[Federal Register Volume 83, Number 139 (Thursday, July 19, 2018)]
[Notices]
[Pages 34227-34245]
[FR Doc No: 2018-15368]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83633; File No. SR-NSCC-2017-018]

Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Amendment No. 1 to a Proposed Rule
Change To Amend the Loss Allocation Rules and Make Other Changes

July 13, 2018.
    On December 18, 2017, the National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') and Rule 19b-4 thereunder, proposed rule
change SR-NSCC-2017-018 (``Proposed Rule Change'') to amend the loss
allocation rules and make other changes; the Proposed Rule Change was
published for comment in the Federal Register on January 8, 2018.\1\ 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.\2\ On March
20, 2018, the Commission instituted proceedings to determine whether to
approve or disapprove the Proposed Rule Change; 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.\3\ On June 28, 2018, NSCC filed Amendment No. 1 to the
Proposed Rule Change to amend and replace in its entirety the Proposed
Rule Change as originally submitted on December 18, 2017.\4\ As of the
date of this release, the Commission has not received any

comments on the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively.
Securities Exchange Act Release No. 82428 (January 2, 2018), 83 FR
897 (January 8, 2018) (SR-NSCC-2017-018). On December 18, 2017, NSCC
filed the Proposed Rule Change as advance notice SR-NSCC-2017-806
(``Advance Notice'') with the Commission pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act entitled the Payment, Clearing, and
Settlement Supervision Act of 2010 (``Clearing Supervision Act'')
and Rule 19b-4(n)(1)(i) of the Act. (12 U.S.C. 5465(e)(1) and 17 CFR
240.19b-4(n)(1)(i), respectively.) On January 30, 2018, the
Commission published in the Federal Register notice of filing of the
Advance Notice. The notice also extended the review period for the
Advance Notice pursuant to Section 806(e)(1)(H) of the Clearing
Supervision Act. (12 U.S.C. 5465(e)(1)(H).) See Securities Exchange
Act Release No. 82584 (January 24, 2018), 83 FR 4377 (January 30,
2018) (SR-NSCC-2017-806). On April 10, 2018, the Commission required
additional information for consideration of the Advance Notice,
pursuant to Section 806(e)(1)(D) of the Clearing Supervision Act,
which provided the Commission with an additional 60-days in the
review period beginning on the date that the information requested
is received by the Commission. (12 U.S.C. 5465(e)(1)(D).) 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. On June 28, 2018, NSCC filed Amendment No. 1 to the
Advance Notice. To promote the public availability and transparency
of its post-notice amendment, NSCC submitted a copy of Amendment No.
1 through the Commission's electronic public comment letter
mechanism. Accordingly, Amendment No. 1 to the Advance Notice has
been posted on the Commission's website at https://www.sec.gov/rules/sro/nscc-an.htm and thus been publicly available since June
29, 2018. On July 6, 2018, the Commission received the information
requested, which added an additional 60-days to the review period
pursuant to Sections 806(e)(1)(E) and (G) of the Clearing
Supervision Act. (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. The proposal, as set forth in both the
Advance Notice and the Proposed Rule Change, shall not take effect
until all required regulatory actions are completed.
    \2\ Securities Exchange Act Release No. 82670 (February 8,
2018), 83 FR 6626 (February 14, 2018) (SR-DTC-2017-022; SR-FICC-
2017-022; SR-NSCC-2017-018).
    \3\ Securities Exchange Act Release No. 82910 (March 20, 2018),
83 FR 12968 (March 26, 2018) (SR-NSCC-2017-018); Securities Exchange
Act Release No. 83510 (June 25, 2018), 83 FR 30791 (June 29, 2018)
(SR-DTC-2017-022; SR-FICC-2017-022; SR-NSCC-2017-018).
    \4\ To promote the public availability and transparency of its
post-notice amendment, NSCC submitted a copy of Amendment No. 1
through the Commission's electronic public comment letter mechanism.
Accordingly, Amendment No. 1 to the Proposed Rule Change has been
posted on the Commission's website at https://www.sec.gov/rules/sro/nscc.htm and thus been publicly available since June 29, 2018.
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    The Proposed Rule Change, as amended by Amendment No. 1, is
described in Items I and II below, which Items have been prepared by
NSCC. The Commission is publishing this notice to solicit comments on
the Proposed Rule Change, as amended by Amendment No. 1, from
interested persons.

I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

    The proposed rule change consists of modifications to NSCC's Rules
and Procedures (``Rules'') in order to amend provisions in the Rules
regarding loss allocation as well as make other changes, as described
in greater detail below.\5\
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    \5\ Capitalized terms not defined herein are defined in the
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the 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 III 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
Description of Amendment No. 1
    This filing constitutes Amendment No. 1 (``Amendment'') to rule
filing SR-NSCC-2017-018 (``Rule Filing'') previously filed by NSCC on
December 18, 2017.\6\ This Amendment amends and replaces the Rule
Filing in its entirety. NSCC submits this Amendment in order to further
clarify the operation of the proposed rule changes on loss allocation
by providing additional information and examples. In particular, this
Amendment would:
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    \6\ See Securities Exchange Act Release No. 82428 (January 2,
2018), 83 FR 897 (January 8, 2018) (SR-NSCC-2017-018).
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    (i) Clarify which Members would be subject to loss allocation with
respect to Defaulting Member Events (as defined below and in the
proposed rule change) and Declared Non-Default Loss Events (as defined
below and in the proposed rule change) occurring during an Event Period
(as defined below and in the proposed rule change). Specifically,
pursuant to the Amendment, proposed Section 4 of Rule 4 would provide
that each Member that is a Member on the first day of an Event Period
would be obligated to pay its pro rata share of losses and liabilities
arising out of or relating to each Defaulting Member Event (other than
a Defaulting Member Event with respect to which it is the Defaulting
Member (as defined below and in the proposed rule change)) and each
Declared Non-Default Loss Event occurring during the Event Period.
Proposed Section 4 of Rule 4 would also make it clear that any Member
for which NSCC ceases to act on a non-business day, triggering an Event
Period that commences on the next business day, would be deemed to be a
Member on the first day of that Event Period.
    (ii) Clarify the obligations and Loss Allocation Cap (as defined
below and in the proposed rule change) of a Member that withdraws from
membership in respect of a loss allocation round. Specifically,
pursuant to the Amendment, proposed Section 6 of Rule 4 would provide
that the Member would nevertheless remain obligated for its pro rata
share of losses and liabilities with respect to any Event Period for
which it is otherwise obligated under Rule 4; however, its aggregate
obligation would be limited to the amount of its Loss Allocation Cap as
fixed in the round for which it withdrew.
    (iii) Clarify that a Member would be obligated to NSCC for all
losses and liabilities incurred by NSCC arising out of or relating to
any Defaulting Member Event with respect to the Member. Specifically,
pursuant to the Amendment, proposed Section 4 of Rule 4 would provide
that each Member would be obligated to NSCC for the entire amount of
any loss or liability incurred by NSCC arising out of or relating to
any Defaulting Member Event with respect to such Member.
    (iv) Clarify that, although a Defaulting Member would not be
allocated a ratable share of losses and liabilities arising out of or
relating to its own Defaulting Member Event, it would remain obligated
to NSCC for all such losses and liabilities. Specifically, pursuant to
the Amendment, proposed Section 10 of Rule 4 would provide that no loss
allocation under Rule 4 would constitute a waiver of any claim NSCC may
have against a Member for any loss or liability to which the Member is
subject under the Rules, including, without limitation, any loss or
liability to which it may be subject under Rule 4.
    In addition, pursuant to the Amendment, NSCC is making other
clarifying and technical changes to the proposed rule change, as
proposed herein.
Nature of the Proposed Change
    The primary purpose of this proposed rule change is to amend NSCC's
loss allocation rules in order to enhance the resiliency of NSCC's loss
allocation process so that NSCC can take timely action to address
multiple loss events that occur in succession during a short period of
time (defined and explained in detail below). In connection therewith,
the proposed rule change would (i) align the loss allocation rules of
the three clearing agencies of The Depository Trust & Clearing
Corporation (``DTCC''), namely The Depository Trust Company (``DTC''),
Fixed Income Clearing Corporation (``FICC'') (including the Government
Securities Division (``FICC/GSD'') and the Mortgage-Backed Securities
Division (``FICC/MBSD'')), and NSCC (collectively, the ``DTCC Clearing
Agencies''), so as to provide consistent treatment, to the extent
practicable and appropriate, especially for firms that are participants
of two or more DTCC Clearing Agencies, (ii) increase transparency and
accessibility of the loss allocation rules by enhancing their
readability and clarity, (iii) reduce the time within which NSCC is
required to return a former Member's Clearing Fund deposit, (iv)
increase clarity of the voluntary termination provisions, and (v) make
conforming and technical changes.
(i) Background
    Central counterparties (``CCPs'') play a key role in financial
markets by mitigating counterparty credit risk on transactions between
market participants. CCPs achieve this by providing guaranties to
participants and, as a consequence, are typically exposed to credit
risks that could lead to default losses. In addition, in performing its
critical functions, a CCP could be exposed to non-default losses that
are otherwise incident to the CCP's clearance and settlement business.
    A CCP's rulebook should provide a complete description of how
losses would be allocated to participants if the size of the losses
exceeded the CCP's pre-funded resources. Doing so provides for an
orderly allocation of losses, and potentially allows the CCP to
continue providing critical services to the market and thereby results
in significant financial stability benefits. In addition, a clear
description of the loss allocation process offers transparency and
accessibility to the CCP's participants.

Current NSCC Loss Allocation Process
    As a CCP, NSCC's loss allocation process is a key component of its
risk management process. Risk management is the foundation of NSCC's
ability to guarantee settlement, as well as the means by which NSCC
protects itself and its Members from the risks inherent in the
clearance and settlement process. NSCC's risk management process must
account for the fact that, in certain extreme circumstances, the
collateral and other financial resources that secure NSCC's risk
exposures may not be sufficient to fully cover losses resulting from
the liquidation of the portfolio of a Member for whom NSCC has ceased
to act.\7\
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    \7\ When NSCC restricts a Member's access to services generally,
NSCC is said to have ``ceased to act'' for the Member. Rule 46
(Restrictions on Access to Services) sets out the circumstances
under which NSCC may cease to act for a Member, and Rule 18
(Procedures for When the Corporation Declines or Ceases to Act) sets
out the types of actions NSCC may take when it ceases to act for a
Member. Supra note 5.
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    The Rules currently provide for a loss allocation process through
which both NSCC (by applying no less than 25% of its retained earnings
in accordance with Addendum E) and its Members would share in the
allocation of a loss resulting from the default of a Member for whom
NSCC has ceased to act pursuant to the Rules. The Rules also recognize
that NSCC may incur losses outside the context of a defaulting Member
that are otherwise incident to NSCC's clearance and settlement
business.
    NSCC's loss allocation rules currently provide that in the event
NSCC ceases to act for a Member, the amounts on deposit to the Clearing
Fund from the defaulting Member, along with any other resources of, or
attributable to, the defaulting Member that NSCC may access under the
Rules (e.g., payments from Clearing Agency Cross-Guaranty Agreements),
are the first source of funds NSCC would use to cover any losses that
may result from the closeout of the defaulting Member's guaranteed
positions. If these amounts are not sufficient to cover all losses
incurred, then NSCC will apply the following available resources, in
the following loss allocation waterfall order:
    First, as provided in Addendum E, NSCC's corporate contribution of
at least 25 percent of NSCC's retained earnings existing at the time of
a Member impairment, or such greater amount as the Board of Directors
may determine; and
    Second, if a loss still remains, as and in the manner provided in
Rule 4, the required Clearing Fund deposits of Members who are non-
defaulting Members on the date of default.
    Pursuant to current Section 5 of Rule 4, if, as a result of
applying the Clearing Fund deposit of a Member, the Member's actual
Clearing Fund deposit is less than its Required Deposit, it will be
required to eliminate such deficiency in order to satisfy its Required
Deposit amount. Pursuant to current Section 4 of Rule 4, Members can
also be assessed for non-default losses incident to the operation of
the clearance and settlement business of NSCC. Pursuant to current
Section 8 of Rule 4, Members may withdraw from membership within
specified timeframes after a loss allocation charge to limit their
obligation for future assessments.
Overview of the Proposed Rule Changes
A. Changes To Enhance Resiliency of NSCC's Loss Allocation Process
    In order to enhance the resiliency of NSCC's loss allocation
process, NSCC proposes to change the manner in which each of the
aspects of the loss allocation waterfall described above would be
employed. NSCC would retain the current core loss allocation process
following the application of the defaulting Member's resources, i.e.,
first, by applying NSCC's corporate contribution, and second, by pro
rata allocations to Members. However, NSCC would clarify or adjust
certain elements and introduce certain new loss allocation concepts, as
further discussed below. In addition, the proposed rule change would
address the loss allocation process as it relates to losses arising
from or relating to multiple default or non-default events in a short
period of time, also as described below.
    Accordingly, NSCC is proposing five (5) key changes to enhance
NSCC's loss allocation process:
    (1) Changing the calculation and application of NSCC's corporate
contribution.
    As stated above, Addendum E currently provides that NSCC will
contribute no less than 25% of its retained earnings (or such higher
amount as the Board of Directors shall determine) to a loss or
liability that is not satisfied by the impaired Member's Clearing Fund
deposit. Under the proposal, NSCC would amend the calculation of its
corporate contribution from a percentage of its retained earnings to a
mandatory amount equal to 50% of the NSCC General Business Risk Capital
Requirement.\8\ NSCC's General Business Risk Capital Requirement, as
defined in NSCC's Clearing Agency Policy on Capital Requirements,\9\
is, at a minimum, equal to the regulatory capital that NSCC is required
to maintain in compliance with Rule 17Ad-22(e)(15) under the Act.\10\
The proposed Corporate Contribution (as defined in the proposed rule
change) would be held in addition to NSCC's General Business Risk
Capital Requirement.
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    \8\ NSCC calculates its General Business Risk Capital
Requirement as the amount equal to the greatest of (i) an amount
determined based on its general business profile, (ii) an amount
determined based on the time estimated to execute a recovery or
orderly wind-down of NSCC's critical operations, and (iii) an amount
determined based on an analysis of NSCC's estimated operating
expenses for a six (6) month period.
    \9\ See Securities Exchange Act Release No. 81105 (July 7,
2017), 82 FR 32399 (July 13, 2017) (SR-NSCC-2017-004).
    \10\ 17 CFR 240.17Ad-22(e)(15).
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    Currently, the Rules do not require NSCC to contribute its retained
earnings to losses and liabilities other than those from Member
impairments. Under the proposal, NSCC would apply its corporate
contribution to non-default losses as well. The proposed Corporate
Contribution would apply to losses arising from Defaulting Member
Events and Declared Non-Default Loss Events (as such terms are defined
below and in the proposed rule change), and would be a mandatory
contribution by NSCC prior to any allocation of the loss among NSCC's
Members.\11\ As proposed, if the Corporate Contribution is fully or
partially used against a loss or liability relating to an Event Period,
the Corporate Contribution would be reduced to the remaining unused
amount, if any, during the following two hundred fifty (250) business
days\12\ in order to permit NSCC to replenish the Corporate
Contribution.\13\ To ensure transparency, Members would receive

