[Federal Register Volume 83, Number 169 (Thursday, August 30, 2018)]
[Notices]
[Pages 44340-44353]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18869]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83955; File No. SR-NSCC-2017-805]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of No Objection to an Advance Notice, as Modified 
by Amendment No. 1, To Adopt a Recovery & Wind-Down Plan and Related 
Rules

August 27, 2018.
    On December 18, 2017, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') advance notice SR-NSCC-2017-805 pursuant to Section 
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act entitled the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule 
19b-4(n)(1)(i) under the Securities Exchange Act of 1934 (``Act'') \2\ 
to adopt a recovery and wind-down plan (``R&W Plan'') and related 
rules.\3\ The advance notice was published for comment in the Federal 
Register on January 30, 2018.\4\ In that publication, the Commission 
also extended the review period of the advance notice for an additional 
60 days, pursuant to Section 806(e)(1)(H) of the Clearing Supervision 
Act.\5\ On April 10, 2018, the Commission required additional 
information from NSCC pursuant to Section 806(e)(1)(D) of the Clearing 
Supervision Act,\6\ which tolled the Commission's period of review of 
the advance notice until 60 days from the date the information required 
by the Commission was received by the Commission.\7\ On June 28, 2018, 
NSCC filed Amendment No. 1 to the advance notice to amend and replace 
in its entirety the advance notice as originally filed on December 18, 
2017.\8\ On July 6, 2018, the Commission received a response to its 
request for additional information in consideration of the advance 
notice, which, in turn, added a further 60-days to the review period 
pursuant to Section 806(e)(1)(E) and (G) of the Clearing Supervision 
Act.\9\ The Commission did not receive any comments. This publication 
serves as notice that the Commission does not object to the proposed 
changes set forth in the advance notice, as modified by Amendment No. 1 
(hereinafter, ``Advance Notice'').
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ On December 18, 2017, NSCC filed the advance notice as 
proposed rule change SR-NSCC-2017-017 with the Commission pursuant 
to Section 19(b)(1) of the Act and Rule 19b-4 thereunder (``Proposed 
Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, 
respectively. The Proposed Rule Change was published in the Federal 
Register on January 8, 2018. Securities Exchange Act Release No. 
82430 (January 2, 2018), 83 FR 841 (January 8, 2018) (SR-NSCC-2017-
017). On February 8, 2018, the Commission designated a longer period 
within which to approve, disapprove, or institute proceedings to 
determine whether to approve or disapprove the Proposed Rule Change. 
Securities Exchange Act Release No. 82669 (February 8, 2018), 83 FR 
6653 (February 14, 2018) (SR-DTC-2017-021, SR-FICC-2017-021, SR-
NSCC-2017-017). On March 20, 2018, the Commission instituted 
proceedings to determine whether to approve or disapprove the 
Proposed Rule Change. Securities Exchange Act Release No. 82908 
(March 20, 2018), 83 FR 12986 (March 26, 2018) (SR-NSCC-2017-017). 
On June 25, 2018, the Commission designated a longer period for 
Commission action on the proceedings to determine whether to approve 
or disapprove the Proposed Rule Change. Securities Exchange Act 
Release No. 83509 (June 25, 2018), 83 FR 30785 (June 29, 2018) (SR-
DTC-2017-021, SR-FICC-2017-021, SR-NSCC-2017-017). On June 28, 2018, 
NSCC filed Amendment No. 1 to the Proposed Rule Change. Securities 
Exchange Act Release No. 83632 (July 13, 2018), 83 FR 34166 (July 
19, 2018) (SR-NSCC-2017-017). NSCC submitted a courtesy copy of 
Amendment No. 1 to the Proposed Rule Change through the Commission's 
electronic public comment letter mechanism. Accordingly, Amendment 
No. 1 to the Proposed Rule Change has been publicly available on the 
Commission's website at https://www.sec.gov/rules/sro/nscc.htm since 
June 29, 2018. The Commission did not receive any comments. The 
proposal, as set forth in both the advance notice and the Proposed 
Rule Change, each as modified by Amendments No. 1, shall not take 
effect until all required regulatory actions are completed.
    \4\ Securities Exchange Act Release No. 82581 (January 24, 
2018), 83 FR 4327 (January 30, 2018) (SR-NSCC-2017-805) 
(``Notice'').
    \5\ Pursuant to Section 806(e)(1)(H) of the Clearing Supervision 
Act, the Commission may extend the review period of an advance 
notice for an additional 60 days, if the changes proposed in the 
advance notice raise novel or complex issues, subject to the 
Commission providing the clearing agency with prompt written notice 
of the extension. 12 U.S.C. 5465(e)(1)(H). The Commission found that 
the advance notice raised novel and complex issues and, accordingly, 
extended the review period of the advance notice for an additional 
60 days until April 17, 2018. See Notice, supra note 4.
    \6\ 12 U.S.C. 5465(e)(1)(D).
    \7\ See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii); see Memorandum 
from the Office of Clearance and Settlement Supervision, Division of 
Trading and Markets, titled ``Commission's Request for Additional 
Information,'' available at https://www.sec.gov/rules/sro/nscc-an.htm.
    \8\ Securities Exchange Act Release No. 83745 (July 31, 2018), 
83 FR 38329 (August 6, 2018) (SR-NSCC-2017-805). NSCC submitted a 
courtesy copy of Amendment No. 1 to the advance notice through the 
Commission's electronic public comment letter mechanism. 
Accordingly, Amendment No. 1 to the advance notice has been publicly 
available on the Commission's website at https://www.sec.gov/rules/sro/nscc-an.htm since June 29, 2018.
    \9\ 12 U.S.C. 5465(e)(1)(E) and (G); see Memorandum from the 
Office of Clearance and Settlement Supervision, Division of Trading 
and Markets, titled ``Response to the Commission's Request for 
Additional Information,'' available at https://www.sec.gov/rules/sro/nscc-an.htm.
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I. Description of the Advance Notice

    In the Advance Notice, NSCC proposes to (1) adopt an R&W Plan; (2) 
amend NSCC's Rules & Procedures (``Rules'') \10\ to adopt Rule 41 
(Corporation Default), Rule 42 (Wind-down of the Corporation), and Rule 
60 (Market Disruption and Force Majeure) (each a ``Proposed Rule'' and, 
collectively, the ``Proposed Rules''); and (3) re-number current Rule 
42 (Wind-down of a Member, Fund Member or Insurance Carrier/Retirement 
Services Member) to Rule 40, which is currently reserved for future 
use.
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    \10\ Capitalized terms used herein and not otherwise defined 
herein are defined in the Rules.
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    NSCC states that the R&W Plan would be used by the Board of 
Directors of NSCC (``Board'') and management of NSCC in the event NSCC 
encounters scenarios that could potentially prevent it from being able 
to provide its critical services as a going concern.
    NSCC states that the Proposed Rules are designed to (1) facilitate 
the implementation of the R&W Plan when necessary and, in particular, 
allow NSCC to effectuate its strategy for winding down and transferring 
its business; (2) provide Members and Limited Members with transparency 
around critical provisions of the R&W Plan that relate to their rights, 
responsibilities and obligations; and (3) provide NSCC with the legal 
basis to implement those provisions of the R&W Plan when necessary.

A. NSCC R&W Plan

    The R&W Plan would be structured to provide a roadmap, define the 
strategy, and identify the tools available to NSCC to either (i) 
recover, in the event it experiences losses that exceed its prefunded 
resources (such strategies and tools referred to herein as the 
``Recovery Plan'') or (ii) wind-down its business in a manner designed 
to permit the continuation of its critical services in the event that 
such recovery efforts are not successful (such strategies and tools 
referred to herein as the ``Wind-down Plan'').
    The R&W Plan would identify (i) the recovery tools available to 
NSCC to address the risks of (a) uncovered losses

[[Page 44341]]

