
[Federal Register Volume 88, Number 167 (Wednesday, August 30, 2023)]
[Notices]
[Pages 59968-59976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-18670]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98213; File No. SR-NSCC-2023-007]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Modify the 
Amended and Restated Stock Options and Futures Settlement Agreement and 
Make Certain Revisions to the NSCC Rules

August 24, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 10, 2023, National Securities Clearing Corporation (``NSCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the clearing agency. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to (1) modify the 
Amended and Restated Stock Options and Futures Settlement Agreement 
dated August 5, 2017 between NSCC and The Options Clearing Corporation 
(``OCC,'' and together with NSCC, the ``Clearing Agencies'') 
(``Existing Accord'') \3\ and (2) make certain revisions to Rule 18, 
Procedure III and Addendum K of the NSCC Rules & Procedures (``NSCC 
Rules'') \4\ in connection with the proposed modifications to the 
Existing Accord, as described in greater detail below.\5\
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    \3\ The Existing Accord was previously approved by the 
Commission. See Securities Exchange Act Release Nos. 81266, 81260 
(Jul. 31, 2017) (File Nos. SR-NSCC-2017-007; SR-OCC-2017-013), 82 FR 
36484 (Aug. 4, 2017).
    \4\ Capitalized terms not defined herein are defined in the NSCC 
Rules available at www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf.
    \5\ OCC also has filed a proposed rule change and an advance 
notice with the Commission in connection with this proposal. See 
File Nos. SR-OCC-2023-007 and SR-OCC-2023-801 (the ``OCC Filing'').
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
Executive Summary
    NSCC is a clearing agency that provides clearing, settlement, risk 
management, and central counterparty services for trades involving 
equity securities. OCC is the sole clearing agency for standardized 
equity options listed on national securities exchanges registered with 
the Commission, including options that contemplate the physical 
delivery of equities cleared by NSCC in exchange for cash (``physically 
settled'' options).\6\ OCC also clears certain futures contracts that, 
at maturity, require the delivery of equity securities cleared by NSCC 
in exchange for cash. As a result, the exercise/assignment of certain 
options or maturation of certain futures cleared by OCC effectively 
results in stock settlement obligations. NSCC and OCC maintain a legal 
agreement, generally referred to by the parties as the ``Accord'' 
agreement, that governs the processing of such physically settled 
options and futures cleared by OCC that

[[Page 59969]]

result in transactions in underlying equity securities to be cleared by 
NSCC (``Existing Accord'').
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    \6\ The term ``physically-settled'' as used throughout the OCC 
Rulebook refers to cleared contracts that settle into their 
underlying interest (i.e., options or futures contracts that are not 
cash-settled). When a contract settles into its underlying interest, 
shares of stock are sent, i.e., delivered, to contract holders who 
have the right to receive the shares from contract holders who are 
obligated to deliver the shares at the time of exercise/assignment 
in the case of an option, and maturity in the case of a future.
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    The Existing Accord establishes terms under which NSCC accepts for 
clearing certain securities transactions that result from the exercise 
and assignment of relevant options contracts and the maturity of 
futures contracts that are cleared and settled by OCC.\7\ It also 
establishes the time when OCC's settlement guaranty in respect of those 
transactions ends and NSCC's settlement guaranty begins.
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    \7\ Under the Existing Accord, such options and futures are 
defined as ``E&A/Delivery Transactions,'' which refers to ``Exercise 
& Assignment Delivery Transactions.''
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    The Existing Accord allows for a scenario in which NSCC could 
choose not to guarantee the settlement of such securities arising out 
of transactions. Specifically, NSCC is not obligated to guarantee 
settlement until its member has met its collateral requirements at 
NSCC. If NSCC chooses not to guarantee settlement, OCC would engage in 
an alternate method of settlement outside of NSCC. This scenario 
presents two primary problems. First, the cash required for OCC and its 
Clearing Members in certain market conditions to facilitate settlement 
outside of NSCC could be significantly more than the amount required if 
NSCC were to guarantee the relevant transactions. This is because 
settlement of the transactions in the underlying equity securities 
outside of NSCC would mean that they would no longer receive the 
benefit of netting through the facilities of NSCC. In such a scenario, 
the additional collateral required from Clearing Members to support 
OCC's continuing settlement guarantee would also have to be 
sufficiently liquid to properly manage the risks associated with those 
transactions being due on the second business day following the option 
exercise, or the relevant futures contract maturity date.
    Based on an analysis of scenarios using historical data where it 
was assumed that OCC could not settle transactions through the 
facilities of NSCC, the worst-case outcome resulted in extreme 
liquidity demands--of over $300 billion--for OCC to effect settlement 
via an alternative method, e.g., by way of gross broker-to-broker 
