Rule 4, 
following the procedures and timeframes set forth in proposed Sections 
4 and 6 of Rule 4 as if such Mutual Fund Participants are Members. If 
any loss or liability remains thereafter and there are no continuing 
Mutual Fund Participants, NSCC would proceed with loss allocations to 
Members for a Defaulting Member Event in accordance with proposed 
Section 4 of Rule 4.
    As proposed, Section 13 would reduce NSCC's retention period of 
Mutual Fund Deposits from ninety (90) days under the current Section 6 
of Rule 4 to thirty (30) calendar days. Specifically, NSCC is proposing 
that a Mutual Fund Participant that elects to withdraw from membership 
would be entitled to the return of its Mutual Fund Deposit no later 
than thirty (30) calendar days after all of its transactions have 
settled and it has satisfied all of its matured and contingent 
obligations to NSCC for which such Mutual Fund Participant was 
responsible while a Mutual Fund Participant. NSCC is proposing this 
change in order to harmonize the retention period of Mutual Fund 
Deposit with the proposed Clearing Fund retention period in proposed 
Section 7 of Rule 4, as described above.
    As proposed, Section 13 would make it clear that NSCC's rights, 
authority and obligations with respect to deposits to the Clearing Fund 
as set forth in Rule 4 would apply to Mutual Fund Deposits.
Section 14
    NSCC is proposing to add a new Section 14 to Rule 4 that would be 
entitled ``Insurance Deposits.'' Under the proposal, NSCC would 
consolidate provisions from various sections in current Rule 4 
concerning Insurance Carrier/Retirement Services Members and group them 
into proposed Section 14. Aside from the consolidation, NSCC is not 
proposing any substantive changes to these provisions, except for 
changes to (i) reduce NSCC's retention period of Insurance Deposits 
when an Insurance Participant (as defined below and in the proposed 
rule change) elects to withdraw from membership, in order to harmonize 
it with proposed Section 7, as described above, and (ii) improve the 
transparency and accessibility of the provisions.
    As in the current Rules, proposed Section 14 would provide that 
each Mutual Fund/Insurance Services Member that uses the Insurance and 
Retirement Processing Services and each Insurance Carrier/Retirement 
Services Member (collectively, ``Insurance Participants'') may be 
required to make a cash deposit to the Clearing Fund in the amounts 
determined in accordance with Procedure XV and other applicable Rules 
(its ``Insurance Deposit'' and, unless specified otherwise, for the 
purposes of the Rules, Required Fund Deposits shall include Insurance 
Deposits). Proposed Section 14 would also provide that if any Insurance 
Participant fails to satisfy any obligation to NSCC relating to the 
Insurance and Retirement Processing Services, NSCC would first apply 
such Insurance Participant's Insurance Deposit. If after such 
application any loss or liability remains, NSCC would allocate the 
remaining loss or liability to the other Insurance Participants in 
successive rounds of loss allocations in each case up to the aggregate 
of Insurance Deposits from non-defaulting Insurance Participants, and 
after the first such round, Insurance Participants that have not 
submitted a Loss Allocation Withdrawal Notice in accordance with 
proposed Section 6 of Rule 4, following the procedures and timeframes 
set forth in proposed Sections 4 and 6 of Rule 4 as if such Insurance 
Participants are Members. If any loss or liability remains thereafter 
and there are no continuing Insurance Participants, NSCC would proceed 
with loss allocations to Members for a Defaulting Member Event in 
accordance with proposed Section 4 of Rule 4.
    As proposed, Section 14 would reduce NSCC's retention period of 
Insurance Deposits from ninety (90) days under the current Section 6 of 
Rule 4 to thirty (30) calendar days. Specifically, NSCC is proposing 
that an Insurance Participant that elects to withdraw from membership 
would be entitled to the return of its Insurance Deposit no later than 
thirty (30) calendar days after all of its transactions have settled 
and it has satisfied all of its matured and contingent obligations to 
NSCC for which such Insurance Participant was responsible while an 
Insurance Participant. NSCC is proposing this change in order to 
harmonize the retention period of Insurance Deposit with the proposed 
Clearing Fund retention period in proposed Section 7 of Rule 4, as 
described above.
    As proposed, Section 14 would make it clear that NSCC's rights, 
authority and obligations with respect to deposits to the Clearing Fund 
as set forth in Rule 4 would apply to Insurance Deposits.
B. Proposed Changes to Addendum E (Statement of Policy--Application of 
Retained Earnings--Member Impairments) and Addendum K (Interpretation 
of the Board of Directors--Application of Clearing Fund)
    Addendum E is a statement of policy that currently provides that 
NSCC will apply no less than twenty-five (25) percent of its retained 
earnings to cover losses or liabilities from a Member's impairment that 
is not otherwise