or liquidity shortfalls resulting from the default of one or more 
Members, and (b) losses arising from non-default events, such as damage 
to its physical assets, a cyber-attack, or custody and investment 
losses, and (ii) the strategy for implementation of such tools. The R&W 
Plan would also establish the strategy and framework for the orderly 
wind-down of NSCC and the transfer of its business in the remote event 
the implementation of the available recovery tools does not 
successfully return NSCC to financial viability.
    As discussed in greater detail below, the R&W Plan would provide, 
among other matters, (i) an overview of the business of NSCC and its 
parent, The Depository Trust & Clearing Corporation (``DTCC''); \11\ 
(ii) an analysis of NSCC's intercompany arrangements and critical links 
to other financial market infrastructure (``FMI''); (iii) a description 
of NSCC's services, and the criteria used to determine which services 
are considered critical; (iv) a description of the NSCC and DTCC 
governance structure; (v) a description of the governance around the 
overall recovery and wind-down program; (vi) a discussion of tools 
available to NSCC to mitigate credit/market \12\ risks and liquidity 
risks, including recovery indicators and triggers, and the governance 
around management of a stress event along a Crisis Continuum timeline; 
(vii) a discussion of potential non-default losses and the resources 
available to NSCC to address such losses, including recovery triggers 
and tools to mitigate such losses; (viii) an analysis of the recovery 
tools' characteristics, including how they are designed to be 
comprehensive, effective, and transparent, how the tools provide 
incentives to Members to, among other things, control and monitor the 
risks they may present to NSCC, and how NSCC seeks to minimize the 
negative consequences of executing its recovery tools; and (ix) the 
framework and approach for the orderly wind-down and transfer of NSCC's 
business, including an estimate of the time and costs to effect a 
recovery or orderly wind-down of NSCC.
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    \11\ DTCC is a user-owned and user-governed holding company and 
is the parent company of NSCC and its affiliates, The Depository 
Trust Company (``DTC'') and Fixed Income Clearing Corporation 
(``FICC'', and, together with NSCC and DTC, the ``Clearing 
Agencies''). The R&W Plan would describe how corporate support 
services are provided to NSCC from DTCC and DTCC's other 
subsidiaries through intercompany agreements under a shared services 
model.
    \12\ NSCC states that it uses the term ``credit/market'' risks 
in the R&W Plan because NSCC monitors its credit exposure to its 
Members by managing the market risks of each Member's unsettled 
portfolio through the collection of the Clearing Fund. See infra 
note 21.
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    Certain recovery tools that would be identified in the R&W Plan are 
based in the Rules (including the Proposed Rules); therefore, 
descriptions of those tools in the R&W Plan would include descriptions 
of, and reference to, the applicable Rules and any related internal 
policies and procedures. Other recovery tools that would be identified 
in the R&W Plan are based in contractual arrangements to which NSCC is 
a party, including, for example, existing committed or pre-arranged 
liquidity arrangements. Further, the R&W Plan would state that NSCC may 
develop further supporting internal guidelines and materials that may 
provide operational support for matters described in the R&W Plan, and 
that such documents would be supplemental and subordinate to the R&W 
Plan.
    NSCC states that many of the tools available to NSCC that would be 
described in the R&W Plan are NSCC's existing, business-as-usual risk 
management and Member default management tools, which would continue to 
be applied in scenarios of increasing stress. In addition to these 
existing, business-as-usual tools, the R&W Plan would describe NSCC's 
other principal recovery tools, which include, for example, (i) 
identifying, monitoring and managing general business risk and holding 
sufficient liquid net assets funded by equity (``LNA'') to cover 
potential general business losses pursuant to the Clearing Agency 
Policy on Capital Requirements (``Capital Policy''),\13\ (ii) 
maintaining the Clearing Agency Capital Replenishment Plan 
(``Replenishment Plan'') as a viable plan for the replenishment of 
capital should NSCC's equity fall close to or below the amount being 
held pursuant to the Capital Policy,\14\ and (iii) the process for the 
allocation of losses among Members, as provided in Rule 4 (Clearing 
Fund).\15\ The R&W Plan would provide governance around the selection 
and implementation of the recovery tool or tools most relevant to 
mitigate a stress scenario and any applicable loss or liquidity 
shortfall.
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    \13\ See Securities Exchange Act Release No. 81105 (July 7, 
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003, SR-FICC-2017-
007, SR-NSCC-2017-004).
    \14\ See id.
    \15\ See supra note 10.
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    The development of the R&W Plan is facilitated by the Office of 
Recovery & Resolution Planning (``R&R Team'') of DTCC.\16\ The R&R Team 
reports to the DTCC Management Committee (``Management Committee'') and 
is responsible for maintaining the R&W Plan and for the development and 
ongoing maintenance of the overall recovery and wind-down planning 
process. The Board, or such committees as may be delegated authority by 
the Board from time to time pursuant to its charter, would review and 
approve the R&W Plan biennially, and would also review and approve any 
changes that are proposed to the R&W Plan outside of the biennial 
review.
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    \16\ DTCC operates on a shared services model with respect to 
NSCC and its other subsidiaries. Most corporate functions are 
established and managed on an enterprise-wide basis pursuant to 
intercompany agreements under which it is generally DTCC that 
provides a relevant service to a subsidiary, including NSCC.
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    As discussed in greater detail below, the Proposed Rules would 
define the procedures that may be employed in the event of NSCC's 
default and its wind-down, and would provide for NSCC's authority to 
take certain actions on the occurrence of a Market Disruption Event, as 
defined therein. NSCC states that the Proposed Rules are designed to 
provide Members and Limited Members with transparency and certainty 
with respect to these matters. NSCC also states that the Proposed Rules 
are designed to facilitate the implementation of the R&W Plan, 
particularly NSCC's strategy for winding down and transferring its 
business, and are designed to provide NSCC with the legal basis to 
implement those aspects of the R&W Plan.
1. Business Overview, Critical Services, and Governance
    The introduction to the R&W Plan would identify the document's 
purpose and its regulatory background, and would outline a summary of 
the R&W Plan. The stated purpose of the R&W Plan is that it is to be 
used by the Board and NSCC management in the event NSCC encounters 
scenarios that could potentially prevent it from being able to provide 
its critical services as a going concern.
    The R&W Plan would describe DTCC's business profile, provide a 
summary of NSCC's services, and identify the intercompany arrangements 
and links between NSCC and other entities, including other FMIs. NSCC 
states that the overview section would provide a context for the R&W 
Plan by describing NSCC's business, organizational structure and 
critical links to other entities. NSCC also states that by providing 
this context, this section would facilitate the analysis of the 
potential impact of utilizing the recovery tools set forth in later 
sections of the Recovery Plan, and the analysis

[[Page 44342]]

of the factors that would be addressed in implementing the Wind-down 
Plan.
    The R&W Plan would provide a description of established links 
between NSCC and other FMIs, including The Options Clearing Corporation 
(``OCC''), CDS Clearing and Depository Services Inc. (``CDS''), and 
DTC. NSCC states that this section of the R&W Plan, which identifies 
and briefly describes NSCC's established links, is designed to provide 
a mapping of critical connections and dependencies that may need to be 
relied on or otherwise addressed in connection with the implementation 
of either the Recovery Plan or the Wind-down Plan.
    The R&W Plan would define the criteria for classifying certain of 
NSCC's services as ``critical,'' and would identify those critical 
services and the rationale for their classification. This section of 
the R&W Plan would provide an analysis of the potential systemic impact 
from a service disruption, which NSCC states is important for 
evaluating how the recovery tools and the wind-down strategy would 
facilitate and provide for the continuation of NSCC's critical services 
to the markets it serves. The criteria that would be used to identify 
an NSCC service or function as critical would include (1) whether there 
is a lack of alternative providers or products; (2) whether failure of 
the service could impact NSCC's ability to perform its central 
counterparty services; (3) whether failure of the service could impact 
NSCC's ability to perform its netting services, and the availability of 
market liquidity; and (4) whether the service is interconnected with 
other participants and processes within the U.S. financial system, for 
example, with other FMIs, settlement banks, broker-dealers, and 
exchanges. The R&W Plan would then list each of those services, 
functions or activities that NSCC has identified as ``critical'' based 
on the applicability of these four criteria. The R&W Plan would also 
include a non-exhaustive list of NSCC services that are not deemed 
critical.
    NSCC states that the evaluation of which services provided by NSCC 
are deemed critical is important for purposes of determining how the 
R&W Plan would facilitate the continuity of those services. While 
NSCC's Wind-down Plan would provide for the transfer of all critical 
services to a transferee in the event NSCC's wind-down is implemented, 
it would anticipate that any non-critical services that are ancillary 
and beneficial to a critical service, or that otherwise have 
substantial user demand from the continuing membership, would also be 
transferred.
    The R&W Plan would describe the governance structure of both DTCC 
and NSCC. This section of the R&W Plan would identify the ownership and 
governance model of these entities at both the Board and management 
levels. The R&W Plan would state that the stages of escalation required 
to manage recovery under the Recovery Plan or to invoke NSCC's wind-
down under the Wind-down Plan would range from relevant business line 
managers up to the Board through NSCC's governance structure. The R&W 
Plan would then identify the parties responsible for certain activities 
under both the Recovery Plan and the Wind-down Plan, and would describe 
their respective roles. The R&W Plan would identify the Risk Committee 
of the Board (``Board Risk Committee'') as being responsible for 
oversight of risk management activities at NSCC, which include focusing 
on both oversight of risk management systems and processes designed to 
identify and manage various risks faced by NSCC as well as oversight of 
NSCC's efforts to mitigate systemic risks that could impact those 
markets and the broader financial system.\17\ The R&W Plan would 
identify the DTCC Management Risk Committee (``Management Risk 
Committee'') as primarily responsible for general, day-to-day risk 
management through delegated authority from the Board Risk Committee. 
The R&W Plan would state that the Management Risk Committee has 
delegated specific day-to-day risk management, including management of 
risks addressed through margining systems and related activities, to 
the DTCC Group Chief Risk Office (``GCRO''), which works with staff 
within the DTCC Financial Risk Management group. Finally, the R&W Plan 
would describe the role of the Management Committee, which provides 
overall direction for all aspects of NSCC's business, technology, and 
operations and the functional areas that support these activities.
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    \17\ The DTCC, DTC, NSCC, FICC Risk Committee Charter is 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
policy-and-compliance/DTCC-BOD-Risk-Committee-Charter.pdf.
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    The R&W Plan would describe the governance of recovery efforts in 
response to both default losses and non-default losses under the 
Recovery Plan, identifying the groups responsible for those recovery 
efforts. Specifically, the R&W Plan would state that the Management 
Risk Committee provides oversight of actions relating to the default of 
a Member, which would be reported and escalated to it through the GCRO, 
and the Management Committee provides oversight of actions relating to 
non-default events that could result in a loss, which would be reported 
and escalated to it from the DTCC Chief Financial Officer (``CFO'') and 
the DTCC Treasury group that reports to the CFO, and from other 
relevant subject matter experts based on the nature and circumstances 
of the non-default event.\18\ More generally, the R&W Plan would state 
that the type of loss and the nature and circumstances of the events 
that lead to the loss would dictate the components of governance to 
address that loss, including the escalation path to authorize those 
actions. Both the Recovery Plan and the Wind-down Plan would describe 
the governance of escalations, decisions, and actions under each of 
those plans.
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    \18\ The R&W Plan would state that these groups would be 
involved to address how to mitigate the financial impact of non-
default losses, and in recommending mitigating actions, the 
Management Committee would consider information and recommendations 
from relevant subject matter experts based on the nature and 
circumstances of the non-default event. Any necessary operational 
response to these events, however, would be managed in accordance 
with applicable incident response/business continuity process.
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    Finally, the R&W Plan would describe the role of the R&R Team in 
managing the overall recovery and wind-down program and plans for each 
of the Clearing Agencies.
2. NSCC Recovery Plan
    NSCC states that the Recovery Plan is intended to be a roadmap of 
those actions that NSCC may employ to monitor and, as needed, stabilize 
its financial condition. NSCC also states that as each event that could 
lead to a financial loss could be unique in its circumstances, NSCC 
proposes that the Recovery Plan would not be prescriptive and would 
permit NSCC to maintain flexibility in its use of identified tools and 
in the sequence in which such tools are used, subject to any conditions 
in the Rules or the contractual arrangement on which such tool is 
based. NSCC's Recovery Plan would consist of (1) a description of the 
risk management surveillance, tools, and governance that NSCC would 
employ across evolving stress scenarios that it may face as it 
transitions through a Crisis Continuum, described below; (2) a 
description of NSCC's risk of losses that may result from non-default 
events, and the financial resources and recovery tools available to 
NSCC to manage those risks and any resulting losses; and (3) an 
evaluation of the characteristics of the recovery tools that may be 
used in response to either default losses or non-default losses. In all 
cases, NSCC states