settlement, as discussed in more detail below. OCC Clearing Members, by 
way of their contributions to the OCC Clearing Fund, would bear the 
brunt of this demand. Furthermore, there is no guarantee that OCC 
Clearing Members could fund the entire amount of any similar real-life 
scenarios. By contrast, projected GSPs identified during the study 
ranged from approximately $419 million to over $6 billion, also as 
discussed in more detail below.
    The second primary problem relates to the significant operational 
complexities if settlement occurs outside of NSCC. More specifically, 
netting through NSCC reduces the volume and value of settlement 
obligations. For example, in 2022 it is estimated that netting through 
NSCC's continuous net settlement (``CNS'') accounting system \8\ 
reduced the value of CNS settlement obligations by approximately 98% or 
$510 trillion from $519 trillion to $9 trillion. If settlement occurred 
outside of NSCC, on a broker-to-broker basis between OCC Clearing 
Members, for example, shares would not be netted, and Clearing Members 
would have to coordinate directly with each other to settle the 
relevant transactions. The operational complexities and uncertainty 
associated with alternate means of settlement would impact every market 
participant involved in a settlement of OCC-related transactions.
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    \8\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting 
Operation) of the NSCC Rules, supra note 4.
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    To address these problems, the Clearing Agencies are proposing to 
amend and restate the Existing Accord and make related changes to their 
respective rules that would allow OCC to elect to make a cash payment 
to NSCC following the default of a Common Member \9\ that would cause 
NSCC to guarantee settlement of that Common Member's transactions and, 
therefore, cause those transactions to be settled through processing by 
NSCC. As part of this proposal, OCC also would enhance its daily 
liquidity stress testing processes and procedures to account for the 
possibility of OCC making such a payment to NSCC in the event of a 
Common Member default. By making these enhancements to its stress 
testing, OCC could include the liquid resources necessary to make the 
payment in its resource planning. The Clearing Agencies believe that by 
NSCC accepting such a payment from OCC the operational efficiencies and 
reduced costs related to the settlement of transactions through NSCC 
would limit market disruption following a Common Member default because 
settlement through NSCC following such a default would be less 
operationally complex and would be expected to require less liquidity 
and other collateral from market participants than the processes 
available to OCC for closing out positions. Additionally, proposed 
enhancements by OCC to its liquidity stress testing would add 
assurances that OCC could make such a payment in the event of a Common 
Member default. The Clearing Agencies believe that their respective 
clearing members and all other participants in the markets for which 
OCC provides clearance and settlement would benefit from OCC's ability 
to choose to make a cash payment to effect settlement through the 
facilities of NSCC. This change would provide more certainty around 
certain default scenarios and would blunt the financial and operational 
burdens market participants could experience in the case of most 
clearing member defaults.\10\
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    \9\ A firm that is both an OCC Clearing Member and an NSCC 
Member or is an OCC Clearing Member that has designated an NSCC 
Member to act on its behalf is referred to herein as a ``Common 
Member''. The term ``Clearing Member'' as used herein has the 
meaning provided in OCC's By-Laws. See OCC's By-laws & Rules, 
available at www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules. The term ``Member'' as used herein has 
the meaning provided in NSCC's Rules. See supra note 4.
    \10\ OCC filed its analysis of the financial impact of alternate 
means of settlement as an exhibit to the OCC Filing.
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Background
    OCC acts as a central counterparty clearing agency for U.S.-listed 
options and futures on a number of underlying financial assets 
including common stocks, currencies and stock indices. In connection 
with these services, OCC provides the OCC Guaranty pursuant to its By-
Laws and Rules. NSCC acts as a central counterparty clearing agency for 
certain equity securities, corporate and municipal debt, exchange 
traded funds and unit investment trusts that are eligible for its 
services. Eligible trading activity may be processed through NSCC's CNS 
system or Balance Order Account system,\11\ where all eligible compared 
and recorded transactions for a particular settlement date are netted 
by issue into one net long (buy), net short (sell) or flat position. As 
a result, for each day with activity, each Member has a single deliver 
or receive obligation for each issue in which it has activity. In 
connection with these services, NSCC also provides the NSCC Guaranty 
pursuant to Addendum K of the NSCC Rules.
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    \11\ See Rule 8 (Balance Order and Foreign Security Systems) and 
Procedure V (Balance Order Accounting Operation) of the NSCC Rules, 
supra note 4.
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    OCC's Rules provide that delivery of, and payment for, securities 
underlying certain exercised stock options and matured single stock 
futures that are physically settled are generally effected through the 
facilities of NSCC and are