notice of any such reduction to the Corporate Contribution.
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    \11\ The proposed rule change would not require a Corporate
Contribution with respect to the use of the Clearing Fund as a
liquidity resource; however, if NSCC uses the Clearing Fund as a
liquidity resource for more than 30 calendar days, as set forth in
proposed Section 2 of Rule 4, then NSCC would have to consider the
amount used as a loss to the Clearing Fund incurred as a result of a
Defaulting Member Event and allocate the loss pursuant to proposed
Section 4 of Rule 4, which would then require the application of a
Corporate Contribution.
    \12\ Rule 1 defines ``business day'' as ``any day on which the
Corporation is open for business. However, on any business day that
banks or transfer agencies in New York State are closed or a
Qualified Securities Depository is closed, no deliveries of
securities and no payments of money shall be made through the
facilities of the Corporation.'' Supra note 5.
    \13\ NSCC believes that two hundred and fifty (250) business
days would be a reasonable estimate of the time frame that NSCC
would require to replenish the Corporate Contribution by equity in
accordance with NSCC's Clearing Agency Policy on Capital
Requirements, including a conservative additional period to account
for any potential delays and/or unknown exigencies in times of
distress.
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    As compared to the current approach of applying ``no less than'' a
percentage of retained earnings to defaulting Member losses, the
proposed Corporate Contribution would be a fixed percentage of NSCC's
General Business Risk Capital Requirement, which would provide greater
transparency and accessibility to Members. The proposed Corporate
Contribution would apply not only towards losses and liabilities
arising out of or relating to Defaulting Member Events but also those
arising out of or relating to Declared Non-Default Loss Events, which
is consistent with the current industry guidance that ``a CCP should
identify the amount of its own resources to be applied towards losses
arising from custody and investment risk, to bolster confidence that
participants' assets are prudently safeguarded.''\14\
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    \14\ See Resilience of central counterparties (CCPs): Further
guidance on the PFMI, issued by the Committee on Payments and Market
Infrastructures and the International Organization of Securities
Commissions, at 42 (July 2017), available at www.bis.org/cpmi/publ/d163.pdf.
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    Under the current Addendum E, NSCC has the discretion to contribute
amounts higher than the specified percentage of retained earnings, as
determined by the Board of Directors, to any loss or liability incurred
by NSCC as result of a Member's impairment. This option would be
retained and expanded under the proposal so that it would be clear that
NSCC can voluntarily apply amounts greater than the Corporate
Contribution against any loss or liability (including non-default
losses) of NSCC, if the Board of Directors, in its sole discretion,
believes such to be appropriate under the factual situation existing at
the time.
    The proposed rule changes relating to the calculation and
application of the Corporate Contribution are set forth in proposed
Sections 4 and 5 of Rule 4, as further described below.
    (2) Introducing an Event Period.
    In order to clearly define the obligations of NSCC and its Members
regarding loss allocation and to balance the need to manage the risk of
sequential loss events against Members' need for certainty concerning
their maximum loss allocation exposures, NSCC is proposing to introduce
the concept of an ``Event Period'' to the Rules to address the losses
and liabilities that may arise from or relate to multiple Defaulting
Member Events and/or Declared Non-Default Loss Events that arise in
quick succession. Specifically, the proposal would group Defaulting
Member Events and Declared Non-Default Loss Events occurring in a
period of ten (10) business days (``Event Period'') for purposes of
allocating losses to Members in one or more rounds (as described
below), subject to the limitations of loss allocation set forth in the
proposed rule change and as explained below.\15\ In the case of a loss
or liability arising from or relating to a Defaulting Member Event, an
Event Period would begin on the day NSCC notifies Members that it has
ceased to act \16\ for the Defaulting Member (or the next business day,
if such day is not a business day). In the case of a loss or liability
arising from or relating to a Declared Non-Default Loss Event, an Event
Period would begin on the day that NSCC notifies Members of the
Declared Non-Default Loss Event (or the next business day, if such day
is not a business day). If a subsequent Defaulting Member Event or
Declared Non-Default Loss Event occurs during an Event Period, any
losses or liabilities arising out of or relating to any such subsequent
event would be resolved as losses or liabilities that are part of the
same Event Period, without extending the duration of such Event Period.
An Event Period may include both Defaulting Member Events and Declared
Non-Default Loss Events, and there would not be separate Event Periods
for Defaulting Member Events or Declared Non-Default Loss Events
occurring during overlapping ten (10) business day periods.
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    \15\ NSCC believes that having a ten (10) business day Event
Period would provide a reasonable period of time to encompass
potential sequential Defaulting Member Events or Declared Non-
Default Loss Events that are likely to be closely linked to an
initial event and/or a severe market dislocation episode, while
still providing appropriate certainty for Members concerning their
maximum exposure to mutualized losses with respect to such events.
    \16\ Supra note 7.
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    The amount of losses that may be allocated by NSCC, subject to the
required Corporate Contribution, and to which a Loss Allocation Cap
would apply for any Member that elects to withdraw from membership in
respect of a loss allocation round, would include any and all losses
from any Defaulting Member Events and any Declared Non-Default Loss
Events during the Event Period, regardless of the amount of time,
during or after the Event Period, required for such losses to be
crystallized and allocated.\17\
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    \17\ As discussed below, each Member that is a Member on the
first day of an Event Period would be obligated to pay its pro rata
share of losses and liabilities arising out of or relating to each
Defaulting Member Event (other than a Defaulting Member Event with
respect to which it is the Defaulting Member) and each Declared Non-
Default Loss Event occurring during the Event Period.
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    The proposed rule changes relating to the implementation of an
Event Period are set forth in proposed Section 4 of Rule 4, as further
described below.
    (3) Introducing the concept of ``rounds'' and Loss Allocation
Notice.
    Pursuant to the proposed rule change, a loss allocation ``round''
would mean a series of loss allocations relating to an Event Period,
the aggregate amount of which is limited by the sum of the Loss
Allocation Caps of affected Members (a ``round cap''). When the
aggregate amount of losses allocated in a round equals the round cap,
any additional losses relating to the applicable Event Period would be
allocated in one or more subsequent rounds, in each case subject to a
round cap for that round. NSCC may continue the loss allocation process
in successive rounds until all losses from the Event Period are
allocated among Members that have not submitted a Loss Allocation
Withdrawal Notice in accordance with proposed Section 6 of Rule 4.
    Each loss allocation would be communicated to Members by the
issuance of a notice that advises the Members of the amount being
allocated to them (``Loss Allocation Notice''). Each Member's pro rata
share of losses and liabilities to be allocated in any round would be
equal to (i) the average of its Required Fund Deposit for the seventy
(70) business days preceding the first day of the applicable Event
Period or such shorter period of time that the Member has been a Member
(each Member's ``Average RFD''), divided by (ii) the sum of Average RFD
amounts of all Members subject to loss allocation in such round.
    Each Loss Allocation Notice would specify the relevant Event Period
and the round to which it relates. The first Loss Allocation Notice in
any first, second, or subsequent round would expressly state that such
Loss Allocation Notice reflects the beginning of the first, second, or
subsequent round, as the case may be, and that each Member in that
round has five (5) business days from the issuance of such first Loss
Allocation Notice for the round to notify NSCC of its election to
withdraw from membership with NSCC pursuant to proposed Section 6 of
Rule 4, and thereby benefit from its Loss Allocation Cap.\18\ The
``Loss Allocation Cap'' of a

Member would be equal to the greater of (x) its Required Fund Deposit
on the first day of the applicable Event Period and (y) its Average
RFD.
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    \18\ Pursuant to the current Section 8 of Rule 4, the time
period for a participant to give notice of its election to terminate
its business with NSCC in respect of a pro rata charge is ten (10)
business days after receiving notice of a pro rata charge. Supra
note 5.
    NSCC believes that it is appropriate to shorten such time period
from ten (10) business days to five (5) business days because NSCC
needs timely notice of which Members would remain in its membership
for purposes of calculating the loss allocation for any subsequent
round. NSCC believes that five (5) business days would provide
Members with sufficient time to decide whether to cap their loss
allocation obligations by withdrawing from their membership in NSCC.
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    After a first round of loss allocations with respect to an Event
Period, only Members that have not submitted a Loss Allocation
Withdrawal Notice in accordance with proposed Section 6 of Rule 4 would
be subject to further loss allocation with respect to that Event
Period.
    The amount of any second or subsequent round cap may differ from
the first or preceding round cap because there may be fewer Members in
a second or subsequent round if Members elect to withdraw from
membership with NSCC as provided in proposed Section 6 of Rule 4
following the first Loss Allocation Notice in any round.
    For example, for illustrative purposes only, after the required
Corporate Contribution, if NSCC has a $5 billion loss determined with
respect to an Event Period and the sum of Loss Allocation Caps for all
Members subject to the loss allocation is $4 billion, the first round
would begin when NSCC issues the first Loss Allocation Notice for that
Event Period. NSCC could issue one or more Loss Allocation Notices for
the first round until the sum of losses allocated equals $4 billion.
Once the $4 billion is allocated, the first round would end and NSCC
would need a second round in order to allocate the remaining $1 billion
of loss. NSCC would then issue a Loss Allocation Notice for the $1
billion and this notice would be the first Loss Allocation Notice for
the second round. The issuance of the Loss Allocation Notice for the $1
billion would begin the second round.
    The proposed rule change would link the Loss Allocation Cap to a
round in order to provide Members the option to limit their loss
allocation exposure at the beginning of each round. As proposed and as
described further below, a Member could limit its loss allocation
exposure to its Loss Allocation Cap by providing notice of its election
to withdraw from membership within five (5) business days after the
issuance of the first Loss Allocation Notice in any round.
    The proposed rule changes relating to the implementation of
``rounds'' and Loss Allocation Notices are set forth in proposed
Section 4 of Rule 4, as further described below.
    (4) Implementing a ``look-back'' period to calculate a Member's
loss allocation pro rata share and its Loss Allocation Cap.
    Currently, the Rules calculate a Member's pro rata share for
purposes of loss allocation based on the Member's ``allocation for a
System,'' which in turn is based on settlement dollar amounts.
Therefore, a Member's loss allocation obligations are currently based
on the Member's activity in each of the various services or ``Systems''
offered by NSCC.\19\ The Rules do not anticipate the possibility of
more than one Defaulting Member Event or Declared Non-Default Loss
Event in quick succession.
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    \19\ NSCC's current loss allocation rules pre-date NSCC's move
to a risk-based margining methodology.
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    Given NSCC's risk-based margining methodology, NSCC believes that
it would be more appropriate to determine a Member's pro rata share of
losses and liabilities based on the amount of risk that the Member
brings to NSCC, which is represented by the Member's Required Deposit
(NSCC is proposing that ``Required Deposits'' be renamed ``Required
Fund Deposits,'' as described below). Accordingly, NSCC is proposing to
calculate each Member's pro rata share of losses and liabilities to be
allocated in any round (as described above and in the proposed rule
change) to be equal to (i) the Member's Average RFD divided by (ii) the
sum of Average RFD amounts for all Members that are subject to loss
allocation in such round.
    Additionally, as described above and in the proposed rule change,
if a Member withdraws from membership pursuant to proposed Section 6 of
Rule 4, NSCC is proposing that the Member's Loss Allocation Cap be
equal to the greater of (i) its Required Fund Deposit on the first day
of the applicable Event Period or (ii) its Average RFD.
    NSCC believes that employing a backward-looking average to
calculate a Member's loss allocation pro rata share and Loss Allocation
Cap would disincentivize Member behavior that could heighten volatility
or reduce liquidity in markets in the midst of a financial crisis.
Specifically, the proposed look-back period would discourage a Member
from reducing its settlement activity during a time of stress primarily
to limit its loss allocation pro rata share, which, as proposed, would
now be based on the Member's average settlement activity over the look-
back period rather than its settlement activity at a point in time that
the Member may not be able to estimate. Similarly, NSCC believes that
taking a backward-looking average into consideration when determining a
Member's Loss Allocation Cap would also deter a Member from reducing
its settlement activity during a time of stress primarily to limit its
Loss Allocation Cap.
    NSCC believes that having a look-back period of seventy (70)
business days is appropriate, because it would be long enough to enable
NSCC to capture a full calendar quarter of a Member's activities,
including quarterly option expirations, and smooth out the impact from
any abnormalities and/or arbitrariness that may have occurred, but not
too long that the Member's business strategy and outlook could have
shifted significantly, resulting in material changes to the size of its
portfolios.
    The proposed rule changes relating to the implementation of a look-
back period are set forth in proposed Section 4 of Rule 4, as further
described below.
    (5) Capping withdrawing Members' loss allocation exposure and
related changes.
    NSCC's current loss allocation rules allow a Member to withdraw if
the Member notifies NSCC, within ten (10) business days after receipt
of notice of a pro rata charge, of its election to terminate its
membership and thereby avail itself of a cap on loss allocation, which
is its Required Deposit as fixed immediately prior to the time of the
pro rata charge. As discussed above, the proposed rule change would
continue providing Members the opportunity to limit their loss
allocation exposure by offering withdrawal options; however, the cap on
loss allocation would be calculated differently and the associated
withdrawal process would also be modified as it relates to withdrawals
associated with the loss allocation process. In particular, the
proposed rule change would shorten the withdrawal notification period
from ten (10) business days to five (5) business days, and would also
change the beginning of such notification period from the receipt of
the notice of a pro rata charge to the issuance of the notice, as
further described below.
    As proposed, if a Member timely provides notice of its withdrawal
from membership in respect of a loss allocation round, the maximum
amount of losses it would be responsible for would be its Loss
Allocation Cap,\20\ provided that the Member complies with the
requirements of the withdrawal

