Sponsoring Member Required Fund Deposit may be used to satisfy any
amount allocated against a Sponsoring Member, whether in its capacity
as a Member, a Sponsoring Member, or otherwise. With respect to an
obligation to make payment due to any loss allocation amounts assessed
on a Sponsoring Member pursuant to Section 9(b) of proposed Rule 2C,
the Sponsoring Member may instead elect to terminate its membership in
NSCC pursuant to Section 6 of Rule 4 and thereby benefit from its Loss
Allocation Cap pursuant to Section 4 of Rule 4; however, for the
purpose of determining the Loss Allocation Cap for such Sponsoring
Member, its Required Fund Deposit shall be the sum of its Required Fund
Deposits associated with its proprietary accounts at NSCC (including
its proprietary SFT Account (as defined below and in the proposed rule
change) pursuant to proposed Rule 56), its Sponsoring Member Required
Fund Deposit, and its Agent Clearing Member Required Fund Deposits, if
any, for each of its Agent Clearing Member Customer Omnibus Accounts.
Proposed Rule 2C, Section 10 (Restrictions on Access to Services by a
Sponsoring Member)
    Section 10 of proposed Rule 2C would establish the rights of NSCC
to restrict a Sponsoring Member's access to NSCC's services.
    Section 10(a) of proposed Rule 2C would provide that the Board of
Directors may at any time, upon NSCC providing notice to a Sponsoring
Member pursuant to Section 5 of Rule 45 (Notices), suspend a Sponsoring
Member in its capacity as a Sponsoring Member from any service provided
by NSCC either with respect to a particular transaction or transactions
or with respect to transactions generally or prohibit or limit such
Sponsoring Member's access to services offered by NSCC in the event
that one or more of the factors set forth in Section 1 of Rule 46
(Restrictions on Access to Services) is present with respect to the
Sponsoring Member.
    Section 10(b) of proposed Rule 2C would provide that Rule 46 shall
apply with respect to a Sponsoring Member in the same way as it applies
to Members, including the Board of Directors' right to summarily
suspend the Sponsoring Member and to cease to act for such Sponsoring
Member. As under Rule 46, the Board of Directors would need to make the
determination of whether to suspend, prohibit or limit a Sponsoring
Member's access to services offered by NSCC on the basis of the factors
set forth in that rule.
    Section 10(c) of proposed Rule 2C would provide that if NSCC ceases
to act for a Sponsoring Member in its capacity as a Sponsoring Member,
Section 14 of proposed Rule 56 shall apply and NSCC shall decline to
accept or process data from the Sponsoring Member on Sponsored Member
Transactions and NSCC shall cease to act for all of the Sponsored
Members of the affected Sponsoring Member (unless such Sponsored
Members are also Sponsored Members of other Sponsoring Members).
Section 10(c) would also provide that if NSCC suspends, prohibits or
limits a Sponsoring Member in its capacity as a Sponsoring Member with
respect to such Sponsoring Member's access to services offered by NSCC,
NSCC shall decline to accept or process data from the Sponsoring Member
on Sponsored Member Transactions and shall suspend the Sponsored
Members of the affected Sponsoring Member (unless they are also
Sponsored Members of other Sponsoring Members) for so long as NSCC is
suspending, prohibiting or limiting the Sponsoring Member. Any
Sponsored Member Transactions which have been novated to NSCC shall
continue to be processed by NSCC. In addition, Section 10(c) would
provide that NSCC, in in sole discretion, shall determine whether to
close-out the affected Sponsored Member Transactions or permit the
Sponsored Members to complete their settlement.
    This is different from how NSCC would treat Agent Clearing Member
Transactions of an Agent Clearing Member under Section 9 of proposed
Rule 2D if NSCC ceased to act for the Agent Clearing Member.
Specifically, for Agent Clearing Member Transactions, as proposed, NSCC
would close-out any Agent Clearing Member Transactions which have been
novated to NSCC; however, with respect to Sponsored Member
Transactions, consistent with FICC's Sponsoring Member/Sponsored Member
Program for the reasons described above in Item II(A)1(iii)
``Sponsoring Members and Sponsored Members,'' NSCC would have the
option to either terminate or settle a Sponsored Member's novated
positions after ceasing to act for the Sponsoring Member. NSCC would
have the practical and legal capability to make such an election
because each Sponsored Member would be a limited-purpose member of
NSCC. Accordingly, NSCC would have the requisite information about each
of the Sponsored Member's novated positions (by virtue of each
Sponsored Member's novated portfolio represented as a different sub-
account of the Sponsoring Member (i.e., Sponsored Member Sub-Account)
on the books and records of NSCC) to make such an election. By
contrast, an Agent Clearing Member's Customers would not be limited-
purpose members of NSCC nor would NSCC know which transactions within
an Agent Clearing Member Customer Omnibus Account belong to which
Customers. As such, NSCC would not be able to separately terminate or
complete settlement with respect to Customers' novated positions.
Proposed Rule 2C, Section 11 (Restrictions on Access to Services by a
Sponsored Member)
    Section 11 of proposed Rule 2C would establish the rights of NSCC
to restrict a Sponsored Member's access to NSCC's services.