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that it would act in accordance with the Rules, within the governance 
structure described in the R&W Plan, and in accordance with applicable 
regulatory oversight to address each situation to best protect NSCC, 
Members, and the markets in which it operates.
(i) Managing Member Default Losses and Liquidity Needs Through the 
Crisis Continuum
    The Recovery Plan would describe the risk management surveillance, 
tools, and governance that NSCC may employ across an increasing stress 
environment, which is referred to as the Crisis Continuum. This 
description would identify those tools that can be employed to mitigate 
losses, and mitigate or minimize liquidity needs, as the market 
environment becomes increasingly stressed. The phases of the Crisis 
Continuum would include (1) a stable market phase, (2) a stress market 
phase, (3) a phase commencing with NSCC's decision to cease to act for 
a Member or Affiliated Family of Members \19\ (referred to in the R&W 
Plan as the ``Member default phase''), and (4) a recovery phase. In the 
R&W Plan, the term ``cease to act'' and the events that may lead to 
such decision are used within the context of Rule 46 of the Rules.\20\ 
Further, the R&W Plan would, for purposes of the R&W Plan, use the 
following terms: (1) ``Member default'' to refer to the event or events 
that precipitate NSCC ceasing to act for a Member or an Affiliated 
Family; (2) ``Defaulting Member'' to refer to a Member for which NSCC 
has ceased to act; and (3) ``Member Default Losses'' to refer to losses 
that arise out of or relate to the Member default (including any losses 
that arise from liquidation of that Member's portfolio), and to 
distinguish such losses from those that arise out of the business or 
other events not related to a Member default, which are separately 
addressed in the R&W Plan.
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    \19\ The R&W Plan would define an Affiliated Family of Members 
as a number of affiliated entities that are all Members of NSCC.
    \20\ See Rule 46 (Restrictions on Access to Services), supra 
note 10.
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    NSCC states that the Recovery Plan would provide context to its 
roadmap through this Crisis Continuum by describing NSCC's ongoing 
management of credit, market, and liquidity risk, and its existing 
process for measuring and reporting its risks as they align with 
established thresholds for its tolerance of those risks. NSCC also 
states that the Recovery Plan would discuss the management of credit/
market risk and liquidity exposures together because the tools that 
address these risks can be deployed either separately or in a 
coordinated approach in order to address both exposures. NSCC states 
that it manages these risk exposures collectively to limit their 
overall impact on NSCC and its membership. NSCC states that as part of 
its market risk management strategy, NSCC manages its credit exposure 
to Members by determining the appropriate Required Deposits to the 
Clearing Fund and monitoring its sufficiency, as provided for in the 
Rules.\21\ NSCC states that it manages its liquidity risks with an 
objective of maintaining sufficient resources to be able to fulfill 
obligations that have been guaranteed by NSCC in the event of a Member 
default that presents the largest aggregate liquidity exposure to NSCC 
over the settlement cycle.\22\
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    \21\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund 
Formula and Other Matters), supra note 10. NSCC states that because 
it does not maintain a guaranty fund separate and apart from the 
Clearing Fund it collects from Members, NSCC monitors its credit 
exposure to its Members by managing the market risks of each 
Member's unsettled portfolio through the collection of the Clearing 
Fund. The aggregate of all Members' Required Fund Deposits comprises 
the Clearing Fund that represents NSCC's prefunded resources to 
address uncovered loss exposures, as provided for in Rule 4 
(Clearing Fund). Therefore, NSCC states that its market risk 
management strategy is designed to comply with Rule 17Ad-22(e)(4) 
under the Act, where these risks are referred to as ``credit 
risks.'' See 17 CFR 240.17Ad-22(e)(4).
    \22\ NSCC's liquidity risk management strategy, including the 
manner in which NSCC utilizes its liquidity tools, is described in 
the Clearing Agency Liquidity Risk Management Framework. See 
Securities Exchange Act Release No. 82377 (December 21, 2017), 82 FR 
61617 (December 28, 2017) (SR-DTC-2017-004, SR-FICC-2017-008, SR-
NSCC-2017-005).
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    The Recovery Plan would outline the metrics and indicators that 
NSCC has developed to evaluate a stress situation against established 
risk tolerance thresholds. Each risk mitigation tool identified in the 
Recovery Plan would include a description of the escalation thresholds 
that allow for effective and timely reporting to the appropriate 
internal management staff and committees, or to the Board. NSCC states 
that the Recovery Plan is designed to make clear that these tools and 
escalation protocols would be calibrated across each phase of the 
Crisis Continuum. The Recovery Plan would also establish that NSCC 
would retain the flexibility to deploy such tools either separately or 
in a coordinated approach, and to use other alternatives to these 
actions and tools as necessitated by the circumstances of a particular 
Member default, in accordance with the Rules. Therefore, NSCC states 
that the Recovery Plan would both provide NSCC with a roadmap to follow 
within each phase of the Crisis Continuum, and would permit it to 
adjust its risk management measures to address the unique circumstances 
of each event.
    The Recovery Plan would describe the conditions that mark each 
phase of the Crisis Continuum, and would identify actions that NSCC 
could take as it transitions through each phase in order to both 
prevent losses from materializing through active risk management, and 
to restore the financial health of NSCC during a period of stress.
    The stable market phase of the Crisis Continuum would describe 
active risk management activities in the normal course of business. 
These activities would include (1) routine monitoring of margin 
adequacy through daily review of back testing and stress testing 
results that review the adequacy of NSCC's margin calculations, and 
escalation of those results to internal and Board committees; \23\ and 
(2) routine monitoring of liquidity adequacy through review of daily 
liquidity studies that measure sufficiency of available liquidity 
resources to meet cash settlement obligations of the Member that would 
generate the largest aggregate payment obligation.\24\
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    \23\ NSCC's stress testing practices are described in the 
Clearing Agency Stress Testing Framework (Market Risk). See 
Securities Exchange Act Release No. 82638 (December 19, 2017), 82 FR 
61082 (December 26, 2017) (SR-DTC-2017-005, SR-FICC-2017-009, SR-
NSCC-2017-006).
    \24\ See supra note 22 (concerning NSCC's liquidity risk 
management strategy).
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    The Recovery Plan would describe some of the indicators of the 
stress market phase of the Crisis Continuum, which would include, for 
example, volatility in market prices of certain assets where there is 
increased uncertainty among market participants about the fundamental 
value of those assets. This phase would involve general market 
stresses, when no Member default would be imminent. Within the 
description of this phase, the Recovery Plan would provide that NSCC 
may take targeted, routine risk management measures as necessary and as 
permitted by the Rules.
    Within the Member default phase of the Crisis Continuum, the 
Recovery Plan would provide a roadmap for the existing procedures that 
NSCC would follow in the event of a Member default and any decision by 
NSCC to cease to act for that Member.\25\ The Recovery Plan would 
provide that the objectives of NSCC's actions upon a Member or 
Affiliated Family default are to (1) minimize losses and market 
exposure of

[[Page 44344]]

the affected Members and NSCC's non-Defaulting Members; and (2) to the 
extent practicable, minimize disturbances to the affected markets. The 
Recovery Plan would describe tools, actions, and related governance for 
both market risk monitoring and liquidity risk monitoring through this 
phase. Management of liquidity risk through this phase would involve 
ongoing monitoring of the adequacy of NSCC's liquidity resources, and 
the Recovery Plan would identify certain actions NSCC may deploy as it 
deems necessary to mitigate a potential liquidity shortfall. The 
Recovery Plan would state that, throughout this phase, relevant 
information would be escalated and reported to both internal management 
committees and the Board Risk Committee.
---------------------------------------------------------------------------

    \25\ See Rule 18 (Procedures for When the Corporation Declines 
or Ceases to Act) and Rule 46 (Restrictions on Access to Services), 
supra note 10.
---------------------------------------------------------------------------

    The Recovery Plan would also identify financial resources available 
to NSCC, pursuant to the Rules, to address losses arising out of a 
Member default. Specifically, Rule 4 (Clearing Fund) provides that 
losses remaining after application of the Defaulting Member's resources 
be satisfied first by applying a Corporate Contribution, and then, if 
necessary, by allocating remaining losses among the membership in 
accordance with Rule 4 (Clearing Fund).\26\
---------------------------------------------------------------------------

    \26\ Rule 4 (Clearing Fund) defines the amount NSCC would 
contribute to address a loss resulting from either a Member default 
or a non-default event as the Corporate Contribution. This amount is 
50 percent of the General Business Risk Capital Requirement, which 
is calculated pursuant to the Capital Policy and which NSCC states 
is an amount sufficient to cover potential general business losses 
so that NSCC can continue operations and services as a going concern 
if those losses materialize, in an effort to comply with Rule 17Ad-
22(e)(15) under the Act. See supra note 13 (concerning the Capital 
Policy); 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------

    In order to provide for an effective and timely recovery, the 
Recovery Plan would describe the period of time that would occur near 
the end of the Member default phase, during which NSCC may experience 
stress events or observe early warning indicators that allow it to 
evaluate its options and prepare for the recovery phase (referred to in 
the R&W Plan as the Recovery Corridor). The Recovery Plan would then 
describe the recovery phase of the Crisis Continuum, which would begin 
on the date that NSCC issues the first Loss Allocation Notice of the 
second loss allocation round with respect to a given Event Period.\27\ 
The recovery phase would describe actions that NSCC may take to avoid 
entering into a wind down of its business.
---------------------------------------------------------------------------

    \27\ As provided for in Rule 4 (Clearing Fund), the ``Event 
Period'' is the 10 Business Days beginning on (i) with respect to a 
Member default, the day on which NSCC notifies Members that it has 
ceased to act for a Member under the Rules, or (ii) with respect to 
a non-default loss, the day that NSCC notifies Members of the 
determination by the Board that there is a non-default loss event. 
Rule 4 (Clearing Fund) defines a ``round'' as a series of loss 
allocations relating to an Event Period, and provides that the first 
Loss Allocation Notice in a first, second, or subsequent round shall 
expressly state that such notice reflects the beginning of a first, 
second, or subsequent round. The maximum allocable loss amount of a 
round is equal to the sum of the Loss Allocation Caps of those 
Members included in the round. See Rule 4 (Clearing Fund), supra 
note 10.
---------------------------------------------------------------------------

    NSCC states that it expects that significant deterioration of 
liquidity resources would cause it to enter the Recovery Corridor. 
Therefore, the R&W Plan would describe the actions NSCC may take aimed 
at replenishing those resources. Throughout the Recovery Corridor, NSCC 
would monitor the adequacy of its resources and the expected timing of 
replenishment of those resources, and would do so through the 
monitoring of certain corridor indicator metrics.
    NSCC states that the majority of the corridor indicators, as 
identified in the Recovery Plan, relate directly to conditions that may 
require NSCC to adjust its strategy for hedging and liquidating a 
Defaulting Member's portfolio, and any such changes would include an 
assessment of the status of the corridor indicators. For each corridor 
indicator, the Recovery Plan would identify (1) measures of the 
indicator, (2) evaluations of the status of the indicator, (3) metrics 
for determining the status of the deterioration or improvement of the 
indicator, and (4) Corridor Actions, which are steps that may be taken 
to improve the status of the indicator,\28\ as well as management 
escalations required to authorize those steps. NSCC states that because 
NSCC has never experienced the default of multiple Members, it has not, 
historically, measured the deterioration or improvements metrics of the 
corridor indicators. Therefore, NSCC states that these metrics were 
chosen based on the business judgment of NSCC management.
---------------------------------------------------------------------------

    \28\ The Corridor Actions that would be identified in the R&W 
Plan are designed to be indicative, but not prescriptive; therefore, 
if NSCC needs to consider alternative actions due to the applicable 
facts and circumstances, the escalation of those alternative actions 
would follow the same escalation protocol identified in the R&W Plan 
for the Corridor Indicator to which the action relates.
---------------------------------------------------------------------------