process in proposed Section 6 of Rule 4.\21\
---------------------------------------------------------------------------

    \20\ If a Member's Loss Allocation Cap exceeds the Member's
then-current Required Fund Deposit, it must still cover the excess
amount.
    \21\ For the avoidance of doubt, pursuant to Section 13(d) of
Rule 4(A) (Supplemental Liquidity Deposits), a Special Activity
Supplemental Deposit of a Member may not be used to calculate or be
applied to satisfy any pro rata charge pursuant to Section 4 of Rule
4. Supra note 5.
---------------------------------------------------------------------------

    Currently, NSCC's loss allocation provisions provide that if a pro
rata charge is made against a Member's actual Clearing Fund deposit,
and as result thereof the Member's deposit is less than its Required
Deposit, the Member will, upon demand by NSCC, be required to replenish
its deposit to eliminate the deficiency within such time as NSCC shall
require. To increase transparency of the timeframe under which NSCC
would require funds from Members to satisfy their loss allocation
obligations, NSCC is proposing that Members would receive two (2)
business days' notice of a loss allocation, and Members would be
required to pay the requisite amount no later than the second business
day following issuance of such notice.\22\ Members would have five (5)
business days \23\ from the issuance of the first Loss Allocation
Notice in any round of an Event Period to decide whether to withdraw
from membership.\24\
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    \22\ NSCC believes that allowing Members two (2) business days
to satisfy their loss allocation obligations would provide Members
sufficient notice to arrange funding, if necessary, while allowing
NSCC to address losses in a timely manner.
    \23\ Supra note 18.
    \24\ NSCC believes that setting the start date of the withdrawal
notification period to the date of issuance of a notice would
provide a single withdrawal timeframe that would be consistent
across the Members.
---------------------------------------------------------------------------

    Each round would allow a Member the opportunity to notify NSCC of
its election to withdraw from membership after satisfaction of the
losses allocated in such round. Multiple Loss Allocation Notices may be
issued with respect to each round to allocate losses up to the round
cap.
    Specifically, the first round and each subsequent round of loss
allocation would allocate losses up to a round cap of the aggregate of
all Loss Allocation Caps of those Members included in the round. If a
Member provides notice of its election to withdraw from membership, it
would be subject to loss allocation in that round, up to its Loss
Allocation Cap. If the first round of loss allocation does not fully
cover NSCC's losses, a second round will be noticed to those Members
that did not elect to withdraw from membership in the previous round;
however, as noted above, the amount of any second or subsequent round
cap may differ from the first or preceding round cap because there may
be fewer Members in a second or subsequent round if Members elect to
withdraw from membership with NSCC as provided in proposed Section 6 of
Rule 4 following the first Loss Allocation Notice in any round.
    Pursuant to the proposed rule change, in order to avail itself of
its Loss Allocation Cap, a Member would need to follow the requirements
in proposed Section 6 of Rule 4, which would provide that the Member
must: (i) Specify in its Loss Allocation Withdrawal Notice (as defined
below and in the proposed rule change) an effective date of withdrawal,
which date shall be no later than ten (10) business days following the
last day of the applicable Loss Allocation Withdrawal Notification
Period (as defined below and in the proposed rule change) (i.e., no
later than ten (10) business days after the 5th business day following
the first Loss Allocation Notice in that round of loss allocation),\25\
(ii) cease all activity that would result in transactions being
submitted to NSCC for clearance and settlement for which such Member
would be obligated to perform, where the scheduled final settlement
date would be later than the effective date of the Member's withdrawal,
and (iii) ensure that all clearance and settlement activity for which
such Member is obligated to NSCC is fully and finally settled by the
effective date of the Member's withdrawal, including, without
limitation, by resolving by such date all fails and buy-in obligations.
---------------------------------------------------------------------------

    \25\ NSCC believes that having an effective date of withdrawal
that is not later than ten (10) business days following the last day
of the Loss Allocation Withdrawal Notification Period would provide
Members with a reasonable period of time to wind down their
activities at NSCC while minimizing any uncertainty typically
associated with a longer withdrawal period.
---------------------------------------------------------------------------

    As proposed, a Member that withdraws in compliance with proposed
Section 6 of Rule 4 would remain obligated for its pro rata share of
losses and liabilities with respect to any Event Period for which it is
otherwise obligated under Rule 4; however, its aggregate obligation
would be limited to the amount of its Loss Allocation Cap (as fixed in
the round for which it withdrew).
    The proposed rule changes are designed to enable NSCC to continue
the loss allocation process in successive rounds until all of NSCC's
losses are allocated. To the extent that a Member's Loss Allocation Cap
exceeds the Member's Required Fund Deposit on the first day of the
applicable Event Period, NSCC may in its discretion retain any excess
amounts on deposit from the Member, up to the Member's Loss Allocation
Cap.
    The proposed rule changes relating to capping withdrawing Members'
loss allocation exposure and related changes to the withdrawal process
are set forth in proposed Sections 4 and 6 of Rule 4, as further
described below.
B. Changes To Align Loss Allocation Rules
    The proposed rule changes would align the loss allocation rules, to
the extent practicable and appropriate, of the three DTCC Clearing
Agencies so as to provide consistent treatment, especially for firms
that are participants of two or more DTCC Clearing Agencies. As
proposed, the loss allocation waterfall and certain related provisions,
e.g., returning a former Member's Clearing Fund, would be consistent
across the DTCC Clearing Agencies to the extent practicable and
appropriate. The proposed rule changes of NSCC that would align loss
allocation rules of the DTCC Clearing Agencies are set forth in
proposed Sections 1, 2, 7, and 12 of Rule 4, as further described
below.
C. Clarifying Changes Relating to Loss Allocation
    The proposed rule changes are intended to make the provisions in
the Rules governing loss allocation more transparent and accessible to
Members. In particular, NSCC is proposing the following changes
relating to loss allocation to clarify Members' obligations for
Declared Non-Default Loss Events.
    Aside from losses that NSCC might face as a result of a Defaulting
Member Event, NSCC could incur non-default losses incident to its
clearance and settlement business.\26\ The Rules currently permit NSCC
to apply Clearing Fund to non-default losses. Specifically, pursuant to
Section 2(b) of Rule 4,\27\ NSCC can use the Clearing Fund to satisfy
losses or liabilities of NSCC incident to the operation of the
clearance and settlement business of NSCC. Section II of Addendum K
provides additional details regarding the application of the Clearing
Fund to losses outside of a System.
---------------------------------------------------------------------------

    \26\ Non-default losses may arise from events such as damage to
physical assets, a cyber-attack, or custody and investment losses.
    \27\ Section 2(b) of Rule 4 provides that ``the use of the
Clearing Fund . . . shall be limited to satisfaction of losses or
liabilities of the Corporation incident to the operation of the
clearance and settlement business of the Corporation other than
losses and liabilities of a System.'' Supra note 5.
---------------------------------------------------------------------------

    If there is a failure of NSCC following a non-default loss, such
occurrence would affect Members in much the same

way as a failure of NSCC following a Defaulting Member Event.
Accordingly, NSCC is proposing rule changes to enhance the provisions
relating to non-default losses by clarifying Members' obligations for
such losses.
    Specifically, NSCC is proposing enhancement of the governance
around non-default losses that would trigger loss allocation to Members
by specifying that the Board of Directors would have to determine that
there is a non-default loss that may be a significant and substantial
loss or liability that may materially impair the ability of NSCC to
provide clearance and settlement services in an orderly manner and will
potentially generate losses to be mutualized among the Members in order
to ensure that NSCC may continue to offer clearance and settlement
services in an orderly manner. The proposed rule change would provide
that NSCC would then be required to promptly notify Members of this
determination, which is referred to in the proposed rule as a Declared
Non-Default Loss Event. In addition, NSCC is proposing to better align
the interests of NSCC with those of its Members by stipulating a
mandatory Corporate Contribution apply to a Declared Non-Default Loss
Event prior to any allocation of the loss among Members, as described
above. Additionally, NSCC is proposing language to clarify Members'
obligations for Declared Non-Default Loss Events.
    The proposed rule changes relating to Declared Non-Default Loss
Events and Members' obligations for such events are set forth in
proposed Section 4 of Rule 4, as further described below.
D. Reduce the Time Within Which NSCC Is Required To Return a Former
Member's Clearing Fund Deposit
    The proposed rule change would reduce the time period in which NSCC
may retain a Member's Clearing Fund deposit. Specifically, NSCC
proposes that if a Member gives notice to NSCC of its election to
withdraw from membership, NSCC will return the Member's Actual Deposit
in the form of (i) cash or securities within thirty (30) calendar days
and (ii) Eligible Letters of Credit within ninety (90) calendar days,
after all of the Member's transactions have settled and all matured and
contingent obligations to NSCC for which the Member was responsible
while a Member have been satisfied, except NSCC may retain for up to
two (2) years the Actual Deposits from Members who have Sponsored
Accounts at DTC.
    NSCC believes that shortening the time period for the return of a
Member's Clearing Fund deposit would be helpful to firms who have
exited NSCC so that they could have use of the deposits sooner than
under the current Rules while at the same time protecting NSCC because
such return would only occur if all obligations of the terminating
Member to NSCC have been satisfied, which would include both matured as
well as contingent obligations.
    The proposed rule changes relating to the reduced time period in
which NSCC is required to return the Clearing Fund deposit of a former
Member are set forth in proposed Section 7 of Rule 4, as further
described below.
    The foregoing changes as well as other changes (including a number
of conforming and technical changes) that NSCC is proposing in order to
improve the transparency and accessibility of the Rules are described
in detail below.
E. Loss Allocation Waterfall Comparison
    The following example \28\ illustrates the differences between the
current and proposed loss allocation provisions:
---------------------------------------------------------------------------

    \28\ For purposes of this example, NSCC has assumed that the
losses occurred with guaranteed CNS activity of Members, and NSCC
allocated all such Members' deposits to the Clearing Fund to CNS
activity (which is typically more than 99% of the NSCC daily gross
settlement amount).
---------------------------------------------------------------------------