    Section 11(a) of proposed Rule 2C would provide that the Board of
Directors may at any time upon NSCC providing notice to a Sponsored
Member and its Sponsoring Member pursuant to Section 5 of Rule 45
(Notices), suspend a Sponsored Member from any service provided by NSCC
either with respect to a particular transaction or transactions or with
respect to transactions generally, or prohibit or limit such Sponsored
Member with respect to access to services offered by NSCC in the event
that one or more of the factors set forth in Section 1 of Rule 46
(Restrictions on Access to Services) is present with respect to the
Sponsored Member.
    Section 11(b) of proposed Rule 2C would provide that Rule 46 shall
apply with respect to a Sponsored Member in the same way as it applies
to Members, including the Board of Directors' right to summarily
suspend a Sponsored Member and to cease to act for such Sponsored
Member. As under Rule 46, the Board of Directors would need to make the
determination of whether to suspend, prohibit or limit a Sponsored
Member's access to services offered by NSCC on the basis of the factors
set forth in that rule.
    Section 11(c) of proposed Rule 2C would provide that if NSCC ceases
to act for a Sponsored Member, Section 14 of proposed Rule 56 shall
apply.
    Section 11(d) of proposed Rule 2C would provide that NSCC shall
cease to act for a Sponsored Member that is no longer in compliance
with the requirements of Section 3(a) of proposed Rule 2C.
Proposed Rule 2C, Section 12 (Insolvency of a Sponsoring Member)
    Section 12(a) of proposed Rule 2C would provide that a Sponsoring
Member shall be obligated to immediately notify NSCC that (a) it fails,
or is unable, to perform its contracts or obligations or (b) it is
insolvent, as required by Section 1 of Rule 20 (Insolvency) for other
Members. A Sponsoring Member shall be treated by NSCC in all respects
as insolvent under the same circumstances set forth in Section 2 of
Rule 20 for other Members. Section 3 of Rule 20 shall apply, in the
same manner in which such section applies to other Members, in the case
where NSCC treats a Sponsoring Member as insolvent.
    Section 12(b) of proposed Rule 2C would provide that in the event
that NSCC determines to treat a Sponsoring Member as insolvent pursuant
to Rule 20 (Insolvency), NSCC shall have the right to cease to act for
the insolvent Sponsoring Member pursuant to Section 10 of the proposed
Rule 2C. If NSCC ceases to act for the insolvent Sponsoring Member,
NSCC shall decline to accept or process data from the Sponsoring
Member, including Sponsored Member Transactions, and NSCC shall
terminate the membership of all of the insolvent Sponsoring Member's
Sponsored Members unless they are the Sponsored Members of another
Sponsoring Member. Any Sponsored Member Transactions which have been
novated to NSCC shall continue to be processed by NSCC. NSCC, in its
sole discretion, shall determine whether to close-out the affected
Sponsored Member Transactions and/or permit the Sponsored Members to
complete their settlement. This is different from how NSCC would treat
Agent Clearing Member Transactions. As described above, NSCC would
close-out any Agent Clearing Member Transactions which have been
novated to NSCC. However, with respect to Sponsored Member
Transactions, consistent with FICC's Sponsoring Member/Sponsored Member
Program for the reasons described above in Item II(A)1(iii)
``Sponsoring Members and Sponsored Members,'' NSCC would have the
option to either terminate or settle a Sponsored Member's novated
positions after ceasing to act for the Sponsoring Member. This is
because NSCC would have the practical and legal capability to make such
an election because each Sponsored Member would be a limited-purpose
member of NSCC. Accordingly, NSCC would have the requisite information
about each of the Sponsored Member's novated positions (by virtue of
each Sponsored Member's novated portfolio represented as a different
sub-account of the Sponsoring Member (i.e., Sponsored Member Sub-
Account) on the books and records of NSCC) to make such an election. By
contrast, an Agent Clearing Member's Customers would not be limited-
purpose members of NSCC nor would NSCC know which transactions within
an Agent Clearing Member Customer Omnibus Account belong to which
Customers. As such, NSCC would not be able to separately terminate or
complete settlement with respect to Customers' novated positions.
Proposed Rule 2C, Section 13 (Insolvency of a Sponsored Member)
    Section 13 of proposed Rule 2C would establish NSCC's rights in the
event of an insolvency of a Sponsored Member.
    Section 13(a) of proposed Rule 2C would provide that a Sponsored
Member and its Sponsoring Member (to the extent it has knowledge
thereof) shall be obligated to immediately notify NSCC that the
Sponsored Member is insolvent or that the Sponsored Member would be
unable to perform any of its material contracts, obligations or
agreements in the same manner as required by Section 1 of Rule 20
(Insolvency) for other Members. For purposes of Section 13 of proposed
Rule 2C, a Sponsoring Member shall be deemed to have knowledge that a
Sponsored Member is insolvent or would be unable to perform on any of
its material contracts, obligations or agreements if one or more duly
authorized representatives of the Sponsoring Member, in its capacity as
such, has knowledge of such matters. A Sponsored Member shall be
treated by NSCC in all respects as insolvent under the same
circumstances set forth in Section 2 of Rule 20 for other Members.
Section 3 of Rule 20 shall apply, in the same manner in which such
section applies to other Members, in the case where NSCC treats a
Sponsored Member as insolvent.
    Section 13(b) of proposed Rule 2C would provide that in the event
that NSCC determines to treat a Sponsored Member as insolvent pursuant
to Rule 20 (Insolvency), NSCC shall have the right to cease to act for
the insolvent Sponsored Member pursuant to Section 11 of the proposed
Rule 2C. If NSCC ceases to act for the insolvent Sponsored Member,
Section 14 of proposed Rule 56 shall apply with respect to the close-
out of the insolvent Sponsored Member's Sponsored Member Transactions.
Proposed Rule 2C, Section 14 (Liquidation of Sponsored Member and
Related Sponsoring Member Positions)
    Section 14 of proposed Rule 2C would provide a mechanism by which a
Sponsoring Member may cause the termination and liquidation of a
Sponsored Member's positions arising from Sponsored Member Transactions
between the Sponsoring Member and its Sponsored Member that have been
novated to NSCC. Specifically, in the event (i) the Sponsoring Member
triggers the termination of a Sponsored Member's positions or (ii) NSCC
ceases to act for the Sponsored Member and the Sponsoring Member does
not continue to perform the obligations of the Sponsored Member, both
the Sponsored Member's positions and the Sponsoring Member's
corresponding positions arising from the Sponsored Member Transactions
between the Sponsoring Member and the Sponsored Member would be
terminated. Thereupon, the Sponsoring Member would calculate a net
liquidation value of such terminated positions, which liquidation value
would be paid either

to or by the Sponsored Member by or to the Sponsoring Member. NSCC
would not, as a practical matter, be involved in such settlement and
would not need to take any market action because the termination of the
Sponsored Member's positions and the corresponding Sponsoring Member's
positions would leave NSCC flat. Additionally, the Sponsoring Member
would indemnify NSCC for any claim by a Sponsored Member arising out of
the Sponsoring Member's calculation of the net liquidation value.
    Section 14(a) of proposed Rule 2C would specify the scope of
positions to which Section 14 of proposed Rule 2C applies. It would
state that Section 14 only applies with respect to the liquidation of
positions resulting from Sponsored Member Transactions that have been
novated to NSCC.
    Section 14(a) of proposed Rule 2C would further state that such
section would only apply if (i) a Sponsoring Member is a Defaulting
Member and NSCC has not ceased to act for the Sponsoring Member and
(ii) a Corporation Default has not occurred. This is because, as
described above in Section 12(b) of proposed Rule 2C, NSCC would have
discretion in the event it ceases to act for a Sponsoring Member to
close-out the positions of Sponsored Members for which the defaulting
Sponsoring Member was responsible or to allow them to settle. If NSCC
does close-out such positions, it would do so in accordance with
Section 14 of proposed Rule 56. If a Corporation Default has occurred
with respect to NSCC, each Sponsored Member's positions would be closed
out in accordance with Section 17 of proposed Rule 56.
    Section 14(b) of proposed Rule 2C would set out the process by
which a Sponsoring Member or NSCC may cause the termination of a
Sponsored Member's positions. It would provide that on any Business
Day, the Sponsoring Member or NSCC may cause such termination by
delivering a notice to NSCC or the Sponsoring Member, respectively.
NSCC anticipates that each Sponsored Member and Sponsoring Member would
agree in the bilateral documentation between them as to what
circumstances or events give rise to the ability of the Sponsoring
Member to deliver a notice to NSCC terminating the Sponsored Member's
positions.\64\
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    \64\ It bears noting in this regard that termination of the
Sponsored Member's positions would not be the exclusive mechanism by
which a Sponsoring Member may limit its credit risk. As described
above, under Section 2(m) of proposed Rule 2C, a Sponsoring Member
may voluntarily elect to terminate its status as a Sponsoring Member
in respect of one or more Sponsored Members. Such a termination
would not affect the settlement of the Sponsored Member's existing
positions but would restrict the ability of the Sponsored Member to
have its future trades accepted for novation by NSCC through such
Sponsoring Member. The proposed rule change in Section 14(b) of
proposed Rule 2C would not affect the functioning of the proposed
rule change in Section 2(m) of proposed Rule 2C or the general
ability of a Sponsoring Member and the Sponsored Member to agree on
the circumstances of when the Sponsoring Member may terminate its
status as Sponsoring Member for the Sponsored Member.
---------------------------------------------------------------------------