[[Page 59970]]

not settled through OCC's facilities.\12\ OCC and NSCC executed the 
Existing Accord to facilitate, via NSCC's systems, the physical 
settlement of securities arising out of options and futures cleared by 
OCC. OCC Clearing Members that clear and settle physically settled 
options and futures transactions through OCC also are required under 
OCC's Rules \13\ to be Members of NSCC or to have appointed or 
nominated a Member of NSCC to act on its behalf. As noted above, these 
firms are referred to as ``Common Members'' in the Existing Accord.
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    \12\ See Chapter IX of OCC's Rules (Delivery of Underlying 
Securities and Payment), supra note 9.
    \13\ See OCC Rule 901, supra note 9.
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Summary of the Existing Accord
    The Existing Accord governs the transfer between OCC and NSCC of 
responsibility for settlement obligations that involve a delivery and 
receipt of stock in the settlement of physically settled options and 
futures that are cleared and settled by OCC and for which the 
underlying securities are eligible for clearing through the facilities 
of NSCC (``E&A/Delivery Transactions''). It also establishes the time 
when OCC's settlement guarantee (the ``OCC Guaranty'') ends and NSCC's 
settlement guarantee (the ``NSCC Guaranty'') \14\ begins with respect 
to E&A/Delivery Transactions. However, in the case of a Common Member 
default \15\ NSCC can reject these settlement obligations, in which 
case the settlement guaranty would not transfer from OCC to NSCC, and 
OCC would not have a right to settle the transactions through the 
facilities of NSCC. Instead, OCC would have to engage in alternative 
methods of settlement that have the potential to create significant 
liquidity and collateral requirements for both OCC and its non-
defaulting Clearing Members.\16\ More specifically, this could involve 
broker-to-broker settlement between OCC Clearing Members.\17\ This 
settlement method is operationally complex because it requires 
bilateral coordination directly between numerous Clearing Members 
rather than relying on NSCC to facilitate multilateral netting to 
settle the relevant settlement obligations. As described above, it also 
potentially could result in significant liquidity and collateral 
requirements for both OCC and its non-defaulting Clearing Members 
because the transactions would not be netted through the facilities of 
NSCC. Alternatively, where NSCC accepts the E&A/Delivery Transactions 
from OCC, the OCC Guaranty ends and the NSCC Guaranty takes effect. The 
transactions are then netted through NSCC's systems, which allows 
settlement obligations for the same settlement date to be netted into a 
single deliver or receive obligation. This netting reduces the costs 
associated with securities transfers by reducing the number of 
securities movements required for settlement and further reduces 
operational and market risk. The benefits of such netting by NSCC may 
be significant with respect to the large volumes of E&A/Delivery 
Transactions processed during monthly options expiry periods.
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    \14\ See Addendum K and Procedure III of the NSCC Rules, supra 
note 4.
    \15\ A Common Member that has been suspended by OCC or for which 
NSCC has ceased to act is referred to as a ``Mutually Suspended 
Member.''
    \16\ For example, OCC evaluated certain Clearing Member default 
scenarios in which OCC assumed that NSCC would not accept the 
settlement obligations under the Existing Accord, including the 
default of a large Clearing Member coinciding with a monthly options 
expiration. OCC has estimated that in such a Clearing Member default 
scenario, the aggregate liquidity burden on OCC in connection with 
obligations having to be settled on a gross, broker-to-broker basis 
could reach a significantly high level. For example, in January 
2022, the largest gross broker-to-broker settlement amount in the 
case of a larger Clearing Member default would have resulted in 
liquidity needs of approximately $384,635,833,942. OCC provided the 
data and analysis as an exhibit to the OCC Filing.
    \17\ In broker-to-broker settlement, Clearing Member parties are 
responsible for coordinating settlement--delivery and payment--among 
themselves on a transaction-by-transaction basis. Once transactions 
settle, the parties also have an obligation to affirmatively notify 
OCC so that OCC can close out the transactions. If either one of or 
both of the parties do not notify OCC, the transaction would remain 
open on OCC's books indefinitely until the time both parties have 
provided notice of settlement to OCC.
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    Pursuant to the Existing Accord, on each trading day NSCC delivers 
to OCC a file that identifies the securities, including stocks, 
exchange-traded funds and exchange-traded notes, that are eligible (1) 
to settle through NSCC and (2) to be delivered in settlement of (i) 
exercises and assignments of stock options cleared and settled by OCC 
or (ii) delivery obligations from maturing stock futures cleared and 
settled by OCC. OCC, in turn, delivers to NSCC a file identifying 
securities to be delivered, or received, for physical settlement in 
connection with OCC transactions.\18\
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    \18\ Each day that both OCC and NSCC are open for accepting 
trades for clearing is referred to as an ``Activity Date'' in the 
Existing Accord. Securities eligible for settlement at NSCC are 
referred to collectively as ``Eligible Securities'' in the Existing 
Accord. Eligible securities are settled at NSCC through NSCC's CNS 
Accounting Operation or NSCC's Balance Order Accounting Operation.
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    After NSCC receives the list of eligible transactions from OCC and 
NSCC has received all required deposits to the NSCC Clearing Fund from 
all Common Members taking into consideration amounts required to 
physically settle the OCC transactions, the OCC Guaranty would end and 
the NSCC Guaranty would begin with respect to physical settlement of 
the eligible OCC-related transactions.\19\ At this point, NSCC is 
solely responsible for settling the transactions.\20\
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    \19\ The term ``NSCC Clearing Fund'' as used herein has the same 
meaning as the term ``Clearing Fund'' as provided in the NSCC Rules. 
Procedure XV of the NSCC Rules provides that all NSCC Clearing Fund 
requirements and other deposits must be made within one hour of 
demand, unless NSCC determines otherwise, supra note 4.
    \20\ This is referred to in the Existing Accord as the 
``Guaranty Substitution Time,'' and the process of the substitution 
of the NSCC Guaranty for the OCC Guaranty with respect to E&A/
Delivery Transactions is referred to as ``Guaranty Substitution.''
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    Each day, NSCC is required to promptly notify OCC at the time the 
NSCC Guaranty takes effect. If NSCC rejects OCC's transactions due to 
an improper submission \21\ or if NSCC ``ceases to act'' for a Common 
Member,\22\ NSCC's Guaranty would not take effect for the affected 
transactions pursuant to the NSCC Rules.
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    \21\ Guaranty Substitution by NSCC (discussed further below) 
does not occur with respect to an E&A/Delivery Transaction that is 
not submitted to NSCC in the proper format or that involves a 
security that is not identified as an Eligible Security on the then-
current NSCC Eligibility Master File.
    \22\ Under NSCC's Rules, a default would generally be referred 
to as a ``cease to act'' and could encompass a number of 
circumstances, such as an NSCC Member's failure to make a Required 
Fund Deposit in a timely fashion. See NSCC Rule 46 (Restrictions on 
Access to Services), supra note 4. An NSCC Member for which it has 
ceased to act is referred to in the Existing Accord as a 
``Defaulting NSCC Member.'' Transactions associated with a 
Defaulting NSCC Member are referred to as ``Defaulted NSCC Member 
Transactions'' in the Existing Accord.
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    NSCC is required to promptly notify OCC if it ceases to act for a 
Common Member. Upon receiving such a notice, OCC would not continue to 
submit to NSCC any further unsettled transactions that involve such 
Common Member, unless authorized representatives of both OCC and NSCC 
otherwise consent. OCC would, however, deliver to NSCC a list of all 
transactions that have already been submitted to NSCC and that involve 
such Common Member. The NSCC Guaranty ordinarily would not take effect 
with respect to transactions for a Common Member for which NSCC has 
ceased to act, unless both Clearing Agencies agree otherwise. As such, 
NSCC does not have any existing contractual obligation to guarantee 
such Common Member's transactions. To the extent the NSCC Guaranty does 
not take effect, OCC's Guaranty would continue to apply, and, as 
described above, OCC would remain responsible for effecting the 
settlement

[[Page 59971]]