[[Page 4390]]

satisfied by the impaired Member's Clearing Fund deposit. NSCC is 
proposing to delete Addendum E in its entirety because it would no 
longer be relevant given the proposed rule change relating to the 
Corporate Contribution discussed above.
    NSCC is proposing to modify Addendum K to delete all provisions 
associated with loss allocation and application of the Clearing Fund in 
connection with a loss or liability incurred by NSCC, including 
modifying the title of Addendum K. These provisions would no longer be 
necessary under the proposed rule change because the loss allocation 
process in its entirety would be governed by Rule 4. In addition, the 
current language in Addendum K regarding allocation by System would no 
longer be applicable under the proposed rule change as described above. 
NSCC would retain the provisions in Addendum K that pertain to NSCC's 
guaranty and rename Addendum K ``The Corporation's Guaranty.''
(iii) Other Proposed Rule Changes
    NSCC is proposing changes to Rule 1 (Definitions and Descriptions), 
Rule 2B (Ongoing Membership Requirements and Monitoring), Rule 4(A) 
(Supplemental Liquidity Deposits), Rule 13 (Exception Processing), Rule 
15 (Assurances of Financial Responsibility and Operational Capability), 
Rule 42 (Wind-Down of a Member, Fund Member or Insurance Carrier/
Retirement Services Member), Procedure III (Trade Recording Service 
(Interface with Qualified Clearing Agencies)), Procedure XV (Clearing 
Fund Formula and Other Matters), and Addendum O (Admission of Non-US 
Entities as Direct NSCC Members). NSCC is proposing changes to these 
Rules in order to conform them with the proposed changes to Rule 4 as 
well as to make certain technical changes to these Rules.
    Specifically, NSCC is proposing to add the following defined terms 
to Rule 1, in alphabetical order: Actual Deposit, Average RFD, Clearing 
Fund Cash, Corporate Contribution, Declared Non-Default Loss Event, 
Defaulting Member, Defaulting Member Event, Eligible Letter of Credit, 
Event Period, Insurance Deposit, Insurance Participant, Issuer, Lender, 
Loss Allocation Cap, Loss Allocation Notice, Loss Allocation Withdrawal 
Notice, Loss Allocation Withdrawal Notification Period, Mutual Fund 
Deposit, Mutual Fund Participant, Required Fund Deposit, Termination 
Date, and Voluntary Termination Notice.
    NSCC is proposing to delete the defined term ``The Corporation'' in 
Rule 1 and replace it with ``Corporation'' in Rule 1. NSCC is proposing 
to replace ``Required Deposits'' with ``Required Fund Deposits'' in 
Rule 2B, Rule 4(A), Rule 15, Rule 42, Procedure III, and Procedure XV. 
NSCC is also proposing to replace ``Letter of Credit'' with ``Eligible 
Letter of Credit'' in Rule 42 and Addendum O.
    In addition, in Section 5 of Rule 2B, NSCC proposes to change the 
reference to Section 8 of Rule 4 to reflect the updated section number, 
which would be to Section 4 of Rule 4. NSCC is also proposing 
conforming changes to this section to ensure that termination 
provisions in the Rules, whether voluntary or in response to a loss 
allocation, are consistent with one another to the extent appropriate.
    Currently, Section 5 of Rule 2B provides that participants may 
elect to voluntarily retire their membership by providing NSCC with 
written notice of such termination. Such termination will not be 
effective until accepted by NSCC, which shall be evidenced by a notice 
to NSCC's participants announcing the participant's retirement and the 
effective date of the retirement. This section also provides that a 
participant's voluntary termination of membership shall not affect its 
obligations to NSCC.
    Where appropriate, NSCC is proposing changes to align Section 5 of 