    The notice submitted by a Sponsoring Member to NSCC (or vice versa)
would cause the termination of all of the SFT Positions of the
Sponsored Member established in the Sponsored Member Sub-Account. The
notice would also cause the immediate termination of the corresponding
SFT Positions of the Sponsoring Member established in the Sponsoring
Member's proprietary SFT Account. The effect of such terminations would
be to leave NSCC flat.
    Section 14(b) of proposed Rule 2C would also provide that the
termination of the Sponsored Member's positions (and the Sponsoring
Member's corresponding positions) would be effected by the Sponsoring
Member's establishment of a final net settlement position for each
eligible security with a distinct CUSIP number (``Final Net Settlement
Position'').
    Section 14(c) of proposed Rule 2C would specify how the Final Net
Settlement Positions established pursuant to Section 14(b) of proposed
Rule 2C would be liquidated (i.e., how such positions would be
converted into an amount payable). It would also provide how the amount
payable arising from the liquidation of the Final Net Settlement
Positions would be discharged.
    Specifically, Section 14(c) of proposed Rule 2C would first provide
that the Sponsoring Member would liquidate the Final Net Settlement
Positions established pursuant to Section 14(b) of proposed Rule 2C by
establishing (i) a single liquidation amount in respect of the
Sponsored Member's Final Net Settlement Positions (a ``Sponsored Member
Liquidation Amount'') and (ii) a single liquidation amount in respect
of the Sponsoring Member's Final Net Settlement Positions (a
``Sponsoring Member Liquidation Amount''). The Sponsored Member
Liquidation Amount would be owed either by NSCC to the Sponsored Member
or by the Sponsored Member to NSCC because it would relate to the
Sponsored Member's Final Net Settlement Positions with NSCC, while the
Sponsoring Member Liquidation Amount would be owed either by NSCC to
the Sponsoring Member or by the Sponsoring Member to NSCC because it
would relate to the Sponsoring Member's Final Net Settlement Positions
with NSCC.
    Because the Final Net Settlement Positions of the Sponsoring Member
would be identical to, but in the opposite direction of, the Final Net
Settlement Positions of the Sponsored Member, the Sponsored Member
Liquidation Amount would equal the Sponsoring Member Liquidation
Amount. Therefore, if NSCC were to owe the Sponsored Member Liquidation
Amount to the Sponsored Member, the Sponsoring Member would owe the
Sponsoring Member Liquidation Amount to NSCC. By the same token, if the
Sponsored Member were to owe the Sponsored Member Liquidation Amount to
NSCC, NSCC would owe the Sponsoring Member the Sponsoring Member
Liquidation Amount. In all instances, NSCC would owe and be owed the
same amount of money.
    Section 14(c) of proposed Rule 2C would also provide how the
Sponsoring Member may calculate the Sponsoring Member Liquidation
Amount. It would state that the Sponsoring Member may calculate the
Sponsoring Member Liquidation Amount based on prevailing market prices
of the relevant securities and/or the gains realized and losses
incurred by the Sponsoring Member in hedging its risk associated with
the liquidation of the Sponsoring Member's Final Net Settlement
Positions. Section 14(c) of proposed Rule 2C would further clarify that
such Sponsoring Member Liquidation Amount may also take into account
any losses and expenses incurred by the Sponsoring Member in connection
with the liquidation of the positions.
    Section 14(c) of proposed Rule 2C would further provide that, if a
Sponsored Member Liquidation Amount is due to NSCC, the Sponsoring
Member would be obligated to pay such Sponsored Member Liquidation
Amount to NSCC under the Sponsoring Member Guaranty and that this
obligation would, automatically and without further action, be set off
against the obligation of NSCC to pay the corresponding Sponsoring
Member Liquidation Amount to the Sponsoring Member. By virtue of such
setoff, the Sponsored Member's obligation to NSCC would be discharged,
as would NSCC's obligation to the Sponsoring Member. The Sponsoring
Member would, however, have a reimbursement claim against the Sponsored
Member in an amount equal to the Sponsored Member Liquidation Amount.
This reimbursement claim

would arise as a matter of law by virtue of the Sponsoring Member's
performance under Sponsoring Member Guaranty, though Sponsoring Members
and Sponsored Members may specify terms related to the reimbursement
claim in their bilateral submission. NSCC would have no rights or
obligations in respect of any such reimbursement claim.
    If a Sponsored Member Liquidation Amount were owed by NSCC to the
Sponsored Member, Section 14(c) of proposed Rule 2C would provide for
the Sponsoring Member to satisfy that obligation by transferring the
Sponsored Member Liquidation Amount to the Sponsoring Member's account
at its Settling Bank (``Sponsoring Member Settling Bank Omnibus
Account''). Section 14(c) of proposed Rule 2C would state that, to the
extent the Sponsoring Member makes such a transfer, it would discharge
NSCC's obligation to transfer the Sponsored Member Liquidation Amount
to the Sponsored Member and the Sponsoring Member's corresponding
obligation to transfer the Sponsoring Member Liquidation Amount to
NSCC.
    Section 14(d) of proposed Rule 2C would provide for the Sponsoring
Member to indemnify NSCC and its employees, officers, directors,
shareholders, agents, and Members (collectively, the ``Sponsoring/
Sponsored Membership Program Indemnified Parties'' or ``SMP Indemnified
Parties'') for any and all losses, liability, or expenses arising from
any claim by an affected Sponsored Member disputing the Sponsoring
Member's calculation of any Sponsored Member Liquidation Amount or
Sponsoring Member Liquidation Amount.
    Section 14(e) of proposed Rule 2C would provide that NSCC
acknowledges that a Sponsoring Member may take a security interest in
NSCC's obligations to a Sponsored Member in respect of its transactions
that have been novated to NSCC by such Sponsoring Member and
established in the Sponsoring Member's Sponsored Member Sub-Account for
the Sponsored Member. Such security interest would not impose new
obligations on NSCC but could allow the Sponsoring Member to direct
NSCC to submit payments due to the Sponsored Member to the Sponsoring
Member, so that the Sponsoring Member can apply such amounts to the
Sponsored Member's unsatisfied obligations to the Sponsoring Member.
(B) Proposed Rule 2D--Agent Clearing Members
    NSCC is proposing to add Rule 2D, entitled ``Agent Clearing
Members.'' This new rule would govern the proposed agent clearing
membership and would be comprised of 12 sections, each of which is
described below.
Proposed Rule 2D, Section 1 (General)
    Section 1 of proposed Rule 2D would be a general provision
regarding the Rules applicable to Agent Clearing Members.
    Section 1 of proposed Rule 2D would provide that NSCC will permit a
Member that is approved to be an Agent Clearing Member to submit
transactions to NSCC for novation on behalf of one or more of the Agent
Clearing Member's Customers. Section 1 of proposed Rule 2D would
further provide that the rights, liabilities and obligations of Agent
Clearing Members shall be governed by proposed Rule 2D, and that
references to the term ``Member'' in other Rules would not apply to
Agent Clearing Members, in their respective capacities as such, unless
specifically noted as such in proposed Rule 2D or in such other Rules.
    Section 1 of proposed Rule 2D would also provide that an Agent
Clearing Member shall continue to have all of the rights, liabilities
and obligations as set forth in the Rules and in any agreement between
it and NSCC pertaining to its status as a Member, and such rights,
liabilities and obligations shall be separate from its rights,
liabilities and obligations as an Agent Clearing Member except as
contemplated under Sections 6, 7 and 8 of proposed Rule 2D.
Proposed Rule 2D, Section 2 (Qualifications of Agent Clearing Members,
the Application Process and Continuance Standards)
    Section 2 of proposed Rule 2D would establish the eligibility
requirements for Members that wish to become Agent Clearing Members,
the membership application process that would be required of each
Member to become an Agent Clearing Member, the on-going membership
requirements that would apply to Agent Clearing Members, as well as the
requirements regarding an Agent Clearing Member's election to
voluntarily terminate its membership.
    Under Section 2(a) of proposed Rule 2D, any Member would be
eligible to apply to become an Agent Clearing Member; however, if a
Member is a Registered Broker-Dealer, such Member would only be
permitted to apply to become an Agent Clearing Member if it has (1) Net
Worth of at least $25 million and (2) excess net capital over the
minimum net capital requirement imposed by the Commission (or such
higher minimum capital requirement imposed by the Member's designated
examining authority) of at least $10 million.\65\ As proposed, NSCC may
require that a Person be a Member for a certain time period before that
Person may be considered to become an Agent Clearing Member.
---------------------------------------------------------------------------

