
[Federal Register Volume 82, Number 191 (Wednesday, October 4, 2017)]
[Notices]
[Pages 46329-46332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-21282]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 32839; File No. 812-14818]


National Securities Clearing Corporation

September 28, 2017.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice. Notice of application for an order under section 
3(b)(2) of the Investment Company Act of 1940 (``Act'').

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Applicant: National Securities Clearing Corporation (``NSCC'').

Summary of Application: Applicant seeks an order under Section 3(b)(2) 
of the Act declaring it to be primarily engaged in a business other 
than that of investing, reinvesting, owning, holding or trading in 
securities. Applicant is primarily in the business of providing 
clearing, settlement, risk management, central counterparty (``CCP'') 
and ancillary services to the registered broker-dealers, banks and 
other market participants that are its ``Members'', as such term is 
defined in the rules and procedures of Applicant (``NSCC Rules'').

Filing Date: The application was filed on September 8, 2017.

Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicant with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on October 23, 2017, and should be accompanied by proof of 
service on applicant, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-1090. Applicant, c/o David F. Freeman, Jr., 
Arnold & Porter LLP, 601 Massachusetts Avenue NW., Washington, DC 
20001.

FOR FURTHER INFORMATION CONTACT: Jennifer O. Palmer, Senior Counsel, at 
(202) 551-5786, or Nadya B. Roytblat, Assistant Chief Counsel, at (202) 
551-6825 (Division of Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number, or applicant 
using the Company name box, at http://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicant's Representations

    1. Formed in 1976, Applicant is organized under the Business 
Corporation Law of the State of New York and is registered as a 
clearing agency under the Securities and Exchange Act of 1934, as 
amended (``Exchange Act''), and the rules and regulations thereunder 
(``Exchange Act Rules''). Applicant is also designated as a 
systemically important financial market utility (``SIFMU'') by the 
Financial Stability Oversight Council (``FSOC'') under Title VIII of 
The Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-
Frank Act''). As a registered clearing agency, Applicant is regulated 
by the Commission. As a SIFMU, Applicant is subject to enhanced 
supervision by the Commission in consultation with the Board of 
Governors of the Federal Reserve System (``FRB'').\1\
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    \1\ See Securities Exchange Act Release No. 34-78961 (Sep. 28, 
2016), 81 FR 70786, 70788 (Oct. 13, 2016).
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    2. Applicant is a wholly-owned subsidiary of The Depository Trust & 
Clearing Corporation (``DTCC''). Applicant has one authorized class of 
stock, which is common stock. All issued and outstanding shares of 
Applicant's common stock are held by DTCC and there are no plans to 
alter this wholly-owned subsidiary structure. There is no trading 
market in Applicant's shares.
    3. Applicant provides clearing, settlement, risk management and CCP 
services to its Members for broker-to-broker trades in the United 
States involving equities, corporate and municipal debt, American 
depositary receipts, exchange traded funds and unit investment trusts. 
In addition to these core services, Applicant also offers ancillary, 
non-guaranteed services, including wealth management services (``WMS'') 
and insurance and retirement services (``I&RS''), which automate manual 
processes in the mutual funds, insurance and alternative investment 
products areas. Applicant's operations are national.
    4. Applicant operates a continuous net settlement (``CNS'') system, 
through which the trades in CNS-eligible securities are processed. 
Applicant acts as a CCP in respect of such CNS trades, becoming the 
buyer to every seller and the seller to every buyer, thereby 
guaranteeing the completion of such trades and eliminating counterparty 
risk among its Members. As a result, Applicant has obligations to and 
claims against its Members on opposite sides of guaranteed netted 
transactions. Applicant also provides a trade guarantee with respect to 
balance order transactions.
    5. Due to the nature of Applicant's operations and the large volume 
and dollar value of trades that it guarantees, Applicant maintains a 
large clearing fund (``Clearing Fund'') and a large amount of other 
cash on hand. The Clearing Fund consists of deposits (i.e., margin and 
other contributions) posted by Members in the form of cash and

[[Page 46330]]