    Assumptions:
    (i) Member A defaults on a business day (Day 1). On the same day,
NSCC ceases to act for Member A and notifies Members of the cease to
act. After liquidating Member A's portfolio and applying Member A's
Clearing Fund deposit, NSCC has a loss of $350 million.
    (ii) Member X voluntarily retires from membership five (5) business
days after NSCC ceases to act for Member A (Day 6).
    (iii) Member B defaults seven (7) business days after NSCC ceases
to act for Member A (Day 8). On the same day, NSCC ceases to act for
Member B and notifies Members of the cease to act. After liquidating
Member B's portfolio and applying Member B's Clearing Fund deposit,
NSCC has a loss of $350 million.
    (iv) The current NSCC loss provisions require NSCC to contribute no
less than 25% of its retained earnings as a corporate contribution. For
the purposes of this example, it is assumed that NSCC will contribute
25% of its retained earnings. The amount of NSCC's retained earnings is
$416 million.
    (v) NSCC's General Business Risk Capital Requirement is $154
million.
    Current Loss Allocation:
    Under the current loss allocation provisions, with respect to the
losses arising out of Member A's default, NSCC will contribute $104
million ($416 million * 25%) from retained earnings and then allocate
the remaining loss of $246 million ($350 million - $104 million) to
Members.
    With respect to losses arising out of Member B's default, NSCC will
contribute $78 million (($416 million - $104 million) * 25%) from
retained earnings and then allocate the remaining loss of $272 million
($350 million - $78 million) to Members. Because Member X voluntarily
retired before NSCC ceased to act for Member B, Member X is not subject
to loss allocation with respect to losses arising out of Member B's
default.
    Altogether, with respect to losses arising out of defaults of
Member A and Member B, NSCC will contribute $182 million of retained
earnings and will allocate losses of $518 million to Members.
    Proposed Loss Allocation:
    Under the proposed loss allocation provisions, a Defaulting Member
Event with respect to Member A's default would have occurred on Day
One, and a Defaulting Member Event with respect to Member B's default
would have occurred on Day 8. Because the Defaulting Member Events
occurred during a 10-business day period, they would be grouped
together into an Event Period for purposes of allocating losses to
Members. The Event Period would begin on the 1st business day and end
on the 10th business day.
    With respect to losses arising out of Member A's default, NSCC
would apply a Corporate Contribution of $77 million ($154 million *
50%) and then allocate the remaining loss of $273 million ($350 million
- $77 million) to Members. With respect to losses arising out of Member
B's default, NSCC would not apply a Corporate Contribution since it
would have already contributed the maximum Corporate Contribution of
50% of its General Business Risk Capital Requirement. NSCC would
allocate the losses of $350 million arising out of Member B's default
to Members. Because Member X was a Member on the first day of the Event
Period, Member X would be subject to loss allocation with respect to
all events occurring during the Event Period, even if the event
occurred after its retirement. Therefore, Member X would be subject to
loss allocation with respect to Member B's default.
    Altogether, with respect to losses arising out of defaults of
Member A and Member B, NSCC would apply a Corporate Contribution of $77
million and would allocate losses of $623 million to Members. The
principal differences in the above example are

due to (i) the proposed changes to the calculation and application of
the Corporate Contribution and (ii) the proposed introduction of an
Event Period.
(ii) Detailed Description of the Proposed Rule Changes Related to Loss
Allocation
A. Proposed Changes to Rule 4 (Clearing Fund)
Overview of Rule 4 (Clearing Fund)
    Rule 4 currently addresses Clearing Fund requirements and loss
allocation obligations. While Procedure XV addresses the various
Clearing Fund calculations, Rule 4 sets forth rights, obligations and
other aspects associated with the Clearing Fund, as well as the loss
allocation process. Rule 4 is currently organized into 12 sections.
NSCC is proposing changes to each section, and consolidating provisions
in Rule 4 relating to Mutual Fund Services and Insurance and Retirement
Processing Services into new sections, as described below.
Section 1
    Section 1 of Rule 4 currently sets forth the requirement that each
Member and Mutual Fund/Insurance Services Member shall, and each Fund
Member and Insurance Carrier/Retirement Services Member may, be
required to make a deposit to the Clearing Fund. Section 1 currently
provides that each participant's Required Deposit is based on one or
more formulas specified by NSCC's Board of Directors. The basis of each
such formula is participants' usage of NSCC's facilities. Section 1
also currently sets forth the minimum amount of each participant
category's Required Deposit.
    Current Section 1 allows a portion of a participant's Clearing Fund
deposit to be evidenced by an open account indebtedness secured by
Eligible Clearing Fund Securities, subject to certain limitations set
forth in Procedure XV, and sets forth the various requirements
associated with the deposit of Eligible Clearing Fund Securities.
Current Section 1 also permits NSCC to require participants to post a
letter of credit where NSCC believes the participants present legal
risk.
    Current Section 1 also provides that NSCC allocate the Clearing
Fund by types of service (e.g., Mutual Fund Services) as well as by
Systems (e.g., CNS), and divide the Clearing Fund into separate
``Allocations'' for each such service and separate ``Funds'' for each
such System.
    Under the proposed rule change, NSCC is proposing to add a
subheading of ``Required Fund Deposits'' to Section 1 and restructure
Section 1 so that it applies to Members only and delete references to
Mutual Fund/Insurance Services Members, Fund Members and Insurance
Carrier/Retirement Services Members from Section 1.\29\ Provisions of
Rule 4 regarding Mutual Fund/Insurance Services Members and Fund
Members would be covered in a new proposed Section 13 to Rule 4,
discussed below. Provisions of Rule 4 regarding Insurance Carrier/
Retirement Services Members would be covered in a new proposed Section
14 to Rule 4, discussed below.
---------------------------------------------------------------------------

    \29\ In addition to Section 1 of Rule 4, NSCC is proposing to
delete references to Mutual Fund/Insurance Services Members, Fund
Members and Insurance Carrier/Retirement Services Members from
Sections 2, 3, 4, 5, 6, 7, 8, 9, and 12 of Rule 4.
---------------------------------------------------------------------------

    Under the proposed rule change, Section 1 would continue to have
the same provisions as they relate to Members except for the following:
(i) The language throughout the section would be reorganized,
streamlined and clarified, (ii) ``Required Deposits'' would be renamed
``Required Fund Deposits,'' \30\ which is a more descriptive term to
refer to Members' deposits required for the Clearing Fund, and would
harmonize with the rules of FICC/GSD and FICC/MBSD \31\ and the term
used in such rules,\32\ (iii) a sentence would be added regarding
additional deposits maintained by the Members at NSCC, (iv) the
provision regarding the Clearing Fund being allocated by Systems and
services would be deleted,\33\ and (v) change ``Rules'' to ``Rules and
Procedures'' to better reflect the name of NSCC's rulebook.\34\
---------------------------------------------------------------------------

    \30\ In addition to Section 1 of Rule 4, NSCC is proposing to
rename ``Required Deposits'' to ``Required Fund Deposits'' in
Sections 2, 3, 4, 8, 9, and 11 of Rule 4.
    \31\ FICC/GSD Rulebook (``FICC/GSD Rules''), available at http:/
/dtcc.com/~/media/Files/Downloads/legal/rules/ficc_gov_rules.pdf and
FICC/MBSD Clearing Rules (``FICC/MBSD Rules''), available at http://
dtcc.com/~/media/Files/Downloads/legal/rules/ficc_mbsd_rules.pdf.
    \32\ See FICC/GSD Rule 1 (Definitions) and FICC/MBSD Rule 1
(Definitions), supra note 31.
    \33\ In addition to Section 1 of Rule 4, NSCC is proposing to
delete references to the Clearing Fund being allocated by Systems
and services from Sections 2, 3, and 4 of Rule 4.
    \34\ In addition to Section 1 of Rule 4, NSCC is proposing to
change ``Rules'' to ``Rules and Procedures'' in Sections 9 and 12 of
Rule 4.
---------------------------------------------------------------------------

    The proposed sentence regarding additional deposits to the Clearing
Fund would permit Members to post such additional deposits at their
discretion and would make clear that such additional deposits would be
deemed to be part of the Clearing Fund and the Member's Actual Deposit
(as discussed below and as defined in the proposed rule change) but
would not be deemed to be part of the Member's Required Fund Deposit.
    NSCC proposes to add language in Section 1 to make it clear that
each Member would grant NSCC a first priority perfected security
interest in its right, title and interest in and to any Eligible
Clearing Fund Securities, funds and assets pledged to NSCC to secure
the Member's open account indebtedness or placed by the Member in
NSCC's possession (or its agents acting on its behalf) to secure all
such Member's obligations to NSCC, and that NSCC would be entitled to
exercise the rights of a pledgee under common law and a secured party
under Articles 8 and 9 of the New York Uniform Commercial Code with
respect to such assets. The additional language would further harmonize
the Rules with language used in the FICC/GSD Rules and FICC/MBSD
Rules,\35\ thus providing consistent treatment of pledged resources for
firms that are members of both NSCC and FICC.
---------------------------------------------------------------------------

    \35\ See Section 4 of FICC/GSD Rule 4 and Section 4 of FICC/MBSD
Rule 4, supra note 31.
---------------------------------------------------------------------------

    NSCC proposes to clarify the language in footnote 2 of Section 1.
In addition, NSCC proposes to add ``Eligible Letter of Credit'' as a
defined term to refer to letters of credit posted by participants if
required by NSCC,\36\ which would harmonize the term with the term used
in the FICC/GSD Rules and FICC/MBSD Rules,\37\ thus providing
consistent terminology for firms that are members of both NSCC and
FICC.
---------------------------------------------------------------------------

    \36\ In addition to Section 1 of Rule 4, NSCC is also proposing
to rename ``Letter of Credit'' to ``Eligible Letter of Credit'' in
Sections 2 and 12 of Rule 4.
    \37\ See FICC/GSD Rule 1 (Definitions) and FICC/MBSD Rule 1
(Definitions), supra note 31.
---------------------------------------------------------------------------

    Similarly, NSCC proposes to add ``Actual Deposit'' as a defined
term in Section 1 to refer to Eligible Clearing Fund Securities, funds
and assets pledged to NSCC to secure a Member's open account
indebtedness or placed by a Member in the possession of NSCC (or its
agents acting on its behalf) and any Eligible Letters of Credit issued
on behalf of a Member in favor of NSCC.
    Instead of requiring participants to pledge Eligible Clearing Fund
Securities to NSCC's account at a Qualified Securities Depository
designated by the participants, NSCC proposes to clarify and streamline
Section 1 of proposed Rule 4 to provide that Eligible Clearing Fund
Securities pledged to secure a Member's open account indebtedness would
be delivered to NSCC's account at DTC.
    NSCC would delete the provision regarding allocation of the
Clearing

Fund by Systems and services, as this provision is no longer relevant
under the proposed rule change. Provisions relating to Mutual Fund
Services and Insurance and Retirement Processing Services in Section 1
(as well as other sections in Rule 4) would be consolidated in the
proposed new Sections 13 and 14, entitled ``Mutual Fund Deposits'' and
``Insurance Deposits,'' respectively.
    To consolidate provisions regarding the maintenance, investment and
permitted use of Clearing Fund, NSCC would move the last paragraph of
Section 1 about segregation and maintenance of Clearing Fund (again, in
terms of ``Fund,'' ``System,'' and ``Allocation,'' as discussed above)
to Section 2.
    In addition, NSCC proposes to correct a typographical error in the
reference to a footnote in Section 1 of Rule 4. Specifically, there is
an incorrect reference to footnote 22 in the second paragraph of
Section 1 in current Rule 4. NSCC is proposing to change this reference
to reflect the correct footnote, which is footnote 2.
Section 2
    Section 2 of Rule 4 currently covers the permitted uses of the
Clearing Fund (again by ``Fund'' and ``Allocation,'' as set forth in
current Section 1), including the investment of Clearing Fund Cash and
Cash Receipts, as well as participants' rights to any interest earned
or paid on pledged Eligible Clearing Fund Securities or cash deposits.
    NSCC is proposing to add a subheading of ``Permitted Use,
Investment, and Maintenance of Clearing Fund Assets'' to Section 2 and
restructure Section 2 so that it applies to Members only. NSCC is also
proposing to restructure Section 2 so that the permitted use of
Clearing Fund appears first, then the investment of Clearing Fund,
followed by maintenance of Clearing Fund.
    Under the proposed rule change, the permitted use of Clearing Fund
paragraph would continue to have the same provisions as they relate to
how the Clearing Fund can be used by NSCC, except the provisions would
be streamlined and clarified. Specifically, in order to be consistent
with the proposed change in Section 4 (as described below) regarding
NSCC requiring Members to pay their loss allocation amounts (leaving
their Required Fund Deposits intact), NSCC is proposing to modify the
permitted use of Clearing Fund to make it clear that the Clearing Fund
can be used by NSCC to secure each Member's performance of obligations
to NSCC, including each Member's obligations with respect to any loss
allocations as set forth in Section 4 of Rule 4. NSCC is also proposing
to delete the defined term of Cash Receipts and related provisions from
Rule 4 because, unlike the Clearing Fund, Cash Receipts are money
payments received from participants and payable to others; therefore,
NSCC believes that continuing to include Cash Receipts in Rule 4 is no
longer necessary and may cause confusion among Members.
    NSCC is proposing to add a paragraph that provides that each time
NSCC uses any part of the Clearing Fund to provide liquidity to NSCC to
meet its settlement obligations, including, without limitation, through
the direct use of cash in the Clearing Fund or through the pledge or
rehypothecation of pledged Eligible Clearing Fund Securities in order
to secure liquidity for more than thirty (30) calendar days, NSCC, at
the close of business on the 30th calendar day (or on the first
business day thereafter) from the day of such use, would consider the
amount used but not yet repaid as a loss to the Clearing Fund incurred
as a result of a Defaulting Member Event and immediately allocate such
loss in accordance with proposed Section 4 of Rule 4. NSCC believes
that this proposed change would increase transparency and accessibility
of the Rules for Members by specifying a point in time by which NSCC
would need to replenish the Clearing Fund through loss allocation if
NSCC uses the Clearing Fund to provide or secure liquidity to NSCC to
meet its settlement obligations. NSCC believes that a period of thirty
(30) calendar days would be appropriate because it would provide
sufficient time for NSCC to determine whether it would be able to
obtain the necessary funds from liquidation of the portfolio of the
Defaulting Member to repay the used Clearing Fund amount. In addition,
this proposed change would also harmonize this section with the
comparable section in the FICC/GSD Rules and FICC/MBSD Rules,\38\ so as
to provide consistent treatment for firms that are members of both NSCC
and FICC.
---------------------------------------------------------------------------