    \65\ NSCC is proposing these financial minimums for Registered
Broker-Dealer Agent Clearing Member applicants to reflect the
additional responsibility that the applicant would undertake as an
Agent Clearing Member. These financial minimums are determined based
on NSCC's assessment of the minimum capital that would be necessary
for a broker-dealer to conduct meaningful level of NSCC-cleared
activity while serving as a credit counterparty in respect of
others' trades. In addition, NSCC is proposing these financial
minimums for Registered Broker-Dealer Agent Clearing Member
applicants to be consistent with proposed requirements applicable to
Registered Broker-Dealer Sponsoring Member applicants. NSCC believes
this approach to financial minimums is appropriate because both
Sponsoring Members and Agent Clearing Members would be viewed and
surveilled as the credit counterparties to NSCC in respect of the
transactions that they submit for clearing in respect of Sponsoring
Member Sub-Accounts and Agent Clearing Member Customer Omnibus
Accounts, respectively. Although the model of clearing would differ
as between Sponsoring Members and Agent Clearing Members, both would
be types of Members that would be standing behind the credit of
their clients. Accordingly, NSCC believes it is appropriate to use
consistent financial minimums.
---------------------------------------------------------------------------

    Section 2(b) of proposed Rule 2D would provide that each Member
applicant to become an Agent Clearing Member would be required to
provide an application and other information requested by NSCC. Agent
Clearing Member applications shall first be reviewed by NSCC and would
require the Board of Directors' approval, unless the Member applicant
is already a Sponsoring Member under proposed Rule 2C or a sponsoring
member of FICC. NSCC believes this approach to the Board of Directors'
approval for Agent Clearing Members is appropriate in light of the fact
that the critical components of the FICC sponsoring member applications
as well as the NSCC Agent Clearing Member and Sponsoring Member
applications and the criteria that the respective boards assess when
determining whether to admit a Member in such respective capacities are
substantially similar.
    Under Section 2(c) of proposed Rule 2D, if the Agent Clearing
Member application is denied, such denial would be handled in
accordance with Section 1 of Rule 2A (Initial Membership Requirements).
    As proposed in Section 2(d) of proposed Rule 2D, NSCC may impose
additional financial requirements on an

Agent Clearing Member applicant based upon the level of the anticipated
positions and obligations of such applicant, the anticipated risk
associated with the volume and types of transaction such applicant
proposes to process through NSCC as an Agent Clearing Member and the
overall financial condition of such applicant. Under the proposal, with
respect to an application of a Member to become an Agent Clearing
Member that requires the Board of Directors' approval, the Board of
Directors shall also approve any increased financial requirements
imposed by NSCC in connection with the approval of the application, and
NSCC would thereafter regularly review such Agent Clearing Member
regarding its compliance with the increased financial requirements.\66\
---------------------------------------------------------------------------

    \66\ If the increased financial requirements are imposed in
connection with an Agent Clearing Member application that does not
require the Board of Directors' approval, the increased financial
requirements would not be subject to the Board of Directors'
approval. Nonetheless, once an Agent Clearing Member application is
approved with increased financial requirements, NSCC would
thereafter regularly review such Agent Clearing Member regarding its
continued adherence to such increased financial requirements as well
as determine whether such increased financial requirements are still
appropriate. If the Agent Clearing Member is unable to adhere to the
increased financial requirements, the Board of Directors may,
pursuant to Section 9 of proposed Rule 2D, suspend, prohibit or
limit the Agent Clearing Member's access to NSCC's services.
---------------------------------------------------------------------------

    In addition, under Section 2(e) of proposed Rule 2D, NSCC may
require each Agent Clearing Member or any Agent Clearing Member
applicant to furnish adequate assurances of such Agent Clearing Member
or Agent Clearing Member applicant's financial responsibility and
operational capability within the meaning of Rule 15 (Assurances of
Financial Responsibility and Operational Capability), as NSCC may at
any time or from time to time deem necessary or advisable in order to
protect NSCC, its participants, creditors or investors, to safeguard
securities and funds in the custody or control of NSCC and for which
NSCC is responsible, or to promote the prompt and accurate clearance,
settlement and processing of securities transactions.\67\
---------------------------------------------------------------------------

    \67\ As an example, NSCC may require an Agent Clearing Member or
an Agent Clearing Member applicant to furnish adequate assurances of
such Agent Clearing Member or Agent Clearing Member applicant's
financial responsibility and operational capability if NSCC has
concerns about such Agent Clearing Member or Agent Clearing Member
applicant's overall financial health or credit rating.
---------------------------------------------------------------------------

    Section 2(f) of proposed Rule 2D would provide that each Member
whose Agent Clearing Member application is approved would sign and
deliver to NSCC an agreement between NSCC and the Member and specifies
the terms and conditions deemed by NSCC to be necessary in order to
protect itself and its participants (``Agent Clearing Member
Agreement'') and a related legal opinion in a form satisfactory to
NSCC.
    Section 2(g) of proposed Rule 2D would provide that each Agent
Clearing Member shall submit to NSCC, within the timeframes and in the
formats required by NSCC, the reports and information that all Members
are required to submit regardless of type of Member and the reports and
information required to be submitted for its respective type of Member,
all pursuant to Section 2 of Rule 2B (Ongoing Membership Requirements
and Monitoring) and, if applicable, Addendum O (Admission of Non-US
Entities as Direct NSCC Members).
    Section 2(h) of proposed Rule 2D would provide that an Agent
Clearing Member's books and records, insofar as they relate to the
Agent Clearing Member Transactions submitted to NSCC, shall be open to
the inspection of the duly authorized representatives of NSCC to the
same extent provided in Rule 2A (Initial Membership Requirements) for
other Members.
    Section 2(i) of proposed Rule 2D would provide that an Agent
Clearing Member shall promptly inform NSCC, both orally and in writing,
if it is no longer in compliance with the relevant standards and
qualifications for applying to become an Agent Clearing Member set
forth in the proposed Rule 2D. Notification must take place immediately
and in no event later than 2 Business Days from the date on which the
Agent Clearing Member first learns of its non-compliance. As proposed,
NSCC would assess a fine in accordance with the Fine Schedule in
Addendum P against any Agent Clearing Member that fails to so notify
NSCC.\68\ If the Agent Clearing Member fails to remain in compliance
with the relevant standards and qualifications, NSCC would, if
necessary, undertake appropriate action to determine the status of the
Agent Clearing Member and its continued eligibility as such. In
addition, NSCC may review the financial responsibility and operational
capability of the Agent Clearing Member, and otherwise require from the
Agent Clearing Member additional reports of its financial or
operational condition at such intervals and in such detail as NSCC
shall determine. In addition, if NSCC has reason to believe that an
Agent Clearing Member may fail to comply with any of the Rules
applicable to Agent Clearing Members, it may require the Agent Clearing
Member to provide it, within such timeframe, and in such detail, and
pursuant to such manner as NSCC shall determine, with assurances in
writing of a credible nature that the Agent Clearing Member shall not,
in fact, violate any of the Rules.
---------------------------------------------------------------------------

