
[Federal Register Volume 81, Number 172 (Tuesday, September 6, 2016)]
[Notices]
[Pages 61271-61283]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21245]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78710; File No. 601-01]


Euroclear Bank SA/NV; Notice of Filing of Application To Modify 
an Existing Exemption From Clearing Agency Registration

August 29, 2016

I. Introduction

    On May 9, 2016, Euroclear Bank SA/NV (``EB'') filed with the 
Securities and Exchange Commission (``Commission'') an application on 
Form CA-1 requesting to modify an existing exemption \1\ (``Existing 
Exemption'') from clearing agency registration (``Modification 
Application'') \2\ pursuant to Section 17A \3\ of the Securities 
Exchange Act of 1934 (``Exchange Act'') and Rule 17Ab2-1 thereunder.\4\ 
Subject to certain limitations and conditions, the Existing Exemption 
enables EB as operator of the Euroclear System \5\ to perform the 
functions of a clearing agency with respect to transactions involving 
certain U.S. government securities (``U.S. Government Securities'') \6\ 
for its U.S.

[[Page 61272]]

participants (``U.S. Participants'') \7\ without registering as a 
clearing agency (``U.S. Government Securities Clearing Agency 
Activities'').\8\
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    \1\ See Self-Regulatory Organizations; Morgan Guaranty Trust 
Company of New York, Brussels Office, as Operator of the Euroclear 
System; Order Approving Application for Exemption From Registration 
as a Clearing Agency, Exchange Act Release No. 39643 (Feb. 11, 
1998), 63 FR 8232 (Feb. 18, 1998) (``Original Exemption Order''); 
and Self-Regulatory Organizations; Morgan Guaranty Trust Company, 
Brussels Office, as Operator of the Euroclear System and Euroclear 
Bank, S.A.; Order Approving Application to Modify an Existing 
Exemption From Clearing Agency Registration, Exchange Act Release 
No. 43775 (Dec. 28, 2000), 66 FR 819 (Jan. 4, 2001) (``2001 
Exemption Modification Order'') (together the Existing Exemption).
    \2\ The descriptions set forth in this notice regarding the 
structure and operations of EB have been largely derived from 
information contained in EB's amended Form CA-1 application and 
publicly available sources. The redacted Modification Application 
and non-confidential exhibits thereto are available on the 
Commission's Web site.
    \3\ 15 U.S.C. 78q-1.
    \4\ 17 CFR 240.17Ab2-1.
    \5\ ``Euroclear System'' means the securities settlement system 
that has been operated by EB or its predecessor since 1968 and the 
assets, means, and rights related to such services. All services 
performed by EB that relate to securities settlement and custody are 
part of the Euroclear System. See Modification Application, Exhibit 
S-1 at 1.
    \6\ As used herein, the term ``U.S. Government Securities'' has 
the same meaning as the term ``eligible U.S. government securities'' 
used in the Existing Exemption, which consists of government 
securities described in Section 3(a)(42) of the Exchange Act, except 
that it does not include any (i) foreign-targeted U.S. government or 
agency securities or (ii) securities issued or guaranteed by the 
International Bank for Reconstruction and Development (i.e., the 
World Bank) or any other similar international organization, and 
that are (i) Fedwire-eligible U.S. government securities, (ii) 
mortgage-backed pass through securities that are guaranteed by the 
Government National Mortgage Association (``GNMA''), and (iii) any 
collateralized mortgage obligation whose underlying securities are 
Fedwire-eligible U.S. government securities or GNMA guaranteed 
mortgage-backed pass through securities and which are depository 
eligible securities. For reference purposes, Fedwire is a large-
value transfer system operated by the Board of Governors of the 
Federal Reserve System that supports the electronic transfer of 
funds and of book-entry securities. See Original Exemption Order, 
supra note 1, at 8239.
    \7\ As used herein, the term ``U.S. Participant'' refers to any 
Euroclear System participant having a U.S. residence, based upon the 
location of its executive office or principal place of business, 
including, without limitation, (i) a U.S. bank (as defined by 
Section 3(a)(6) of the Exchange Act), (ii) a foreign branch of a 
U.S. bank or U.S.-registered broker-dealer, and (iii) any broker-
dealer registered as such with the Commission, even if such broker-
dealer does not have a U.S. residence.
    \8\ See Original Exemption Order, supra note 1, at 8232.
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    In the Modification Application, EB has requested that the 
Commission broaden the Existing Exemption to permit EB to perform 
certain additional clearing agency services (such as certain central 
securities depository (``CSD'') services \9\ and collateral management 
services) for its U.S. Participants using equity securities issued by 
U.S. Issuers \10\ (``U.S. Equity Securities'') \11\ to fulfill certain 
collateral obligations. Those additional clearing agency services, 
referred to herein as the ``U.S. Equities Clearing Agency Activities,'' 
specifically consist of the following:
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    \9\ As used herein, the term ``CSD services'' has the meaning 
set forth in 17 CFR 240.17Ad-22(a)(2). The Commission notes that it 
has proposed to move this definition to 17 CFR 240.17Ad-22(a)(3). 
See Exchange Act Release No. 34-71699 (Mar. 12, 2014), 79 FR 16865, 
16970 (Mar. 26, 2014), corrected at 79 FR 29507, 29612 (May 22, 
2014).
    \10\ As used herein, the term ``U.S. Issuer'' refers to an 
issuer organized or incorporated under the laws of any state of the 
United States, territory thereof, or the District of Columbia.
    \11\ As used herein, the term ``U.S. Equity Securities'' refers 
to an instrument that represents a direct ownership in a company, 
such as a stock, share, certificate of interest, or participation in 
any profit sharing agreement, preorganization certificate of 
subscription, voting trust certificate or certificate of deposit for 
an equity security, limited partnership interest, interest in a 
joint venture or certificate of interest in a business trust. 
However, the term ``U.S. Equity Securities'' does not include 
interests in structured finance vehicles such as limited 
partnerships, business trusts, or similar arrangements that have no 
independent operations and are used solely as special purpose 
financing vehicles. See Modification Application, Exhibit S-1 at 2.

    (a) The provision of clearing agency services (such as certain 
CSD services and collateral management services) in relation to U.S. 
Participants' use and reuse of U.S. Equity Securities issued by U.S. 
Issuers in support of collateral obligations utilizing the 
collateral management services provided by EB in relation to any 
securities or cash account held at EB that is used to receive 
collateral (``Collateral Accounts'') \12\ in connection with the 
services described in (b) below and in connection with receipt and 
delivery from other Euroclear System participants that are users of 
such collateral management services provided by EB; and
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    \12\ See Modification Application, Exhibit S-1 at 10-15. The use 
of the term Collateral Accounts herein includes both IMS Linked 
Accounts and EB's collateral management services. For a description 
of the IMS Linked Accounts, see Modification Application, Exhibit S-
1 at 10-11.
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    (b) solely for the purpose of implementing the services 
described in (a) above, the provision of certain clearing agency 
services for U.S. Participants' receipt and delivery of U.S. Equity 
Securities in relation to collateral management services through 
accounts held at EB that are linked to EB's account held at DTC.\13\
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    \13\ See Modification Application, Exhibit S-1 at 40.

EB would create the Collateral Accounts for use in the provision of the 
U.S. Equities Clearing Agency Activities, and for use in connection 
with a joint venture between Euroclear SA/NV (``ESA''), the parent 
company of EB, and The Depository Trust and Clearing Corporation 
(``DTCC''), called DTCC-Euroclear Global Collateral Ltd. (``DEGCL''). 
As further described herein, DEGCL would provide an inventory 
management service (``JV-IMS'') to facilitate, among other things, the 
repositioning and crediting of assets, including U.S. Equity 
Securities, throughout the EB infrastructure that would be used to 
provide the collateral management services.
    EB requests that it be permitted to provide the U.S. Equities 
Clearing Agency Activities without registering as a clearing agency and 
subject to the applicable conditions specified below. In addition, EB 
requests that it be permitted to continue providing the U.S. Government 
Securities Clearing Agency Activities without registering as a clearing 
agency and under substantially the same conditions as those set forth 
in the Existing Exemption.
    The Commission is publishing this notice to solicit comments from 
interested persons on the Modification Application. The Commission will 
consider any comments it receives in making its determination whether 
to approve the Modification Application.

II. Background

A. EB Organization and Legal Framework

    EB is a limited liability company organized under the laws of 
Belgium and also is authorized in Belgium as a Belgian credit 
institution. EB is an international CSD and a global provider of 
clearance, settlement, collateral management, and related services. In 
particular, EB provides its participants with a means of acquiring, 
holding, transferring, and pledging security entitlements by electronic 
book-entry on its records outside of the United States, either free of 
payment or against payment, in multiple currencies.\14\ EB is 
headquartered in Brussels, Belgium, with a secondary office in Braine 
l'Alleund, Belgium, branch offices in Wanchai, Hong Kong and Krakow, 
Poland, and a representative office in New York City.\15\
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    \14\ See Modification Application, Exhibit S-1 at 3.
    \15\ See Modification Application, Exhibit I-1.
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    EB is part of a group of companies that serve as market 
infrastructures by offering clearing agency services to the domestic 
markets in Belgium, Netherlands, France, England, Ireland, Sweden, and 
Finland (collectively with EB, the ``Euroclear Group'').\16\ Entities 
in the Euroclear Group are subsidiaries of ESA, a Belgian limited 
liability company.\17\ Control and direction of the Euroclear Group 
strategic decisions are vested in ESA. ESA provides common services to 
EB and other affiliated companies of the Euroclear Group.\18\ ESA 
maintains intercompany agreements with EB that set forth respective 
services and obligations.\19\
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    \16\ In 2015, the Euroclear Group had assets under custody of 
[euro]27.5 trillion, turnover equivalent to [euro]674.7 trillion, 
and a settlement volume of 190.7 million netted transactions. 
Euroclear Group's collateral management platform, the Collateral 
Highway, processed collateralized transactions in 2015 for an amount 
of [euro]1.068 trillion on a daily basis. See Modification 
Application, Exhibit S-1 at 3.
    \17\ See Modification Application, Exhibit A-2.
    \18\ See Modification Application, Exhibit S-1 at 3.
    \19\ Id.
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    As previously noted, all services performed by EB that relate to 
securities settlement and custody are part of the Euroclear System, 
which is designated as a securities settlement system under the Belgian 
Settlement Finality Act.\20\ According to EB, Belgian law provides for 
robust asset protection rights for assets deposited in the Euroclear 
System and for the protection of the holding of assets on the books of 
EB.\21\ Furthermore, EB represents that Belgian