    The Recovery Plan would also describe the reporting and escalation 
of the status of the corridor indicators throughout the Recovery 
Corridor. Significant deterioration of a corridor indicator, as 
measured by the metrics set out in the Recovery Plan, would be 
escalated to the Board. NSCC management would review the corridor 
indicators and the related metrics at least annually, and would modify 
these metrics as necessary in light of observations from simulations of 
Member defaults and other analyses. Any proposed modifications would be 
reviewed by the Management Risk Committee and the Board Risk Committee. 
The Recovery Plan would estimate that NSCC may remain in the Recovery 
Corridor between one day and two weeks. NSCC states that this estimate 
is based on historical data observed in past Member defaults, the 
results of simulations of Member defaults, and periodic liquidity 
analyses conducted by NSCC. NSCC states that the actual length of a 
Recovery Corridor would vary based on actual market conditions observed 
at the time, and NSCC would expect the Recovery Corridor to be shorter 
in market conditions of increased stress.
    The Recovery Plan would outline steps by which NSCC may allocate 
its losses, which would occur when and in the order provided in Rule 4 
(Clearing Fund).\29\ The Recovery Plan would also identify tools that 
may be used to address foreseeable shortfalls of NSCC's liquidity 
resources following a Member default, and would provide that these 
tools may be used as appropriate during the Crisis Continuum to address 
liquidity shortfalls if they arise. NSCC states that the goal in 
managing NSCC's qualified liquidity resources is to maximize resource 
availability in an evolving stress situation, to maintain flexibility 
in the order and use of sources of liquidity, and to repay any third 
party lenders of liquidity in a timely manner. Additional voluntary or 
uncommitted tools to address potential liquidity shortfalls, which may 
supplement NSCC's other liquid resources described herein, would also 
be identified in the Recovery Plan. The Recovery Plan would state that, 
due to the extreme nature of a stress event that would cause NSCC to 
consider the use of these liquidity tools, the availability and 
capacity of these liquidity tools, and the willingness of 
counterparties to lend, cannot be accurately predicted and are 
dependent on the circumstances of the applicable stress period, 
including market price volatility, actual or perceived disruptions in 
financial markets, the costs to NSCC of utilizing these tools, and any 
potential impact on NSCC's credit rating.
---------------------------------------------------------------------------

    \29\ See supra note 10.
---------------------------------------------------------------------------

    The Recovery Plan would state that NSCC will have entered the 
recovery phase on the date that it issues the first

[[Page 44345]]

Loss Allocation Notice of the second loss allocation round with respect 
to a given Event Period. The Recovery Plan would provide that, during 
the recovery phase, NSCC would continue and, as needed, enhance, the 
monitoring and remedial actions already described in connection with 
previous phases of the Crisis Continuum, and would remain in the 
recovery phase until its financial resources are expected to be or are 
fully replenished, or until the Wind-down Plan is triggered.
    The Recovery Plan would describe governance for the actions and 
tools that may be employed within each phase of the Crisis Continuum, 
which would be dictated by the facts and circumstances applicable to 
the situation being addressed. Such facts and circumstances would be 
measured by the various indicators and metrics applicable to that phase 
of the Crisis Continuum, and would follow the relevant escalation 
protocols that would be described in the Recovery Plan. The Recovery 
Plan would also describe the governance procedures around a decision to 
cease to act for a Member, pursuant to the Rules, and around the 
management and oversight of the subsequent liquidation of the 
Defaulting Member's portfolio. The Recovery Plan would state that, 
overall, NSCC would retain flexibility in accordance with the Rules, 
its governance structure, and its regulatory oversight, to address a 
particular situation in order to best protect NSCC and the Members, and 
to meet the primary objectives, throughout the Crisis Continuum, of 
minimizing losses and, where consistent and practicable, minimizing 
disturbance to affected markets.
(ii) Non-Default Losses
    The Recovery Plan would outline how NSCC may address losses that 
result from events other than a Member default. While these matters are 
addressed in greater detail in other documents, this section of the R&W 
Plan would provide a roadmap to those documents and an outline for 
NSCC's approach to monitoring and managing losses that could result 
from a non-default event. The R&W Plan would first identify some of the 
risks NSCC faces that could lead to these losses, which include, for 
example, (1) the business and profit/loss risks of unexpected declines 
in revenue or growth of expenses; (2) the operational risks of 
disruptions to systems or processes that could lead to large losses, 
including those resulting from, for example, a cyber-attack; and (3) 
custody or investment risks that could lead to financial losses. The 
Recovery Plan would describe NSCC's overall strategy for the management 
of these risks, which includes a ``three lines of defense'' approach to 
risk management that allows for comprehensive management of risk across 
the organization.\30\ The Recovery Plan would also describe NSCC's 
approach to financial risk and capital management. The R&W Plan would 
identify key aspects of this approach, including, for example, an 
annual budget process, business line performance reviews with 
management, and regular review of capital requirements against LNA. 
These risk management strategies are collectively intended to allow 
NSCC to effectively identify, monitor, and manage risks of non-default 
losses.
---------------------------------------------------------------------------

    \30\ NSCC states that the ``three lines of defense'' approach to 
risk management includes (1) a first line of defense comprised of 
the various business lines and functional units that support the 
products and services offered by NSCC; (2) a second line of defense 
comprised of control functions that support NSCC, including the risk 
management, legal and compliance areas; and (3) a third line of 
defense, which is performed by an internal audit group. The Clearing 
Agency Risk Management Framework includes a description of this 
``three lines of defense'' approach to risk management, and 
addresses how NSCC comprehensively manages various risks, including 
operational, general business, investment, custody, and other risks 
that arise in or are borne by it. Securities Exchange Act Release 
No. 81635 (September 15, 2017), 82 FR 44224 (September 21, 2017) 
(SR-DTC-2017-013, SR-FICC-2017-016, SR-NSCC-2017-012). The Clearing 
Agency Operational Risk Management Framework describes the manner in 
which NSCC manages operational risks, as defined therein. Securities 
Exchange Act Release No. 81745 (September 28, 2017), 82 FR 46332 
(October 4, 2017) (SR-DTC-2017-014, SR-FICC-2017-017, SR-NSCC-2017-
013).
---------------------------------------------------------------------------

    The R&W Plan would identify the two categories of financial 
resources NSCC maintains to cover losses and expenses arising from non-
default risks or events as (1) LNA, maintained, monitored, and managed 
pursuant to the Capital Policy, which include (a) amounts held in 
satisfaction of the General Business Risk Capital Requirement,\31\ (b) 
the Corporate Contribution,\32\ and (c) other amounts held in excess of 
NSCC's capital requirements pursuant to the Capital Policy; and (2) 
resources available pursuant to the loss allocation provisions of Rule 
4 (Clearing Fund).\33\
---------------------------------------------------------------------------

    \31\ See supra note 26.
    \32\ See supra note 26.
    \33\ See supra note 10.
---------------------------------------------------------------------------

    The R&W Plan would address the process by which the CFO and the 
DTCC Treasury group would determine which available LNA resources are 
most appropriate to cover a loss that is caused by a non-default event. 
This determination involves an evaluation of a number of factors, 
including the current and expected size of the loss, the expected time 
horizon over when the loss or additional expenses would materialize, 
the current and projected available LNA, and the likelihood LNA could 
be successfully replenished pursuant to the Replenishment Plan, if 
triggered.\34\ Finally the R&W Plan would discuss how NSCC would apply 
its resources to address losses resulting from a non-default event, 
including the order of resources it would apply if the loss or 
liability exceeds NSCC's excess LNA amounts, or is large relative 
thereto, and the Board has declared the event a Declared Non-Default 
Loss Event pursuant to Rule 4 (Clearing Fund).\35\
---------------------------------------------------------------------------

    \34\ See supra note 13 (concerning the Capital Policy).
    \35\ See supra note 10.
---------------------------------------------------------------------------

    The R&W Plan would also describe proposed Rule 60 (Market 
Disruption and Force Majeure), which NSCC is proposing to adopt in the 
Rules. NSCC states that this Proposed Rule is designed to provide 
transparency around how NSCC would address extraordinary events that 
may occur outside its control. Specifically, the Proposed Rule would 
define a Market Disruption Event and the governance around a 
determination that such an event has occurred. The Proposed Rule would 
also describe NSCC's authority to take actions during the pendency of a 
Market Disruption Event that it deems appropriate to address such an 
event and facilitate the continuation of its services, if practicable.
    The R&W Plan would describe the interaction between the Proposed 
Rule and NSCC's existing processes and procedures addressing business 
continuity management and disaster recovery (generally, the ``BCM/DR 
procedures''). NSCC states that the intent is to make clear that the 
Proposed Rule is designed to support those BCM/DR procedures and to 
address circumstances that may be exogenous to NSCC and not necessarily 
addressed by the BCM/DR procedures. Finally, the R&W Plan would 
describe that, because the operation of the Proposed Rule is specific 
to each applicable Market Disruption Event, the Proposed Rule does not 
define a time limit on its application. However, the R&W Plan would 
note that actions authorized by the Proposed Rule would be limited to 
the pendency of the applicable Market Disruption Event, as made clear 
in the Proposed Rule. NSCC states that, overall, the Proposed Rule is 
designed to mitigate risks caused by Market Disruption Events and, 
thereby, minimize the risk of financial loss that may result from such 
events.