of such Common Member's transactions pursuant to OCC's By-Laws and 
Rules.
    As noted above, the Existing Accord does provide that the Clearing 
Agencies may agree to permit additional transactions for a Common 
Member default (``Defaulted NSCC Member Transactions'') to be processed 
by NSCC while subject to the NSCC Guaranty. This optional feature, 
however, creates uncertainty for the Clearing Agencies and market 
participants about how Defaulted NSCC Member Transactions may be 
processed following a Common Member default and also does not provide 
NSCC with the ability to collect collateral from OCC that it may need 
to close out these additional transactions. While the optional feature 
would remain in the agreement as part of this proposal, the proposed 
changes to the Existing Accord, as described below, could significantly 
reduce the likelihood that it would be utilized.
Proposed Changes to the Existing Accord
    The proposed changes to the Existing Accord would permit OCC to 
make a cash payment, referred to as the ``Guaranty Substitution 
Payment'' or ``GSP,'' to NSCC. This cash payment could occur on either 
or both of the day that the Common Clearing Member becomes a Mutually 
Suspended Member and on the next business day. Upon NSCC's receipt of 
the Guaranty Substitution Payment from OCC, the NSCC Guaranty would 
take effect for the Common Member's transactions, and they would be 
accepted by NSCC for clearance and settlement.\23\ OCC could use all 
Clearing Member contributions to the OCC Clearing Fund \24\ and certain 
Margin Assets \25\ of a defaulted Clearing Member to pay the GSP, as 
described in more detail below.
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    \23\ Acceptance of such transactions by NSCC would be subject to 
NSCC's standard validation criteria for incoming trades. See NSCC 
Rule 7, supra note 4.
    \24\ The term ``OCC Clearing Fund'' as used herein has the same 
meaning as the term ``Clearing Fund'' in OCC's By-Laws, supra note 
9.
    \25\ The term ``Margin Assets'' as used herein has the same 
meaning as provided in OCC's By-Laws, supra note 9.
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    NSCC would calculate the Guaranty Substitution Payment as the sum 
of the Mutually Suspended Member's unpaid required deposit to the NSCC 
Clearing Fund (``Required Fund Deposit'') \26\ and the unpaid 
Supplemental Liquidity Deposit \27\ obligation that is attributable to 
E&A/Delivery Transactions. The proposed changes to the Existing Accord 
define how NSCC would calculate the Guaranty Substitution Payment.
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    \26\ The Required Fund Deposit is calculated pursuant to Rule 4 
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other 
Matters) of the NSCC Rules. See supra note 4.
    \27\ Under the NSCC Rules, NSCC collects additional cash 
deposits from those Members who would generate the largest 
settlement debits in stressed market conditions, referred to as 
``Supplemental Liquidity Deposits'' or ``SLD.'' See Rule 4A of the 
NSCC Rules, supra note 4.
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    More specifically, NSCC would first determine how much of the 
member's unpaid Clearing Fund requirement would be included in the GSP. 
NSCC would look at the day-over-day change in gross market value of the 
Mutually Suspended Member's positions as well as day-over-day change in 
the member's NSCC Clearing Fund requirements. Based on such changes, 
NSCC would identify how much of the change in the Clearing Fund 
requirement was attributable to E&A/Delivery Transactions coming from 
OCC. If 100 percent of the day-over-day change in the NSCC Clearing 
Fund requirement is attributable to activity coming from OCC, then the 
GSP would include 100 percent of the member's NSCC Clearing Fund 
requirement. If less than 100 percent of the change is attributable to 
activity coming from OCC, then the GSP would include that percent of 
the member's unpaid NSCC Clearing Fund requirement attributable to 
activity coming from OCC. NSCC would then determine the portion of the 
member's unpaid SLD obligation that is attributable to E&A/Delivery 
Transactions. As noted above, the GSP would be the sum of these two 
amounts. A member's NSCC Clearing Fund requirement and SLD obligation 
at NSCC are designed to address the credit and liquidity risks that a 
member poses to NSCC. The GSP calculation is intended to assess how 
much of a member's obligations arise out of activity coming from OCC so 
that the amount paid by OCC is commensurate with the risk to NSCC of 
guarantying such activity.
    To permit OCC to anticipate the potential resources it would need 
to pay the GSP for a Mutually Suspended Member, each business day NSCC 
would provide OCC with (1) Required Fund Deposit and Supplemental 
Liquidity Deposit obligations, as calculated pursuant to the NSCC 
Rules, and (2) the gross market value of the E&A/Delivery Transactions 
and the gross market value of total Net Unsettled Positions (as such 
term is defined in the NSCC Rules). On options expiry days that fall on 
a Friday, NSCC would also provide OCC with information regarding 
liquidity needs and resources, and any intraday SLD requirements of 
Common Members. Such information would be delivered pursuant to the 
ongoing information sharing obligations under the Existing Accord (as 
proposed to be amended) and the Service Level Agreement (``SLA'') to 
which both NSCC and OCC are a party pursuant to Section 2 of the 
Existing Accord.\28\ The SLA addresses specifics regarding the time, 
form and manner of various required notifications and actions described 
in the Accord and also includes information applicable under the 
Accord.
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    \28\ The revised SLA has been filed as an exhibit to this 
filing.
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    NSCC and OCC believe the proposed calculation of the Required Fund 
Deposit portion of the GSP is appropriate because it is designed to 
provide a reasonable proxy for the impact of the Mutually Suspended 
Member's E&A/Delivery Transactions on its Required Fund Deposit. While 
impact study data did show that the proposed calculation could result 
in a GSP that overestimates or underestimates the Required Fund Deposit 
attributable to the Mutually Suspended Member's E&A/Delivery 
Transactions,\29\ current technology constraints prohibit NSCC from 
performing a precise calculation of the GSP on a daily basis for every 
Common Member.\30\
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    \29\ The impact study was conducted at the Commission's request 
to cover a three-day period and reviewed the ten Common Members with 
the largest Required Fund Deposits attributable to the Mutually 
Suspended Member's E&A/Delivery Transactions. Over the 30 instances 
in the study, approximately 15 instances resulted in an 
underestimate of the Required Fund Deposit by an average of 
approximately $112,900,926; four instances where the proxy 
calculation was the same as the Required Fund Deposit; and eleven 
instances of an overestimate of the Required Fund Deposit by an 
average of approximately $59,654,583. NSCC filed additional detail 
related to the referenced study as an exhibit to this filing.
    \30\ OCC and NSCC have agreed that performing the necessary 
technology build at this time would delay the implementation of this 
proposal. Therefore, NSCC would consider incorporating those 
technology updates into future revisions to the Accord, for example 
in connection with a move to a shorter settlement cycle in the U.S. 
equities markets.
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    Implementing the ability for OCC to make the GSP and cause the E&A/
Delivery Transactions to be cleared and settled through NSCC would 
promote the ability of OCC and NSCC to be efficient and effective in 
meeting the requirements of the markets they serve. This is because 
data demonstrates that the expected size of the GSP would be smaller 
than the amount of cash that would otherwise be needed by OCC and its 
Clearing Members to facilitate settlement outside of NSCC. More 
specifically, based on a historical study

[[Page 59972]]