[[Page 61273]]

law and EB's arrangements provide a high degree of certainty with 
regards to finality of transfers on EB's books, the holding of 
collateral in accounts, the contractual framework of participants in 
the Euroclear System, and default procedures.\22\
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    \20\ See Modification Application, Exhibit K-5 at 22.
    \21\ See Modification Application, Exhibit S-1 at 35.
    \22\ See Modification Application, Exhibit S-1 at 35.
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    To utilize the Euroclear System, EB participants enter into a 
contractual relationship with EB to open and maintain securities and 
cash accounts at EB.\23\ EB participants agree that their rights to 
assets held in the Euroclear System are defined and governed by Belgian 
law.\24\ EB states that under Belgian law, it is generally the 
beneficiary of a statutory lien on assets in accounts held at EB to 
secure any claim it has against EB participants arising in connection 
with the clearance or the settlement of transactions through, or in 
connection with, the Euroclear System, including claims resulting from 
loans or advances.\25\
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    \23\ See Modification Application, Exhibit J.
    \24\ Specifically, EB represents that EB participants' rights in 
securities held in the Euroclear System are defined and governed by 
Belgian Royal Decree No. 62 dated Nov. 10, 1967 on the Deposit of 
Fungible Financial Instruments and the Settlement of Transactions 
involving such Instruments or similar Belgian legislation. EB states 
that the applicable Belgian law is effectively similar to securities 
entitlements under Revised Article 8 of the Uniform Commercial Code. 
See Modification Application, Exhibit S-1 at 36.
    \25\ See Modification Application, Exhibit E-5 at 34.
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B. Regulatory Oversight of EB and ESA

    EB represents that it is subject to consolidated supervision by the 
National Bank of Belgium (``NBB'') and the Belgian Financial Services 
Market Authority (``FSMA'').\26\ EB also represents that NBB supervises 
ESA, due to its status as an authorized holding company of a regulated 
credit institution (i.e., EB) and as an institution assimilated to a 
securities settlement system (i.e., the Euroclear System).\27\
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    \26\ See Modification Application, Exhibit S-1 at 19.
    \27\ See Modification Application, Exhibit S-1 at 20. According 
to EB, pursuant to Article 20, Sec.  2 of the Belgian Royal Decree 
of September 26, 2005, institutions assimilated to a settlement 
institution may not have shareholdings in commercial companies 
without the prior approval of the NBB, unless the shareholding is 
taken in companies whose activities consist, in whole or in part, in 
the activities which a settlement institution or an institution 
assimilated thereto may carry out.
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    According to EB, the NBB exercises its supervision over EB and ESA 
on a consolidated basis.\28\ Specifically, the NBB has prudential 
supervision and oversight over EB as a licensed credit institution 
operating in Belgium. Furthermore, the NBB supervises EB in its role as 
operator of the Euroclear System and as a recognized CSD. EB states 
that the NBB is required to ensure: (1) That EB's clearance, 
settlement, and payment systems operate properly; (2) that those 
systems are efficient and sound; and (3) that EB meets the obligations 
applicable to credit institutions under applicable European law, as 
adopted into Belgian law.\29\ EB represents that the NBB has the 
authority to order EB to limit, suspend, or stop activities if EB does 
not comply with the regulatory requirements of its various 
authorizations.\30\ EB also states that the NBB assesses EB under the 
Principles for Financial Market Infrastructures (``PFMI'') and 
considers best practices where appropriate.\31\
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    \28\ Id. In addition, EB is submitted to the Regulation 575/2013 
of 26 June 2013 on prudential requirements for credit institutions 
and investment firms (CRR) IV and Regulation 909/2014 of 23 July 
2014 on improving securities settlement in the European Union and on 
central securities depositaries (CSDR). See Modification 
Application, Exhibit K-5 at 16.
    \29\ See Modification Application, Exhibit S-1 at 20.
    \30\ Id.
    \31\ See Modification Application, Exhibit S-1 at 20. The PFMI 
are standards applicable to financial market infrastructures, such 
as CSDs and securities settlement systems. Committee on Payment and 
Settlement Systems (now the Committee on Payment and Market 
Infrastructure) and Technical Committee of the International 
Organization of Securities Commissions, Principles for financial 
market infrastructures (Apr. 16, 2012), available at http://www.bis.org/publ/cpss101a.pdf.
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    EB further represents that the FSMA regulates EB for the purposes 
of compliance with investor protection rules and rules on the 
operation, integrity, and transparency of the Belgian financial 
markets.\32\ These include requirements relating to conflicts of 
interest with clients, customer protection in case of insolvencies, and 
enforcement of conduct requirements.
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    \32\ See Modification Application, Exhibit S-1 at 20-21.
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C. EB's Existing Exemption

    The Commission originally granted the Existing Exemption in 1998 to 
EB's predecessor, Morgan Guaranty Trust Company of New York, Brussels 
Office (``MGT-Brussels''), as operator of the Euroclear System (the 
Original Exemption Order).\33\ Before EB replaced MGT-Brussels as the 
operator of the Euroclear System, the Commission approved a 
modification to the Original Exemption Order to reflect the change in 
control of the Euroclear System from MGT-Brussels to EB (the 2001 
Exemption Modification Order).\34\ Under the Existing Exemption, EB may 
only provide the U.S. Government Securities Clearing Agency Activities 
to U.S. Participants.\35\
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    \33\ See supra note 1.
    \34\ The change in control of the Euroclear System from MGT-
Brussels to EB has been the only modification of the exemption. See 
supra note 1. The 2001 Exemption Modification Order was the last 
time the Commission modified the Existing Exemption.
    \35\ See Original Exemption Order, supra note 1, at 8239.
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    Under the terms of the Existing Exemption, the Commission placed a 
limit on the volume of transactions in U.S. Government Securities 
conducted by U.S. Participants that can be settled through the 
Euroclear System. Specifically, the average daily volume of U.S. 
Government Securities settled through the Euroclear System for U.S. 
Participants may not exceed five percent of the total average daily 
dollar value of the aggregate volume in U.S. Government Securities.\36\ 
To facilitate the monitoring of compliance with the volume limit and 
the impact of EB's operations on the U.S. Government Securities market 
under the Existing Exemption, EB is required to provide the Commission 
with quarterly reports, calculated on a twelve-month rolling basis, of 
(i) the average daily volume of transactions in eligible U.S. 
Government Securities for U.S. Participants that are subject to the 
volume limit and (ii) the average daily volume of transactions in 
eligible U.S. Government Securities for all Euroclear System 
participants, whether or not subject to the volume limit.\37\
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    \36\ See id. at 8239.
    \37\ See Original Exemption Order, supra note 1, at 8240. EB's 
non-U.S. participants are not subject to any restrictions under the 
Existing Exemption.
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    EB is also required to notify the Commission regarding material 
adverse changes in any account maintained in the Euroclear System for 
U.S. Participants.\38\ In addition, EB is required to respond to 
Commission requests for information regarding any U.S. Participant 
about whom the Commission has financial solvency concerns, including, 
for example, a settlement default by a U.S. Participant.\39\ The 
Commission also required the execution of a satisfactory memorandum of 
understanding with the

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Belgian banking and securities regulator (currently the NBB) to 
facilitate the provision of information by EB to the Commission.\40\
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    \38\ For purposes of the Original Exemption Order, the term 
``material adverse changes'' included (i) the termination of any 
U.S. Participant; (ii) the liquidation of any securities collateral 
pledged by a U.S. Participant to secure an extension of credit made 
through the Euroclear System; (iii) the institution of any 
proceedings to have a U.S. Participant declared insolvent or 
bankrupt; or (iv) the disruption or failure in whole or in part in 
the operations of the Euroclear System either at its regular 
operating location or at its contingency center. See Original 
Exemption Order, supra note 1, at 8240, n.78.
    \39\ See Original Exemption Order, supra note 1, at 8240.
    \40\ See 2001 Exemption Modification Order, supra note 1, at 
821; see also Understanding Regarding an Application of Euroclear 
Bank for an Exemption Under U.S. Federal Securities Laws (January, 
30, 2001) available at https://www.nbb.be/doc/cp/nl/aboutcbfa/mou/pdf/mou_2001-01-30_euroclearbank.pdf.
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D. EB Collateral Management Services

    EB participants are able to utilize various clearance and 
settlement services through the Euroclear System.\41\ Among those 
services are the EB collateral management services (``EB-CMS''), which 
provide a framework for exchanging collateral to fulfill bilateral 
obligations between counterparties.\42\ Parties to bilateral 
arrangements that require the posting of collateral by one party 
(``Collateral Giver'') in favor of the other party (``Collateral 
Taker'') may use the EB-CMS to secure credit exposures arising under 
such bilateral arrangements. The terms of such bilateral arrangements 
and related collateral needs (including the credit exposure, collateral 
requirements, and collateral terms) are negotiated and agreed between 
the parties independently of EB. After such arrangements are agreed, 
the parties then enter into an agreement with EB to provide the 
collateral management services.
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    \41\ See Modification Application, Ex. J.
    \42\ See Modification Application, Ex. S-1 at 3.
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    EB states that its non-U.S. participants use the EB-CMS to meet 
collateral obligations with a variety of assets, including U.S. 
Government Securities and U.S. Equity Securities.\43\ EB also 
represents that U.S. Participants currently use the EB-CMS to meet 
collateral obligations with a wide variety of assets including U.S. 
Government Securities but not U.S. Equity Securities,\44\ as the 
Existing Exemption prohibits EB from allowing U.S. Participants to hold 
U.S. Equity Securities in an account held at EB for any purpose. EB 
states that as part of its contractual documentation with its 
participants, it prohibits any U.S. Participant from holding U.S. 
Equity Securities in accounts held at EB for any purpose (``Current 
Equities Restrictions'').\45\ EB represents that automated systems 
protocols and control procedures are implemented in the Euroclear 
System to enforce the Current Equities Restrictions. The systems 
protocols consist of coded validation rules that are part of EB's fully 
automated and standard processes that run prior to the settlement of 
any securities movement to or from an account held at EB.\46\
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    \43\ See Modification Application, Exhibit S-1 at 34.
    \44\ Id.
    \45\ EB's customer contracts provide that: ``Due to restrictions 
imposed on Euroclear Bank by the United States Securities and 
Exchange Commission (SE.C.) following SEC Rule 17Ab2-1, equities, 
ETFs and REITs issued by companies incorporated in a state or 
territory of the United States can be held in Euroclear Bank by non-
US Participants only.'' See Modification Application, Exhibit S-1 at 
6.
    \46\ Id.
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III. EB's Proposed Infrastructure