    \68\ See Addendum P (Fine Schedule), supra note 4.
---------------------------------------------------------------------------

    Section 2(j) of proposed Rule 2D would provide that in the event
that an Agent Clearing Member fails to remain in compliance with the
relevant requirements of the Rules or the Agent Clearing Member
Agreement, NSCC shall have the right to cease to act for the Agent
Clearing Member in its capacity as an Agent Clearing Member in
accordance with Section 9 of proposed Rule 2D or as a Member more
generally, unless the Agent Clearing Member requests that such action
not be taken and NSCC determines that, depending upon the specific
circumstances and the record of the Agent Clearing Member, it is
appropriate instead to establish for such Agent Clearing Member a time
period, which shall be determined by NSCC and which shall be no longer
than 30 calendar days unless otherwise determined by NSCC, during which
the Agent Clearing Member must resume compliance with such
requirements. As proposed, in the event that the Agent Clearing Member
is unable to satisfy such requirements within the time period specified
by NSCC, NSCC shall, pursuant to the Rules, cease to act for the Agent
Clearing Member in its capacity as an Agent Clearing Member pursuant to
Section 9 of the proposed Rule 2D or as a Member more generally.
    Section 2(k) of proposed Rule 2D would provide that if the sum of
the Volatility Charges applicable to an Agent Clearing Member's Agent
Clearing Member Customer Omnibus Account(s) and its other accounts at
NSCC exceeds its Net Member Capital, the Agent Clearing Member shall
not be permitted to submit activity into its Agent Clearing Member
Customer Omnibus Account(s), unless otherwise determined by NSCC in
order to promote orderly settlement.\69\ As proposed, an ``Agent
Clearing Member Customer Omnibus Account'' would mean a ledger
maintained on the books and records of NSCC that reflects the
outstanding Agent Clearing Member

Transactions that an Agent Clearing Member enters into on behalf of
Customers and that have been novated to NSCC, the SFT Positions or SFT
Cash associated with those transactions, and any debits or credits of
cash associated with such transactions effected pursuant to Rule 12
(Settlement).
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    \69\ NSCC selected the Volatility Charges and Net Member Capital
as the criteria for purposes of establishing the activity limit for
Agent Clearing Members. This is because an Agent Clearing Member's
total Volatility Charges being in excess of its Net Member Capital
is an important indicator that the Agent Clearing Member's financial
resources, as measured by its Net Capital, net assets or equity
capital, may be insufficient to meet the largest component of its
Required Fund Deposit (i.e., Volatility Charges).
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    Section 2(l) of proposed Rule 2D would provide that an Agent
Clearing Member may voluntarily elect to terminate its status as an
Agent Clearing Member by providing NSCC with a written notice from an
Agent Clearing Member to NSCC that the Agent Clearing Member is
voluntarily electing to terminate its status as an Agent Clearing
Member (``Agent Clearing Member Voluntary Termination Notice''). The
Agent Clearing Member shall specify in the Agent Clearing Member
Voluntary Termination Notice a desired date for such termination, which
date shall not be prior to the scheduled Final Settlement Date of any
remaining obligation owed by the Agent Clearing Member to NSCC as of
the time such Agent Clearing Member Voluntary Termination Notice is
submitted to NSCC, unless otherwise approved by NSCC.
    Section 2(l) of proposed Rule 2D would also provide that such
termination would not be effective until accepted by NSCC, which shall
be no later than 10 Business Days after the receipt of the Agent
Clearing Member Voluntary Termination Notice from such Agent Clearing
Member. NSCC's acceptance shall be evidenced by a notice to NSCC's
participants announcing the termination of the Agent Clearing Member's
status as such and the date on which the termination of the Agent
Clearing Member's status as an Agent Clearing Member becomes effective
(``Agent Clearing Member Termination Date''). As proposed, after the
close of business on the Agent Clearing Member Termination Date, the
Agent Clearing Member shall no longer be eligible to submit Agent
Clearing Member Transactions. If any Agent Clearing Member Transaction
is submitted to NSCC by the Agent Clearing Member that is scheduled to
settle after the Agent Clearing Member Termination Date, such Agent
Clearing Member's Agent Clearing Member Voluntary Termination Notice
would be deemed void, and the Agent Clearing Member would remain
subject to the proposed Rule 2D as if it had not given such Agent
Clearing Member Voluntary Termination Notice.
    Section 2(m) of proposed Rule 2D would provide that an Agent
Clearing Member's voluntary termination of its status as such shall not
affect its obligations to NSCC, or the rights of NSCC, with respect to
Agent Clearing Member Transactions submitted to NSCC before the
applicable Agent Clearing Member Termination Date. Any such Agent
Clearing Member Transactions that have been novated to NSCC shall
continue to be processed by NSCC. The return of the Agent Clearing
Member's Clearing Fund deposit shall be governed by Section 7 of Rule 4
(Clearing Fund). If an Event Period were to occur after an Agent
Clearing Member has submitted the Agent Clearing Member Voluntary
Termination Notice but on or prior to the Agent Clearing Member
Termination Date, in order for the Agent Clearing Member to benefit
from its Loss Allocation Cap pursuant to Section 4 of Rule 4, the Agent
Clearing Member would need to comply with the provisions of Section 6
of Rule 4 and submit a Loss Allocation Withdrawal Notice, which notice,
upon submission, shall supersede and void any pending Agent Clearing
Member Voluntary Termination Notice previously submitted by the Agent
Clearing Member.
    Section 2(n) of proposed Rule 2D would provide that any non-public
information furnished to NSCC pursuant to proposed Rule 2D shall be
held in confidence as may be required under the laws, rules and
regulations applicable to NSCC that relate to the confidentiality of
records. Section 2(n) would also provide that each Agent Clearing
Member shall maintain DTCC Confidential Information in confidence to
the same extent and using the same means it uses to protect its own
confidential information, but no less than a reasonable standard of
care, and shall not use DTCC Confidential Information or disclose DTCC
Confidential Information to any third party except as necessary to
perform such Agent Clearing Member's obligations under the Rules or as
otherwise required by applicable law. Section 2(n) would further
provide that each Agent Clearing Member acknowledges that a breach of
its confidentiality obligations under the Rules may result in serious
and irreparable harm to NSCC and/or DTCC for which there is no adequate
remedy at law. In addition, Section 2(n) would provide that in the
event of such a breach by the Agent Clearing Member, NSCC and/or DTCC
shall be entitled to seek any temporary or permanent injunctive or
other equitable relief in addition to any monetary damages
thereunder.\70\
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    \70\ Section 2(n) of proposed Rule 2D is designed to be
consistent with NSCC's proposed change to revise certain provisions
in the Rules relating to the confidentiality of information
furnished by participants. See Securities Exchange Act Release No.
92334 (July 7, 2021), 86 FR 36815 (July 13, 2021) (SR-NSCC-2021-
007).
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Proposed Rule 2D, Section 3 (Compliance With Laws)
    Section 3 of proposed Rule 2D would provide that each Agent
Clearing Member shall comply in all material respects with all
applicable laws, including applicable laws relating to securities,
taxation and money laundering, as well as global sanctions laws, in
connection with the use of NSCC's services.
Proposed Rule 2D, Section 4 (Agent Clearing Member Transactions)
    Section 4 of proposed Rule 2D would provide that an Agent Clearing
Member shall be permitted to submit to NSCC on behalf of one or more
Customers' Securities Financing Transactions (``Agent Clearing Member
Transactions'') in accordance with proposed Rule 56, as described
below.
Proposed Rule 2D, Section 5 (Agent Clearing Member Agent Obligations)
    Section 5 of proposed Rule 2D would establish rules-based
obligations for Agent Clearing Members and the establishment of Agent
Clearing Member Customer Omnibus Accounts.
    Section 5(a) of proposed Rule 2D would provide that an Agent
Clearing Member shall be permitted to submit to NSCC for novation Agent
Clearing Member Transactions entered into by the Agent Clearing Member
as agent on behalf of one or more Customers. Any such submission shall
be in accordance with proposed Rule 2D. As proposed, subject to the
provisions of the Rules, an Agent Clearing Member's clearing of Agent
Clearing Member Transactions for Customers (``Customer Clearing
Service'') may be provided by an Agent Clearing Member to its Customers
on any terms and conditions mutually agreed to by the Agent Clearing
Member and its Customers; provided, that each Agent Clearing Member
shall, before providing Customer Clearing Service to any Customer,
enter into an agreement with that Customer that binds the Customer to
the provisions of the Rules applicable to Agent Clearing Member
Transactions and Customers.
    Section 5(b) of proposed Rule 2D would provide that, with respect
to an Agent Clearing Member that submits Agent Clearing Member
Transactions to NSCC for novation on behalf of its Customers, NSCC
shall maintain one or more Agent Clearing Member Customer Omnibus
Accounts in the name of the