Rule 2B with the proposed new Section 6 of Rule 4, both of which 
address termination of membership. Specifically, NSCC is proposing to 
rename the subheading of Section 5 of Rule 2B to ``Voluntary 
Termination'' and to provide that when a participant elects to 
voluntarily terminate its membership by providing NSCC a written notice 
of such termination (``Voluntary Termination Notice''), the participant 
must specify in its Voluntary Termination Notice an effective date for 
its withdrawal (``Termination Date''), provided such Termination Date 
shall not be prior to the scheduled final settlement date of any 
remaining obligation owed by the participant to NSCC as of the time 
such Voluntary Termination Notice is submitted to NSCC, unless 
otherwise approved by NSCC. In addition, NSCC would make it clear that 
the acceptance by NSCC of a participant's Voluntary Termination Notice 
shall be no later than ten (10) business days after the receipt of such 
notice from the participant. NSCC is also proposing to clarify that as 
of the Termination Date, a participant that terminates its membership 
shall no longer be eligible or required to submit transactions to NSCC 
for clearance and settlement, unless the Board of Directors determines 
otherwise in order to ensure an orderly liquidation of the 
participant's open obligations. If any transaction is submitted to NSCC 
by such participant that is scheduled to settle on or after the 
Termination Date, the participant's Voluntary Termination Notice would 
be deemed void and the participant would remain subject to the Rules as 
if it had not given such notice. Furthermore, NSCC is proposing to add 
a sentence to Section 5 of Rule 2B to refer participants to Sections 7, 
13 and 14 of Rule 4, as applicable, regarding provisions on the return 
of a participant's Clearing Fund deposit and to specify that if an 
Event Period were to occur after a participant has submitted its 
Voluntary Termination Notice but prior to the Termination Date, in 
order for such participant to benefit from its Loss Allocation Cap 
pursuant to Section 4 of Rule 4, the participant would need to comply 
with the provisions of Section 6 of Rule 4 and submit a Loss Allocation 
Withdrawal Notice, which notice, upon submission, would supersede and 
void any pending Voluntary Termination Notice previously submitted by 
the participant.
    In Rule 4(A), NSCC proposes to amend Section 11 to update a cross-
reference to the time period for the refund of deposits to the Clearing 
Fund when a Member ceases to be a participant in order to align it with 
proposed Section 7 of Rule 4, which would reduce the time period from 
90 days to 30 calendar days. NSCC is also proposing to add a reference 
to Section 13 of Rule 4 in clause (c) of Section 13 of Rule 4(A) in 
order to specify that a Special Activity Supplemental Deposit of a 
Member may be used to satisfy a loss or liability as provided in such 
new proposed Section 13. NSCC is also proposing technical changes in 
Sections 2 and 13 of Rule 4(A) to reflect new proposed defined terms in 
the Rules.
    In Rule 13, NSCC would replace ``System'' with ``system'' to 
reflect the proposed deletion of ``System'' as a defined term from Rule 
4 and Addendum K. In Procedure XV, NSCC would replace ``Qualified 
Securities Depository'' with ``DTC'' to be consistent with the proposed 
change in Section 1 of Rule 4.
Member Outreach
    Beginning in August 2017, NSCC conducted outreach to Members in 
order to provide them with advance notice of the proposed changes. As 
of the date of this filing, no written comments relating to the 
proposed changes have been received in response to this outreach. The 
Commission will