    As introduced earlier and discussed further below, EB has requested 
that the Commission broaden the Existing Exemption to allow it to 
provide collateral management services to its U.S. Participants using 
U.S. Equity Securities. Under the Existing Exemption, EB may already 
offer the EB-CMS for U.S. Government Securities to both U.S. 
Participants and non-U.S. participants, but EB may only offer the EB-
CMS for U.S. Equity Securities to its non-U.S. participants. EB has 
made the request to broaden its exempt clearing agency activities for 
the purpose of assisting its participants' compliance with new 
regulations described below scheduled to take effect in the near future 
that will significantly affect the use of collateral. In connection 
with its request, EB is taking preparatory measures to create the 
infrastructure to accommodate the U.S. Equities Clearing Agency 
Activities. For example, as further described below, DEGCL was formed 
in part to facilitate a U.S. Participant's repositioning of assets in 
the U.S. Participant's account held at The Depository Trust Company 
(``DTC'') to create a credit for those assets in the U.S. Participant's 
Collateral Account held at EB for use in the EB-CMS.

A. New Collateral Regulations

    According to the Modification Application, new and enhanced 
regulatory requirements (``New Collateral Regulations'') are leading 
counterparties to derivative and financing transactions to seek 
streamlined margin processing and increased efficiency in the 
availability and deployment of collateral.\47\ These New Collateral 
Regulations are expected to be implemented in the European Union in the 
near future.\48\ EB states that the regulatory changes include new 
restrictions on eligible collateral, requiring the use of highly liquid 
assets, prescribed haircuts, and segregation requirements, as well as a 
prohibition on rehypothecation for initial margin. EB believes that 
when fully implemented, the New Collateral Regulations will result in 
increased capital requirements, mandatory central clearing of more 
derivative transactions, and new margining rules for bilateral trades, 
which will increase demand for high quality collateral. EB projects 
that the requirement for more transactions and exposures to be 
collateralized globally will result in a significant increase in the 
number of required collateral movements between market participants, 
which will have implications for counterparty credit risk, funding and 
capital charges, and reputational and operational risk.
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    \47\ See Modification Application, Exhibit S-1 at 6.
    \48\ Id.; see also letter from Gabriel Bernardino, Chair of the 
Joint Committee of the European Supervisory Authorities to Lord 
Jonathan Hill, EU Commissioner for Financial Stability, Financial 
Services and Capital Markets Union European Commission (June 30, 
2016) (regarding the delayed adoption of the Joint draft Regulatory 
Technical Standards on risk mitigation techniques for non-centrally 
cleared OTC derivatives), available at https://eiopa.europa.eu/Publications/Joint%20Committee/ESAs%202016%2050%20%28ESAs_joint_letter%20to%20the%20Commission%20on%20delayed%20adoption.pdf.
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    EB also represents that these regulatory changes include 
requirements for initial margin for counterparties to certain 
derivative and financing transactions, as well as a reduction or 
removal of unsecured thresholds for variation margin. EB expects that 
these new initial margin requirements will significantly increase the 
amount of collateral required to support a number of derivative and 
financing transactions. In addition, EB represents that it is expected 
that the removal or reduction of unsecured thresholds for variation 
margin will mean any changes in underlying transaction valuations may 
trigger increased margin calls, requiring market participants to hold 
additional collateral available for posting.
    EB represents that the New Collateral Regulations therefore are 
expected to greatly increase the complexity of collateral management 
and create new competition for collateral.\49\ Industry

[[Page 61275]]

research cited by EB indicates that as these regulatory changes take 
effect, the volume of required collateral movements will increase and 
the number of collateral settlement fails and associated costs are 
likely to rise proportionally.\50\
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    \49\ EB states that collateral movements will need to be tracked 
and applied against a growing number and type of credit support 
documentation, while segregation rules will multiply the number of 
collateral accounts needed and correspondingly increase the 
complexity of accurately processing collateral movements across 
account types, fragmented central clearing and collateral delivery 
channels. See Modification Application, Exhibit S-1 at 7; see also 
Implications of Collateral Settlement Fails: An Industry Perspective 
on Bilateral OTC Derivatives (Feb. 2016), available at http://www.imas.org.sg//media/2016/03/03/_Implications_of_Collateral___FINAL.pdf (``Implications of 
Collateral Settlement Fails''); Collateral Management in Europe: 
Searching for Central Intelligence (May 2015), available at https://www.euroclear.com/dam/Brochures/Euroclear-Collateral-Management-Aite-Paper.pdf; The Economics of Collateral (Dec. 2013), available 
at http://dtcc.com/~/media/Files//WhitePapers/%20Report.ashx.
    \50\ See, e.g., Implications of Collateral Settlement Fails, 
supra note 49, at 5.
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B. DEGCL

    DEGCL was formed to help market participants comply with the New 
Collateral Regulations, and will offer global information, 
recordkeeping, and processing services for derivatives collateral 
movements and other types of financing transactions.\51\ ESA and DTCC 
formed the joint venture in 2014, and DEGCL is authorized as a service 
company by the Financial Conduct Authority (``FCA'') in the United 
Kingdom.\52\ EB represents that DEGCL seeks to provide services to its 
users, including buy-side and sell-side financial institutions, in 
meeting their risk management and regulatory requirements for the 
holding and exchange of collateral as required by the New Collateral 
Regulations.\53\ These services will be offered to users located 
primarily in Europe and the U.S.\54\ In particular, DEGCL would provide 
the JV-IMS to help facilitate the U.S. Equities Clearing Agency 
Activities.\55\
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    \51\ See Modification Application, Exhibit S-1 at 3.
    \52\ DEGCL's reference number as an authorized service company 
is 686269. See FCA Financial Services Register, available at https://www.fca.org.uk/register.
    \53\ See Modification Application, Exhibit S-1 at 7.
    \54\ See id.
    \55\ See Modification Application, Exhibit S-1 at 8.
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1. DEGCL JV-IMS
    EB represents that the JV-IMS would provide an automated mechanism 
for an entity that is both a participant of EB and DTC (``JV-IMS 
User'') \56\ to receive recommendations on how to reposition assets in 
the JV-IMS User's account held at DTC, including U.S. Equity 
Securities, for subsequent crediting of those assets to its Collateral 
Accounts within the EB-CMS (and for the return of such assets to the 
JV-IMS User's account held at DTC). To facilitate the JV-IMS, EB will 
become a participant at DTC, subject to approval by DTC, its standard 
membership requirements and certain heightened requirements for a non-
U.S. entity.\57\
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    \56\ See id.
    \57\ EB has signed a DTC Participant's Agreement pursuant to 
which it agreed that the DTC rules shall be a part of the terms and 
conditions of every contract or transaction that EB may make or have 
with DTC. See id.; see also DTC Policy Statements on the Admission 
of Participants (June 2013).
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    Prior to initial use, a JV-IMS User will set parameters that 
specify which types of assets in its account held at DTC (and in what 
amounts) it will make available for the JV-IMS, including any limits or 
criteria on those assets (such as ratings).\58\ The JV-IMS User will 
then transfer assets that meet the parameters to a sub-account held at 
DTC that is designated for, and dedicated to, the JV-IMS. (See Step 1 
of Chart 1 below.) The JV-IMS will then monitor that information and 
independently verify that the assets identified by the JV-IMS User meet 
its own parameters, as well as the EB eligibility requirements (such as 
an accepted CUSIP number). If so, the JV-IMS will prepare and submit to 
EB free of payment delivery instructions (which EB will in turn submit 
to DTC on the JV-IMS User's behalf) to transfer the assets identified 
by the JV-IMS User in its designated sub-account held at DTC to EB's 
account held at DTC.\59\ (See Step 2 of Chart 1 below.) The JV-IMS will 
also prepare and submit instructions to EB to credit such transferred 
assets from EB's account held at DTC to the relevant JV-IMS User's 
Collateral Accounts. (See Step 2a of Chart 1 below.)
---------------------------------------------------------------------------

    \58\ See Modification Application, Exhibit S-1 at 8.
    \59\ This process is subject to DTC rules governing EB's role in 
repositioning assets. See Self-Regulatory Organizations; The 
Depository Trust Company; Order Approving Proposed Rule Change To 
Establish a Link with Euroclear, Exchange Act Release No. 78358 
(July 19, 2016), 81 FR 48482 (July 25, 2016) (DTC-2016-004) (``DTC 
EB Link Rule'').
---------------------------------------------------------------------------

    Additionally, the JV-IMS would facilitate the automated return of 
such assets to the JV-IMS User's account held at DTC when necessary to 
meet other settlement obligations and for corporate actions by 
preparing and submitting to EB (for eventual forwarding by EB to DTC) 
free of payment delivery instructions to transfer such assets from EB's 
account held at DTC to the relevant JV-IMS User's sub-account held at 
DTC. Finally, the JV-IMS would report to the JV-IMS User all settlement 
instructions generated via the JV-IMS, the status of the generated 
settlement instructions, and other relevant information in regards to 
such settlement instructions. All of the foregoing would be subject to 
the DTC rules regarding a link with EB that was approved by the 
Commission in July 2016.\60\
---------------------------------------------------------------------------