eligible securities. Pursuant to the NSCC Rules, Members are required 
to maintain deposits in the Clearing Fund. The amount of each Member's 
required deposit is calculated by Applicant using a risk-based margin 
methodology.
    6. Applicant uses the Clearing Fund, among other resources, to 
manage its risks related to its trade guarantee. Specifically, deposits 
in the Clearing Fund, among other resources, are available to Applicant 
to facilitate settlement in the event of a Member default and to cover 
potential losses due to such an event. Additionally, Applicant uses its 
liquid assets to meet the requirements imposed on it as a registered 
clearing agency and SIFMU and to generate revenue to the extent such 
assets are not otherwise being put to productive use.
    7. To more efficiently utilize Clearing Fund cash and other cash on 
hand, Applicant seeks to prudently invest part of the Clearing Fund 
cash and other cash on hand in bank certificates of deposit (``CDs'') 
and other investment securities. The managed investment of cash on hand 
also provides a measure of protection against inflationary factors and 
bolsters and protects NSCC's financial position over time.
    8. Applicant is permitted under the NSCC Rules to invest Clearing 
Fund cash in accordance with an investment policy approved by 
Applicant's board of directors (``Board of Directors''). Applicant is 
also permitted to invest other cash on hand in accordance with such 
investment policy (``Clearing Agency Investment Policy'').
    9. The Clearing Agency Investment Policy is designed to comply with 
the laws, rules and regulations applicable to Applicant as a registered 
clearing agency and SIFMU, including, without limitation, Exchange Act 
Section 17A and Exchange Act Rule 17Ad-22.\2\ The Clearing Agency 
Investment Policy was approved by the Commission pursuant to delegated 
authority.\3\ Any material changes to the Clearing Agency Investment 
Policy must be approved by the Board of Directors. Any changes to the 
Clearing Agency Investment Policy, regardless of materiality, will be 
submitted to the Commission pursuant to Exchange Act Rule 19b-4, with 
confidential treatment requested.
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    \2\ Exchange Act Rule 17 Ad-22 requires, among other things, 
that Applicant hold assets in a way that minimizes risk of loss or 
delay in access to them and to invest assets in instruments with 
minimal credit, market, and liquidity risks.
    \3\ See Securities Exchange Act Release No. 34-75730 (August 19, 
2015), 80 FR 51638 (August 25, 2015) (SR-NSCC-2015-802) (Notice of 
Filing of Amendment No. 1 and No Objection to Advance Notice Filing, 
as Modified by Amendment No. 1, to Establish a Prefunded Liquidity 
Program As Part of NSCC's Liquidity Risk Management).
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Applicant's Legal Analysis

    1. Section 3(a)(l)(A) of the Act defines the term ``investment 
company'' to include an issuer that is or holds itself out as being 
engaged primarily, or proposes to engage primarily, in the business of 
investing, reinvesting or trading in securities. Section 3(a)(l)(C) of 
the Act further defines an investment company as an issuer that is 
engaged or proposes to engage in the business of investing, 
reinvesting, owning, holding or trading in securities, and owns or 
proposes to acquire investment securities having a value in excess of 
40 percent of the value of the issuer's total assets (exclusive of 
Government securities and cash items) on an unconsolidated basis. 
Applicant states that it does not hold itself out as being engaged 
primarily in the business of investing, reinvesting or trading in 
securities within the meaning of Section 3(a)(l)(A) of the Act. 
Applicant states that it does not currently hold, but has previously 
held \4\ and may again wish to hold, more than 40 percent of its total 
assets, exclusive of Government securities and cash items, in bank CDs 
and other investment securities. Upon such change in composition of its 
assets, Applicant might fall within the definition of investment 
company under Section 3(a)(l)(C) of the Act.
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    \4\ Applicant has previously held greater than 40% of the value 
of its total assets, exclusive of Government securities and cash 
items, in bank CDs and other investment securities. Applicant has 
relied on Rule 3a-3 under the Act, which provides an exemption from 
the definition of investment company for wholly-owned subsidiaries 
of a company that is not itself an investment company. However, that 
exemption does not apply if the wholly-owned subsidiary has issued 
paper (other than short-term paper) to other holders. On September 
10, 2015, Applicant launched a commercial paper and extendible note 
program (``CP Program'') under which Applicant could issue paper 
other than short-term paper. Out of an abundance of caution, (a) 
prior to the launch of the CP Program, Applicant reduced its 
holdings of investment securities to less than 40% of the value of 
Applicant's total assets, exclusive of Government securities and 
cash items, and (b) pending the application, Applicant has 
maintained its holdings of investment securities below the 40% 
threshold.
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    2. Rule 3a-1 under the Act provides an exemption from the 
definition of investment company if no more than 45 percent of a 
company's total assets consist of, and not more than 45 percent of its 
net income over the last four quarters is derived from, securities 
other than Government securities and securities of majority-owned 
subsidiaries and companies primarily controlled by it. Applicant states 
that it cannot rely on Rule 3a-1 because it may again wish to hold more 
than 45 percent of its total assets in bank CDs and other investment 
securities and, upon such change in composition of its assets, it will 
not meet the requirements of Rule 3a-1.
    3. Section 3(b)(2) of the Act provides that, notwithstanding 
Section 3(a)(l)(C) of the Act, the Commission may issue an order 
declaring an issuer to be primarily engaged in a business other than 
that of investing, reinvesting, owning, holding, or trading in 
securities directly, through majority-owned subsidiaries, or controlled 
companies conducting similar types of businesses. Applicant requests an 
order under Section 3(b)(2) of the Act declaring that it is primarily 
engaged in a business other than that of investing, reinvesting, 
owning, holding or trading in securities, and therefore is not an 
investment company as defined in the Act. In determining whether an 
issuer is ``primarily engaged'' in a non-investment company business 
under Section 3(b)(2) of the Act, the Commission considers the 
following factors: (a) The company's historical development, (b) its 
public representations of policy, (c) the activities of its officers 
and directors, (d) the nature of its present assets, and (e) the 
sources of its present income.\5\
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    \5\ Tonopah Mining Company of Nevada, 26 SEC 426, 427 (1947).
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    4. Applicant submits that it satisfies the criteria for issuance of 
an order under Section 3(b)(2) of the Act because the facts show that 
Applicant is primarily engaged in the business of providing clearing, 
settlement, risk management, CCP and ancillary services to its Members, 
and not in the business of investing, reinvesting, owning, holding or 
trading in securities.
    a. Historical Development. Applicant states that its origins date 
back to the back-office crisis of the late 1960s and early 1970s and 
the enactment of the Securities Acts Amendments of 1975, which enabled 
the development of a national securities market system and a national 
clearance and settlement system and their regulation.\6\ Applicant was 
formed in 1976 and now operates as a wholly-owned subsidiary of DTCC.
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    \6\ See Securities Acts Amendments of 1975, Public Law 94-29, 89 
Stat. 97 (1975).
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    Applicant states that it (a) is a clearing agency registered under 
the Exchange Act and, as such, is subject to comprehensive regulation 
by the Commission and (b) has been designated by FSOC as a SIFMU under 
Title VIII of the Dodd-Frank Act and, as such, is subject to enhanced 
supervision by the Commission in consultation with the FRB. Applicant 
states that both the