[[Page 4391]]

be notified of any written comments received.
Implementation Timeframe
    Pending Commission approval, NSCC expects to implement this 
proposal promptly. Members would be advised of the implementation date 
of this proposal through issuance of an NSCC Important Notice.
Expected Effect on Risks to the Clearing Agency, Its Participants and 
the Market
    NSCC believes that the proposed rule changes to enhance the 
resiliency of NSCC's loss allocation process and to shorten the time 
within which NSCC is required to return a former Member's Clearing Fund 
deposit would reduce the risk of uncertainty to NSCC, its Members and 
the market overall. Specifically, by modifying the calculation of 
NSCC's corporate contribution, NSCC would apply a mandatory fixed 
percentage of its General Business Risk Capital Requirement (as 
compared to the current Rules which provide for ``no less than'' a 
percentage of retained earnings), which would provide greater 
transparency and accessibility to Members as to how much NSCC would 
contribute in the event of a loss or liability. By modifying the 
application of NSCC's corporate contribution to apply to Declared Non-
Default Loss Events, in addition to Defaulting Member Events, on a 
mandatory basis, NSCC would expand the application of its corporate 
contribution beyond losses and liabilities from Member impairments, 
which would better align the interests of NSCC with those of its 
Members by stipulating a mandatory application of the Corporate 
Contribution to a Declared Non-Default Loss Event prior to any 
allocation of the loss among Members. Taken together, these proposed 
rule changes would enhance the overall resiliency of NSCC's loss 
allocation process by enhancing the calculation and application of 
NSCC's Corporate Contribution, which is one of the key elements of 
NSCC's loss allocation process. Moreover, by providing greater 
transparency and accessibility to Members, as stated above, the 
proposed rule changes regarding the Corporate Contribution, including 
the proposed replenishment period, would allow Members to better assess 
the adequacy of NSCC's loss allocation process.
    By introducing the concept of an Event Period, NSCC would be able 
to group Defaulting Member Events and Declared Non-Default Loss Events 
occurring in a period of ten (10) business days for purposes of 
allocating losses to Members. NSCC believes that the Event Period would 
provide a defined structure for the loss allocation process to 
encompass potential sequential Defaulting Member Events or Declared 
Non-Default Loss Events that are likely to be closely linked to an 
initial event and/or market dislocation episode. Having this structure 
would enhance the overall resiliency of NSCC's loss allocation process 
because NSCC would be better equipped to address losses that may arise 
from multiple Defaulting Member Events and/or Declared Non-Default Loss 
Events that arise in quick succession. Moreover, the proposed Event 
Period structure would provide certainty for Members concerning their 
maximum exposure to mutualized losses with respect to such events.
    By introducing the concept of ``rounds'' (and accompanying Loss 
Allocation Notices) and applying this concept to the timing of loss 
allocation payments and the Member withdrawal process in connection 
with the loss allocation process, NSCC would (i) set forth a defined 
amount that it would allocate to Members during each round (i.e., the 
round cap), (ii) advise Members of loss allocation obligation 
information as well as round information through the issuance of Loss 
Allocation Notices, and (iii) provide Members with the option to limit 
their loss allocation exposure after the issuance of the first Loss 
Allocation Notice in each round. These proposed rule changes would 
enhance the overall resiliency of NSCC's loss allocation process 
because they would enable NSCC to continue the loss allocation process 
in successive rounds until all of NSCC's losses are allocated and 
enable NSCC to identify continuing Members for purposes of calculating 
subsequent loss allocation obligations in successive rounds. Moreover, 
the proposed rule changes would define for Members a clear manner and 
process in which they could cap their loss allocation exposure to NSCC.
    By implementing a ``look-back'' period to calculate a Member's loss 
allocation obligations and its Loss Allocation Cap, NSCC would 
discourage Members from reducing their settlement activity during a 
time of stress primarily to limit their loss allocation obligations. By 
determining a Member's loss allocation obligations and its Loss 
Allocation Cap based on the greater of its Required Fund Deposit or the 
average thereof over a look-back period, NSCC would be able to 
calculate a Member's pro rata share of losses and liabilities based on 
the amount of risk that the Member brings to NSCC. These proposed rule 
changes would enhance the overall resiliency of NSCC's loss allocation 
process because they would deter Members from reducing their settlement 
activity during a time of stress primarily to limit their Loss 
Allocation Caps.
    By reducing the time within which NSCC is required to return a 
former Member's Clearing Fund deposit, NSCC would enable firms that 
have exited NSCC to have access to their funds sooner than under the 
current Rules, while at the same time protecting NSCC and its provision 
of clearance and settlement services because such return would only 
occur if all obligations of the terminating Member to NSCC have been 
satisfied. As such, NSCC would maintain the requisite level of Clearing 
Fund deposit to ensure that it can continue to meet its clearance and 
settlement obligations.
Management of Identified Risks
    NSCC is proposing the rule changes as described in detail above in 
order to enhance the resiliency of NSCC's loss allocation process and 
provide transparency and accessibility to Members regarding NSCC's loss 
allocation process.
Consistency With the Clearing Supervision Act
    The proposed rule change would be consistent with Section 805(b) of 
the Clearing Supervision Act.\52\ The objectives and principles of 
Section 805(b) of the Clearing Supervision Act are to promote robust 
risk management, promote safety and soundness, reduce systemic risks, 
and support the stability of the broader financial system.\53\
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    \52\ 12 U.S.C. 5464(b).
    \53\ Id.
---------------------------------------------------------------------------