    \60\ See id.
---------------------------------------------------------------------------

C. EB Collateral Accounts

    After the JV-IMS User's assets are credited to EB's account held at 
DTC via the JV-IMS processes described above, the assets would then be 
credited to the Collateral Accounts for the relevant EB 
participant.\61\ As stated above, EB's internal protocols would 
structure these Collateral Accounts to only allow U.S. Participants: 
(1) To take receipt of U.S. Equity Securities credited to the account 
via the JV-IMS process described immediately above; (2) to deliver U.S. 
Equity Securities out of the Collateral Accounts for mobilization as 
collateral through the EB-CMS infrastructure and to receive U.S. Equity 
Securities into the Collateral Accounts mobilized from other 
participants of the EB-CMS; and (3) to deliver U.S. Equity Securities 
back to the relevant JV-IMS User's sub-account at DTC. (See Step 3 of 
Chart 1 below.) EB represents that these transfer and use restrictions 
on Collateral Accounts would prevent a U.S. Participant's U.S. Equity 
Securities held in Collateral Accounts from being used for any other 
purposes in the Euroclear System, such as normal settlement activity, 
except under certain circumstances involving the default of a 
Collateral Giver.\62\
---------------------------------------------------------------------------

    \61\ All settlement activity related to the JV-IMS that occurs 
on the books of DTC is governed exclusively by DTC procedures. All 
activity related to the use of assets that occurs on the books of EB 
is governed exclusively by the EB contractual framework. See 
Modification Application, Exhibit S-1 at 9.
    \62\ See Modification Application, Exhibit S-1 at 11.
---------------------------------------------------------------------------

    Currently, non-U.S. JV-IMS Users may move U.S. Equity Securities 
from DTC to EB by transferring the securities to an account held at DTC 
for EB's custodian. If the Modification Application is approved, non-
U.S. JV-IMS Users may transfer U.S. Equity Securities to either EB's 
account held at DTC or an account held at DTC for EB's custodian.
    If a JV-IMS User defaults, either a Collateral Taker or a 
Collateral Giver can notify EB of a default under their bilateral 
transaction. EB's operations staff would then initiate a process to 
override the regular controls that govern use of U.S. Equity Securities 
as collateral and instead would instruct DTC to debit those securities 
from EB's DTC Account and to credit them to the account held at DTC for 
EB's custodian, while still being credited to the Collateral Taker's 
account at EB.\63\
---------------------------------------------------------------------------

    \63\ Id.
---------------------------------------------------------------------------

    In the Modification Application, EB proposes to amend the Current 
Equities Restrictions \64\ to permit the use by U.S. Participants of 
U.S. Equity Securities subject to the transfer and use restrictions 
described above. In all other circumstances, the Current Equities

[[Page 61276]]

Restrictions would otherwise remain applicable.
---------------------------------------------------------------------------

    \64\ See supra Section II.D.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN06SE16.007

BILLING CODE 8011-01-C

IV. The Modification Application

    The Modification Application requests that the Commission do the 
following: (i) Continue the Existing Exemption under substantially 
similar conditions except as otherwise specified herein, (ii) broaden 
the Existing Exemption to allow EB to provide the U.S. Equities 
Clearing Agency Activities under new conditions applicable to those 
activities, and (iii) apply conditions to EB that are largely 
harmonized between the U.S. Government Securities Clearing Agency 
Activities and U.S. Equity Clearing Agency Activities (collectively, 
the ``Clearing Agency Activities'').

A. Continue the Existing Exemption on Substantially Similar Conditions 
Specific to U.S. Government Securities Clearing Agency Activities

    EB specifically requests that the Commission continue the Existing 
Exemption to conduct the U.S. Government Securities Clearing Agency 
Activities without: (i) Requiring EB to register as a clearing agency 
with the Commission; (ii) changing the definition of the terms U.S. 
Government Securities or U.S. Participants, as set forth in the 
Existing Exemption; or (iii) changing the conditions set forth in the 
Existing Exemption with regards to the U.S. Government Securities 
Clearing Agency Activities, listed below:

    (a) Volume Limit. The average daily volume of transactions in 
eligible U.S. Government Securities for U.S. Participants processed 
through EB as operator of the Euroclear System may not exceed five 
percent of the total average daily dollar value of the aggregate 
volume in eligible U.S. Government Securities.
    (b) Commission Access to Information regarding U.S. Government 
Securities Clearing Agency Activities. EB will continue to provide 
the Commission with quarterly reports, calculated on a twelve-month 
rolling basis, of (a) the average daily volume of transactions in 
eligible U.S. Government Securities for U.S. Participants that are 
subject to the volume limit as described in Section IV.C.2 of the 
Original Exemption Order and (b) the average daily volume of 
transactions in eligible government securities for all Euroclear 
System participants, whether or not subject to the volume limit as 
described in Section IV.C.2 of the Original Exemption Order.\65\

    \65\ See Modification Application, Exhibit S-1 at 39.
---------------------------------------------------------------------------

    EB also requests that the following conditions of the Existing 
Exemption with regards to the U.S. Government Securities Clearing 
Agency Activities be replaced and superseded by the corresponding 
conditions set forth in Part VI.D. below that are applicable to the 
Clearing Agency Activities:

    (a) the obligations in Section IV.C.3 of the Original Exemption 
Order to provide disclosure documents to the Commission;
    (b) the obligations in Section IV.C.3 of the Original Exemption 
Order to file with the Commission amendments to its application for 
exemption on Form CA-1; and
    (c) the obligations in Section IV.C.3 of the Original Exemption 
Order to notify the Commission regarding material adverse changes in 
any account maintained by Euroclear for its U.S. Participants and to 
respond to a Commission request for information about any U.S. 
Participant about whom the Commission has financial solvency 
concerns.\66\

    \66\ See id.
---------------------------------------------------------------------------

B. Modify the Existing Exemption To Permit EB To Perform U.S. Equities 
Clearing Agency Activities Subject to Additional Conditions

    EB requests that the Commission permit EB to provide, without 
registering as a clearing agency with the Commission, the U.S. Equities 
Clearing Agency Activities. As described in the Modification 
Application, EB's provision of U.S. Equities Clearing Agency Activities 
would entail activities such as custody and

[[Page 61277]]

safekeeping,\67\ settlement,\68\ and asset servicing \69\ on behalf of 
U.S. Participants with respect to U.S. Equity Securities. For example, 
EB would maintain securities accounts on its books,\70\ provide 
safekeeping of and recordkeeping for those securities accounts,\71\ 
settle instructions by participants,\72\ and provide recordkeeping and 
reporting in real time on the status of settlement to participants.\73\ 
EB would also process corporate actions as part of its asset servicing 
business for any U.S. Equity Securities that remain in EB's account 
held at DTC on the record date.\74\
---------------------------------------------------------------------------

    \67\ See Modification Application, Exhibit S-1 at 4.
    \68\ See Modification Application, Exhibit S-1 at 5.
    \69\ See Modification Application, Exhibit S-1 at J-3.
    \70\ See Modification Application, Exhibit S-1 at 2.
    \71\ See Modification Application, Exhibit K-5 at 80-81.
    \72\ See Modification Application, Exhibit K-5 at 76, 83.
    \73\ See Modification Application, Exhibit K-5 at 76.
    \74\ See Modification Application, Exhibit J-3.
---------------------------------------------------------------------------

    The EB-CMS would be offered to U.S. Participants in support of 
their obligations under security-based swap transactions, securities 
lending transactions, and repurchase agreements, among other 
transactions.\75\ The EB-CMS would independently verify that the 
collateral proposed and provided by the Collateral Giver meets the 
terms reported by the counterparties for the duration of the collateral 
obligation.\76\ EB would do this by calculating the exchange of value 
necessary to meet the collateral obligation information entered in by 
the users of the EB-CMS, including by making value determinations, such 
as marking to market the value of the collateral based on reference 
data.\77\ Also, EB would generate instructions and communicate the 
instructions to EB's settlement processing infrastructure to transfer 
collateral among the Collateral Accounts.\78\
---------------------------------------------------------------------------

    \75\ See, e.g., Modification Application, Exhibit P-2 
(describing necessary revisions to its Operating Procedures related 
to collateral services, derivatives services, loan services, 
repurchase services, and securities lending services arising out of 
the proposed U.S. Equities Clearing Agency Activities).
    \76\ See Modification Application, Exhibit J-3.
    \77\ See Modification Application, Exhibit K-5 at 60 
(referencing obtaining the market value of a security. The EB-CMS 
system does not apply any further haircuts or adjustments once the 
market value is obtained from third party data providers); see also 
Euroclear plc, Risk Management at Euroclear: Including Pillar 3 
Disclosure 2012--Euroclear plc, at 43 (2012) (``Securities for which 
Euroclear Bank does not obtain external quotations regularly can 
also be valued according to the price associated with securities 
transactions in the Euroclear system, or according to theoretical 
models.''), available at https://www.euroclear.com/dam/Brochures/Pillar3_2012.pdf.
    \78\ See Modification Application, Exhibit J-3.
---------------------------------------------------------------------------

V. Applicable Statutory Standards

A. Section 17A of the Exchange Act

    Section 17A of the Exchange Act directs the Commission to 
facilitate the establishment of (i) a national system for the prompt 
and accurate clearance and settlement of securities transactions and 
(ii) linked or coordinated facilities for clearance and settlement of 
securities transactions.\79\ In facilitating the establishment of the 
national clearance and settlement system, the Commission must have due 
regard for the public interest, the protection of investors, the 
safeguarding of securities and funds, and maintenance of fair 
competition among brokers and dealers, clearing agencies, and transfer 
agents.\80\ Section 17A(b)(1) of the Exchange Act requires all clearing 
agencies to register with the Commission.\81\ It also states that, upon 
the Commission's motion or upon a clearing agency's application, the 
Commission may conditionally or unconditionally exempt a clearing 
agency from any provision of Section 17A of the Exchange Act or the 
rules or regulations thereunder if the Commission finds that such 
exemption is consistent with the public interest, the protection of 
investors, and the purposes of Section 17A of the Exchange Act, 
including the prompt and accurate clearance and settlement of 
securities and funds.
---------------------------------------------------------------------------