[[Page 44346]]

(iii) Recovery Tool Characteristics
    The Recovery Plan would describe NSCC's evaluation of the tools 
identified within the Recovery Plan, and its rationale for concluding 
that such tools are comprehensive, effective, and transparent, and that 
such tools provide incentives to Members and minimize negative impact 
on Members and the financial system.
3. NSCC Wind-Down Plan
    The Wind-down Plan would provide the framework and strategy for the 
orderly wind-down of NSCC if the use of the recovery tools described in 
the Recovery Plan does not successfully return NSCC to financial 
viability. NSCC states that while such event is extremely unlikely 
given the comprehensive nature of the recovery tools, NSCC is proposing 
a wind-down strategy that provides for (1) the transfer of NSCC's 
business, assets, and membership to another legal entity, (2) such 
transfer being effected in connection with proceedings under Chapter 11 
of the U.S. Bankruptcy Code,\36\ and (3) after effectuating this 
transfer, NSCC liquidating any remaining assets in an orderly manner in 
bankruptcy proceedings. NSCC states that the proposed transfer approach 
to a wind-down would meet its objectives of (1) assuring that NSCC's 
critical services will be available to the market as long as there are 
Members in good standing, and (2) minimizing disruption to the 
operations of Members and financial markets generally that might be 
caused by NSCC's failure.
---------------------------------------------------------------------------

    \36\ 11 U.S.C. 101 et seq.
---------------------------------------------------------------------------

    In describing the transfer approach to NSCC's Wind-down Plan, the 
R&W Plan would identify the factors that NSCC considered in developing 
this approach, including the fact that NSCC does not own material 
assets that are unrelated to its clearance and settlement activities. 
Therefore, NSCC states that a business reorganization or ``bail-in'' of 
debt approach would be unlikely to mitigate significant losses. 
Additionally, NSCC states that the proposed approach was developed in 
consideration of its critical and unique position in the U.S. markets, 
which precludes any approach that would cause NSCC's critical services 
to no longer be available.
    First, the Wind-down Plan would describe the potential scenarios 
that could lead to the wind-down of NSCC, and the likelihood of such 
scenarios. The Wind-down Plan would identify the time period leading up 
to a decision to wind-down NSCC as the Runway Period. NSCC states that 
this period would follow the implementation of any recovery tools, as 
it may take a period of time, depending on the severity of the market 
stress at that time, for these tools to be effective or for NSCC to 
realize a loss sufficient to cause it to be unable to effectuate 
settlements and repay its obligations.\37\ The Wind-down Plan would 
identify some of the indicators that NSCC has entered the Runway 
Period.
---------------------------------------------------------------------------

    \37\ The Wind-down Plan would state that, given NSCC's position 
as a user-governed financial market utility, it is possible that 
Members might voluntarily elect to provide additional support during 
the recovery phase leading up to a potential trigger of the Wind-
down Plan, but would also be designed to make clear that NSCC cannot 
predict the willingness of Members to do so.
---------------------------------------------------------------------------

    The trigger for implementing the Wind-down Plan would be a 
determination by the Board that recovery efforts have not been, or are 
unlikely to be, successful in returning NSCC to viability as a going 
concern. As described in the R&W Plan, NSCC states that this is an 
appropriate trigger because it is both broad and flexible enough to 
cover a variety of scenarios, and would align incentives of NSCC and 
the Members to avoid actions that might undermine NSCC's recovery 
efforts. Additionally, NSCC states that this approach takes into 
account the characteristics of NSCC's recovery tools and enables the 
Board to consider (1) the presence of indicators of a successful or 
unsuccessful recovery, and (2) potential for knock-on effects of 
continued iterative application of NSCC's recovery tools.
    The Wind-down Plan would describe the general objectives of the 
transfer strategy, and would address assumptions regarding the transfer 
of NSCC's critical services, business, assets, and membership, and the 
assignment of NSCC's links with other FMIs, to another legal entity 
that is legally, financially, and operationally able to provide NSCC's 
critical services to entities that wish to continue their membership 
following the transfer (``Transferee''). The Wind-down Plan would 
provide that the Transferee would be either (1) a third party legal 
entity, which may be an existing or newly established legal entity or a 
bridge entity formed to operate the business on an interim basis to 
enable the business to be transferred subsequently (``Third Party 
Transferee''); or (2) an existing, debt-free failover legal entity 
established ex-ante by DTCC (``Failover Transferee'') to be used as an 
alternative Transferee in the event that no viable or preferable Third 
Party Transferee timely commits to acquire NSCC's business. NSCC would 
seek to identify the proposed Transferee, and negotiate and enter into 
transfer arrangements during the Runway Period and prior to making any 
filings under Chapter 11 of the U.S. Bankruptcy Code.\38\ The Wind-down 
Plan would anticipate that the transfer to the Transferee be effected 
in connection with proceedings under Chapter 11 of the U.S. Bankruptcy 
Code, and pursuant to a bankruptcy court order under Section 363 of the 
Bankruptcy Code, with the intent that the transfer be free and clear of 
claims against, and interests in, NSCC, except to the extent expressly 
provided in the court's order.\39\
---------------------------------------------------------------------------

    \38\ See 11 U.S.C. 101 et seq.
    \39\ See 11 U.S.C. 363.
---------------------------------------------------------------------------

    NSCC states that in order to effect a timely transfer of its 
services and minimize the market and operational disruption of such 
transfer, NSCC would expect to transfer all of its critical services 
and any non-critical services that are ancillary and beneficial to a 
critical service, or that otherwise have substantial user demand from 
the continuing membership. Following the transfer, the Wind-down Plan 
would anticipate that the Transferee and its continuing membership 
would determine whether to continue to provide any transferred non-
critical service on an ongoing basis, or terminate the non-critical 
service following some transition period. NSCC's Wind-down Plan would 
anticipate that the Transferee would enter into a transition services 
agreement with DTCC so that DTCC would continue to provide the shared 
services it currently provides to NSCC, including staffing, 
infrastructure and operational support. The Wind-down Plan would also 
anticipate the assignment of NSCC's link arrangements, including those 
with DTC, CDS and OCC, described above, to the Transferee.\40\ The 
Wind-down Plan would provide that Members' open positions existing 
prior to the effective time of the transfer would be addressed by the 
provisions of the proposed Wind-down Rule and Corporation Default Rule, 
as defined and described below, and that the Transferee would not

[[Page 44347]]

acquire any pending or open transactions with the transfer of the 
business. The Wind-down Plan would anticipate that the Transferee would 
accept transactions for processing with a trade date from and after the 
effective time of the transfer.
---------------------------------------------------------------------------

    \40\ The proposed transfer arrangements outlined in the Wind-
down Plan do not contemplate the transfer of any credit or funding 
agreements, which are generally not assignable by NSCC. However, to 
the extent the Transferee adopts rules substantially identical to 
those NSCC has in effect prior to the transfer, NSCC states that the 
Transferee would have the benefit of any rules-based liquidity 
funding. The Wind-down Plan contemplates that no Clearing Fund would 
be transferred to the Transferee, as it is not held in a bankruptcy 
remote manner and it is the primary prefunded liquidity resource to 
be accessed in the recovery phase.
---------------------------------------------------------------------------

    The Wind-down Plan would provide that, following the effectiveness 
of the transfer to the Transferee, the wind-down of NSCC would involve 
addressing any residual claims against NSCC through the bankruptcy 
process and liquidating the legal entity. The Wind-down Plan does not 
contemplate NSCC continuing to provide services in any capacity 
following the transfer time, and any services not transferred would be 
terminated.
    The Wind-down Plan would also identify the key dependencies for the 
effectiveness of the transfer, which include regulatory approvals that 
would permit the Transferee to be legally qualified to provide the 
transferred services from and after the transfer, and approval by the 
applicable bankruptcy court of, among other things, the proposed sale, 
assignments, and transfers to the Transferee.
    The Wind-down Plan would address governance matters related to the 
execution of the transfer of NSCC's business and its wind-down. The 
Wind-down Plan would address the duties of the Board to execute the 
wind-down of NSCC in conformity with (1) the Rules, (2) the Board's 
fiduciary duties, which mandate that it exercise reasonable business 
judgment in performing these duties, and (3) NSCC's regulatory 
obligations under the Act as a registered clearing agency. The Wind-
down Plan would also identify certain factors the Board may consider in 
making these decisions, which would include, for example, whether NSCC 
could safely stabilize the business and protect its value without 
seeking bankruptcy protection, and NSCC's ability to continue to meet 
its regulatory requirements.
    The Wind-down Plan would describe (1) actions NSCC or DTCC may take 
to prepare for wind-down in the period before NSCC experiences any 
financial distress, (2) actions NSCC would take both during the 
recovery phase and the Runway Period to prepare for the execution of 
the Wind-down Plan, and (3) actions NSCC would take upon commencement 
of bankruptcy proceedings to effectuate the Wind-down Plan.
    Finally, the Wind-down Plan would include an analysis of the 
estimated time and costs to effectuate the R&W Plan, and would provide 
that this estimate be reviewed and approved by the Board annually. In 
order to estimate the length of time it might take to achieve a 
recovery or orderly wind-down of NSCC's critical operations, as 
contemplated by the R&W Plan, the Wind-down Plan would include an 
analysis of the possible sequencing and length of time it might take to 
complete an orderly wind-down and transfer of critical operations, as 
described in earlier sections of the R&W Plan. The Wind-down Plan would 
also include in this analysis consideration of other factors, including 
the time it might take to complete any further attempts at recovery 
under the Recovery Plan. The Wind-down Plan would then multiply this 
estimated length of time by NSCC's average monthly operating expenses, 
including adjustments to account for changes to NSCC's profit and 
expense profile during these circumstances, over the previous twelve 
months to determine the amount of LNA that it should hold to achieve a 
recovery or orderly wind-down of NSCC's critical operations. The 
estimated wind-down costs would constitute the Recovery/Wind-down 
Capital Requirement under the Capital Policy.\41\ Under that policy, 
the General Business Risk Capital Requirement is calculated as the 
greatest of three estimated amounts, one of which is this Recovery/
Wind-down Capital Requirement.\42\
---------------------------------------------------------------------------

    \41\ See supra note 13.
    \42\ See supra note 13.
---------------------------------------------------------------------------

    NSCC states that the R&W Plan is designed as a roadmap, and the 
types of actions that may be taken both leading up to and in connection 
with implementation of the Wind-down Plan would be primarily addressed 
in other supporting documentation referred to therein.
    The Wind-down Plan would address proposed Rule 41 (Corporation 
Default) and proposed Rule 42 (Wind-down of the Corporation), which 
would be adopted to facilitate the implementation of the Wind-down 
Plan, as discussed below.