of alternate means of settlement available to OCC from September 2021 
through September 2022, in the event that NSCC did not accept E&A/
Delivery Transactions, the worst-case scenario peak liquidity need OCC 
identified was $384,635,833,942 for settlement to occur on a gross 
broker-to-broker basis. OCC estimates that the corresponding GSP in 
this scenario would have been $863,619,056. OCC also analyzed several 
other large liquidity demand amounts that were identified during the 
study if OCC effected settlement on a gross broker-to-broker basis.\31\ 
These liquidity demand amounts and the largest liquidity demand amount 
OCC observed of $384,635,833,942 substantially exceed the amount of 
liquid resources currently available to OCC.\32\ By contrast, projected 
GSPs identified during the study ranged from $419,297,734 to 
$6,281,228,428. For each of these projected GSP amounts, OCC observed 
that the Margin Assets and OCC Clearing Fund contributions that would 
have been required of Clearing Members in these scenarios would have 
been sufficient to satisfy the amount of the projected GSPs.
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    \31\ OCC filed additional detail related to the referenced study 
as an exhibit to the OCC Filing.
    \32\ As of Mar. 31, 2023, OCC held approximately $10.37 billion 
in qualifying liquid resources. See OCC Quantitative Disclosure, 
Jan.-Mar. 2023, available at www.theocc.com/risk-management/pfmi-disclosures.
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    To help address the current technology constraint that prohibits 
NSCC from performing a precise calculation of the GSP on a daily basis 
for every Common Member, proposed Section 6(b)(i) of the Existing 
Accord and related Section 7(d) of the SLA would provide that, with 
respect to a Mutually Suspended Member, either NSCC or OCC may require 
that the Required Fund Deposit portion of the GSP be re-calculated by 
calculating the Required Fund Deposit for the Mutually Suspended Member 
both before and after the delivery of the E&A/Delivery Transactions and 
utilize the precise amount that is attributable to that activity in the 
final GSP. If such a recalculation is required, the result would 
replace the Required Fund Deposit component of the GSP that was 
initially calculated. The SLD component of the GSP would be unchanged 
by such recalculation.
    As the above demonstrates, the GSP is intended to address the 
significant collateral and liquidity requirements that could be 
required of OCC Clearing Members in the event of a Common Member 
default.
    Allowing OCC to make a GSP payment also is intended to allow for 
settlement processing to take place through the facilities of NSCC to 
retain operational efficiencies associated with the settlement process. 
Alternative settlement means such as broker-to broker settlement add 
operational burdens because transactions would need to be settled 
individually on one-off bases. In contrast, NSCC's netting reduces the 
volume and value of settlement obligations that would need to be closed 
out in the market.\33\ Because the clearance and settlement of 
obligations through NSCC's facilities following a Common Member 
default, including netting of E&A/Delivery Transactions with a Common 
Member's positions at NSCC would avoid these potentially significant 
operational burdens for OCC and its Clearing Members, OCC and NSCC 
believe that the proposed changes would limit market disruption 
relating to a Common Member default. NSCC netting significantly reduces 
the total number of obligations that require the exchange of money for 
settlement. Allowing more activity to be processed through NSCC's 
netting systems would minimize risk associated with the close out of 
those transactions following the default of a Common Member.
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    \33\ CNS reduces the value of obligations that require financial 
settlement by approximately 98 percent, where, for example, 
approximately $519 trillion in trades could be netted down to 
approximately $9 trillion in net settlements.
---------------------------------------------------------------------------

    Amending the Existing Accord to define the terms and conditions 
under which Guaranty Substitution may occur, at OCC's election, with 
respect to Defaulted NSCC Member Transactions after a Common Member 
becomes a Mutually Suspended Member would also provide more certainty 
to both the Clearing Agencies and market participants generally about 
how a Mutually Suspended Member's Defaulted NSCC Member Transactions 
may be processed.
    NSCC and OCC have agreed it is appropriate to limit the 
availability of the proposed provision to the day of the Common Member 
default and the next business day because, based on historical cease to 
act events and simulations of cease to act events involving Common 
Members, most activity of a Mutually Suspended Member is closed out on 
those days.\34\ Furthermore, the benefits of netting through NSCC's 
systems would be reduced for any activity submitted to NSCC after that 
time.
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    \34\ OCC filed data regarding simulated events as an exhibit to 
the OCC Filing.
---------------------------------------------------------------------------

    To implement these proposed changes to the Existing Accord, OCC and 
NSCC propose to make the following changes.
Section 1--Definitions
    First, new definitions would be added, and existing definitions 
would be amended in Section 1, which is the Definitions section.
    The new defined terms would be as follows.
     The term ``Close Out Transaction'' would be defined to 
mean ``the liquidation, termination or acceleration of one or more 
exercised or matured Stock Options \35\ or Stock Futures \36\ 
contracts, securities contracts, commodity contracts, forward 
contracts, repurchase agreements, swap agreements, master netting 
agreements or similar agreements of a Mutually Suspended Member 
pursuant to OCC Rules 1101 through 1111 and/or NSCC Rule 18.'' This 
proposed definition would make it clear that the payment of the 
Guaranty Substitution Payment and NSCC's subsequent acceptance of 
Defaulted NSCC Member Transactions for clearance and settlement are 
intended to fall within the ``safe harbors'' provided in the Bankruptcy 
Code,\37\ the Securities Investor Protection Act,\38\ and other similar 
laws.
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    \35\ The term ``Stock Options'' is defined in the Existing 
Accord within the definition of ``Eligible Securities'' and refers 
to options issued by OCC.
    \36\ The term ``Stock Futures'' is defined in the Existing 
Accord within the definition of ``Eligible Securities,'' described 
below, and refers to stock futures contracts cleared by OCC.
    \37\ 11 U.S.C. 101 et seq., including Sec. Sec.  362(b)(6), (7), 
(17), (25) and (27) (exceptions to the automatic stay), Sec. Sec.  
546(e)-(g) and (j) (limitations on avoiding powers), and Sec. Sec.  
555-556 and 559-562 (contractual right to liquidate, terminate or 
accelerate certain contracts).
    \38\ 15 U.S.C. 78aaa-lll, including Sec.  78eee(b)(2)(C) 
(exceptions to the stay).
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     The term ``Guaranty Substitution Payment'' would be 
defined to mean ``an amount calculated by NSCC in accordance with the 
calculations set forth in Appendix A [to the Existing Accord (as 
proposed to be amended)], to include two components: (i) a portion of 
the Mutually Suspended Member's Required Fund Deposit deficit to NSCC 
at the time of the cease to act and (ii) a portion of the Mutually 
Suspended Member's unpaid Supplemental Liquidity Deposit obligation at 
the time of the cease to act.''
     The term ``Mutually Suspended Member'' would mean ``any 
OCC Participating Member \39\ that has been

[[Page 59973]]

suspended by OCC that is also an NSCC Participating Member \40\ for 
which NSCC has ceased to act.''
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    \39\ The term ``OCC Participating Member'' is defined in the 
Existing Accord to mean ``(i) a Common Member; (ii) an OCC Clearing 
Member that is an `Appointing Clearing Member' (as defined in 
Article I of OCC's By-Laws) and has appointed an Appointed Clearing 
Member that is an NSCC Member to effect settlement of E&A/Delivery 
Transactions through NSCC on the Appointing Clearing Member's 
behalf; (iii) an OCC Clearing Member that is an Appointed Clearing 
Member; or (iv) a Canadian Clearing Member.'' No changes are 
proposed to this definition.
    \40\ The term ``NSCC Participating Member'' is defined in the 
Existing Accord to mean ``(i) a Common Member; (ii) an NSCC Member 
that is an `Appointed Clearing Member' (as defined in Article I of 
OCC's By-Laws); or (iii) [The Canadian Depository for Securities 
Limited, or ``CDS'']. For the avoidance of doubt, the Clearing 
Agencies agree that CDS is an NSCC Member for purposes of this 
Agreement.'' No changes are proposed to this definition.
---------------------------------------------------------------------------