    \38\ See Section 5 of FICC/GSD Rule 4 and Section 5 of FICC/MBSD
Rule 4, supra note 31.
---------------------------------------------------------------------------

    Proposed Section 2 would continue to have the same provisions
concerning the investment and maintenance of the Clearing Fund, except
these provisions would also be streamlined and clarified. Specifically,
NSCC is proposing language to make it clear that it may invest cash in
the Clearing Fund in accordance with the Clearing Agency Investment
Policy adopted by NSCC.\39\ NSCC would revise the relocated sentence
from Section 1 which provides that NSCC shall not be required to
segregate any Clearing Fund (again, in terms of ``Fund,'' ``System,''
and ``Allocation,'' as discussed above) in order to (i) conform to the
proposed deletions in Section 1 and use the newly defined term of
``Actual Deposit'' as set forth in Section 1 and (ii) make clear that
NSCC would not be required to segregate a Member's Actual Deposit but
that NSCC would maintain books and records concerning the assets that
constitute each Member's Actual Deposit.
---------------------------------------------------------------------------

    \39\ See Securities Exchange Act Release No. 79528 (December 12,
2016), 81 FR 91232 (December 16, 2016) (SR-NSCC-2016-003). The
Clearing Agency Investment Policy (the ``Policy'') governs the
management, custody, and investment of cash deposited to the
Clearing Fund, the proprietary liquid net assets (cash and cash
equivalents) of NSCC and other funds held by NSCC. The Policy sets
forth guiding principles for the investment of those funds, which
include adherence to a conservative investment philosophy that
places the highest priority on maximizing liquidity and avoiding
risk, as well as mandating the segregation and separation of funds.
The Policy also addresses the process for evaluating credit ratings
of counterparties and identifies permitted investments within
specified parameters. In general, assets are required to be held by
regulated and creditworthy financial institution counterparties and
invested in financial instruments that, with respect to the Clearing
Fund, may include deposits with banks, including the Federal Reserve
Bank of New York, collateralized reverse-repurchase agreements,
direct obligations of the U.S. government and money-market mutual
funds.
---------------------------------------------------------------------------

    Under the proposed rule change, Members would continue to be
entitled to any interest earned or paid on Clearing Fund cash deposits
and pledged Eligible Clearing Fund Securities; however, NSCC is
proposing additional language to make it clear that interest on pledged
Eligible Clearing Fund Securities that is received by NSCC would be
credited to a Member's cash deposits to the Clearing Fund, except in
the event of a default by such Member on any obligations to NSCC, in
which case NSCC may exercise its rights under proposed Section 3 of
Rule 4.
Section 3
    Section 3 of Rule 4 currently provides that NSCC may apply a
participant's actual deposit to any obligation the participant has to
NSCC that the participant has failed to satisfy and to any Cross-
Guaranty Obligation. Participants are required to eliminate any
resulting deficiencies in their Required Deposits within such time as
NSCC requires. Section 3 also currently provides for the manner in
which loss allocation would apply with respect to Off-the-Market
Transactions.

    Under the proposed rule change, NSCC is proposing to add a
subheading of ``Application of Clearing Fund Deposits and Other Amounts
to Members' Obligations'' and to delete provisions that do not apply to
Members and/or that reference the Clearing Fund being allocated into
Funds/Allocations by Systems and services. Under the proposed rule
change, NSCC would retain the provisions in Section 3 regarding
applying the Member's Actual Deposit to satisfy an obligation to NSCC
that a Member fails to satisfy and the requirement to replenish the
Required Fund Deposit as necessary, but NSCC proposes to add clarifying
language that, in addition to a Member's Actual Deposit, NSCC will also
apply any amounts available under a Clearing Agency Cross-Guaranty
Agreement and any proceeds therefrom to satisfy the obligation. NSCC
also proposes to add language making it clear that NSCC may take any
and all actions with respect to the assets and amounts referenced in
the prior sentence, including assignment, transfer, and sale of any
Eligible Clearing Fund Securities, that NSCC determines is appropriate.
    Under the proposed rule change, NSCC would move the provision
regarding allocation of losses from Off-the-Market Transactions to
proposed Section 4 of Rule 4, which addresses allocation of losses to
Members. NSCC would streamline and clarify the remaining provisions for
transparency and accessibility.
Section 4 and Section 5
    Current Section 4 of Rule 4 contains NSCC's current loss allocation
waterfall, which would be initiated if NSCC incurs a loss or liability
in a System that is not satisfied pursuant to current Section 3.
Section 4 currently provides for the following loss allocation
waterfall:
    (i) Application of NSCC's existing retained earnings or such lesser
part \40\ of the existing retained earnings unless the Board of
Directors elects to apply the Fund/Allocation for a particular System
or service.
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    \40\ Addendum E provides that NSCC ``will apply no less than
twenty-five percent (25%) of its retained earnings, existing at the
time of a Member impairment which gives rise to a loss or liability
not satisfied by the impaired Member's Clearing Fund deposit, to
such loss or liability.'' Supra note 5.
---------------------------------------------------------------------------

    (ii) If a loss or liability remains after the application of the
retained earnings, NSCC would apply the Clearing Fund (this application
is subject to the current structure where the Rules provide that the
Clearing Fund is allocated to different Systems/services).
    a. NSCC is required to provide participants and the Commission with
5 business days' prior notice before applying the Clearing Fund.
    b. Participants (other than those responsible for causing the loss
or liability) would be charged pro rata based upon their allocation to
the applicable Fund, less any amounts that participants were required
to deposit pursuant to Rule 15.
    Section 5 of Rule 4 currently states that if a pro rata charge is
made pursuant to Rule 4 against a participant's actual Clearing Fund
deposit, and as a consequence thereof the participant's remaining
deposit is less than its Required Deposit, the participant would, upon
demand by NSCC, be required to replenish its deposit to eliminate the
deficiency within such time as NSCC shall require. Current Section 5
further provides that if the participant does not take this required
action, NSCC may take disciplinary action against the participant, and
any disciplinary action taken against the participant or the voluntary
or involuntary termination of the participant's membership will not
affect the obligations of the participant to NSCC or any remedy to
which NSCC may be entitled under applicable law.
    Under the proposed rule change, NSCC is proposing to add a
subheading of ``Loss Allocation Waterfall, Off-the-Market
Transactions'' to Section 4 and delete provisions that do not apply to
Members and/or that reference the Clearing Fund being allocated into
Funds/Allocations by System or service. In addition, NSCC is proposing
to restructure its loss allocation waterfall as described below.
    Under the proposal, Section 4 would make clear that the loss
allocation waterfall applies to any loss and liability incurred by NSCC
arising out of or relating to a Defaulting Member Event or a Declared
Non-Default Loss Event.
    As proposed, Section 4 would provide that, for the purposes of Rule
4, the term ``Defaulting Member'' would mean a Member for which NSCC
has ceased to act pursuant to Rule 46,\41\ the term ``Defaulting Member
Event'' would mean the determination by NSCC to cease to act for a
Member pursuant to Rule 46, and the term ``Declared Non-Default Loss
Event'' would mean the determination by the Board of Directors that a
loss or liability incident to the clearance and settlement business of
NSCC may be a significant and substantial loss or liability that may
materially impair the ability of NSCC to provide clearance and
settlement services in an orderly manner and will potentially generate
losses to be mutualized among Members in order to ensure that NSCC may
continue to offer clearance and settlement services in an orderly
manner. Proposed Section 4 would establish the concept of an ``Event
Period'' to provide for a clear and transparent way of handling
multiple loss events occurring in a period of ten (10) business days,
which would be grouped into an Event Period.\42\ As stated above, both
Defaulting Member Events or Declared Non-Default Loss Events could
occur within the same Event Period.
---------------------------------------------------------------------------

    \41\ NSCC may cease to act for a Member pursuant to any of the
circumstances set forth under Rule 46 (Restrictions on Access to
Services), including, but not limited to, in the event the Member is
in default of any delivery of funds or securities to NSCC. Supra
note 5.
    \42\ Supra note 15.
---------------------------------------------------------------------------

    Under the proposal, an Event Period with respect to a Defaulting
Member Event would begin on the day NSCC notifies participants that it
has ceased to act for the Defaulting Member (or the next business day,
if such day is not a business day). In the case of a Declared Non-
Default Loss Event, an Event Period would begin on the day that NSCC
notifies Members of the Declared Non-Default Loss Event (or the next
business day, if such day is not a business day). If a subsequent
Defaulting Member Event or Declared Non-Default Loss Event occurs
during an Event Period, any losses or liabilities arising out of or
relating to any such subsequent event would be resolved as losses or
liabilities that are part of the same Event Period, without extending
the duration of such Event Period.
    As proposed, each Member would be obligated to NSCC for the entire
amount of any loss or liability incurred by NSCC arising out of or
relating to any Defaulting Member Event with respect to such Member.
Under the proposal, to the extent that such loss or liability is not
satisfied pursuant to proposed Section 3 of Rule 4, NSCC would apply a
Corporate Contribution thereto and charge the remaining amount of such
loss or liability ratably to other Members, as provided in proposed
Section 4.
    Under proposed Section 4, the loss allocation waterfall would begin
with a corporate contribution from NSCC (``Corporate Contribution''),
as is the case under the current Rules, but in a different form than
under the current Section 4 of Rule 4. Today, pursuant to Addendum E,
in the event of a Member impairment, NSCC is required to apply at least
25% of its retained earnings existing at the time of a Member
impairment; however, no corporate

contribution from NSCC is currently required for losses resulting other
than those from Member impairments. Under the proposal, NSCC would
amend Section 5 to add a subheading of ``Corporate Contribution'' and
define NSCC's Corporate Contribution with respect to any loss
allocation pursuant to proposed Section 4 of Rule 4, whether arising
out of or relating to a Defaulting Member Event or a Declared Non-
Default Loss Event, as an amount that is equal to fifty (50) percent of
the amount calculated by NSCC in respect of its General Business Risk
Capital Requirement as of the end of the calendar quarter immediately
preceding the Event Period.\43\ The proposed rule change would specify
that NSCC's General Business Risk Capital Requirement, as defined in
NSCC's Clearing Agency Policy on Capital Requirements,\44\ is, at a
minimum, equal to the regulatory capital that NSCC is required to
maintain in compliance with Rule 17Ad-22(e)(15) under the Act.\45\
---------------------------------------------------------------------------

    \43\ Supra note 8.
    \44\ Supra note 9.
    \45\ Supra note 10.
---------------------------------------------------------------------------

    As proposed, if NSCC applies the Corporate Contribution to a loss
or liability arising out of or relating to one or more Defaulting
Member Events or Declared Non-Default Loss Events relating to an Event
Period, then for any subsequent Event Periods that occur during the two
hundred fifty (250) business days thereafter,\46\ the Corporate
Contribution would be reduced to the remaining unused portion of the
Corporate Contribution amount that was applied for the first Event
Period. Proposed Section 5 would require NSCC to notify Members of any
such reduction to the Corporate Contribution.
---------------------------------------------------------------------------

    \46\ Supra note 13.
---------------------------------------------------------------------------