    The proposed rule change would enhance the resiliency of NSCC's 
loss allocation process by (1) modifying the calculation and 
application of NSCC's corporate contribution, (2) introducing an Event 
Period, (3) introducing the concept of ``rounds'' (and accompanying 
Loss Allocation Notices) and applying this concept to the timing of 
loss allocation payments and the Member withdrawal process in 
connection with the loss allocation process, and (4) implementing a 
``look-back'' period to calculate a Member's loss allocation obligation 
(which would replace the current calculation of a Member's loss 
allocation obligation based on the Member's activity in each of the 
various services or ``Systems'' offered by NSCC) and its Loss 
Allocation Cap. Together, these proposed rule changes would (i) create 
greater certainty for Members regarding NSCC's obligation towards a

[[Page 4392]]

loss, (ii) more clearly specify NSCC's and Members' obligations toward 
a loss and balance the need to manage the risk of sequential defaults 
and other potential loss events against Members' need for certainty 
concerning their maximum exposures, and (iii) provide Members the 
opportunity to limit their exposure to NSCC by capping their exposure 
to loss allocation. Reducing the risk of uncertainty to NSCC, its 
Members and the market overall would promote robust risk management, 
promote safety and soundness, reduce systemic risks, and support the 
stability of the broader financial system. Therefore, NSCC believes 
that the proposed rule change to enhance the resiliency of NSCC's loss 
allocation process is consistent with the objectives and principles of 
Section 805(b) of the Clearing Supervision Act cited above.
    The proposed rule change is also consistent with Rules 17Ad-
22(e)(13) and 17Ad-22(e)(23)(i), promulgated under the Act.\54\ Rule 
17Ad-22(e)(13) under the Act requires, in part, that NSCC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to ensure NSCC has the authority and operational 
capacity to take timely action to contain losses and continue to meet 
its obligations.\55\ As described above, the proposed rule changes to 
(1) modify the calculation and application of NSCC's corporate 
contribution, (2) introduce an Event Period, (3) introduce the concept 
of ``rounds'' (and accompanying Loss Allocation Notices) and apply this 
concept to the timing of loss allocation payments and the Member 
withdrawal process in connection with the loss allocation process, and 
(4) implement a ``look-back'' period to calculate a Member's loss 
allocation obligation (which would replace the current calculation of a 
Member's loss allocation obligation based on the Member's activity in 
each of the various services or ``Systems'' offered by NSCC) and its 
Loss Allocation Cap, taken together, are designed to enhance the 
resiliency of NSCC's loss allocation process. Having a resilient loss 
allocation process would help ensure that NSCC can effectively and 
timely address losses relating to or arising out of either the default 
of one or more Members or one or more non-default loss events, which in 
turn would help NSCC contain losses and continue to meet its clearance 
and settlement obligations. Therefore, NSCC believes that the proposed 
rule changes to enhance the resiliency of NSCC's loss allocation 
process are consistent with Rule 17Ad-22(e)(13) under the Act.
---------------------------------------------------------------------------