     The term ``Required Fund Deposit'' would have the meaning 
``provided in Rule 4 of NSCC's Rules and Procedures (or any replacement 
or substitute rule), the version of which, with respect to any 
transaction or obligation incurred that is the subject of this 
Agreement, is in effect at the time of such transaction or incurrence 
of obligation.''
     The term ``Supplemental Liquidity Deposit'' would have the 
meaning ``provided in Rule 4A of NSCC's Rules and Procedures (or any 
replacement or substitute rule), the version of which, with respect to 
any transaction or obligation incurred that is the subject of this 
Agreement, is in effect at the time of such transaction or incurrence 
of obligation.''
    The defined terms that would be amended in Section 1 of the 
Existing Accord are as follows.
     The definition for the term ``E&A/Delivery Transaction'' 
generally contemplates a transaction that involves a delivery and 
receipt of stock in the settlement of physically settled options and 
futures that are cleared and settled by OCC and for which the 
underlying securities are eligible for clearing through the facilities 
of NSCC. The definition would be amended to make clear that it would 
apply in respect of a ``Close Out Transaction'' of a ``Mutually 
Suspended Member'' as those terms are proposed to be defined (described 
above).
     The definition for the term ``Eligible Securities'' 
generally contemplates the securities that are eligible to be used for 
physical settlement under the Existing Accord. The term would be 
modified to clarify that this may include, for example, equities, 
exchange-traded funds and exchange-traded notes that are underlying 
securities for options issued by OCC.
Section 6--Default by an NSCC Participating Member or OCC Participating 
Member
    Section 6 of the Existing Accord provides that NSCC is required to 
provide certain notice to OCC in circumstances in which NSCC has ceased 
to act for a Common Member. Currently, Section 6(A)(ii) of the Existing 
Accord also requires NSCC to notify OCC if a Common Member has failed 
to satisfy its Clearing Fund obligations to NSCC, but for which NSCC 
has not yet ceased to act. In practice, this provision would trigger a 
number of obligations (described below) when a Common Member fails to 
satisfy its NSCC Clearing Fund obligations for any reason, including 
those due to an operational delay. Therefore, OCC and NSCC are 
proposing to remove the notification requirement under Section 6(A)(ii) 
from the Existing Accord. Under Section 7(d) of the Existing Accord, 
NSCC and OCC are required to provide each other with general 
surveillance information regarding Common Members, which includes 
information regarding any Common Member that is considered by the other 
party to be in distress. Therefore, if a Common Member has failed to 
satisfy its NSCC Clearing Fund obligations and NSCC believes this 
failure is due to, for example, financial distress and not, for 
example, due to a known operational delay, and NSCC has not yet ceased 
to act for that Common Member, such notification to OCC would still 
occur but would be done pursuant to Section 7(d) of the Existing Accord 
(as proposed to be amended), and not Section 6(A)(ii). Notifications 
under Section 6 of the Existing Accord (as proposed to be amended) 
would be limited to instances when NSCC has actually ceased to act for 
a Common Member pursuant to the NSCC Rules.\41\
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    \41\ See Rule 46 (Restrictions on Access to Services) of the 
NSCC Rules, supra note 4.
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    Following notice by NSCC that it has ceased to act for a Common 
Member, OCC is obligated in turn to deliver to NSCC a list of all E&A/
Delivery Transactions (excluding certain transactions for which 
Guaranty Substitution does not occur) involving the Common Member.\42\ 
This provision would be amended to clarify that it applies in respect 
of such E&A/Delivery Transactions for the Common Member for which the 
NSCC Guaranty has not yet attached--meaning that Guaranty Substitution 
has not yet occurred.
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    \42\ The section of the Existing Accord that addresses 
circumstances in which NSCC ceases to act and/or an NSCC Member 
defaults is currently part of Section 6(a). It would be re-
designated as Section 6(b) for organizational purposes.
---------------------------------------------------------------------------

    As described above in the summary of the Existing Accord, where 
NSCC has ceased to act for a Common Member, the Existing Accord refers 
to the Common Member as the Defaulting NSCC Member and also refers to 
the relevant E&A/Delivery Transactions in connection with that 
Defaulting NSCC Member for which a Guaranty Substitution has not yet 
occurred as Defaulted NSCC Member Transactions.
    If the Defaulting NSCC Member is also suspended by OCC, it would be 
covered by the proposed definition that is described above for a 
Mutually Suspended Member. For such a Mutually Suspended Member, the 
proposed changes in Section 6(b) would provide that NSCC, by a time 
agreed upon by the parties, would provide OCC with the amount of the 
Guaranty Substitution Payment as calculated by NSCC and related 
documentation regarding the calculation. The Guaranty Substitution 
Payment would be calculated pursuant to NSCC's Rules as that portion of 
the unmet Required Fund Deposit \43\ and Supplemental Liquidity Deposit 
\44\ obligations of the Mutually Suspended Member attributable to the 
Defaulted NSCC Member Transactions. By a time agreed upon by the 
parties,\45\ OCC would then be required to either notify NSCC of its 
intent to make the full amount of the Guaranty Substitution Payment to 
NSCC or notify NSCC that it would not make the Guaranty Substitution 
Payment. If OCC makes the full amount of the Guaranty Substitution 
Payment, NSCC's guaranty would take effect at the time of NSCC's 
receipt of that payment and the OCC Guaranty would end.
---------------------------------------------------------------------------

    \43\ The Required Fund Deposit is calculated pursuant to Rule 4 
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other 
Matters) of the NSCC Rules, see supra note 4.
    \44\ The Supplemental Liquidity Deposit is calculated pursuant 
to Rule 4A (Supplemental Liquidity Deposits) of the NSCC Rules, see 
supra note 4.
    \45\ The time by which OCC would be required to notify NSCC of 
its intent would be defined in the Service Level Agreement. As of 
the time of this filing, the parties intend to set that time as one 
hour after OCC's receipt of the calculated Guaranty Substitution 
Payment from NSCC.
---------------------------------------------------------------------------

    The proposed changes would further provide that if OCC does not 
suspend the Common Member (such that the Common Member would therefore 
not meet the proposed definition of a Mutually Suspended Member) or if 
OCC elects to not make the full amount of the Guaranty Substitution 
Payment to NSCC, then all of the Defaulted NSCC Member Transactions 
would be exited from NSCC's CNS Accounting Operation and/or NSCC's 
Balance Order Accounting Operation, as applicable, and Guaranty 
Substitution would not occur in respect thereof. Therefore, NSCC would 
continue to have no obligation to guarantee or settle the Defaulted 
NSCC Member Transactions, and the OCC Guaranty would continue