    Currently, the Rules do not require NSCC to contribute its retained
earnings to losses and liabilities other than from Member impairments.
Under the proposal, NSCC would expand the application of its corporate
contribution beyond losses and liabilities from Member impairments. The
proposed Corporate Contribution would apply to losses or liabilities
relating to or arising out of Defaulting Member Events and Declared
Non-Default Loss Events, and would be a mandatory loss contribution by
NSCC prior to any allocation of the loss among Members.
    Addendum E currently provides NSCC the option to contribute amounts
higher than the specified percentage of retained earnings, as
determined by the Board of Directors, to any loss or liability incurred
by NSCC as the result of a Member's impairment. This option would be
retained and expanded under the proposal to also cover non-default
losses. Proposed Section 5 would provide that nothing in the Rules
would prevent NSCC from voluntarily applying amounts greater than the
Corporate Contribution against any NSCC loss or liability, whether
arising out of or relating to a Defaulting Member Event or a Declared
Non-Default Loss Event, if the Board of Directors, in its sole
discretion, believes such to be appropriate under the factual situation
existing at the time.
    Proposed Section 4 of Rule 4 would provide that NSCC shall apply
the Corporate Contribution to losses and liabilities that arise out of
or relate to one or more Defaulting Member Events and/or Declared Non-
Default Loss Events that occur within an Event Period. The proposed
rule change also provides that if losses and liabilities with respect
to such Event Period remain unsatisfied following application of the
Corporate Contribution, NSCC would allocate such losses and liabilities
to Members, as described below.
    Proposed Section 4 of Rule 4 would also retain the requirement of
loss allocation among Members if a loss or liability remains after the
application of the Corporate Contribution, as described above. In
contrast to the current Section 4 where NSCC would apply Members'
Required Deposits to the mutualized loss allocation amounts, under the
proposal, NSCC would require Members to pay their loss allocation
amounts (leaving their Required Fund Deposits intact).\47\ Loss
allocation obligations would continue to be calculated based upon a
Member's pro rata share of losses and liabilities (although the pro
rata share would be calculated differently than it is today), and
Members would still retain the ability to voluntarily withdraw from
membership and cap their loss allocation obligation (although the loss
allocation obligation would also be calculated differently than it is
today).
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    \47\ NSCC believes that shifting from the two-step methodology
of applying the Clearing Fund and then requiring Members to
immediately replenish it, to requiring direct payment would increase
efficiency while preserving the right to charge a Member's Clearing
Fund deposits in the event the Member does not timely pay. Such a
failure to pay would trigger recourse to the Clearing Fund deposits
of the Member under proposed Section 3 of Rule 4. In addition, this
change would provide greater stability for NSCC in times of stress
by allowing NSCC to retain the Clearing Fund, its critical prefunded
resource, while charging loss allocations. NSCC believes doing so
would allow NSCC to cover its current credit exposures to Members at
all times. By retaining the Clearing Fund as proposed, NSCC could
use the Clearing Fund to secure the performance obligations of
Members to NSCC, including their payment obligation for any loss
allocation, while maintaining access to prefunded resources. By
being able to manage its current credit exposures throughout the
loss allocation process, NSCC would be able to continue to provide
its critical operations and services during what would be expected
to be a stressful period.
---------------------------------------------------------------------------

    The proposed rule change to Section 4 of Rule 4 would clarify that
each Member that is a Member on the first day of an Event Period would
be obligated to pay its pro rata share of losses and liabilities
arising out of or relating to each Defaulting Member Event (other than
a Defaulting Member Event with respect to which it is the Defaulting
Member) and each Declared Non-Default Loss Event occurring during the
Event Period. The proposal would make it clear that any Member for
which NSCC ceases to act on a non-business day, triggering an Event
Period that commences on the next business day, shall be deemed to be a
Member on the first day of that Event Period.
    Under the proposed rule change, a loss allocation ``round'' would
mean a series of loss allocations relating to an Event Period, the
aggregate amount of which is limited by the round cap. When the
aggregate amount of losses allocated in a round equals the round cap,
any additional losses relating to the applicable Event Period would be
allocated in one or more subsequent rounds, in each case subject to a
round cap for that round. NSCC may continue the loss allocation process
in successive rounds until all losses from the Event Period are
allocated among Members that have not submitted a Loss Allocation
Withdrawal Notice in accordance with proposed Section 6 of Rule 4.
    As proposed, each loss allocation would be communicated to Members
by the issuance of a Loss Allocation Notice. Under the proposal, each
Member's pro rata share of losses and liabilities to be allocated in
any round would be equal to (i) the Member's Average RFD divided by
(ii) the sum of Average RFD amounts of all Members subject to loss
allocation in such round.
    Each Loss Allocation Notice would specify the relevant Event Period
and the round to which it relates. The first Loss Allocation Notice in
any first, second, or subsequent round would expressly state that such
Loss Allocation Notice reflects the beginning of the first, second, or
subsequent round, as the case may be, and that each Member in that
round has five (5) business days from the issuance of such first Loss
Allocation Notice for the round (such period, a ``Loss Allocation
Withdrawal Notification Period'') to notify NSCC of its election to
withdraw from membership with NSCC pursuant to

proposed Section 6 of Rule 4, and thereby benefit from its Loss
Allocation Cap.\48\ As proposed, the ``Loss Allocation Cap'' of a
Member would be equal to the greater of (x) its Required Fund Deposit
on the first day of the applicable Event Period and (y) its Average
RFD.
---------------------------------------------------------------------------

    \48\ Supra note 18.
---------------------------------------------------------------------------

    NSCC is proposing to clarify that after a first round of loss
allocation with respect to an Event Period, only Members that have not
submitted a Loss Allocation Withdrawal Notice in accordance with
proposed Section 6 of Rule 4 would be subject to further loss
allocation with respect to that Event Period.
    As proposed, Members would have two (2) business days after NSCC
issues a first round Loss Allocation Notice to pay the amount specified
in any such notice.\49\ On a subsequent round (i.e., if the first round
did not cover the entire loss of the Event Period because NSCC was only
able to allocate up to the round cap), Members would also have two (2)
business days after notice by NSCC to pay their loss allocation amounts
(again subject to their Loss Allocation Caps), unless Members have
notified (or will timely notify) NSCC of their election to withdraw
from membership with respect to a prior loss allocation round pursuant
to proposed Section 6 of Rule 4.
---------------------------------------------------------------------------

    \49\ Supra note 22.
---------------------------------------------------------------------------

    As proposed, Section 4 would also provide that, to the extent that
a Member's Loss Allocation Cap exceeds the Member's Required Fund
Deposit on the first day of the applicable Event Period, NSCC may in
its discretion retain any excess amounts on deposit from the Member, up
to the Member's Loss Allocation Cap.
    Under the proposal, if a Member fails to make its required payment
in respect of a Loss Allocation Notice by the time such payment is due,
NSCC would have the right to proceed against such Member as a Member
that has failed to satisfy an obligation in accordance with proposed
Section 3 of Rule 4 described above. Members who wish to withdraw would
be required to comply with the requirements in proposed Section 6 of
Rule 4, described further below. Specifically, proposed Section 4 of
Rule 4 would provide that if, after notifying NSCC of its election to
withdraw from membership pursuant to proposed Section 6 of Rule 4, the
Member fails to comply with the provisions of proposed Section 6 of
Rule 4, its notice of withdrawal would be deemed void and any further
losses resulting from the applicable Event Period may be allocated
against it as if it had not given such notice.
    Under the proposal, NSCC would delete the provision in current
Section 4 of Rule 4 that requires NSCC to provide Members and the
Commission with 5 business days' prior notice before applying the
Clearing Fund to a loss or liability because such requirement would no
longer be relevant under the proposed rule change. Under the proposed
rule change, NSCC would notify Members subject to loss allocation of
the amounts being allocated to them in one or more Loss Allocation
Notices. As proposed, instead of applying the Clearing Fund, NSCC would
require Members to pay their loss allocation amounts (leaving their
Clearing Fund deposits intact). In order to conform to these proposed
rule changes, NSCC is proposing to eliminate the required notification
to Members regarding the application of Clearing Fund in current
Section 4 of Rule 4. NSCC is also proposing to delete the required
notification to the Commission regarding the application of Clearing
Fund in the same section. While as a practical matter, NSCC would
notify the Commission of a decision to loss allocate, NSCC does not
believe such notification needs to be specified in the Rules.
    Under the proposed rule change, NSCC would move the provision
related to Off-the-Market Transactions from current Section 3 of Rule 4
to proposed Section 4 of Rule 4 and clarify that (i) a loss or
liability of NSCC in connection with the close-out or liquidation of an
Off-the-Market Transaction would be allocated to the Member that was
the counterparty to such transaction and (ii) no allocation would be
made if the Defaulting Member satisfied all applicable intraday mark-
to-market margin charges assessed by NSCC with respect to the Off-the-
Market Transaction prior to its default.\50\
---------------------------------------------------------------------------

    \50\ See Securities Exchange Act Release No. 79598 (December 19,
2016), 81 FR 94462 (December 23, 2016) (SR-NSCC-2016-005), at 94465,
and Securities Exchange Act Release No. 79592 (December 19, 2016),
81 FR 94448 (December 23, 2016) (SR-NSCC-2016-803), at 94452.
---------------------------------------------------------------------------

Section 6
    Proposed Section 6 of Rule 4 would include the provisions regarding
withdrawal from membership currently covered by Section 8 of Rule 4.
NSCC believes that relocating the provisions on withdrawal from
membership as it pertains to loss allocation, so that it comes right
after the section on the loss allocation waterfall, would provide for
the better organization of Rule 4. As proposed, the subheading for
Section 6 would read ``Withdrawal Following Loss Allocation.''
    Currently, Section 8 of Rule 4 provides that participants may
notify NSCC within ten (10) business days after receipt of notice of a
pro rata charge that they have elected to terminate their membership
and thereby avail themselves of a cap on loss allocation, which is
currently their Required Deposit as fixed immediately prior to the time
of the pro rata charge.
    As stated above, under the proposed rule change, a Member who
wishes to withdraw from membership in respect of a loss allocation
round must provide notice of its election to withdraw (``Loss
Allocation Withdrawal Notice'') within five (5) business days from the
issuance of the first Loss Allocation Notice in any round.\51\ In order
to avail itself of its Loss Allocation Cap, the Member would need to
follow the requirements in proposed Section 6 of Rule 4, which would
provide that the Member must: (i) Specify in its Loss Allocation
Withdrawal Notice an effective date for withdrawal from membership,
which date shall not be later than ten (10) business days following the
last day of the Loss Allocation Withdrawal Notification Period (i.e.,
no later than ten (10) business days after the 5th business day
following the first Loss Allocation Notice in that round of loss
allocation),\52\ (ii) cease all activity that would result in
transactions being submitted to NSCC for clearance and settlement for
which such Member would be obligated to perform, where the scheduled
final settlement date would be later than the effective date of the
Member's withdrawal, and (iii) ensure that all clearance and settlement
activity for which such Member is obligated to NSCC is fully and
finally settled by the effective date of the Member's withdrawal,
including, without limitation, by resolving by such date all fails and
buy-in obligations.
---------------------------------------------------------------------------

    \51\ Supra note 18.
    \52\ Supra note 25.
---------------------------------------------------------------------------