B. Proposed Rules

    In connection with the adoption of the R&W Plan, NSCC proposes to 
adopt the Proposed Rules, each of which is described below. NSCC states 
that the Proposed Rules are designed to facilitate the execution of the 
R&W Plan and are designed to provide Members and Limited Members with 
transparency as to critical aspects of the R&W Plan, particularly as 
they relate to the rights and responsibilities of both NSCC and 
Members. NSCC also states that the Proposed Rules are designed to 
provide a legal basis to these aspects of the R&W Plan.
1. Rule 41 (Corporation Default)
    The proposed Rule 41 (``Corporation Default Rule'') would provide a 
mechanism for the termination, valuation and netting of unsettled, 
guaranteed Continuous Net Settlement (``CNS'') system \43\ transactions 
in the event NSCC is unable to perform its obligations or otherwise 
suffers a defined event of default, such as entering insolvency 
proceedings. NSCC states that the proposed Corporation Default Rule is 
designed to provide Members with transparency and certainty regarding 
what would happen if NSCC were to fail (defined in the proposed Rule as 
a Corporation Default).
---------------------------------------------------------------------------

    \43\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting 
Operation), supra note 10.
---------------------------------------------------------------------------

    The proposed rule would define the events that would constitute a 
Corporation Default, which would generally include (1) the failure of 
NSCC to make any undisputed payment or delivery to a Member if such 
failure is not remedied within seven days after notice of such failure 
is given to NSCC; (2) NSCC is dissolved; (3) NSCC institutes a 
proceeding seeking a judgment of insolvency or bankruptcy, or a 
proceeding is instituted against it seeking a judgment of bankruptcy or 
insolvency and such judgment is entered; or (4) NSCC seeks or becomes 
subject to the appointment of a receiver, trustee or similar official 
pursuant to the federal securities laws or Title II of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act \44\ for it or for all 
or substantially all of its assets.
---------------------------------------------------------------------------

    \44\ 12 U.S.C. 5381 et seq.
---------------------------------------------------------------------------

    Upon a Corporation Default, the proposed Corporation Default Rule 
would provide that all unsettled, guaranteed CNS transactions would be 
terminated and, no later than 45 days from the date on which the event 
that constitutes a Corporation Default occurred (``Default Date''), the 
Board would determine a single net amount owed by or to each Member 
with respect to such transactions pursuant to the valuation procedures 
set forth in the Proposed Rule. NSCC states that essentially, for each 
affected position in a CNS Security, the CNS Market Value would be 
determined by using the Current Market Price for that security as 
determined in the CNS System as of the close of business on the next 
Business Day following the Default Date.
    NSCC would determine a Net Contract Value for each Member's net 
unsettled long or short position in a CNS Security by netting the 
Member's

[[Page 44348]]

(i) contract price for such net position that, as of the Default Date, 
has not yet passed the Settlement Date, and (ii) the Current Market 
Price in the CNS System on the Default Date for its fail positions. To 
determine each Member's CNS Close-out Value, (i) the Net Contract Value 
for each CUSIP would be subtracted from the CNS Market Value for such 
CUSIP, and (ii) the resulting difference for all CUSIPs in which the 
Member had a net long or short position would be summed, and would be 
netted and offset against any other amounts that may be due to or owing 
from the Member under the Rules. The proposed Corporation Default Rule 
would provide for notification to each Member of its CNS Close-out 
Value, and would also address interpretation of the Rules in relation 
to certain terms that are defined in the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (``FDICIA'').\45\
---------------------------------------------------------------------------

    \45\ 12 U.S.C. 1811 et seq.
---------------------------------------------------------------------------

    NSCC states that this valuation approach, which is comparable to 
the approach adopted by other central counterparties, is appropriate 
for NSCC given the market in which NSCC operates and the volumes of 
transactions it processes in CNS because it would provide for a common, 
clear and transparent valuation methodology and price per CUSIP 
applicable to all affected Members.
2. Rule 42 (Wind-Down of the Corporation)
    NSCC states that the proposed Rule 42 (``Wind-down Rule'') is 
designed to facilitate the execution of the Wind-down Plan. The Wind-
down Rule would include a proposed set of defined terms that would be 
applicable only to the provisions of this Proposed Rule. NSCC states 
that the Wind-down Rule is designed to make clear that a wind-down of 
NSCC's business would occur (1) after a decision is made by the Board, 
and (2) in connection with the transfer of NSCC's services to a 
Transferee, as described therein. NSCC states that, generally, the 
proposed Wind-down Rule is designed to create clear mechanisms for the 
transfer of Eligible Members, Eligible Limited Members, and Settling 
Banks (as these terms would be defined in the Wind-down Rule), and 
NSCC's business, in order to provide for continued access to critical 
services and to minimize disruption to the markets in the event the 
Wind-down Plan is initiated.
(i) Wind-Down Trigger
    First, NSCC states that the Proposed Rule is designed to make clear 
that the Board is responsible for initiating the Wind-down Plan, and 
would identify the criteria the Board would consider when making this 
determination. As provided for in the Wind-down Plan and in the 
proposed Wind-down Rule, the Board would initiate the Wind-down Plan 
if, in the exercise of its business judgment and subject to its 
fiduciary duties, it has determined that the execution of the Recovery 
Plan has not or is not likely to restore NSCC to viability as a going 
concern, and the implementation of the Wind-down Plan, including the 
transfer of NSCC's business, is in the best interests of NSCC, Members 
and Limited Members, its shareholders and creditors, and the U.S. 
financial markets.
(ii) Identification of Critical Services; Designation of Dates and 
Times for Specific Actions
    The Proposed Rule would provide that, upon making a determination 
to initiate the Wind-down Plan, the Board would identify the critical 
and non-critical services that would be transferred to the Transferee 
at the Transfer Time (as defined below and in the Proposed Rule), as 
well as any non-critical services that would not be transferred to the 
Transferee. The proposed Wind-down Rule would establish that any 
services transferred to the Transferee will only be provided by the 
Transferee as of the Transfer Time, and that any non-critical services 
that are not transferred to the Transferee would be terminated at the 
Transfer Time. The Proposed Rule would also provide that the Board 
would establish (1) an effective time for the transfer of NSCC's 
business to a Transferee (``Transfer Time''), (2) the last day that 
transactions may be submitted to NSCC for processing (``Last 
Transaction Acceptance Date''), and (3) the last day that transactions 
submitted to NSCC will be settled (``Last Settlement Date'').
(iii) Treatment of Pending Transactions
    The Wind-down Rule would authorize the Board to provide for the 
settlement of pending transactions prior to the Transfer Time, so long 
as the Corporation Default Rule has not been triggered. The Board would 
also have the ability to allow Members to only submit trades that would 
effectively offset pending positions or provide that transactions will 
be processed in accordance with special or exception processing 
procedures. NSCC states that the Proposed Rule is designed to enable 
these actions in order to facilitate settlement of pending transactions 
and reduce claims against NSCC that would have to be satisfied after 
the transfer has been effected. If none of these actions are deemed 
practicable (or if the Corporation Default Rule has been triggered), 
then the provisions of the proposed Corporation Default Rule would 
apply to the treatment of open, pending transactions.
    NSCC states that the Proposed Rule is designed to make clear, 
however, that NSCC would not accept any transactions for processing 
after the Last Transaction Acceptance Date or which are designated to 
settle after the Last Settlement Date. Any transactions to be processed 
and/or settled after the Transfer Time would be required to be 
submitted to the Transferee, and would not be NSCC's responsibility.
(iv) Notice Provisions
    The proposed Wind-down Rule would provide that, upon a decision to 
implement the Wind-down Plan, NSCC would provide Members and Limited 
Members and its regulators with a notice that includes material 
information relating to the Wind-down Plan and the anticipated transfer 
of NSCC's membership and business, including, for example, (1) a brief 
statement of the reasons for the decision to implement the Wind-down 
Plan; (2) identification of the Transferee and information regarding 
the transaction by which the transfer of NSCC's business would be 
effected; (3) the Transfer Time, Last Transaction Acceptance Date, and 
Last Settlement Date; and (4) identification of Eligible Members and 
Eligible Limited Members, and the critical and non-critical services 
that would be transferred to the Transferee at the Transfer Time, as 
well as those Non-Eligible Members and Non-Eligible Limited Members (as 
defined in the Proposed Rule), and any non-critical services that would 
not be included in the transfer. NSCC would also make available the 
rules and procedures and membership agreements of the Transferee.
(v) Transfer of Membership
    The proposed Wind-down Rule would address the expected transfer of 
NSCC's membership to the Transferee, which NSCC would seek to 
effectuate by entering into an arrangement with a Failover Transferee, 
or by using commercially reasonable efforts to enter into such an 
arrangement with a Third Party Transferee. Therefore, the Wind-down 
Rule would provide Members, Limited Members and Settling Banks with 
notice that, in connection with the implementation of the Wind-down 
Plan and with no further action required by any party, (1) their 
membership with NSCC would transfer to the Transferee,

[[Page 44349]]

(2) they would become party to a membership agreement with such 
Transferee, and (3) they would have all of the rights and be subject to 
all of the obligations applicable to their membership status under the 
rules of the Transferee. These provisions would not apply to any Member 
or Limited Member that is either in default of an obligation to NSCC or 
has provided notice of its election to withdraw from membership. 
Further, NSCC states that the proposed Wind-down Rule is designed to 
make clear that it would not prohibit (1) Members and Limited Members 
that are not transferred by operation of the Wind-down Rule from 
applying for membership with the Transferee, or (2) Members, Limited 
Members, and Settling Banks that would be transferred to the Transferee 
from withdrawing from membership with the Transferee.\46\
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    \46\ The Members and Limited Members whose membership is 
transferred to the Transferee pursuant to the proposed Wind-down 
Rule would submit transactions to be processed and settled subject 
to the rules and procedures of the Transferee, including any 
applicable margin charges or other financial obligations.
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(vi) Comparability Period
    NSCC states that the proposed automatic mechanism for the transfer 
of NSCC's membership is intended to provide NSCC's membership with 
continuous access to critical services in the event of NSCC's wind-
down, and to facilitate the continued prompt and accurate clearance and 
settlement of securities transactions. The proposed Wind-down Rule 
would provide that NSCC would enter into arrangements with a Failover 
Transferee, or would use commercially reasonable efforts to enter into 
arrangements with a Third Party Transferee, providing that, in either 
case, with respect to the critical services and any non-critical 
services that are transferred from NSCC to the Transferee, for at least 
a period of time to be agreed upon (``Comparability Period''), the 
business transferred from NSCC to the Transferee would be operated in a 
manner that is comparable to the manner in which the business was 
previously operated by NSCC. Specifically, the proposed Wind-down Rule 
would provide that (1) the rules of the Transferee and terms of 
membership agreements would be comparable in substance and effect to 
the analogous Rules and membership agreements of NSCC; (2) the rights 
and obligations of any Members, Limited Members and Settling Banks that 
are transferred to the Transferee would be comparable in substance and 
effect to their rights and obligations as to NSCC; and (3) the 
Transferee would operate the transferred business and provide any 
services that are transferred in a comparable manner to which such 
services were provided by NSCC. NSCC states that the purpose of these 
provisions and the intended effect of the proposed Wind-down Rule is to 
facilitate a smooth transition of NSCC's business to a Transferee and 
to provide that, for at least the Comparability Period, the Transferee 
(1) would operate the transferred business in a manner that is 
comparable in substance and effect to the manner in which the business 
was operated by NSCC, and (2) would not require sudden and disruptive 
changes in the systems, operations and business practices of the new 
members of the Transferee.
(vii) Subordination of Claims Provisions and Miscellaneous Matters
    The proposed Wind-down Rule would include a provision addressing 
the subordination of unsecured claims against NSCC of Members and 
Limited Members who fail to participate in NSCC's recovery efforts 
(i.e., firms delinquent in their obligations to NSCC or elect to retire 
from NSCC in order to minimize their obligations with respect to the 
allocation of losses, pursuant to the Rules). NSCC states that this 
provision is designed to incentivize Members to participate in NSCC's 
recovery efforts.\47\
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    \47\ Nothing in the proposed Wind-down Rule would seek to 
prevent a Member, Limited Member or Settling Bank that retired its 
membership at NSCC from applying for membership with the Transferee. 
Once its NSCC membership is terminated, however, such firm would not 
be able to benefit from the membership assignment that would be 
effected by this proposed Wind-down Rule, and it would have to apply 
for membership directly with the Transferee, subject to its 
membership application and review process.
---------------------------------------------------------------------------