    \79\ See 15 U.S.C. 78q-1(a)(2); see also Report of the Senate 
Committee on Banking, Housing & Urban Affairs, S. Rep. No. 94-75, at 
4 (1975) (stating that ``[t]he Committee believes the banking and 
security industries must move quickly toward the establishment of a 
fully integrated national system for the prompt and accurate 
processing and settlement of securities transactions'').
    \80\ See 15 U.S.C. 78q-1(a)(2)(A).
    \81\ See 15 U.S.C. 78q-1(b) and 17 CFR 240.17Ab2-1.
---------------------------------------------------------------------------

    The Commission notes that the proposed Clearing Agency Activities 
would be the only clearing agency activities EB would perform under an 
exemption order.\82\ For example, EB proposes to continue the U.S. 
Government Securities Clearing Agency Activities on substantially the 
same basis as under the Existing Exemption. For the purposes of the 
U.S. Equities Clearing Agency Activities, EB is not proposing to act as 
a CSD for the issuance of new U.S. Equity Securities, nor is it seeking 
to facilitate the settlement of purchase and sale transactions in U.S. 
Equity Securities; its limited role would be to facilitate use by U.S. 
Participants of U.S. Equity Securities via the EB-CMS. EB also is not 
proposing to operate as a self-regulatory organization similar to 
registered clearing agencies or perform other clearing agency functions 
such as acting as a central counterparty, netting transactions or 
comparing trade execution information.
---------------------------------------------------------------------------

    \82\ See 15 U.S.C. 78c(a)(23). For example, EB will not act as a 
central counterparty.
---------------------------------------------------------------------------

    The Commission notes that it has previously found an exemption from 
clearing agency registration to be an appropriate response in instances 
where an entity has engaged in a limited scope of clearing agency 
activity. For example, the Commission has previously concluded that 
entities providing only matching services could obtain an exemption 
from registration as a clearing agency.\83\ Additionally, and similar 
to the approach taken under the Existing Exemption for EB, the 
Commission has also previously granted an exemption from registration 
as a clearing agency to another entity that was performing clearance, 
settlement, and collateral management services for certain U.S. 
government securities.\84\
---------------------------------------------------------------------------

    \83\ See, e.g., Interpretation: Confirmation and Affirmation of 
Securities Trades; Matching, Exchange Act Release No. 39829 (Apr. 6, 
1998), 63 FR 17943 (Apr. 13, 1998); Bloomberg STP LLC; SS&C 
Technologies, Inc.; Order of the Commission Approving Applications 
for an Exemption From Registration as a Clearing Agency; Notice, 
Exchange Act Release No. 34-76514 (Nov. 24, 2015), 80 FR 75388 (Dec. 
1, 2015).
    \84\ See, e.g., Self-Regulatory Organizations; Cedel Bank; Order 
Approving Application for Exemption From Registration as a Clearing 
Agency, Exchange Act Release No. 38328 (Feb. 24, 1997), 62 FR 9225 
(Feb. 28, 1997).
---------------------------------------------------------------------------

    When the Commission approved the Original Exemption Order and the 
2001 Exemption Modification Order, it stated that granting either 
exemptions from portions of Section 17A of the Exchange Act or from 
registration requires substantial compliance with Section 17A of the 
Exchange Act and the rules and regulations thereunder based on a review 
of the standards in place.\85\ The Existing Exemption therefore 
reflected an approach whereby certain determinations were made 
regarding the then-current rules and structure of EB, as identified in 
Section 17A(b)(3)(A) through (I) of the Exchange Act. In the 
Modification Application, EB has represented that it continues to meet 
the standards previously applied when the Commission approved the 
Existing Exemption \86\ and, for the purposes of its consideration of 
the Modification Application, the Commission is taking

[[Page 61278]]

those representations into account.\87\ In light of its experience with 
EB under the Existing Exemption since 1998, as well as its past 
practice of otherwise exempting from registration certain clearing 
agencies that perform a limited range of clearing agency services, the 
Commission preliminarily believes that granting EB an exemption from 
registration for the Clearing Agency Activities would be appropriate. 
Therefore, in evaluating the Modification Application, the Commission 
considers whether exempting EB from clearing agency registration to 
perform the Clearing Agency Activities satisfies the requirements of an 
exemption from registration under Section 17A(b)(1) of the Exchange 
Act, which is consistency with the public interest, the protection of 
investors and the purposes of Section 17A of the Exchange Act, 
including the prompt and accurate clearance and settlement of 
securities and funds.
---------------------------------------------------------------------------

    \85\ See Original Exemption Order, supra note 1, at 8235; 2001 
Exemption Modification Order, supra note 1, at 820.
    \86\ See Modification Application, Exhibit S-1 at 13.
    \87\ The Commission also notes that it has no basis to believe 
that EB has not operated within and otherwise performed in 
accordance with the terms and conditions of the Existing Exemption.
---------------------------------------------------------------------------

B. Consistency of the Modification Application With Section 17A of the 
Exchange Act

    The objectives and findings described in Section 17A of the 
Exchange Act include developing uniform standards and procedures for 
clearance and settlement, employing new data processing and 
communication techniques that promote more efficient, effective, and 
safe clearance and settlement of securities transactions, and reducing 
the physical movement of securities in the control of a clearing agency 
or for which a clearing agency has custody. The findings in Section 17A 
of the Exchange Act also state that the implementation of linked 
systems and uniform standards would reduce unnecessary costs and 
increase the protection of investors and persons facilitating 
transactions by and acting on behalf of investors.
1. Facilitating the Establishment of Linked or Coordinated Facilities 
for the Settlement of Transactions
    In adopting Section 17A of the Exchange Act, Congress found that 
the linking of settlement facilities and the development of uniform 
standards and procedures for settlement will reduce unnecessary costs 
and increase the protection of investors,\88\ and directed the 
Commission to use its authority to facilitate the establishment of 
linked or coordinated facilities for settlement of transactions in 
securities.\89\ The Commission preliminarily believes that the 
Modification Application would facilitate the establishment of linked 
or coordinated facilities for the settlement of securities transactions 
because, as previously described, the U.S. Equities Clearing Agency 
Activities are effectuated via the linking of settlement facilities 
between DTC, a registered clearing agency, and EB, a clearing agency 
currently exempt from registration. The Commission also preliminarily 
believes that the linking and coordination of these two settlement 
facilities will establish uniform standards and procedures that will 
enable entities that are members of both DTC and EB to position U.S. 
securities in Europe for use as collateral in a manner that will reduce 
unnecessary costs and increase the protection of investors.
---------------------------------------------------------------------------

    \88\ See 15 U.S.C. 78q-1(a)(1)(D).
    \89\ See 15 U.S.C. 78q-1(a)(2)(A)(ii).
---------------------------------------------------------------------------

    EB states that, in providing the U.S. Equities Clearing Agency 
Activities, they are in a unique position as a ``neutral, inter-
operable, venue-agnostic utility'' to source and mobilize collateral 
across geographical borders and time zones.\90\ According to EB, this 
efficiency would extend to EB's role in both delivering and holding 
collateral, each of which would otherwise require fragmented, bespoke 
arrangements among U.S. Participants and their counterparties if 
conducted on a bilateral basis. The Commission preliminarily believes 
that the Modification Application could generate certain new 
efficiencies, such as those that come from using a common platform 
among multiple participants that can enter into a central, standardized 
service relationship with EB, rather than entering into multiple 
relationships with various trading counterparties.\91\ This transition 
to a uniform, unitary set of collateral management procedures through 
the EB-CMS would also allow U.S. Participants to mobilize a wider range 
of assets in support of fulfilling the collateral obligations 
underlying a variety of securities transactions, such as security-based 
swap transactions. The Commission therefore preliminarily believes that 
the U.S. Equities Clearing Agency Activities would be consistent with 
the efficiency objectives of Section 17A of the Exchange Act because 
they could potentially lead to a lower risk of operational errors that 
could in turn minimize delivery failures by U.S. Participants (i.e., a 
failure of a Collateral Giver to deliver or return the required amount 
and type of collateral to the Collateral Taker on time and in the 
correct location) by using a uniform, unitary set of collateral 
management procedures.\92\ The Commission also believes that fewer 
operational errors would help U.S. Participants maintain accurate 
records, which could help protect investors. The Commission 
preliminarily believes that these enhancements to collateral delivery 
mechanisms also could lower the cost of U.S. Participants to manage 
collateral in support of their transactions with counterparties that 
are also EB participants.
---------------------------------------------------------------------------

    \90\ See Modification Application, Exhibit K-5 at 7.
    \91\ See generally Rodney Garratt & Peter Zimmerman, Does 
Central Clearing Reduce Counterparty Risk in Realistic Financial 
Networks?, Federal Reserve Bank of New York Staff Report No. 717 
(Mar. 2015), available at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr717.pdf (discussing core-periphery 
networks, and the related assumptions that links to core nodes are 
desirable, while links to peripheral nodes are not, because agents 
may prefer to deal with larger players who they are more likely to 
have existing relationships with; exposures to larger players may be 
easier to monitor; and economies of scale may mean that these larger 
players offer more attractive trading terms).
    \92\ See Modification Application, Exhibit S-1 at 16-17.
---------------------------------------------------------------------------