    Proposed Section 6 of Rule 4 would provide that a Member that
withdraws in compliance with the requirements of proposed Section 6 of
Rule 4 would nevertheless remain obligated for its pro rata share of
losses and liabilities with respect to any Event Period for which it is
otherwise obligated under proposed Rule 4; however, the Member's
aggregate obligation would be limited to the amount of its Loss
Allocation Cap (as fixed in the round for which it withdrew).
    NSCC is proposing to include a sentence in proposed Section 6 of
Rule 4 to make it clear that if the Member

fails to comply with the requirements set forth in that section, its
Loss Allocation Withdrawal Notice will be deemed void, and the Member
will remain subject to further loss allocations pursuant to proposed
Section 4 of Rule 4 as if it had not given such notice.
    Currently, Section 8 also contains provisions regarding additional
pro rata charges that may be made by NSCC for the same loss or
liability under the existing loss allocation process and the applicable
caps that participants wishing to voluntarily terminate their
membership after such additional pro rata charges are noticed may avail
themselves of. These provisions would be replaced by the loss
allocation process contained in proposed Section 4 described above.
Section 7
    As proposed, Section 7 would cover the provisions on the return of
a Member's Clearing Fund deposit that are currently covered by Section
6 of Rule 4. Proposed Section 7's subheading would be ``Return of
Members' Clearing Fund Deposits'' and would apply only to Members.
    Currently, with respect to the return of Clearing Fund deposits,
Section 6 of Rule 4 states that NSCC will return a participant's
Clearing Fund deposit 90 days after 3 conditions are met: (i) The
participant ceases to be a participant, (ii) all transactions open at
the time the participant ceases to be a participant which could result
in a charge to the Clearing Fund have been closed, and (iii) all
obligations of the participant to NSCC have been satisfied or have been
deducted from the participant's Clearing Fund deposit by NSCC, provided
that the participant has provided NSCC with satisfactory indemnities or
guarantees or another participant has been substituted on all
transactions and obligations of the participant.
    Current Section 6 provides further that in the absence of an
acceptable guarantee, indemnity or substitution, NSCC will retain the
entire Clearing Fund deposit of a participant if such deposit is less
than $100,000 for two (2) years (or four (4) years for Members who have
Sponsored Accounts at a Qualified Securities Depository) after
conditions described in (i), (ii) and (iii) of the paragraph above have
occurred. If the participant's Clearing Fund deposit is equal to or
greater than $100,000, NSCC will retain the greater of twenty-five (25)
percent of a participant's average Clearing Fund requirement over the
twelve (12) months immediately prior to the date the participant ceased
to be a participant, or $100,000 for two (2) years (or four (4) years
for Members who have Sponsored Accounts at a Qualified Securities
Depository) after conditions described in (i), (ii) and (iii) of the
paragraph above have occurred.
    Current Section 6 states that if a participant made a deposit with
respect to the Mutual Fund Services or Insurance and Retirement
Processing Services, the participant will be entitled to the return of
this deposit ninety (90) days after all associated transactions in
these services have been satisfied.
    Finally, Section 6 currently provides that any obligation of a
participant to NSCC unsatisfied at the time the participant ceases to
be a participant will not be affected by such cessation of membership.
    Proposed Section 7 would reduce the period in which NSCC may retain
a Member's Clearing Fund deposit. Specifically, NSCC proposes that if a
Member gives notice to NSCC of its election to withdraw from
membership, NSCC will return the Member's Actual Deposit in the form of
(i) cash or securities within thirty (30) calendar days and (ii)
Eligible Letters of Credit within ninety (90) calendar days, after all
of the Member's transactions have settled and all matured and
contingent obligations to NSCC for which the Member was responsible
while a Member have been satisfied, except NSCC may retain for up to
two (2) years the Actual Deposits from Members who have Sponsored
Accounts at DTC. NSCC believes that shortening the time periods for the
return of a Member's Clearing Fund deposit would be helpful to firms
who have exited NSCC so that they could have use of the deposits sooner
than under the current Rules, while at the same time protecting NSCC
because such return would only occur if all obligations of the
terminating Member to NSCC have been satisfied. Proposed Section 7
would also harmonize the retention period for a Member's deposits to
the Clearing Fund with the FICC/GSD Rules,\53\ thus providing
consistent treatment for firms that are members of both NSCC and FICC.
Similarly, the Clearing Fund deposit retention for Members who have
Sponsored Accounts at DTC would be reduced in order to stay consistent
with the proposed retention period in the rules of DTC.\54\ In
addition, NSCC proposes to make it clear that a Member's obligations to
NSCC would include both matured as well as contingent obligations.
---------------------------------------------------------------------------

    \53\ Section 10 of FICC/GSD Rule 4, in relevant part, states
that ``If a Netting Member gives notice to the Corporation pursuant
to Rule 3 of its election to terminate its membership in the Netting
System, the Member's deposits to the Clearing Fund in the form of
cash or securities shall be returned to it within 30 calendar days
thereafter . . . provided that all amounts owing to the Corporation
by the Member have been paid to the Corporation prior to such return
and the Member has no remaining open Net Settlement Position, Fail
Net Settlement Position, or Forward Net Settlement Position.'' Supra
note 31.
    \54\ On December 18, 2017, DTC submitted a proposed rule change
and an advance notice to enhance its rules regarding allocation of
losses. See Securities Exchange Act Release Nos. 82426 (January 2,
2018), 83 FR 913 (January 8, 2018) (SR-DTC-2017-022) and 82582
(January 24, 2018), 83 FR 4297 (January 30, 2018) (SR-DTC-2017-804).
On June 28, 2018, DTC submitted amendments to the proposed rule
change and advance notice. Copies of the amendments to the proposed
rule change and the advance notice are available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------

Section 8
    Proposed Section 8 of Rule 4 would cover the subject matter
currently covered in Section 7 of Rule 4. Proposed Section 8's
subheading would be ``Changes in Members' Required Fund Deposits'' and
would apply only to Members.
    Currently, Section 7 of Rule 4 requires participants to satisfy any
increase in their Required Deposit within such time as NSCC requires.
At the time the increase becomes effective, the participant's
obligations to NSCC will be determined in accordance with the increased
Required Deposit whether or not the Member has so increased its
deposit. NSCC is not proposing any substantive changes to this
provision, which will be renumbered as Section 8 of Rule 4 under the
proposed rule change, except for streamlining the provision and
limiting its application to Members as stated above.
Section 9
    Currently, Section 9 of Rule 4 addresses situations where a
participant has excess deposits in the Clearing Fund (i.e., amounts
above its Required Deposit). The current provision provides that NSCC
will, on any day that NSCC has determined and provided notification
that an excess deposit exists with respect to a participant, return an
excess amount requested by a participant that follows the formats and
timeframe established by NSCC for such request. The current provision
makes clear that NSCC will not return the requested excess amount (i)
until any amount required to be charged against the participant's
Required Deposit is paid by the participant to NSCC and/or (ii) if NSCC
determines that the participant's current month's use of one or more
services is materially different than the previous month's use upon
which such excess is based. Section 9 currently makes clear that,
notwithstanding any of the foregoing,

NSCC may, in its discretion, withhold any or all of a participant's
excess deposit if the participant has been placed on the Watch
List.\55\ Current Section 9 also makes clear that nothing in this
section limits NSCC's rights under Rule 15.\56\
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    \55\ Pursuant to Section 4 of Rule 2B, a Member could be placed
on the Watch List either based on its credit rating of 5, 6 or 7,
which can either be generated by the Credit Risk Rating Matrix or
from a manual downgrade, or when NSCC deems such placement as
necessary to protect NSCC and its Members. Supra note 5.
    \56\ Rule 15 permits NSCC to require a Member, Limited Member or
any applicant to become either to furnish NSCC adequate assurances
of the entity's financial responsibility and operational capability
as NSCC may deem necessary. Supra note 5.
---------------------------------------------------------------------------

    Proposed Section 9 would add a subheading ``Excess Clearing Fund
Deposits'' and would apply only to Members. NSCC is not proposing any
substantive changes to this provision, except for streamlining the
provisions in this section and eliminating the condition described in
clause (i) of the paragraph above that limits participants' ability to
request the return of excess amounts on deposit in the Clearing Fund
and replacing clause (ii) of the paragraph above with a clause that
provides NSCC may, in its discretion, withhold any or all of a
participant's excess deposit if NSCC determines that the Member's
anticipated activities in NSCC in the near future may reasonably be
expected to be materially different than its activities of the recent
past. NSCC believes that the proposed additional clause would protect
NSCC and its participants because the clause would allow NSCC to retain
excess deposits to cover an expected near-term increase in a Member's
Required Fund Deposit amount due to the anticipated change in the
Member's activities. The proposed additional clause would also align
NSCC's Rules with that of FICC/GSD and FICC/MBSD,\57\ thus providing
consistent treatment for firms that are members of both NSCC and FICC.
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    \57\ See Section 9 of FICC/GSD Rule 4 (Clearing Fund and Loss
Allocation) and Section 9 of FICC/MBSD Rule 4 (Clearing Fund and
Loss Allocation). Supra note 31.
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Section 10
    Current Section 10 of Rule 4 provides for crediting persons against
whom losses are charged pursuant to Rule 4 if there is a subsequent
recovery of such losses by NSCC. NSCC is not proposing any changes to
this section other than (i) making it clear that no loss allocation
under proposed Rule 4 would constitute a waiver of any claim NSCC may
have against a Member for any losses or liabilities to which the Member
is subject under the Rules, including, without limitation, any loss or
liability to which it may be subject under proposed Rule 4, and (ii)
adding a subheading ``No Waiver; Subsequent Recovery Against Loss
Amounts'' and replacing ``persons'' with ``Persons,'' which is
currently defined in Rule 1 (Definitions and Descriptions) to mean ``a
partnership, corporation, limited liability corporation or other
organization, entity or an individual.'' NSCC is proposing the change
in (i) above to preserve its legal rights and to make it clear to
Members that loss allocation under proposed Rule 4 would not be deemed
as NSCC waiving any claims it may have against a Member for any losses
or liabilities to which the Member is subject under the Rules. With
respect to the proposed change in (ii) above, given that NSCC is a
corporation, NSCC believes that the term ``Person'' already includes
NSCC; however, for increased clarity, NSCC is proposing to add
``including the Corporation'' to make it clear to Members that if there
is a subsequent recovery of losses charged pursuant to Rule 4, the net
amount of the recovery would be credited to Persons, including NSCC,
against whom the loss was charged in proportion to the amounts charged
against them.
Section 11
    Current Section 11 of Rule 4 provides that a participant may
withdraw Eligible Clearing Fund Securities from pledge, provided that
the participant has deposited cash with, or pledged additional Eligible
Clearing Fund Securities to, NSCC that, in the aggregate, secure the
open account indebtedness of the participant and/or satisfy the
participant's Required Deposit. Proposed Section 11 would add a
subheading ``Substitution or Withdrawal of Pledged Securities'' and
would apply only to Members. NSCC is not proposing any substantive
changes to this provision, except for changes to improve the
transparency and accessibility of this section.
Section 12
    Current Section 12 of Rule 4 makes it clear that NSCC has certain
rights with respect to the Clearing Fund. Proposed Section 12 would add
a subheading ``Authority of Corporation'' and would apply only to
Members. NSCC is not proposing any substantive changes to this
provision, except to clarify that a reference to 30 days in current
Section 12 would mean 30 calendar days.
Section 13
    NSCC is proposing to add a new Section 13 to Rule 4 that would be
entitled ``Mutual Fund Deposits.'' Under the proposal, NSCC would
consolidate provisions from various sections in the current Rule 4
concerning Mutual Fund/Insurance Services Members and Fund Members and
group them into proposed Section 13. Aside from the consolidation, NSCC
is not proposing any substantive changes to these provisions, except
for changes to (i) reduce NSCC's retention period of Mutual Fund
Deposits when a Mutual Fund Participant (as defined below and in the
proposed rule change) elects to withdraw from membership, in order to
harmonize it with the proposed change in Section 7, as described above,
and (ii) improve the transparency and accessibility of the provisions.
    Proposed Section 13 would provide that each Member that uses the
Mutual Fund Services to submit mutual fund purchases, redemptions, or
exchanges to any Fund Member or another Member and each Mutual Fund/
Insurance Services Member would, and each Fund Member (collectively
with such Members and Mutual Fund/Insurance Services Members, ``Mutual
Fund Participants'') may, be required to make a cash deposit to the
Clearing Fund in the amounts determined in accordance with Procedure XV
and other applicable Rules (its ``Mutual Fund Deposit'' and, unless
specified otherwise, for the purposes of the Rules, Required Fund
Deposits shall include Mutual Fund Deposits). In the case of a Member,
its Mutual Fund Deposit would be a separate and additional component of
such Member's deposit to the Clearing Fund but not part of the Member's
Required Fund Deposit for purposes of calculating pro rata loss
allocations pursuant to proposed Section 4 of Rule 4.
    As in the current Rules, proposed Section 13 would also provide
that if any Mutual Fund Participant fails to satisfy any obligation to
NSCC relating to Mutual Fund Services, notwithstanding NSCC's right to
reverse in whole or in part any credit previously given to the contra
side to any outstanding Mutual Fund Services transaction of the Mutual
Fund/Insurance Services Member, NSCC would first apply such Mutual Fund
Participant's Mutual Fund Deposit. If after such application any loss
or liability remains and if such Mutual Fund Participant is a Member
that is not otherwise obligated to NSCC, NSCC would apply such Member's
Actual Deposit in accordance with proposed Section 3 of Rule 4. NSCC
would next allocate any further remaining loss or liability to the
other Mutual Fund Participants in successive rounds of loss allocations
in each case up to the