    The proposed Wind-down Rule would address other ex-ante matters 
including provisions providing that Members, Limited Members and 
Settling Banks (1) will assist and cooperate with NSCC to effectuate 
the transfer of NSCC's business to a Transferee, (2) consent to the 
provisions of the rule, and (3) grant NSCC power of attorney to execute 
and deliver on their behalf documents and instruments that may be 
requested by the Transferee. Finally, the Proposed Rule would include a 
limitation of liability for any actions taken or omitted to be taken by 
NSCC pursuant to the Proposed Rule.
    NSCC states that the purpose of the limitation of liability is to 
facilitate and protect NSCC's ability to act expeditiously in response 
to extraordinary events. Such limitation of liability would be 
available only following triggering of the Wind-down Plan. In addition, 
and as a separate matter, NSCC states that the limitation of liability 
provides Members with transparency for the unlikely situation when 
those extraordinary events could occur, as well as supporting the legal 
framework within which NSCC would take such actions. NSCC states that 
these provisions, collectively, are designed to enable NSCC to take 
such acts as the Board determines necessary to effectuate an orderly 
transfer and wind-down of its business should recovery efforts prove 
unsuccessful.
3. Rule 60 (Market Disruption and Force Majeure)
    The proposed Rule 60 (``Force Majeure Rule'') would address NSCC's 
authority to take certain actions upon the occurrence, and during the 
pendency, of a Market Disruption Event, as defined therein. NSCC states 
that the Proposed Rule is designed to clarify NSCC's ability to take 
actions to address extraordinary events outside of the control of NSCC 
and of its membership, and to mitigate the effect of such events by 
facilitating the continuity of services (or, if deemed necessary, the 
temporary suspension of services). To that end, under the proposed 
Force Majeure Rule, NSCC would be entitled, during the pendency of a 
Market Disruption Event, to (1) suspend the provision of any or all 
services, and (2) take, or refrain from taking, or require Members and 
Limited Members to take, or refrain from taking, any actions it 
considers appropriate to address, alleviate, or mitigate the event and 
facilitate the continuation of NSCC's services as may be practicable.
    The proposed Force Majeure Rule would identify the events or 
circumstances that would be considered a Market Disruption Event. The 
proposed Force Majeure Rule would define the governance procedures for 
how NSCC would determine whether, and how, to implement the provisions 
of the rule.
    A determination that a Market Disruption Event has occurred would 
generally be made by the Board, but the Proposed Rule would provide for 
limited, interim delegation of authority to a specified officer or 
management committee if the Board would not be able to take timely 
action. In the event such delegated authority is exercised, the 
proposed Force Majeure Rule would require that the Board be convened as 
promptly as practicable, no later than five Business Days after such 
determination has been made, to ratify, modify, or rescind the action. 
The proposed Force Majeure Rule would also provide for prompt 
notification to

[[Page 44350]]

the Commission, and advance consultation with Commission staff, when 
practicable, including notification when an event is no longer 
continuing and the relevant actions are terminated. The Proposed Rule 
would require Members and Limited Members to notify NSCC immediately 
upon becoming aware of a Market Disruption Event, and, likewise, would 
require NSCC to notify Members and Limited Members if it has triggered 
the Proposed Rule and of actions taken or intended to be taken 
thereunder.
    Finally, the Proposed Rule would address other related matters, 
including a limitation of liability for any failure or delay in 
performance, in whole or in part, arising out of the Market Disruption 
Event. NSCC states that the purpose of the limitation of liability 
would be similar to the purpose of the analogous provision in the 
proposed Wind-down Rule, which is to facilitate and protect NSCC's 
ability to act expeditiously in response to extraordinary events.
4. Proposed Change to the Rule Numbers
    In order to align the order of the Proposed Rules with the order of 
comparable rules in the rulebooks of the other Clearing Agencies, NSCC 
proposes to re-number the current Rule 42 (Wind-down of a Member, Fund 
Member or Insurance Carrier/Retirement Services Member) to Rule 40, 
which is currently reserved for future use.

II. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, its stated purpose is instructive: To 
mitigate systemic risk in the financial system and promote financial 
stability by, among other things, promoting uniform risk management 
standards for systemically important financial market utilities and 
strengthening the liquidity of systemically important financial market 
utilities.\48\
---------------------------------------------------------------------------

    \48\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

    Section 805(a)(2) of the Clearing Supervision Act \49\ authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing and settlement activities of designated clearing entities 
engaged in designated activities for which the Commission is the 
supervisory agency. Section 805(b) of the Clearing Supervision Act \50\ 
provides the following objectives and principles for the Commission's 
risk management standards prescribed under Section 805(a):
---------------------------------------------------------------------------

    \49\ 12 U.S.C. 5464(a)(2).
    \50\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     To promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to support the stability of the broader financial system.
    The Commission has adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act \51\ and Section 17A of the 
Act \52\ (``Rule 17Ad-22'').\53\ Rule 17Ad-22 requires registered 
clearing agencies to establish, implement, maintain, and enforce 
written policies and procedures that are reasonably designed to meet 
certain minimum requirements for their operations and risk management 
practices on an ongoing basis.\54\ Therefore, it is appropriate for the 
Commission to review proposed changes in advance notices against the 
objectives and principles of these risk management standards as 
described in Section 805(b) of the Clearing Supervision Act \55\ and 
against Rule 17Ad-22.\56\
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    \51\ 12 U.S.C. 5464(a)(2).
    \52\ 15 U.S.C. 78q-1.
    \53\ See 17 CFR 240.17Ad-22.
    \54\ Id.
    \55\ 12 U.S.C. 5464(b).
    \56\ See 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------

A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the proposed changes in the Advance 
Notice are designed to help NSCC promote robust risk management, 
promote safety and soundness, reduce systemic risks, and support the 
stability of the broader financial system. As described above, the R&W 
Plan, generally, would help NSCC promote robust risk management and 
reduce systemic risks by providing NSCC with a roadmap for actions it 
may employ to monitor and manage its risks, and, as needed, to 
stabilize its financial condition in the event those risks materialize. 
Specifically, the Recovery Plan would provide a roadmap that would 
identify a number of triggers for the potential application of a number 
of available recovery tools. Identifying triggers for the potential 
application of recovery tools would help promote robust risk management 
and reduce systemic risks by better enabling NSCC to more promptly 
determine when and how it may need to manage a significant stress 
event, and, as needed, stabilize its financial condition.
    Similarly, the Force Majeure Rule is designed to provide a roadmap 
to address extraordinary events that may occur outside of NSCC's 
control. Specifically, the Force Majeure Rule would define a Market 
Disruption Event and provide governance around determining when such an 
event has occurred. The Force Majeure Rule also would describe NSCC's 
authority to take actions during the pendency of a Market Disruption 
Event that it deems appropriate to address such an event and facilitate 
the continuation of NSCC's services, if practicable. By defining a 
Market Disruption Event and providing such governance and authority, 
the Commission believes that the Force Majeure Rule also would help 
promote robust risk management and reduce systemic risks by improving 
NSCC's ability to identify and manage a force majeure event, and, as 
needed, to stabilize its financial condition so that NSCC can continue 
to operate and act as a source of stability for the financial markets 
it serves.
    The Commission believes that the Recovery Plan and the Force 
Majeure Rule reflect an approach designed to allow for a more 
considered and comprehensive evaluation by NSCC of a stressed market 
situation and the ways in which NSCC could apply available recovery 
tools in a manner intended to minimize the potential negative effects 
of the stress situation for NSCC, its Members, and the broader 
financial system. Therefore, the Commission believes that the Recovery 
Plan and the Force Majeure Rule would help promote robust risk 
management at NSCC and, thus, reduce systemic risks by establishing a 
means for NSCC to best determine the most appropriate way to address 
such stress situations in an effective manner.
    The Commission believes that the R&W Plan, generally, would help 
NSCC promote safety and soundness and support the stability of the 
broader financial system by providing a roadmap to wind-down that is 
designed to ensure the availability of NSCC's critical services to the 
marketplace, while reducing disruption to the operations of Members and 
financial markets that might be caused by NSCC's failure. Specifically, 
as described above, the Wind-down Plan, as facilitated by the Wind-down 
Rule and the Corporation Default Rule, would provide for the wind-down 
of NSCC's business and transfer of membership and critical services if 
the recovery tools do not successfully return NSCC to financial 
viability. Accordingly, critical services, such as services that lack 
alternative providers or products, services that the failure of which 
could impact the availability of market

[[Page 44351]]

liquidity, and services that are interconnected with other participants 
and processes within the U.S. financial system would be able to 
continue in an orderly manner while NSCC is seeking to wind-down its 
services. By designing the Wind-down Plan and these Proposed Rules to 
enable the continuity of NSCC's critical services and membership in an 
orderly manner while NSCC is seeking to wind-down its services, the 
Commission believes these proposed changes would help NSCC promote 
safety and soundness and support stability in the broader financial 
system in the event the Wind-down Plan is implemented.
    As described above, NSCC proposes to re-number current Rule 42 
(Wind-down of a Member, Fund Member or Insurance Carrier/Retirement 
Services Member) to Rule 40, which is currently reserved for future 
use, to align the order of the Proposed Rules with the order of 
comparable rules in the rulebooks of the other Clearing Agencies. This 
proposed change would help create ease of reference to and heightened 
transparency of such rules, particularly for Members and for other 
clearing agencies and other market infrastructure that have links to, 
or reliance upon, the critical services offered by NSCC. Enhanced 
access to and transparency of these rules would therefore assist such 
parties in understanding, planning for, and reacting in an orderly 
manner to, the implementation by NSCC of the R&W Plan. Therefore, the 
Commission believes that NSCC's proposed change to the numbering of its 
Rules would help support the stability of the broader financial system.
    By better enabling NSCC to promote robust risk management, promote 
safety and soundness, reduce systemic risks, and support the stability 
of the broader financial system, as described above, the Commission 
believes that the proposed changes in the Advance Notice are consistent 
with Section 805(b) of the Clearing Supervision Act.\57\
---------------------------------------------------------------------------