    The Commission notes that, as an alternative to the linked and 
coordinated approach reflected in the Modification Application, U.S. 
Participants could instead decide to effectuate settlement and 
collateral management of certain securities transactions by using the 
services of various market intermediaries, such as custodians, as well 
as relying upon internal collateral management and back office 
functions. The Commission preliminarily believes that the Modification 
Application could reduce fragmentation of contractual and operational 
relationships that U.S. Participants must maintain across multiple 
entities by instead channeling such activity into the standardized 
procedural framework of the linked and coordinated services provided by 
DTC and EB through the JV-IMS and the EB-CMS. The Commission also notes 
that, notwithstanding a U.S. Participant's potential use of the JV-IMS 
and the EB-CMS, the U.S. Equity Securities would remain immobilized at 
DTC, and subject to the protections applicable to DTC as a registered 
clearing agency, such as DTC risk management controls, including its 
Collateral Monitor and Net Debit Cap.\93\ Accordingly, the Commission 
preliminarily believes that the Modification Application is consistent 
with the requirements of linked or coordinated facilities, in that it 
could reduce costs to U.S. Participants and increase the protection of 
investors

[[Page 61279]]

and persons facilitating transactions by and acting on behalf of 
investors.
---------------------------------------------------------------------------

    \93\ See DTC EB Link Rule, supra note 59.
---------------------------------------------------------------------------

    Finally, as discussed below, the Modification Application includes 
specific reporting conditions on the aggregate movements of U.S. Equity 
Securities into and out of the EB-CMS, which would not be available in 
an easily obtainable format if arrangements were conducted on a 
fragmented bilateral basis, which the Commission preliminarily believes 
will maximize transparency into these exempted clearing agency 
activities. The Commission preliminarily believes that the potential 
for linking and standardizing certain clearing agency services 
contemplated by the Modification Application could, in addition to 
yielding risk and operational efficiencies for U.S. Participants, also 
afford the Commission the ability, through the reporting conditions 
described below, to observe and more closely monitor clearing agency 
activity in these areas in a manner that is relatively more efficient 
than instances where the Commission only has fragmented visibility into 
a series of bilateral transactions across a series of intermediaries. 
As the Commission has stated previously, the ability to see the 
collective activity of various market participants increases 
transparency by providing information to regulators.\94\
---------------------------------------------------------------------------

    \94\ See, e.g., Standards for Covered Clearing Agencies, 
Exchange Act Release No. 71699 (Mar. 12, 2014), 79 FR 29508, 29511 
(May 22, 2014) (discussing such benefits of intermediation as 
increases in transparency by making information on market activity 
and exposures--both prices and quantities--available to regulators 
and the public).
---------------------------------------------------------------------------

2. Safeguarding Securities and Funds Related to the Settlement of 
Securities Transactions
    Congress also found that the safeguarding of securities and funds 
related to the settlement of securities transactions is necessary for 
the protection of investors,\95\ and directed the Commission to have 
due regard for the safeguarding of securities and funds in the use of 
its authority under Section 17A of the Exchange Act.\96\ EB represents 
that it has appropriate rules, procedures and controls to safeguard the 
rights of the securities issuers and holders and prevent unauthorized 
creation or deletion of securities.\97\ According to EB, the creation 
of securities positions is only performed upon receipt of securities to 
be credited to client accounts. Removal of these securities positions 
is generally performed upon final maturity or in the context of a 
corporate event (e.g., an exchange). Both creation and deletion are 
generally processed without manual intervention at EB upon client 
instruction and depository confirmation. Movements in client accounts 
are reported on a daily basis to clients.\98\
---------------------------------------------------------------------------

    \95\ See 15 U.S.C. 78q-1(a)(1)(A).
    \96\ See 15 U.S.C. 78q-1(a)(2)(A).
    \97\ See Modification Application, Exhibit K-5 at 80.
    \98\ See Modification Application, Exhibit K-5 at 81.
---------------------------------------------------------------------------

    EB represents that these procedures and controls are regularly 
reviewed by EB's internal audit department and by its external auditor. 
The results of this review are made available to clients and 
authorities via the yearly ISAE (International Standard on Assurance 
Engagements) 3402 report, which would be provided to the Commission 
under the proposed condition in Part IV.C7.\99\ In addition, each year, 
the external auditor reports its findings on EB's internal controls 
regarding the safekeeping of clients' assets to the Belgian 
authorities.\100\ As previously mentioned, EB is supervised by the NBB, 
as well as under the investor protection mandate of the Belgian FSMA.
---------------------------------------------------------------------------

    \99\ Id.
    \100\ Id.
---------------------------------------------------------------------------

    According to EB, it operates under the Euroclear Group's enterprise 
risk management framework, which includes several features, such as: 
(i) Risk tolerance levels defined annually by the board of directors of 
EB, consistent with available capital, and risk tolerance levels set by 
the management annually with the objective to keep the risk profile low 
and stable; (ii) implementation of an internal capital adequacy 
assessment process, expressed in capital requirements over a one-year 
horizon and an analysis of the potential capital requirements over a 
five-year time horizon; (iii) comprehensive policies that set out how 
the internal control system supports repeatability of results; (iv) an 
active risk register, high-level control objectives and more detailed 
control objectives to identify, track and mitigate risks; (v) 
responsibility for risk control at all levels that is clearly assigned, 
including strong escalation and crises procedures that are regularly 
tested; (vi) risk management and audit functions that are separate and 
independent and report directly to the Euroclear Group CEO; (vii) 
review of quarterly audit and risk reports by the EB and ESA management 
committees and boards of directors (including the audit committees); 
and (viii) risk management controls that identify and address six 
distinct categories of risk (credit risk, liquidity risk, operational 
risk, market risk, business risk and strategic risk).\101\ EB also 
notes that the U.S. Equity Securities that would be available within 
the EB-CMS would be transferred only by book-entry on the books of EB 
and would remain deposited at DTC (either directly or indirectly).\102\
---------------------------------------------------------------------------

    \101\ See Modification Application, Exhibit S-1 at 26-27.
    \102\ See Modification Application, Exhibit S-1 at 37.
---------------------------------------------------------------------------

    The Commission has previously codified its guidance on safeguarding 
of funds and securities, requiring registered clearing agencies to 
develop and maintain plans to assure the safeguarding of securities and 
funds, the integrity of the automated data processing systems, the 
recovery of securities, funds, or data under a variety of loss or 
destruction scenarios, and finally to have business continuity plans 
that allow for timely recovery of operations and ensure the fulfillment 
of a registered clearing agency's obligations.\103\ The Commission also 
has previously stated its belief that the immobilization and 
dematerialization of securities and their transfer by book entry 
results in reduced costs and risks associated with securities 
settlements and custody by removing the need to hold and transfer many, 
if not most, physical certificates.\104\ The Commission preliminary 
believes that the Modification Application is consistent with these 
expressed goals because transfers will take place via book entry at EB. 
Accordingly, the Commission preliminarily believes that EB has the 
ability to safeguard funds and securities consistent with the 
requirements of the Exchange Act.
---------------------------------------------------------------------------

    \103\ See 12 CFR 240.17Ad-22(d)(4).
    \104\ Id. at 66253.
---------------------------------------------------------------------------

3. Prompt and Accurate Settlement of Securities Transactions
    As noted above, Congress found that the prompt and accurate 
clearance and settlement of securities transactions is necessary for 
the protection of investors,\105\ and that inefficient procedures for 
settlement imposed unnecessary costs on investors.\106\ EB states that 
the Euroclear System is a Model 1 delivery vs. payment (``DVP'') 
system, which means instructions are settled between clients on a trade 
by trade (gross) basis, with finality of the transfer of securities 
from the seller to the buyer occurring at the same time as the finality 
of transfer of funds from the

[[Page 61280]]

buyer to the seller.\107\ EB also states that the Euroclear System 
controls the availability of the cash and securities before executing 
instructions (i.e., positioning), so that if the cash and/or the 
securities are not available, the technical and contractual frameworks 
would not allow the transaction to be settled.\108\ EB offers real-time 
settlement from around 01:30 to 19:00 Brussels time to cover multiple 
time zones.\109\
---------------------------------------------------------------------------

    \105\ See 15 U.S.C. 78q-1(a)(1)(A).
    \106\ See 15 U.S.C. 78q-1(a)(1)(B).
    \107\ See Modification Application, Exhibit K-5 at 7.
    \108\ See Modification Application, Exhibit K-5 at 83.
    \109\ See Modification Application, Exhibit K-5 at 127.
---------------------------------------------------------------------------

    The Commission preliminarily believes that approval of the 
Modification Application would promote the prompt and accurate 
clearance and settlement of securities transactions and the protection 
of investors because EB's settlement process is consistent with prior 
Commission observations regarding DVP systems. In particular, the 
Commission has previously stated that DVP reduces the risk that a party 
would lose some or its entire principal because payment is made only if 
securities are delivered.\110\ The Commission also believes that a DVP 
method reduces the potential that delivery of the security is not 
appropriately matched with payment for a security. Therefore, the 
Commission believes the use of a DVP method promotes the clearing 
agency's ability to facilitate prompt and accurate clearance and 
settlement.\111\
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    \110\ See Clearing Agency Standards, Exchange Act Release No. 
68080 (Oct. 22, 2012), 77 FR 66220, 66256 (Nov. 2, 2012).
    \111\ Id.
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4. Maintenance of Fair Competition Among Market Participants
    Section 17A of the Exchange Act also directs the Commission to have 
due regard for the maintenance of fair competition in the use of its 
authority under Section 17A of the Exchange Act.\112\ EB states that 
approving the Modification Application may improve competition among 
market participants offering collateral management services, but does 
not expect it to have any impact on the current competitive landscape 
for provision of settlement of transactions in U.S. Equity Securities 
for U.S. Participants.\113\ EB notes that U.S. Participants already use 
the EB-CMS today for U.S. Government Securities, but are disadvantaged 
compared to non-U.S. participants in the range of collateral that they 
are able to mobilize to meet their collateral obligations in that they 
are currently unable to use U.S. Equity Securities within the EB-CMS. 
As a result, EB's proposed service would reduce the disparity between 
U.S. and non-U.S. participants. EB also states that U.S. Participants 
currently have, and would continue to have the option of providing U.S. 
Equity Securities as collateral by using the services of a market 
intermediary that is not regulated by the Commission as a clearing 
agency (typically a bank) or by making bilateral collateral management 
arrangements and undertaking collateral management activities 
themselves.\114\ Accordingly, the Commission preliminarily believes 
that the Modification Application is consistent with Section 17A of the 
Exchange Act because the Modification Application should facilitate 
fair competition between U.S. and non-U.S. participants, and would not 
prevent U.S. Participants from using other comparable services that may 
be available.
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    \112\ See 15 U.S.C. 78q-1(a)(2)(A).
    \113\ See Modification Application, Exhibit S-1 at 21.
    \114\ See Modification Application, Exhibit S-1 at 22.
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C. Proposed Conditions