    \54\ 17 CFR 240.17Ad-22(e)(13) and (e)(23)(i).
    \55\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(23)(i) under the Act requires NSCC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to publicly disclose all relevant rules and 
material procedures, including key aspects of NSCC's default rules and 
procedures.\56\ The proposed rule changes to (i) align the loss 
allocation rules of the DTCC Clearing Agencies, (ii) improve the 
overall transparency and accessibility of the provisions in the Rules 
governing loss allocation, and (iii) make conforming and technical 
changes, would not only ensure that NSCC's loss allocation rules are, 
to the extent practicable and appropriate, consistent with the loss 
allocation rules of other DTCC Clearing Agencies, but also would help 
to ensure that NSCC's loss allocation rules are transparent and clear 
to Members. Aligning the loss allocation rules of the DTCC Clearing 
Agencies would provide consistent treatment, to the extent practicable 
and appropriate, especially for firms that are participants of two or 
more DTCC Clearing Agencies. Having transparent and clear loss 
allocation rules would enable Members to better understand the key 
aspects of NSCC's default rules and procedures and provide Members with 
increased predictability and certainty regarding their exposures and 
obligations. As such, NSCC believes that the proposed rule changes to 
align the loss allocation rules of the DTCC Clearing Agencies as well 
as to improve the overall transparency and accessibility of NSCC's loss 
allocation rules are consistent with Rule 17Ad-22(e)(23)(i) under the 
Act.
---------------------------------------------------------------------------

    \56\ 17 CFR 240.17Ad-22(e)(23)(i).
---------------------------------------------------------------------------

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,\57\ unless extended as described below. The clearing agency 
shall not implement the proposed change if the Commission has any 
objection to the proposed change.\58\
---------------------------------------------------------------------------

    \57\ 12 U.S.C. 5465(e)(1)(G).
    \58\ 12 U.S.C. 5465(e)(1)(F).
---------------------------------------------------------------------------

    Pursuant to Section 806(e)(1)(H) of the Clearing Supervision 
Act,\59\ 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.
---------------------------------------------------------------------------

    \59\ 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 \60\ because the Commission finds that the Advance 
Notice raises complex issues. Specifically, the proposed changes are 
substantial, detailed, and interrelated to corresponding proposals by 
DTC and FICC.\61\ As described by NSCC above, its loss allocation 
process is a key component of its risk management process. The proposed 
changes would provide a comprehensive revision to such loss allocation 
process when addressing losses from either Defaulting Member Events and 
Declared Non-Default Loss Events. In doing so, NSCC would clarify 
certain elements of, introduce new concepts to, and modify other 
aspects of its loss allocation waterfall as described above. 
Furthermore, the proposed changes would align the loss allocation rules 
across all three DTCC Clearing Agencies, in order to help provide 
consistent treatment of the rules, to the extent practicable and 
appropriate, especially for firms that are participants of two or more 
DTCC Clearing Agencies.
---------------------------------------------------------------------------

    \60\ Id.
    \61\ On December 18, 2017, DTC and FICC submitted advance 
notices and proposed rule changes to enhance their rules regarding 
allocation of losses. See SR-DTC-2017-804, SR-FICC-2017-806 and SR-
DTC-2017-022, SR-FICC-2017-022, which were filed with the Commission 
and the Board of Governors of the Federal Reserve System, 
respectively, available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------

    Accordingly, pursuant to Section 806(e)(1)(H) of the Clearing 
Supervision Act,\62\ 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-2017-806).\63\
---------------------------------------------------------------------------

    \62\ 12 U.S.C. 5465(e)(1)(H).
    \63\ 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.

[[Page 4393]]

    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.\64\
---------------------------------------------------------------------------

    \64\ See supra note 2 (concerning the clearing agency's related 
proposed rule changes).
---------------------------------------------------------------------------

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-2017-806 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-2017-806. 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-2017-806 and should be submitted on 
or before February 14, 2018.

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-01693 Filed 1-29-18; 8:45 am]
 BILLING CODE 8011-01-P