aggregate of Mutual Fund Deposits from non-defaulting Mutual Fund
Participants, and after the first such round, Mutual Fund Participants
that have not submitted a Loss Allocation Withdrawal Notice in
accordance with proposed Section 6 of Rule 4, following the procedures
and timeframes set forth in proposed Sections 4 and 6 of Rule 4 as if
such Mutual Fund Participants are Members. If any loss or liability
remains thereafter and there are no continuing Mutual Fund
Participants, NSCC would proceed with loss allocations to Members for a
Defaulting Member Event in accordance with proposed Section 4 of Rule
4.
    As proposed, Section 13 would reduce NSCC's retention period of
Mutual Fund Deposits from ninety (90) days under the current Section 6
of Rule 4 to thirty (30) calendar days. Specifically, NSCC is proposing
that a Mutual Fund Participant that elects to withdraw from membership
would be entitled to the return of its Mutual Fund Deposit no later
than thirty (30) calendar days after all of its transactions have
settled and it has satisfied all of its matured and contingent
obligations to NSCC for which such Mutual Fund Participant was
responsible while a Mutual Fund Participant. NSCC is proposing this
change in order to harmonize the retention period of Mutual Fund
Deposit with the proposed Clearing Fund retention period in proposed
Section 7 of Rule 4, as described above.
    As proposed, Section 13 would make it clear that NSCC's rights,
authority and obligations with respect to deposits to the Clearing Fund
as set forth in Rule 4 would apply to Mutual Fund Deposits.
Section 14
    NSCC is proposing to add a new Section 14 to Rule 4 that would be
entitled ``Insurance Deposits.'' Under the proposal, NSCC would
consolidate provisions from various sections in current Rule 4
concerning Insurance Carrier/Retirement Services Members and group them
into proposed Section 14. Aside from the consolidation, NSCC is not
proposing any substantive changes to these provisions, except for
changes to (i) reduce NSCC's retention period of Insurance Deposits
when an Insurance Participant (as defined below and in the proposed
rule change) elects to withdraw from membership, in order to harmonize
it with proposed Section 7, as described above, and (ii) improve the
transparency and accessibility of the provisions.
    As in the current Rules, proposed Section 14 would provide that
each Mutual Fund/Insurance Services Member that uses the Insurance and
Retirement Processing Services and each Insurance Carrier/Retirement
Services Member (collectively, ``Insurance Participants'') may be
required to make a cash deposit to the Clearing Fund in the amounts
determined in accordance with Procedure XV and other applicable Rules
(its ``Insurance Deposit'' and, unless specified otherwise, for the
purposes of the Rules, Required Fund Deposits shall include Insurance
Deposits). Proposed Section 14 would also provide that if any Insurance
Participant fails to satisfy any obligation to NSCC relating to the
Insurance and Retirement Processing Services, NSCC would first apply
such Insurance Participant's Insurance Deposit. If after such
application any loss or liability remains, NSCC would allocate the
remaining loss or liability to the other Insurance Participants in
successive rounds of loss allocations in each case up to the aggregate
of Insurance Deposits from non-defaulting Insurance Participants, and
after the first such round, Insurance Participants that have not
submitted a Loss Allocation Withdrawal Notice in accordance with
proposed Section 6 of Rule 4, following the procedures and timeframes
set forth in proposed Sections 4 and 6 of Rule 4 as if such Insurance
Participants are Members. If any loss or liability remains thereafter
and there are no continuing Insurance Participants, NSCC would proceed
with loss allocations to Members for a Defaulting Member Event in
accordance with proposed Section 4 of Rule 4.
    As proposed, Section 14 would reduce NSCC's retention period of
Insurance Deposits from ninety (90) days under the current Section 6 of
Rule 4 to thirty (30) calendar days. Specifically, NSCC is proposing
that an Insurance Participant that elects to withdraw from membership
would be entitled to the return of its Insurance Deposit no later than
thirty (30) calendar days after all of its transactions have settled
and it has satisfied all of its matured and contingent obligations to
NSCC for which such Insurance Participant was responsible while an
Insurance Participant. NSCC is proposing this change in order to
harmonize the retention period of Insurance Deposit with the proposed
Clearing Fund retention period in proposed Section 7 of Rule 4, as
described above.
    As proposed, Section 14 would make it clear that NSCC's rights,
authority and obligations with respect to deposits to the Clearing Fund
as set forth in Rule 4 would apply to Insurance Deposits.
B. Proposed Changes to Addendum E (Statement of Policy--Application of
Retained Earnings--Member Impairments) and Addendum K (Interpretation
of the Board of Directors--Application of Clearing Fund)
    Addendum E is a statement of policy that currently provides that
NSCC will apply no less than twenty-five (25) percent of its retained
earnings to cover losses or liabilities from a Member's impairment that
is not otherwise satisfied by the impaired Member's Clearing Fund
deposit. NSCC is proposing to delete Addendum E in its entirety because
it would no longer be relevant given the proposed rule change relating
to the Corporate Contribution discussed above.
    NSCC is proposing to modify Addendum K to delete all provisions
associated with loss allocation and application of the Clearing Fund in
connection with a loss or liability incurred by NSCC, including
modifying the title of Addendum K. These provisions would no longer be
necessary under the proposed rule change because the loss allocation
process in its entirety would be governed by Rule 4. In addition, the
current language in Addendum K regarding allocation by System would no
longer be applicable under the proposed rule change as described above.
NSCC would retain the provisions in Addendum K that pertain to NSCC's
guaranty and rename Addendum K ``The Corporation's Guaranty.'' NSCC is
also proposing to replace ``Rules'' with ``Rules and Procedures'' to
better reflect the name of NSCC's rulebook.
(iii) Other Proposed Rule Changes
    NSCC is proposing changes to Rule 1 (Definitions and Descriptions),
Rule 2B (Ongoing Membership Requirements and Monitoring), Rule 4(A)
(Supplemental Liquidity Deposits), Rule 13 (Exception Processing), Rule
15 (Assurances of Financial Responsibility and Operational Capability),
Rule 42 (Wind-Down of a Member, Fund Member or Insurance Carrier/
Retirement Services Member), Procedure III (Trade Recording Service
(Interface with Qualified Clearing Agencies)), Procedure XV (Clearing
Fund Formula and Other Matters), and Addendum O (Admission of Non-US
Entities as Direct NSCC Members). NSCC is proposing changes to these
Rules in order to conform them with the proposed changes to Rule 4 as
well as to make certain technical changes to these Rules.

    Specifically, NSCC is proposing to add the following defined terms
to Rule 1, in alphabetical order: Actual Deposit, Average RFD, Clearing
Fund Cash, Corporate Contribution, Declared Non-Default Loss Event,
Defaulting Member, Defaulting Member Event, Eligible Letter of Credit,
Event Period, Insurance Deposit, Insurance Participant, Issuer, Lender,
Loss Allocation Cap, Loss Allocation Notice, Loss Allocation Withdrawal
Notice, Loss Allocation Withdrawal Notification Period, Mutual Fund
Deposit, Mutual Fund Participant, Required Fund Deposit, Termination
Date, and Voluntary Termination Notice.
    NSCC is proposing to delete the defined term ``The Corporation'' in
Rule 1 and replace it with ``Corporation'' in Rule 1. NSCC is proposing
to replace ``Required Deposits'' with ``Required Fund Deposits'' in
Rule 2B, Rule 4(A), Rule 15, Rule 42, Procedure III, and Procedure XV.
NSCC is proposing to replace ``Rules'' with ``Rules and Procedures'' in
Rule 1, Rule 2B, Rule 13, Rule 15, and Procedure III. NSCC is also
proposing to replace ``Letter of Credit'' with ``Eligible Letter of
Credit'' in Rule 42 and Addendum O.
    In addition, in Section 5 of Rule 2B, NSCC proposes to change the
reference to Section 8 of Rule 4 to reflect the updated section number,
which would be to Section 4 of Rule 4. NSCC is also proposing
conforming changes to this section to ensure that termination
provisions in the Rules, whether voluntary or in response to a loss
allocation, are consistent with one another to the extent appropriate.
    Currently, Section 5 of Rule 2B provides that participants may
elect to voluntarily retire their membership by providing NSCC with
written notice of such termination. Such termination will not be
effective until accepted by NSCC, which shall be evidenced by a notice
to NSCC's participants announcing the participant's retirement and the
effective date of the retirement, which is defined as the ``Retirement
Date.'' This section also provides that a participant's voluntary
termination of membership shall not affect its obligations to NSCC.
    Where appropriate, NSCC is proposing changes to align Section 5 of
Rule 2B with the proposed new Section 6 of Rule 4, both of which
address termination of membership. Specifically, NSCC is proposing to
rename the subheading of Section 5 of Rule 2B to ``Voluntary
Termination'' and to change ``retirement'' to ``termination'' and
``Retirement Date'' to ``Termination Date'' throughout Section 5 of
Rule 2B. NSCC is also proposing to provide that when a participant
elects to voluntarily terminate its membership by providing NSCC a
written notice of such termination (``Voluntary Termination Notice''),
the participant must specify in its Voluntary Termination Notice a
desired date for its withdrawal, provided such date shall not be prior
to the scheduled final settlement date of any remaining obligation owed
by the participant to NSCC as of the time such Voluntary Termination
Notice is submitted to NSCC, unless otherwise approved by NSCC. NSCC is
retaining the provision that makes it clear that the termination will
not be effective until accepted by NSCC.\58\ NSCC is also retaining the
provision that describes NSCC's acceptance of the termination; however,
NSCC is proposing to make it clear that such acceptance, as evidenced
by a notice to NSCC's participants, would (i) be no later than ten (10)
business days after the receipt of the Voluntary Termination Notice
from the participant and (ii) announce the last trade date for the
participant instead of the Termination Date. In addition, NSCC is
proposing to make it clear that the Termination Date would be the final
settlement date of all transactions of the participant. NSCC is
proposing these clarifying changes so that the Rules would align more
closely with NSCC's current practice.
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    \58\ Unlike the Voluntary Termination Notice, the Loss
Allocation Withdrawal Notice as proposed in Section 6 of Rule 4 does
not require explicit acceptance by NSCC to be effective. NSCC
believes that requiring explicit acceptance of the Loss Allocation
Withdrawal Notice could complicate the loss allocation process and
potentially result in membership withdrawal being delayed as well as
detract from the objective to have NSCC know on a timely basis which
Members would remain subject to the subsequent rounds of loss
allocation.
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    As an example, Member A submits a Voluntary Termination Notice to
NSCC on April 1st indicating its desired termination date is June 15th.
NSCC would accept such termination request by issuing a notice to
Members within 10 business days from April 1st; such notice would
provide that the last trade date for Member A is June 12th, and the
effective date of Member A's NSCC membership termination would be the
final settlement date of all transactions of Member A. In contrast, if
Member A submits a Voluntary Termination Notice on April 1st and
indicates its desired termination date is April 5th, NSCC would either
(i) accept such termination notice by issuing a notice to Members on or
before April 5th; such notice would provide that the last trade date
for Member A is April 2nd, and the effective date of Member A's NSCC
membership termination would be the final settlement date of all
transactions of Member A, or (ii) if NSCC requires additional time to
process the termination, NSCC would accept such termination notice by
issuing notice to Members after April 5th but still within 10 business
days from April 1st; such notice would provide that the last trade date
for Member A is a date after April 2nd, and the effective date of
Member A's NSCC membership termination would be the final settlement
date of all transactions of Member A.
    NSCC is also proposing to clarify that after the close of business
on the Termination Date,\59\ a participant that terminates its
membership shall no longer be eligible or required to submit
transactions to NSCC for clearance and settlement, unless the Board of
Directors determines otherwise in order to ensure an orderly
liquidation of the participant's open obligations. If any transaction
is submitted to NSCC by such participant that is scheduled to settle
after the Termination Date, the participant's Voluntary Termination
Notice would be deemed void and the participant would remain subject to
the Rules as if it had not given such notice. Furthermore, NSCC is
proposing to add a sentence to Section 5 of Rule 2B to refer
participants to Sections 7, 13 and 14 of Rule 4, as applicable,
regarding provisions on the return of a participant's Clearing Fund
deposit and to specify that if an Event Period were to occur after a
participant has submitted its Voluntary Termination Notice but on or
prior to the Termination Date, in order for such participant to benefit
from its Loss Allocation Cap pursuant to Section 4 of Rule 4, the
participant would need to comply with the provisions of Section 6 of
Rule 4 and submit a Loss Allocation Withdrawal Notice, which notice,
upon submission, would supersede and void any pending Voluntary
Termination Notice previously submitted by the participant. As an
example, if an Event Period occurs after submission of the Voluntary
Termination Notice by a Member but on or prior to the Termination Date,
and the Member does not subsequently submit a Loss Allocation
Withdrawal Notice as proposed in Section 6 of Rule 4, then the Member
would not benefit from its Loss Allocation Cap, i.e., the Member would
remain obligated for its pro rata share of losses and liabilities with
respect to any Event Period that commenced on or prior to the
Termination Date.
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    \59\ Account(s) of a terminating participant are generally
deactivated after the close of business on the Termination Date.
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    In Rule 4(A), NSCC proposes to amend Section 11 to update a cross-

reference to the time period for the refund of deposits to the Clearing
Fund when a Member ceases to be a participant in order to align it with
proposed Section 7 of Rule 4, which would reduce the time period from
90 days to 30 calendar days. NSCC is also proposing to add a reference
to Section 13 of Rule 4 in clause (c) of Section 13 of Rule 4(A) in
order to specify that a Special Activity Supplemental Deposit of a
Member may be used to satisfy a loss or liability as provided in such
new proposed Section 13. NSCC is also proposing technical changes in
Sections 2 and 13 of Rule 4(A) to reflect new proposed defined terms in
the Rules.
    In Rule 13, NSCC would replace ``System'' with ``system'' to