Agent Clearing Member for the benefit of its Customers. Each Agent
Clearing Member Customer Omnibus Account would be permitted to contain
only (i) SFTs entered into by the Agent Clearing Member, on behalf of a
Customer, as Transferor or (ii) SFTs entered into by the Agent Clearing
Member, on behalf of a Customer, as a Transferee. An Agent Clearing
Member would not be permitted to combine SFTs entered into as
Transferee and Transferor in the same Agent Clearing Member Customer
Omnibus Account. This is designed to ensure that NSCC's volatility-
based Clearing Fund deposit requirements represent the sum of each
individual Customer's activity (i.e., that the positions are margined
on a gross basis).\71\
---------------------------------------------------------------------------

    \71\ If an Agent Clearing Member were permitted to maintain SFTs
entered into as both Transferee and Transferor in the same Agent
Clearing Member Customer Omnibus Account, the Required Fund Deposit
obligations of the Agent Clearing Member could potentially be
reduced by offsetting SFT Positions of different Customers in the
same SFT Security.
---------------------------------------------------------------------------

    Section 5(c) of proposed Rule 2D would provide that an Agent
Clearing Member shall act solely as agent of its Customers in
connection with the clearing of Agent Clearing Member Transactions;
provided that the Agent Clearing Member shall remain fully liable for
the performance of all obligations to NSCC arising in connection with
Agent Clearing Member Transactions; and provided further, that the
liabilities and obligations of NSCC with respect to Agent Clearing
Member Transactions entered into by the Agent Clearing Member shall
extend only to the Agent Clearing Member. Section 5(c) of proposed Rule
2D would further provide that, without limiting the generality of the
foregoing, NSCC shall not have any liability or obligation arising out
of or with respect to any Agent Clearing Member Transaction to any
Customer on behalf of whom an Agent Clearing Member entered into the
Agent Clearing Member Transaction.
    Section 5(d) of proposed Rule 2D would provide that nothing in the
Rules shall prohibit an Agent Clearing Member from seeking
reimbursement from a Customer for payments made by the Agent Clearing
Member (whether out of Clearing Fund deposits or otherwise) under the
Rules, or as otherwise may be agreed between the Agent Clearing Member
and the Customer.
Proposed Rule 2D, Section 6 (Clearing Fund Obligations)
    Section 6 of proposed Rule 2D would set forth the Clearing Fund
obligations.
    Section 6(a) of proposed Rule 2D would provide that NSCC shall
maintain one or more Agent Clearing Member Customer Omnibus Accounts
for an Agent Clearing Member. Each Agent Clearing Member shall make and
maintain so long as such Member is an Agent Clearing Member a deposit
to the Clearing Fund as a Required Fund Deposit to support the activity
in its Agent Clearing Member Customer Omnibus Account(s) (the ``Agent
Clearing Member Required Fund Deposit''). Deposits to the Clearing Fund
would be held by NSCC or its designated agents, to be applied as
provided in the Rules.
    Section 6(b) of proposed Rule 2D would provide that, in the
ordinary course, for purposes of satisfying the Agent Clearing Member's
Clearing Fund requirements under the Rules for its Member activity, its
Agent Clearing Member activity, and, to the extent applicable, its
Sponsoring Member activity, the Agent Clearing Member's proprietary
accounts, its Agent Clearing Member Customer Omnibus Account(s), and
its Sponsored Member Sub-Accounts, if any, shall be treated separately,
as if they were accounts of separate entities. Notwithstanding the
previous sentence, however, NSCC may, in its sole discretion, at any
time and without prior notice to the Agent Clearing Member (but being
obligated to give notice to the Agent Clearing Member as soon as
possible thereafter) and whether or not the Agent Clearing Member is in
default of its obligations to NSCC, treat the Agent Clearing Member's
accounts as a single account for the purpose of applying Clearing Fund
deposits; apply Clearing Fund deposits made by the Agent Clearing
Member with respect to any account as necessary to ensure that the
Agent Clearing Member meets all of its obligations to NSCC under any
other account(s); and otherwise exercise all rights to offset and net
against the Clearing Fund deposits any net obligations among any or all
of the accounts, whether or not any other Person is deemed to have any
interest in such account.\72\
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    \72\ NSCC believes this is appropriate because the Clearing Fund
deposits of an Agent Clearing Member are the proprietary assets of
the Agent Clearing Member and NSCC generally has the right to apply
the Clearing Fund deposits of a Member to any of the Member's
obligations to NSCC, regardless of whether those were the
obligations that generated the Clearing Fund deposit requirement.
NSCC therefore believes that, consistent with the FICC Sponsoring
Member/Sponsored Member Program for the reasons described above in
Item II(A)1(iii) ``Sponsoring Members and Sponsored Members,'' an
Agent Clearing Member's Clearing Fund deposits should be available
to satisfy any of the Agent Clearing Member's obligations to NSCC.
---------------------------------------------------------------------------