[[Page 59974]]

to apply to them pursuant to OCC's By-Laws and Rules.\46\
---------------------------------------------------------------------------

    \46\ Under the current and proposed terms of the Existing 
Accord, NSCC would be permitted to voluntarily guaranty and settle 
the Defaulted NSCC Member Transactions.
---------------------------------------------------------------------------

    Proposed changes to the Existing Accord would also address the 
application of any Guaranty Substitution Payment by NSCC. Specifically, 
new Section 6(d) would provide that any Guaranty Substitution Payment 
made by OCC may be used by NSCC to satisfy any liability or obligation 
of the Mutually Suspended Clearing Member to NSCC on account of 
transactions involving the Mutually Suspended Clearing Member for which 
the NSCC Guaranty applies and to the extent that any amount of assets 
otherwise held by NSCC for the account of the Mutually Suspended Member 
(including any Required Fund Deposit or Supplemental Liquidity Deposit) 
are insufficient to satisfy its obligations related to transactions for 
which the NSCC Guaranty applies. Proposed changes to Section 6(d) would 
further provide for the return to OCC of any unused portion of the GSP. 
With regard to the portion of the Guaranty Substitution Payment that 
corresponds to a member's Supplemental Liquidity Deposit obligation, 
NSCC must return any unused amount to OCC within fourteen (14) days 
following the conclusion of NSCC's settlement, close-out and/or 
liquidation. With regard to the portion of the Guaranty Substitution 
Payment that corresponds to a Required Fund Deposit, NSCC must return 
any unused amount to OCC under terms agreed to by the parties.\47\
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    \47\ Such amounts would be returned to OCC as appropriate and in 
accordance with a Netting Contract and Limited Cross-Guaranty, by 
and among The Depository Trust Company, Fixed Income Clearing 
Corporation, NSCC and OCC, dated as of Jan. 1, 2003, as amended.
---------------------------------------------------------------------------

Other Proposed Changes
    Certain other technical changes are also proposed to the Existing 
Accord to conform it to the proposed changes described above. For 
example, the preamble and the ``whereas'' clauses in the Preliminary 
Statement would be amended to clarify that the agreement is an amended 
and restated agreement and to summarize that the agreement would be 
modified to contemplate the Guaranty Substitution Payment structure. 
Section 1(c), which addresses the terms in the Existing Accord that are 
defined by reference to NSCC's Rules and Procedures and OCC's By-Laws 
and Rules would be modified to state that such terms would have the 
meaning then in effect at the time of any transaction or obligation 
that is covered by the agreement rather than stating that such terms 
have the meaning given to them as of the effective date of the 
agreement. This change is proposed to help ensure that the meaning of 
such terms in the agreement would not become inconsistent with the 
meaning in the NSCC Rules and/or OCC By-Laws and Rules, as they may be 
modified through proposed rule changes with the Commission.
    Technical changes would be made to Sections 3(d) and (e) of the 
Existing Accord to provide that those provisions would not apply in the 
event new Section 6(b) described above, is triggered. Section 3(d) 
generally provides that OCC would no longer submit E&A/Delivery 
Transactions to NSCC involving a suspended OCC Participating Member. 
Similarly, Section 3(e) generally provides that OCC would no longer 
submit E&A/Delivery Transactions to NSCC involving an NSCC 
Participating Member for which NSCC has ceased to act. A proposed 
change would also be made to Section 5 of the Existing Accord to modify 
a reference to Section 5 of Article VI of OCC's By-Laws to instead 
provide that the updated cross-reference should be to Chapter IV of 
OCC's Rules.
    Section 5 would also be amended to clarify that Guaranty 
Substitution occurs when NSCC has received both the Required Fund 
Deposit and Supplemental Liquidity Deposit, as calculated by NSCC in 
its sole discretion, from Common Members. The addition of the 
collection of the Supplemental Liquidity Deposit to the definition of 
the Guaranty Substitution Time in this Section 5 would reflect OCC and 
NSCC's agreement that both amounts are components of the Guaranty 
Substitution Payment (as described above) and would make this 
definition consistent with that agreement.
    In Section 7 of the Existing Accord, proposed changes would be made 
to provide that NSCC would provide to OCC information regarding a 
Common Member's Required Fund Deposit and Supplemental Liquidity 
Deposit obligations, to include the Supplemental Liquidity Deposit 
obligation in this notice requirement, and additionally that NSCC would 
provide OCC with information regarding the potential Guaranty 
Substitution Payment for the Common Member. On an options expiration 
date that is a Friday, NSCC would, by close of business on that day, 
also provide to OCC information regarding the intra-day liquidity 
requirement, intra-day liquidity resources and intra-day calls for a 
Common Member that is subject to a Supplemental Liquidity Deposit at 
NSCC.
    Finally, Section 14 of the Existing Accord would be modernized to 
provide that notices between the parties would be provided by email 
rather than by hand, overnight delivery service or first-class mail.
Proposed Changes to NSCC Rules
    In connection with the proposed changes to the Existing Accord, 
NSCC is also proposing changes to its Rules, described below.
    First, NSCC would amend Rule 18 (Procedures for When the 
Corporation Ceases to Act), which describes the actions NSCC would take 
with respect to the transactions of a Member after NSCC has ceased to 
act for that Member.\48\ The proposed changes would include a new 
Section 9(a) to specify that following a Member default, NSCC may 
continue to act and provide the NSCC Guaranty pursuant to a ``Close-Out 
Agreement'' such as the Existing Accord (as it is proposed to be 
amended); \49\ a new Section 9(b) to specify that any transactions 
undertaken pursuant to a Close-Out Agreement would be treated as having 
been received, provided or undertaken for the account of the Member for 
which NSCC has ceased to act, but that any deposit, payment, financial 
assurance or other accommodation provided to NSCC pursuant to a Close-
Out Agreement shall be returned or released as provided for in the 
agreement; and a new Section 9(c), to provide that NSCC shall have a 
lien upon, and may apply, any property of the defaulting Member in 
satisfaction of any obligation, liability or loss that relates to a 
transaction undertaken or service provided pursuant to a Close-Out 
Agreement.
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    \48\ See supra note 4.
    \49\ The Existing Accord is currently the only agreement that 
would be considered a ``Close-Out Agreement'' under this new Section 
9(b).
---------------------------------------------------------------------------