    \57\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

B. Consistency With Rules 17Ad-22(e)(2)(i), (iii), and (v) Under the 
Act

    Rule 17Ad-22(e)(2)(i) under the Act requires a covered clearing 
agency \58\ to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to provide for governance 
arrangements that are clear and transparent.\59\ Rule 17Ad-
22(e)(2)(iii) under the Act requires a covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to provide for governance arrangements 
that support the public interest requirements in Section 17A of the Act 
\60\ applicable to clearing agencies, and the objectives of owners and 
participants.\61\ Rule 17Ad-22(e)(2)(v) under the Act requires a 
covered clearing agency to establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to provide for 
governance arrangements that specify clear and direct lines of 
responsibility.\62\
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    \58\ A ``covered clearing agency'' means, among other things, a 
clearing agency registered with the Commission under Section 17A of 
the Exchange Act (15 U.S.C. 78q-1 et seq.) that is designated 
systemically important by the Financial Stability Oversight Counsel 
(``FSOC'') pursuant to the Clearing Supervision Act (12 U.S.C. 5461 
et seq.). See 17 CFR 240.17Ad-22(a)(5)-(6). On July 18, 2012, FSOC 
designated NSCC as systemically important. U.S. Department of the 
Treasury, ``FSOC Makes First Designations in Effort to Protect 
Against Future Financial Crises,'' available at https://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx. 
Therefore, NSCC is a covered clearing agency.
    \59\ 17 CFR 240.17Ad-22(e)(2)(i).
    \60\ 15 U.S.C. 78q-1.
    \61\ 17 CFR 240.17Ad-22(e)(2)(iii).
    \62\ 17 CFR 240.17Ad-22(e)(2)(v).
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    As described above, the R&W Plan is designed to identify clear 
lines of responsibility concerning the R&W Plan including (1) the 
ongoing development of the R&W Plan; (2) ongoing maintenance of the R&W 
Plan; (3) reviews and approval of the R&W Plan; and (4) the functioning 
and implementation of the R&W Plan. As described above, the R&R Team, 
which reports to the Management Committee, is responsible for 
maintaining the R&W Plan and for the development and ongoing 
maintenance of the overall recovery and wind-down planning process. 
Meanwhile, the Board, or such committees as may be delegated authority 
by the Board from time to time pursuant to its charter, would review 
and approve the R&W Plan biennially, and also would review and approve 
any changes that are proposed to the R&W Plan outside of the biennial 
review. Moreover, the R&W Plan would state the stages of escalation 
required to manage recovery under the Recovery Plan or to invoke NSCC's 
wind-down under the Wind-down Plan, which would range from relevant 
business line managers up to the Board. The R&W Plan would identify the 
parties responsible for certain activities under both the Recovery Plan 
and the Wind-down Plan, and would describe their respective roles. The 
R&W Plan also would specify the process NSCC would take to receive 
input from various parties at NSCC, including management committees and 
the Board.
    In considering the above, the Commission believes that the R&W Plan 
would help contribute to establishing, implementing, maintaining, and 
enforcing written policies and procedures reasonably designed to 
provide for governance arrangements that are clear and transparent 
because it would specify lines of control. The Commission also believes 
that the R&W Plan would help contribute to establishing, implementing, 
maintaining, and enforcing written policies and procedures reasonably 
designed to provide for governance arrangements that support the public 
interest requirements in Section 17A of the Act \63\ applicable to 
clearing agencies, and the objectives of owners and participants 
because the R&W Plan specifies the process NSCC would take to receive 
input from various NSCC stakeholders. In addition, the Commission 
believes that the R&W Plan would help contribute to establishing, 
implementing, maintaining, and enforcing written policies and 
procedures reasonably designed to provide for governance arrangements 
that specify clear and direct lines of responsibility because it 
specifies who is responsible for the ongoing development, maintenance, 
reviews, approval, functioning, and implementation of the R&W Plan.
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    Therefore, the Commission believes that the R&W Plan is consistent 
with Rules 17Ad-22(e)(2)(i), (iii), and (v) under the Act.\64\
---------------------------------------------------------------------------

    \64\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(3)(ii) Under the Act

    Rule 17Ad-22(e)(3)(ii) under the Act requires a covered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to maintain a sound risk management 
framework for comprehensively managing legal, credit, liquidity, 
operational, general business, investment, custody, and other risks 
that arise in or are borne by the covered clearing agency, which 
includes plans for the recovery and orderly wind-down of the covered 
clearing agency necessitated by credit losses, liquidity shortfalls, 
losses from general business risk, or any other losses.\65\
---------------------------------------------------------------------------

    \65\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

    As described above, the R&W Plan's Recovery Plan provides a plan 
for NSCC's recovery necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses by 
defining the risk management activities, stress conditions and

[[Page 44352]]

indicators, and tools that NSCC may use to address stress scenarios 
that could eventually prevent NSCC from being able to provide its 
critical services as a going concern. More specifically, through the 
framework of the Crisis Continuum, which identifies tools that can be 
employed to mitigate losses and mitigate or minimize liquidity needs as 
the market environment becomes increasingly stressed, the Recovery Plan 
would identify measures that NSCC may take to manage risks of credit 
losses and liquidity shortfalls, and other losses that could arise from 
a Member default. The Recovery Plan also would address NSCC's 
management of general business risks and other non-default risks that 
could lead to losses by identifying potential non-default losses and 
the resources available to NSCC to address such losses, including 
recovery triggers and tools to mitigate such losses. Therefore, the 
Commission believes that the R&W Plan's Recovery Plan helps NSCC 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to maintain a sound risk management 
framework for comprehensively managing legal, credit, liquidity, 
operational, general business, investment, custody, and other risks 
that arise in or are borne by NSCC, which includes a recovery plan 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses.
    As described above, the R&W Plan's Wind-down Plan provides a plan 
for orderly wind-down of NSCC, which would be triggered by a 
determination by the Board that recovery efforts have not been, or are 
unlikely to be, successful in returning NSCC to viability as a going 
concern. Once triggered, the Wind-down Plan sets forth mechanisms for 
the transfer of NSCC's membership and business, and it is designed to 
maintain continued access to NSCC's critical services and to minimize 
market impact of the transfer while NSCC is seeking to ultimately wind-
down its services. Specifically, the Wind-down Plan would provide for 
the transfer of NSCC's business, assets, and membership to another 
legal entity with such transfer being effected in connection with 
proceedings under Chapter 11 of the U.S. Bankruptcy Code.\66\ After 
effectuating this transfer, NSCC would liquidate any remaining assets 
in an orderly manner in bankruptcy proceedings.
---------------------------------------------------------------------------

    \66\ 11 U.S.C. 101 et seq.
---------------------------------------------------------------------------

    Although the Commission is not opining on the Wind-down Plan's 
consistency with the U.S. Bankruptcy Code, in reviewing the proposed 
changes, the Commission believes that NSCC's intent to use bankruptcy 
proceedings to achieve an orderly liquidation of assets after any 
transfer of NSCC's business appears reasonable, in light of the 
provisions of the Bankruptcy Code that address the liquidation and 
distribution of a debtor's property among creditors and interest 
holders.\67\ Under many circumstances, Section 363 of the Bankruptcy 
Code provides for the sale of property ``free and clear of any interest 
in such property of an entity other than the estate[.]'' \68\ The 
Commission believes that NSCC's analysis regarding the applicability of 
these provisions, while not free from doubt, presents a reasonable 
approach to liquidation in light of the circumstances and the available 
alternatives.\69\ Therefore, the Commission believes that the R&W 
Plan's Wind-down Plan helps NSCC establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to maintain 
a sound risk management framework for comprehensively managing legal, 
credit, liquidity, operational, general business, investment, custody, 
and other risks that arise in or are borne by NSCC, which includes a 
wind-down plan necessitated by credit losses, liquidity shortfalls, 
losses from general business risk, or any other losses.
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    \67\ See, e.g., 11 U.S.C. 363, 726, and 1129(a)(7).
    \68\ See 11 U.S.C. 363(f).
    \69\ The Wind-down Plan would identify certain factors the Board 
may consider in evaluating alternatives, which would include, for 
example, whether NSCC could safely stabilize the business and 
protect its value without seeking bankruptcy protection, and NSCC's 
ability to continue to meet its regulatory requirements.
---------------------------------------------------------------------------

    Therefore, the Commission believes that the R&W Plan is consistent 
with Rule 17Ad-22(e)(3)(ii) under the Act.\70\
---------------------------------------------------------------------------

    \70\ 17 CFR 240.17Ad-22(e)(3)(ii).
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D. Consistency With Rules 17Ad-22(e)(15)(i)-(ii) Under the Act

    Rule 17Ad-22(e)(15)(i) under the Act requires a covered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to identify, monitor, and manage its 
general business risk and hold sufficient liquid net assets funded by 
equity to cover potential general business losses so that the covered 
clearing agency can continue operations and services as a going concern 
if those losses materialize, including by determining the amount of 
liquid net assets funded by equity based upon its general business risk 
profile and the length of time required to achieve a recovery or 
orderly wind-down, as appropriate, of its critical operations and 
services if such action is taken.\71\ Rule 17Ad-22(e)(15)(ii) under the 
Act requires a covered clearing agency to establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to identify, monitor, and manage its general business risk and 
hold sufficient liquid net assets funded by equity to cover potential 
general business losses so that the covered clearing agency can 
continue operations and services as a going concern if those losses 
materialize, including by holding liquid net assets funded by equity 
equal to the greater of either (x) six months of the covered clearing 
agency's current operating expenses, or (y) the amount determined by 
the board of directors to be sufficient to ensure a recovery or orderly 
wind-down of critical operations and services of the covered clearing 
agency, as contemplated by the plans established under Rule 17Ad-
22(e)(3)(ii) under the Act,\72\ discussed above.\73\
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    \71\ 17 CFR 240.17Ad-22(e)(15)(i).
    \72\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \73\ 17 CFR 240.17Ad-22(e)(15)(ii).
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    As discussed above, NSCC's Capital Policy is designed to address 
how NSCC holds LNA in compliance with these requirements,\74\ while the 
Wind-down Plan would include an analysis to estimate the amount of time 
and cost to achieve a recovery or orderly wind-down of NSCC's critical 
operations and services, and would provide that the Board review and 
approve this analysis and estimation annually. The Wind-down Plan also 
would provide that the estimate would be the Recovery/Wind-down Capital 
Requirement under the Capital Policy. Under that policy, the General 
Business Risk Capital Requirement, which is the amount of LNA that NSCC 
plans to hold to cover potential general business losses so that it can 
continue operations and services as a going concern if those losses 
materialize, is calculated as the greatest of three estimated amounts, 
one of which is this Recovery/Wind-down Capital Requirement. Therefore, 
the Commission believes that the R&W Plan is consistent with Rules 
17Ad-22(e)(15)(i) and (ii) under the Act.\75\
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    \74\ Supra note 13.
    \75\ 17 CFR 240.17Ad-22(e)(15)(i) and (ii).
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\76\ that the Commission does not object to 
advance notice SR-

[[Page 44353]]

NSCC-2017-805, as modified by Amendment No. 1, and that NSCC is 
authorized to implement the proposal as of the date of this notice or 
the date of an order by the Commission approving proposed rule change 
SR-NSCC-2017-017, as modified by Amendment No. 1, whichever is later.
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    \76\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18869 Filed 8-29-18; 8:45 am]
 BILLING CODE 8011-01-P