    Section 6(c) of proposed Rule 2D would provide that the Agent
Clearing Member Required Fund Deposit for each Agent Clearing Member
Customer Omnibus Account shall be calculated separately based on the
Agent Clearing Member Transactions in such Agent Clearing Member
Customer Omnibus Account, and the Agent Clearing Member shall, as
principal, be required to satisfy the Agent Clearing Member Required
Fund Deposit for each of the Agent Clearing Member's Agent Clearing
Member Customer Omnibus Accounts.
    Section 6(d) of proposed Rule 2D would provide that Sections 1, 2,
4, 5, 6, 7, 8, 9, 10, 11 and 12 of Rule 4 (Clearing Fund) shall apply
to the Agent Clearing Member Required Fund Deposit with respect to
obligations of an Agent Clearing Member under the Rules, including its
obligations arising under the Agent Clearing Member Customer Omnibus
Account(s), to the same extent as such sections apply to any Required
Fund Deposit and any other obligations of a Member. For purposes of
Section 1 of Rule 4, obligations and liabilities of a Member to NSCC
that shall be secured shall include, without limitation, a Member's
obligations as an Agent Clearing Member under the Rules, including,
without limitation, any obligation of any such Agent Clearing Member to
provide the Agent Clearing Member Required Fund Deposit and such Agent
Clearing Member's obligations arising under SFTs established in the
Agent Clearing Member Customer Omnibus Accounts of such Agent Clearing
Member.
    Section 6(e) of proposed Rule 2D would provide that an Agent
Clearing Member shall be subject to such fines as may be imposed in
accordance with the Rules for any late satisfaction of a Clearing Fund
deficiency call.
Proposed Rule 2D, Section 7 (Right of Offset)
    Section 7 of proposed Rule 2D would provide that in the ordinary
course, with respect to satisfaction of any Agent Clearing Member's
obligations under the Rules, the Agent Clearing Member's Agent Clearing
Member Customer Omnibus Accounts, the Agent Clearing Member's
proprietary accounts, and the Agent Clearing Member's Sponsored Member
Sub-Accounts, if any, at NSCC shall be treated separately, as if they
were accounts of separate entities. Notwithstanding the previous
sentence, however, NSCC may, in its sole discretion, at any time any
obligation of

the Agent Clearing Member arises in respect of any Agent Clearing
Member Customer Omnibus Account, exercise a right of offset and net any
such obligation against any obligations of NSCC to the Agent Clearing
Member in respect of such Agent Clearing Member's proprietary accounts
at NSCC.
Proposed Rule 2D, Section 8 (Loss Allocation Obligations)
    Section 8 of proposed Rule 2D would establish loss allocation
obligations for Agent Clearing Members.
    Section 8(a) of proposed Rule 2D would provide that, to the extent
NSCC incurs a loss or liability from a Defaulting Member Event or a
Declared Non-Default Loss Event and a loss allocation obligation
arises, that would be the responsibility of the Agent Clearing Member
Customer Omnibus Account as if the Agent Clearing Member Customer
Omnibus Account were a Member, NSCC shall calculate such loss
allocation obligation and the Agent Clearing Member shall be, as
principal, responsible for satisfying such obligations.
    Section 8(b) of proposed Rule 2D would provide that the entire
amount of the Required Fund Deposit associated with the Agent Clearing
Member's proprietary accounts at NSCC and the entire amount of the
Agent Clearing Member Required Fund Deposit may be used to satisfy any
amount allocated against an Agent Clearing Member, whether in its
capacity as a Member, an Agent Clearing Member, or otherwise. With
respect to an obligation to make payment due to any loss allocation
amounts assessed on an Agent Clearing Member pursuant to Section 8(a)
of proposed Rule 2D, the Agent Clearing Member may instead elect to
terminate its membership in NSCC pursuant to Section 6 of Rule 4 and
thereby benefit from its Loss Allocation Cap pursuant to Section 4 of
Rule 4; however, for the purpose of determining the Loss Allocation Cap
for such Agent Clearing Member, its Required Fund Deposit shall be the
sum of its Required Fund Deposits associated with its proprietary
accounts at NSCC (including its proprietary SFT Account pursuant to
proposed Rule 56), its Agent Clearing Member Required Fund Deposit for
each of its Agent Clearing Member Customer Omnibus Accounts, and its
Sponsoring Member Required Fund Deposit, if any.
Proposed Rule 2D, Section 9 (Restrictions on Access to Services by an
Agent Clearing Member)
    Section 9 of proposed Rule 2D would establish the rights of NSCC to
restrict an Agent Clearing Member's access to NSCC's services.
    Section 9(a) of proposed Rule 2D would provide that the Board of
Directors may at any time upon NSCC providing notice to an Agent
Clearing Member pursuant to Section 5 of Rule 45 (Notices), suspend an
Agent Clearing Member in its capacity as an Agent Clearing Member from
any service provided by NSCC either with respect to a particular
transaction or transactions or with respect to transactions generally,
or prohibit or limit such Agent Clearing Member's access to services
offered by NSCC in the event that one or more of the factors set forth
in Section 1 of Rule 46 (Restrictions on Access to Services) is present
with respect to the Agent Clearing Member.
    Section 9(b) of proposed Rule 2D would provide that Rule 46 shall
apply with respect to an Agent Clearing Member in the same way as it
applies to Members, including the Board of Directors' right to
summarily suspend the Agent Clearing Member and to cease to act for
such Agent Clearing Member. As under Rule 46, the Board of Directors
would need to make the determination of whether to suspend, prohibit or
limit an Agent Clearing Member's access to services offered by NSCC on
the basis of the factors set forth in that rule.
    Section 9(c) of proposed Rule 2D would provide that if NSCC ceases
to act for an Agent Clearing Member in its capacity as an Agent
Clearing Member, Section 14 of proposed Rule 56 shall apply and NSCC
shall decline to accept or process data from the Agent Clearing Member
on Agent Clearing Member Transactions and close-out any Agent Clearing
Member Transactions that have been novated to NSCC. Section 9(c) would
also provide that if NSCC suspends, prohibits or limits an Agent
Clearing Member in its capacity as an Agent Clearing Member with
respect to such Agent Clearing Member's access to services offered by
NSCC, NSCC shall decline to accept or process data from the Agent
Clearing Member on Agent Clearing Member Transactions for so long as
NSCC is suspending, prohibiting or limiting the Agent Clearing Member.
Furthermore, Section 9(c) would state that, in addition, NSCC would
close-out any Agent Clearing Member Transactions which have been
novated to NSCC.
    This is different from how NSCC would treat Sponsored Member
Transactions of a Sponsoring Member under Section 10 of proposed Rule
2C if NSCC ceases to act for the Sponsoring Member. With respect to
such transactions, NSCC would have the option to either terminate or
settle a Sponsored Member's positions after ceasing to act for the
Sponsoring Member. The reason for this difference is that NSCC would
have the practical and legal capability to make such an election
because each Sponsored Member would be a limited-purpose member of
NSCC. Accordingly, NSCC would have the requisite information about each
of the Sponsored Member's novated positions (by virtue of each
Sponsored Member's novated portfolio represented as a different sub-
account of the Sponsoring Member (i.e., Sponsored Member Sub-Account)
on the books and records of NSCC) to make such an election. By
contrast, an Agent Clearing Member's Customers would not be limited-
purpose members of NSCC nor would NSCC know which transactions within
an Agent Clearing Member Customer Omnibus Account belong to which
Customers. As such, NSCC would not be able to separately terminate or
complete settlement with respect to Customer's novated positions.
Proposed Rule 2D, Section 10 (Insolvency of an Agent Clearing Member)
    Section 10(a) of proposed Rule 2D would provide that an Agent
Clearing Member shall be obligated to immediately notify NSCC that (a)
it fails, or is unable, to perform its contracts or obligations or (b)
it is insolvent as required by Section 1 of Rule 20 (Insolvency) for
other Members. An Agent Clearing Member shall be treated by NSCC in all
respects as insolvent under the same circumstances set forth in Section
2 of Rule 20 for other Members. Section 3 of Rule 20 shall apply, in
the same manner in which such section applies to other Members, in the
case where NSCC treats an Agent Clearing Member as insolvent.
    Section 10(b) of proposed Rule 2D would provide that in the event
that NSCC determines to treat an Agent Clearing Member as insolvent
pursuant to Rule 20 (Insolvency), NSCC shall have the right to cease to
act for the insolvent Agent Clearing Member pursuant to Section 9 of
proposed Rule 2D. If NSCC ceases to act for the insolvent Agent
Clearing Member, NSCC shall decline to accept or process data from the
Agent Clearing Member, including Agent Clearing Member Transactions. As
proposed, NSCC would close-out any Agent Clearing Member Transactions
which have been novated to NSCC.
    This is different from how NSCC would treat Sponsored Member
Transactions. As described above, NSCC would have the option to either
terminate or settle a Sponsored