    EB represents in its Form CA-1 that it would comply with a series 
of conditions, as described further below, which are designed to 
establish an appropriately robust regulatory framework over the limited 
range of Clearing Agency Activities EB proposes to offer. These 
conditions are set forth in three sections: (A) Continuation of two 
existing conditions applicable to the U.S. Government Securities 
Clearing Agency Activities, (B) operational risk conditions applicable 
to the Clearing Agency Activities, and (C) additional conditions 
applicable to the Clearing Agency Activities.
    With respect to Section B, the Commission preliminarily believes 
that the conditions constitute a robust framework of operational 
conditions to be applied to those EB systems that facilitate the 
Clearing Agency Activities. Under the Existing Exemption, EB was not 
subject to the Commission's Automated Review Policy.\115\ As a result, 
EB does not meet the definition of SCI entity as set forth in Rule 1000 
of Regulation SCI, and is therefore not subject to the Commission's 
Regulation Systems Compliance and Integrity (``Regulation SCI'').\116\ 
The Commission preliminarily believes that it is appropriate to apply 
operational conditions that would require EB to have sufficiently 
resilient systems to support the limited services upon which U.S. 
Participants may rely.
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    \115\ See Exchange Act Release Nos. 27445 (Nov. 16, 1989), 54 FR 
48703 (Nov. 24, 1989), and 29185 (May 9, 1991), 56 FR 22490 (May 15, 
1991).
    \116\ See Regulation Systems, Compliance and Integrity, Exchange 
Act Release No. 73639 (Nov. 19, 2015), 79 FR 72252 (Dec. 5, 2014).
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    The proposed conditions in Part VI.C are tailored to the operations 
of the Clearing Agency Activities and seek to address the same policy 
concerns that were addressed by Regulation SCI, specifically the 
reduction of the occurrence of systems issues, the improvement of 
resiliency of systems, and the enhancement of the Commission's 
oversight and enforcement of technology infrastructure. The Commission 
believes that resiliency conditions are warranted because an 
operational disruption at EB could impact U.S. Participants. The 
Commission understands that EB would use the same set of collateral 
management applications and core settlement processing infrastructure 
housed in the Euroclear System for the U.S. Equities Clearing Agency 
Activities as it uses for the U.S. Government Securities Clearing 
Agency Activities, so the operational conditions would apply across 
both distinct sets of activities.
    Several of the proposed conditions in Part VI.D are reformulations 
of general disclosure and notification conditions that apply generally 
to EB's operations in performing the U.S. Government Securities 
Clearing Agency Activities, as previously applied under the Existing 
Exemption. Specifically, conditions D.3, D.5 and D.7 are taken from the 
Original Exemption Order and would be applied to the Clearing Agency 
Activities. Likewise, the conditions would continue to require EB to 
(i) respond to Commission requests for information concerning financial 
solvency concerns of U.S. Participants and (ii) file amendments to its 
application for exemption on Form CA-1 if it makes any material change 
to the Clearing Agency Activities to allow the Commission to perform 
ongoing monitoring of any future modified order.
    Additionally, the Commission preliminarily believes that the 
routine provision of certain information by EB would be appropriate to 
facilitate the monitoring of the impact of EB's expanded, but still 
limited, Clearing Agency Activities on the national clearance and 
settlement system. The conditions would expand the reporting conditions 
as a result. Under the Original Exemption Order, the Commission 
required EB to provide to the Commission any disclosure documents 
provided to Euroclear System participants, such as any amendments to 
the terms and conditions governing the service, any changes to the 
operating procedures of

[[Page 61281]]

the Euroclear System, the annual shareholder report, and the annual 
internal controls report.\117\ Under proposed condition D.2, EB would 
be required to notify the Commission of any material changes to any 
service agreement between it and any other entity that is performing 
Clearing Agency Activities. Under proposed condition D.4, EB would 
provide the Commission an annual report that would describe material 
changes that do not otherwise necessitate the filing of an amendment of 
the Form CA-1. The annual report would further require a description of 
the functioning of EB's monitoring its own compliance and the 
compliance of third-party service providers with conditions of any 
modified order. Finally, the annual report would require a description 
of the management of any conflicts of interest between EB and an 
affiliated or third-party service provider. The Commission 
preliminarily believes the notification and annual reporting conditions 
would facilitate the general monitoring of the Clearing Agency 
Activities, and in particular, the contractual and operational 
relationships between EB and ESA, as well as between EB and DTCC. ESA 
and DTCC, through the Euroclear System and DEGCL, respectively, could 
play instrumental roles in the EB-CMS, and the Commission preliminarily 
believes that ongoing updates on these relationships are appropriate to 
allow the Commission the ability to assess EB's reliance on affiliates 
to perform clearing agency functions related to the Clearing Agency 
Activities.
---------------------------------------------------------------------------

    \117\ See Original Exemption Order, supra note 1, at 8240.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that the new 
recordkeeping and examination conditions would help the Commission 
assess EB's compliance with the conditions of any future modified 
order. Under conditions C.8 and D.5, EB would be required to keep 
records of documents relating to compliance with the operational 
conditions and records pertaining to the Clearing Agency Activities 
covered within the scope of the modified exemption. Under condition 
D.6, EB would be required to respond to information requests and to 
allow on-site inspections of facilities, records, and personnel for the 
purpose of reviewing the Clearing Agency Activities' operations and 
compliance with the federal securities laws and any future modified 
order issued by the Commission. The recordkeeping and examination 
conditions should facilitate periodic review of EB's adherence to the 
conditions. Finally, under condition D.1, EB would be required to 
provide annual audited financial statements prepared by competent 
independent audit personnel, to assist the Commission's monitoring of 
EB's ongoing condition.

VI. Conditions to Exemption From Clearing Agency Registration

    As mentioned above, EB represents in its Form CA-1 that it would 
comply with all of the conditions described below. EB believes that 
these conditions are consistent with the public interest, the 
protection of investors, and the purposes of Section 17A of the 
Exchange Act.
    The following set of conditions, which would replace and supersede 
all conditions set forth in the Existing Exemption, to read as follows:

A. Continuation of Existing Conditions Applicable to the U.S. 
Government Securities Clearing Agency Activities

    (1) The average daily volume of eligible U.S. Government Securities 
processed for U.S. Participants through EB as operator of the Euroclear 
System may not exceed five percent of the total average daily dollar 
value of the aggregate volume in eligible U.S. Government Securities.
    (2) EB will provide the Commission with quarterly reports, 
calculated on a twelve-month rolling basis, of (a) the average daily 
volume of transactions in eligible U.S. Government Securities for U.S. 
Participants that are subject to the volume limit and (b) the average 
daily volume of transactions in eligible U.S. Government Securities for 
all Euroclear System participants.

B. Condition Applicable to the U.S. Equities Clearing Agency Activities

    EB shall provide to the Commission or its designee quarterly 
reports, calculated on a twelve-month rolling basis, of (1) the average 
daily value of U.S. Equity Securities that are held in Collateral 
Accounts at EB for U.S. Participants and a break-down of the general 
types of EB collateral agreements in respect of which such value is 
given as collateral, (2) the average daily value of U.S. Equity 
Securities that are held in EB's account at DTC relating to inventory 
management services, and (3) the total value, and a break-down of the 
general types of EB collateral agreements in respect of which such 
value is given as collateral, of U.S. Equity Securities that are 
transferred from Collateral Accounts of U.S. Participants at EB to 
other Securities Clearance Accounts at EB (other than IMS-Linked 
Accounts) pursuant to a liquidation of such collateral.

C. Operational Risk Conditions Applicable to Clearing Agency Activities

    (1) EB shall demonstrate to the Commission or its designee prior to 
commencing the U.S. Equities Clearing Agency Activities that EB 
maintains written policies and procedures applicable to those systems 
that support or are integrally related to the Clearing Agency 
Activities (the ``Systems'') that, on an ongoing basis, are reasonably 
designed to:
    (a) Establish a robust operational risk-management framework 
applicable to the Systems with appropriate systems, policies, 
procedures, and controls to identify, monitor, and manage operational 
risks;
    (b) clearly define the roles and responsibilities of EB personnel 
for addressing operational risk (e.g., identify a senior manager 
responsible for compliance with the operational conditions applicable 
to the Systems);
    (c) review operational policies, procedures, and controls 
applicable to the Systems;
    (d) audit the Systems, and test the Systems periodically and at 
implementation of significant changes;
    (e) clearly define operational reliability objectives for the 
Systems;
    (f) ensure that the Systems have scalable capacity adequate to 
handle increasing stress volumes and achieve the Systems service-level 
objectives;
    (g) establish comprehensive physical and information security 
policies that address all potential vulnerabilities and threats to the 
Systems;
    (h) establish a business continuity plan for the Systems that 
addresses events posing a significant risk of disrupting the Systems' 
operations, including events that could cause a wide-scale or major 
disruption in the provision of the Clearing Agency Activities;
    (i) incorporate the use of a secondary site in EB's business 
continuity plan that is designed to ensure that the Systems can resume 
operations within two hours following disruptive events; and
    (j) regularly test or otherwise validate EB's business continuity 
plans; and identify, monitor, and manage the risks that key 
participants, other financial market infrastructures, and service and 
utility providers might pose to the Systems' operations in relation to 
the Clearing Agency Activities.
    (2) For purposes of condition C.1, such policies and procedures 
shall be consistent with current information technology industry 
standards, which