[[Page 46331]]

Commission and the FRB, among other federal agencies, have previously 
indicated that they believe FMUs such as securities clearing agencies 
generally engage in activities other than those of an investment 
company.\7\
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    \7\ Specifically, Applicant asserts that in the notice of final 
rulemaking issued by the Commission and the FRB (among other federal 
agencies) to implement the Volcker Rule, the agencies supported 
their decision not to expressly exclude FMUs from the definition of 
``covered funds'' for purposes of the Volcker Rule by (a) stating 
that ``[they] believe that FMUs are not investment vehicles of the 
type [the Volcker Rule] was designed to address, but rather entities 
that generally engage in other activities, including acting as 
central counterparties that reduce counterparty risk in clearing and 
settlement activities'' and (b) noting that ``if the FMU is 
primarily engaged in transferring, clearing, or settling payments, 
securities, or other financial transactions among or between 
financial institutions, the FMU could rely on the exclusion to the 
definition of investment company provided by section 3(b)(1)'' of 
the Act. See 79 FR 5536, 5700 (Jan. 31, 2014).
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    Applicant represents that substantially all of its activities since 
its formation have been devoted to providing clearing, settlement, risk 
management, CCP and ancillary services to its Members, and Applicant 
intends to continue to be primarily engaged in providing such services.
    Applicant further represents that all of its issued and outstanding 
shares are held by DTCC. Applicant states that its shares have not 
been, and will not be, held out as a financial investment for profit to 
the public.
    b. Public Representations of Policy. Applicant states that it has 
never made any public representations that would indicate that it is in 
any business other than providing clearing, settlement, risk 
management, CCP and ancillary services. Applicant represents that it 
has never held itself out as an investment company within the meaning 
of the Act. Applicant provides that all annual reports, web postings, 
press releases and written communications issued by Applicant have 
related to its business of providing clearing, settlement, risk 
management, CCP and ancillary services. Applicant states that no press 
release or advertising or promotional piece has been issued by 
Applicant concerning its holdings of investment securities or its 
capital investment policies, or concerning any potential for profit or 
appreciation in value relating to its own shares.
    c. Activities of Officers and Directors. Applicant represents that 
all of its directors and officers devote substantially all of their 
time spent on Applicant's matters to its business of providing 
clearing, settlement, risk management, CCP and ancillary services. 
Applicant states that its directors and officers receive no extra or 
separate compensation for any services that may directly or indirectly 
involve Applicant's investment securities. Applicant states that the 
composition of its Board of Directors is designed to comply with the 
fair representation requirement for clearing agencies set forth in 
Exchange Act Section 17A and the governance standards for registered 
clearing agencies set forth in Exchange Act Rule 17Ad-22.
    d. Nature of Assets. Applicant states that, as a service 
organization and a wholly-owned subsidiary of DTCC, Applicant owns very 
few fixed assets and the vast majority of its assets consist of cash 
and securities. Applicant states that, as of March 31, 2017, it had 
about $7.85 billion in total assets, of which cash and cash equivalents 
accounted for about $2.89 billion (36.84%), Members' segregated cash 
accounted for about $29.59 million (0.38%), receivables accounted for 
about $32.82 million (0.42%), other current assets accounted for about 
$5.19 million (0.07%) and Clearing Fund accounted for about $4.84 
billion (61.65%). Applicant states that, as of March 31, 2017, it owned 
Government securities valued at $201.60 million (2.57% of total assets) 
but did not own investment securities (as defined in Section 3(a)(2) of 
the Act).
    Applicant states that it has previously held greater than 40% of 
the value of its total assets, exclusive of Government securities and 
cash items, in bank CDs and other investment securities (as defined in 
Section 3(a)(2) of the Act), and Applicant may wish to do so again. 
Applicant believes that the fact that it has held, and may again wish 
to hold, investment securities in excess of the 40% threshold should 
not preclude a finding that it is engaged primarily in a business other 