    NSCC would also propose clarifications to Sections 4, 6(b)(iii)(B) 
and 8 to use more precise references to the legal entity described in 
those sections of this Rule.
    Second, NSCC would amend Section B of Procedure III and Addendum K 
of the NSCC Rules \50\ to provide that the NSCC Guaranty would not 
attach to Defaulted NSCC Member Transactions except as provided for in 
the Existing Accord (as it is proposed to be amended), and that the 
NSCC Guaranty attaches, with respect to obligations arising from the 
exercise or assignment of OCC options settled at NSCC or stock futures 
contracts cleared by OCC, as

[[Page 59975]]

provided for in the Existing Accord (as it is proposed to be amended) 
or other arrangement with OCC. Finally, the proposed changes to 
Procedure III would clarify that Guaranty Substitution occurs when NSCC 
has received both the Required Fund Deposit and Supplemental Liquidity 
Deposit, consistent with the proposed revisions to Section 5 of the 
Current Accord, described above. As noted above, the proposal to 
include the collection of the Supplemental Liquidity Deposit in 
connection with the Guaranty Substitution reflect OCC and NSCC's 
agreement that both amounts are components of the Guaranty Substitution 
Payment.
---------------------------------------------------------------------------

    \50\ See id.
---------------------------------------------------------------------------

    Collectively, these proposed changes would establish and clarify 
the rights of both NSCC and a Member for which NSCC has ceased to act 
with respect to property held by NSCC and the operation and 
applicability of any Close-Out Agreement, and would make it clear that 
any payments received pursuant to a Close-Out Agreement and NSCC's 
acceptance of a Mutually Suspended Member's transactions for clearance 
and settlement pursuant to a Close-Out Agreement are intended to fall 
within the Bankruptcy Code and Securities Investor Protection Act 
``safe harbors.''
2. Statutory Basis
    NSCC believes the proposed changes to the Existing Accord and its 
Rules are consistent with the requirements of the Exchange Act and the 
rules and regulations thereunder applicable to a registered clearing 
agency. In particular, NSCC believes the proposed change is consistent 
with Section 17A(b)(3)(F) of the Act \51\ and Rules 17Ad-22(e)(7) and 
(20), each promulgated under the Act,\52\ for the reasons described 
below.
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78q-1(b)(3)(F).
    \52\ 17 CFR 240.17Ad-22(e)(7), (20).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that the rules of a clearing agency be designed, in general, to 
protect investors and the public interest.\53\ As described above, NSCC 
believes that providing OCC with the ability to make a Guaranty 
Substitution Payment to it with respect to any unmet obligations of a 
Mutually Suspended Member would promote prompt and accurate clearance 
and settlement because it would allow relevant securities settlement 
obligations to be accepted by NSCC for clearance and settlement, which 
would reduce the size of the related settlement obligations for both 
the Mutually Suspended Member and its assigned delivery counterparties 
through netting through NSCC's CNS Accounting Operation and/or NSCC's 
Balance Order Accounting Operation. Further, this proposal would reduce 
the circumstances in which OCC's Guaranty would continue to apply to 
these settlement obligations, to be settled on a broker-to-broker basis 
between OCC Clearing Members, which could result in substantial 
collateral and liquidity requirements for OCC Clearing Members and 
that, in turn, could also increase a risk of default by the affected 
OCC Clearing Members at a time when a Common Member has already been 
suspended. For these reasons, NSCC believes that the proposed changes 
would be beneficial to and protective of OCC, NSCC, their participants, 
and the markets that they serve and that the proposed changes are 
therefore designed, in general, to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7) requires NSCC, in relevant part, to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to effectively measure, monitor and manage the 
liquidity risk that arises in or is borne by NSCC and to, among other 
things, address foreseeable liquidity shortfalls that would not be 
covered by NSCC's liquid resources.\54\ NSCC believes the proposal is 
consistent the requirements of Rule 17Ad-22(e)(7) because, any increase 
to NSCC's liquidity needs that may be created by applying the NSCC 
Guaranty to Defaulted Member Transactions would occur with a 
simultaneous increase to its liquidity resources in the form of the 
Guaranty Substitution Payment. Therefore, NSCC believes it will 
continue to adhere to the requirements of Rule 17Ad-22(e)(7) under the 
proposal.
---------------------------------------------------------------------------

    \54\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------

    Finally, Rule 17Ad-22(e)(20) requires NSCC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to identify, monitor and manage risks related to any link that 
NSCC establishes with one or more other clearing agencies, financial 
market utilities, or trading markets.\55\ The Existing Accord between 
OCC and NSCC is one such link. As described above, NSCC believes that 
implementation of the proposal would help manage the risks presented by 
the settlement link because, when the proposed provision is triggered 
by OCC, NSCC would receive the Guaranty Substitution Payment with 
respect to the relevant securities settlement obligations.
---------------------------------------------------------------------------

    \55\ 17 CFR 240.17Ad-22(e)(20).
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \56\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. NSCC does not 
believe that the proposal would impose any burden on competition. This 
is because it would implement changes that would permit OCC in certain 
circumstances to make a Guaranty Substitution Payment to NSCC so that 
the NSCC Guaranty would take effect for the Defaulted NSCC Member 
Transactions, and the OCC Guaranty would end. The proposed changes 
would not inhibit access to NSCC's services in any way, applies to all 
Members and does not disadvantage or favor any particular user in 
relationship to another user. Accordingly, NSCC does not believe that 
the proposed rule change would have any impact or impose a burden on 
competition.
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    NSCC has not received or solicited any written comments relating to 
this proposal. If any written comments are received, they will be 
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to 
Section IV (Solicitation of Comments) of the Exhibit 1A in the General 
Instructions to Form 19b-4, the Commission does not edit personal 
identifying information from comment submissions. Commenters should 
submit only information that they wish to make available publicly, 
including their name, email address, and any other identifying 
information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at www.sec.gov/regulatory-actions/how-to-submit-comments. General questions regarding 
the rule filing process or logistical questions regarding this filing 
should be directed to the Main Office of the Commission's Division of 
Trading and Markets at [email protected] or 202-551-5777.
    NSCC reserves the right not to respond to any comments received.

[[Page 59976]]

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NSCC-2023-007 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to File Number SR-NSCC-2023-007. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of NSCC and on DTCC's website 
(http://dtcc.com/legal/sec-rule-filings.aspx).
    Do not include personal identifiable information in submissions; 
you should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection. 
All submissions should refer to File Number SR-NSCC-2023-007 and should 
be submitted on or before September 20, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\57\
---------------------------------------------------------------------------

    \57\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-18670 Filed 8-29-23; 8:45 am]
BILLING CODE 8011-01-P