[[Page 61282]]

shall be comprised of information technology practices that are widely 
available to information technology professionals in the financial 
sector and issued by a widely recognized organization. EB shall inform 
the Commission or its designee of the information technology industry 
standards that EB has chosen to use, affirm that choice on an annual 
basis, and provide advance notice of the use of different standards as 
soon as practicable.
    (3) EB shall provide the Commission or its designee with an annual 
update on the status of the items set forth in condition C.1.
    (4) EB shall establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to ensure that the Systems 
operate on an ongoing basis in a manner that complies with the 
conditions applicable to the Systems and with EB's rules and governing 
documents applicable to the Clearing Agency Activities.
    (5)(a) Upon EB having a reasonable basis to conclude that a 
disruption, compliance issue, or intrusion of the Systems that impacts, 
or is reasonably likely to impact, the Clearing Agency Activities has 
occurred (a ``Systems Event''), EB shall:
    (i) Take appropriate corrective action, which shall include, at a 
minimum, devoting adequate resources to remedy the Systems Event as 
soon as reasonably practical;
    (ii) notify the Commission or its designee of such Systems Event 
within 24 hours after occurrence;
    (iii) until such time as a Systems Event is resolved and EB's 
investigation of the Systems Event is closed, provide updates 
pertaining to such Systems Event to the Commission or its designee on a 
regular basis;
    (iv) within 48 hours after the occurrence of a Systems Event or 
where EB reasonably determines that such deadline cannot be met and so 
notifies the Commission or its designee, promptly thereafter, submit an 
interim written notification pertaining to such Systems Event to the 
Commission or its designee containing: (A) A detailed description of: 
The relevant discovery and duration times, detection, root cause and 
remedial actions taken or planned regarding the Systems Event (to the 
extent known at report time); EB's assessment of the entities 
(including types of market participants) and EB services affected by 
the Systems Event; EB's assessment of the impact of the Systems Event 
on the Participants; and any other pertinent information known by the 
EB about the Systems Event; and (B) a copy of any information 
disseminated to EB's U.S. Participants in accordance with EB's 
notification practices regarding the Systems Event;
    (v) within ten business days after the occurrence of a Systems 
Event, or where EB reasonably determines that such deadline cannot be 
met and so notifies the Commission or its designee, promptly 
thereafter, submit a written final report regarding the matters covered 
in the interim report required under (iii) above to the Commission or 
its designee; and
    (vi) for Systems Events characterized as ``Bronze level'' events 
(i.e., a Systems Event in which the incident is clearly understood, 
almost immediately under control, involves only one business unit and/
or entity, and is resolved within a few hours), in lieu of the 
reporting in (i) through (v) above, provide on a quarterly basis an 
aggregated list of Bronze level events.
    (b) As used herein: (i) A ``disruption'' means an event in the 
Systems that disrupts, or significantly degrades, the normal operation 
of the Systems in relation to the Clearing Agency Activities; (ii) a 
``compliance issue'' means an event at EB that has caused any System to 
operate in a manner that does not comply with the applicable conditions 
or EB's rules and governing documents applicable to the Clearing Agency 
Activities; and (iii) an ``intrusion'' means any unauthorized entry 
into the Systems in relation to the Clearing Agency Activities.
    (6) EB shall, within 30 calendar days after the end of each 
quarter, submit to the Commission or its designee a report describing 
completed, ongoing, and planned material changes to the Systems that 
support or are related to the Clearing Agency Activities during the 
prior, current, and subsequent calendar quarters, including the dates 
or expected dates of commencement and completion. EB shall establish 
reasonable written criteria for identifying a change to the Systems as 
material and report such changes in accordance with such criteria.
    (7) EB shall provide the Commission or its designee with: (a) 
Annually, the audited control report made available to EB's 
Participants prepared in accordance with internationally accepted 
standards for assurance reports on controls at a service organization 
(such as the International Standard on Assurance Engagements (ISAE) 
Standard No. 3402); (b) annually, copies of those portions of any 
annual control report provided by EB to its primary Belgian regulator 
that describes controls applicable to the Systems as used to support or 
in relation to the Clearing Agency Activities; and (c) copies of 
agendas, reports and presentation materials relating to the capacity, 
integrity, resiliency, availability, and security or compliance of the 
Systems that are provided by EB or its primary Belgian regulator to any 
committee of regulators that implements the memorandum of understanding 
among regulators of Euroclear Group's CSD entities that provides for 
the coordinated and common oversight and supervision of the Euroclear 
Group.
    (8) EB shall make, keep, and preserve at least one copy of all 
documents relating to its compliance with the operational risk 
conditions; keep all such documents for a period of not less than five 
years, the first two years in an easily accessible place (which may be 
located in the European Union); and upon request of the Commission, 
promptly furnish to the possession of the Commission or its designee 
copies of any such documents.

D. Additional Conditions Applicable to the Clearing Agency Activities

    (1) EB shall provide to the Commission or its designee its annual 
audited financial statements prepared by competent independent audit 
personnel.
    (2) EB shall notify the Commission or its designee of any material 
changes to any service agreement between EB and any other entity that 
is performing Clearing Agency Activities on behalf of EB if such 
changes are reasonably expected to materially affect the Clearing 
Agency Activities.
    (3) EB will notify the Commission or its designee (a) promptly 
following termination of any U.S. Participant as a participant in the 
Euroclear System, (b) promptly following the liquidation by EB of any 
securities collateral pledged by a U.S. Participant to EB to secure an 
extension of credit made through the Euroclear System, and (c) promptly 
following EB becoming aware of the institution of any proceedings to 
have a U.S. Participant declared insolvent or bankrupt, and will 
respond to Commission requests for information about any U.S. 
Participant about whom the Commission has financial solvency concerns, 
including, for example, a settlement default by a U.S. Participant.
    (4) EB shall annually provide to the Commission or its designee a 
report describing: (a) Material changes to the representations made by 
EB in support of the approval of this Order that would not otherwise 
require amendment of EB's application for exemption on Form CA-1 in 
accordance with these conditions; (b) the functioning of EB's policies 
and procedures for monitoring its own compliance with the conditions

[[Page 61283]]

of this order regarding the Clearing Agency Activities (and the 
compliance of any affiliated or third-party service provider referred 
to in condition D.2); and (c) the management by EB of any conflicts of 
interest of such affiliated or third-party service provider that EB 
becomes aware have arisen since the prior report with respect to the 
performance of the Clearing Agency Activities.
    (5) EB shall keep records relating to the Clearing Agency 
Activities regarding settlement details, account details, service 
agreements, and service notices sent to U.S. Participants pertaining to 
the operation of the Clearing Agency Activities and retain such records 
for a period of not less than five years, the first two years in an 
easily accessible place (which may be located in the European Union).
    (6) EB shall respond to and require its service providers to 
respond to a request from the Commission for additional information 
relating to the Clearing Agency Activities and provide access to the 
Commission or its designee to conduct on-site inspections of all 
facilities (including automated systems and systems environment), 
records, and personnel related to the Clearing Agency Activities. The 
request for information shall be made and the inspections shall be 
conducted solely for the purpose of reviewing the Clearing Agency 
Activities' operations and compliance with the federal securities laws 
and the terms and conditions in any order exempting EB from 
registration as a clearing agency with regard to the Clearing Agency 
Activities.
    (7) EB shall file with the Commission amendments to its application 
for exemption on Form CA-1 if it makes any material change to the 
Clearing Agency Activities or any change materially affecting the 
Clearing Agency Activities as summarized in the relevant exemption 
order, EB's amended Form CA-1 or in any subsequently filed amendments 
to its Form CA-1 that would make such previously provided information 
incomplete or inaccurate.

VII. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed 
exemption is consistent with the public interest, the protection of 
investors, and the purposes of Section 17A of the Exchange Act. To the 
extent possible, commenters are requested to provide empirical data and 
other factual support for their views. In addition, the Commission 
seeks comment generally on the following issues:
    1. Would the Modification Application, if approved, achieve the 
underlying policy objectives of the Exchange Act? Why or why not? In 
particular, please address whether granting an exemption from 
registration does or does not further the goals of promoting investor 
protection and the integrity of the securities markets.
    2. Are the proposed conditions to the Modification Application 
sufficient to promote the purposes of Section 17A of the Exchange Act 
and to allow the Commission to adequately monitor the effects of EB's 
Clearing Agency Activities on the national system for the clearance and 
settlement of securities transactions? Why or why not?
    3. EB has represented that its provision of the U.S. Equities 
Clearing Agency Activities would benefit U.S. Participants by providing 
a service to efficiently satisfy the New Collateral Regulations. Will 
the provision of the U.S. Equities Clearing Agency Activities provide 
those or other benefits? Will providing the service lead to lower 
costs, or higher costs, for U.S. Participants or other segments of the 
U.S. securities markets? What other benefits would U.S. Participants or 
other U.S. persons receive from these services?
    4. Are there other providers of collateral management or related 
post-trade processing services that may be placed at a competitive 
advantage as a result of EB's account at DTC and the creation of DEGCL?
    5. Similar to the volume limits placed on the U.S. Government 
Securities Clearing Agency Activities, should there be a volume limit 
on the U.S. Equities Clearing Agency Activities? If so, what should be 
the volume limit and why?
    6. Are there potential issues or concerns that the Commission 
should consider? For example, differences between U.S. and Belgian law 
or other possible effects of the proposed Modification Application on 
the U.S. securities markets and investors.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number 601-01 on the subject line; or

Paper Comments

     Send paper comments to Brent J. Fields, Secretary, 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-1090. All submissions should refer to File Number 601-01.

To help us process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/other.shtml).
    Copies of the submission, all subsequent amendments, all written 
statements with respect to the application that are filed with the 
Commission, and all written communications relating to the application 
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 Web site viewing and printing in the 
Commission's Public Reference Section, 100 F Street NE., Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number 601-01 and should 
be submitted on or before October 6, 2016.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\118\
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    \118\ 17 CFR 200.30-3(a)(16).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-21245 Filed 9-2-16; 8:45 am]
 BILLING CODE 8011-01-P