than that of investing, reinvesting, owning, holding or trading in 
securities, provided that it uses its investment securities for bona 
fide purposes relating to its clearing, settlement, risk management, 
CCP and ancillary services, and that it does not invest or trade in 
securities for speculative purposes.
    Applicant states that it provides CCP services and certain trade 
guarantees to its Members and requires Members that utilize such 
services to make required deposits to the Clearing Fund. Applicant 
notes that it is a clearing agency registered under the Exchange Act 
and, as such, is subject to comprehensive regulation by the Commission. 
Applicant further notes that it is a SIFMU designated by FSOC under 
Title VIII of the Dodd-Frank Act and, as such, is subject to enhanced 
supervision by the Commission in consultation with the FRB. Applicant 
represents that its allocation, management and use of investment 
securities is consistent with its business of providing CCP and trade 
guaranty services to its Members. Applicant represents that all of its 
investments are and will be managed in accordance with the Clearing 
Agency Investment Policy. Applicant states that it bears the entire 
counterparty risk for the obligations of Members to each other with 
respect to all trades guaranteed by Applicant. Applicant explains that 
it manages this risk by, among other things, requiring Members to 
maintain deposits in the Clearing Fund; however, that does not transfer 
the risk from Applicant. Accordingly, Applicant submits that its 
primary business for purposes of Section 3(b)(2) of the Act may be 
determined without regard to the nature of its assets.
    e. Sources of Income. Applicant represents that it has always 
received the vast majority of its revenues from the provision of 
clearing, settlement, risk management, CCP and ancillary services to 
its Members and not from interest on investment securities. Applicant 
states that, for the quarter ended March 31, 2017, it derived about 
$70.56 million of its total revenues from the provision of clearing 
services, about $27.21 million from ancillary services (WMS and I&RS), 
and $0.79 million from settlement and asset services. Applicant states 
that it realized interest income of about $5.87 million for the quarter 
ended March 31, 2017. Applicant further provides that, for the year 
ended December 31, 2016, it had total revenues of $378,943,000 and 
interest income of $11,325,000. Applicant states that it currently 
invests its cash in Government securities and bank deposits. Applicant 
notes that total revenues as presented in the application and the 
Applicant's financial statements reflect revenues from operations and 
do not include interest income (Applicant's financial statements 
account for interest income as a separate line item). Applicant further 
states that it does not break out its expenses using a cost allocation 
method such that a net income after taxes figure is available for each 
category of services or interest income. Accordingly, Applicant submits 
that its revenues, not net income, should be used as the basis for 
evaluating its investment company status.
    Applicant projects that its interest income will increase over the 
next three years, reaching an estimated $55,700,000 in 2019. Applicant 
represents that the projected increase in interest income will mostly 
be driven by growth in Applicant's CP Program and

[[Page 46332]]

rising interest rates. Applicant states that this projection also 
reflects anticipated increases in its holdings of investment securities 
should the Commission grant the requested Order; however, Applicant 
does not anticipate that its interest income from investment securities 
would ever represent other than a small amount as compared to its total 
revenues. Applicant further states that its projected increase in 
interest income will not result in any material increase in net income 
for Applicant because (a) it passes through to its Members 
substantially all of its earnings on Clearing Fund cash and (b) its 
earnings on CP Program proceeds are substantially offset by its 
interest expense on the commercial paper notes and extendible notes 
that are issued to holders.
    5. Applicant asserts that its historical development, its public 
representations of policy, the activities of its officers and directors 
and its sources of revenue, as discussed in the application, 
demonstrate that it is engaged primarily in the business of providing 
clearing, settlement, risk management, CCP and ancillary services to 
its Members, and not in an investment business. Applicant thus asserts 
that it satisfies the criteria for issuing an order under Section 
3(b)(2) of the Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-21282 Filed 10-3-17; 8:45 am]
 BILLING CODE 8011-01-P