Member's novated positions after ceasing to act for the Sponsoring
Member. However, with respect to Agent Clearing Member Transactions,
NSCC would close-out any such transactions which have been novated to
NSCC. This is because NSCC would have the practical and legal
capability to make such an election with respect to Sponsored Member
Transactions because each Sponsored Member would be a limited-purpose
member of NSCC. Accordingly, NSCC would have the requisite information
about each of the Sponsored Member's novated positions (by virtue of
each Sponsored Member's novated portfolio represented as a different
sub-account of the Sponsoring Member (i.e., Sponsored Member Sub-
Account) on the books and records of NSCC) to make such an election. By
contrast, an Agent Clearing Member's Customers would not be limited-
purpose members of NSCC nor would NSCC know which transactions within
an Agent Clearing Member Customer Omnibus Account belong to which
Customers. As such, NSCC would not be able to separately terminate or
complete settlement with respect to Customers' novated positions.
Proposed Rule 2D, Section 11 (Transfer of Agent Clearing Member
Transactions in Agent Clearing Member Customer Omnibus Accounts)
    Section 11 of proposed Rule 2D would (i) permit an Agent Clearing
Member, upon a default of a Customer and consent of NSCC, to transfer
Agent Clearing Member Transactions of the Customer established in one
or more of the Agent Clearing Member's Agent Clearing Member Customer
Omnibus Accounts from such Agent Clearing Member Customer Omnibus
Accounts to the Agent Clearing Member's proprietary account at NSCC as
a Member and (ii) govern how the transfer would be effectuated.
    Section 11(a) of proposed Rule 2D would clarify the scope to which
Section 11 of proposed Rule 2D applies. It would state that Section 11
would not apply if either (i) the relevant Agent Clearing Member is a
Defaulting Member or (ii) a Corporation Default has occurred. This is
because, as described above with respect to Section 10(b) of proposed
Rule 2D, NSCC would close-out all Agent Clearing Member Transactions
for which the defaulting Agent Clearing Member was responsible. If a
Corporation Default has occurred with respect to NSCC, each Agent
Clearing Member's positions would be closed out in accordance with
Section 17 of proposed Rule 56.
    Section 11(b) of proposed Rule 2D would set out the process by
which an Agent Clearing Member may transfer the Agent Clearing Member
Transactions of a defaulting Customer in one or more of Agent Clearing
Member's Agent Clearing Member Customer Omnibus Accounts. It would
provide that, to the extent permitted under applicable laws and
regulations, an Agent Clearing Member may, upon a default of a Customer
and the consent of NSCC, transfer the Agent Clearing Member
Transactions of the Customer established in one or more of the Agent
Clearing Member's Agent Clearing Member Customer Omnibus Accounts from
such Agent Clearing Member Customer Omnibus Accounts to the Agent
Clearing Member's proprietary account at NSCC as a Member. As proposed,
any such transfer shall occur by novation, such that the obligations
between NSCC and the relevant Customer in respect of the Agent Clearing
Member Transactions shall be terminated and replaced with identical
obligations between NSCC and the Agent Clearing Member, acting as
principal. Section 11(b) would also provide the Agent Clearing Member
shall indemnify NSCC, and its employees, officers, directors,
shareholders, agents, and Members, for any and all losses, liability,
or expenses incurred by them arising from, or in relation to, any such
transfer.
Proposed Rule 2D, Section 12 (Customer Acknowledgments)
    Section 12 of proposed Rule 2D would provide that each Agent
Clearing Member on behalf of each of its Customers agrees that such
Customer, by participating in and entering into Agent Clearing Member
Transactions through the Agent Clearing Member, understands,
acknowledges, and agrees that: (a) The service provided by NSCC with
regard to the Customer Clearing Service would be subject to and
governed by the Rules; (b) the Rules shall govern the novation of Agent
Clearing Member Transactions and all transactions between the Customer
and its Agent Clearing Member resulting in the novation of such
transactions, and at the time of novation of an Agent Clearing Member
Transaction, the Customer on whose behalf it was submitted would be
bound by the Agent Clearing Member Transaction automatically and
without any further action by the Customer or by its Agent Clearing
Member, and the Customer agrees to be bound by the applicable
provisions of the Rules in all respects; (c) NSCC shall be under no
obligation to deal directly with the Customer, and NSCC may deal
exclusively with the Customer's Agent Clearing Member; (d) NSCC shall
have no obligations to the Customer with respect to any Agent Clearing
Member Transactions submitted by an Agent Clearing Member on behalf of
the Customer, including with respect to any payment or delivery
obligations; and (e) the Customer shall have no right to receive from
NSCC, or any right to assert a claim against NSCC with respect to, nor
shall NSCC be liable to the Customer for, any payment or delivery
obligation in connection with any Agent Clearing Member Transactions
submitted by an Agent Clearing Member on behalf of the Customer, and
NSCC shall make any such payments or redeliveries solely to the
relevant Agent Clearing Member.
(C) Proposed Rule 56--Securities Financing Transaction Clearing Service
    NSCC is proposing to add Rule 56, entitled ``Securities Financing
Transaction Clearing Service.'' This new rule would govern the proposed
SFT Clearing Service and would be comprised of 18 sections, each of
which is described below.
    In connection with the proposed SFT Clearing Service, NSCC is
proposing to add the following terms and definitions, as described
below.
    The term ``Aggregate Net SFT Close-out Value'' would mean, with
respect to an SFT Member, the sum of the SFT Close-out Value (as
defined below and in the proposed rule change) for each SFT Position to
which the SFT Member is a party.
    The term ``Approved SFT Submitter'' would mean a provider of
transaction data on an SFT that the parties to the SFT have selected
and NSCC has approved, subject to such terms and conditions as to which
the Approved SFT Submitter and NSCC may agree.
    The term ``Bilaterally Initiated SFT'' would mean an SFT, the
Initial Settlement of which occurred prior to the submission of such
SFT to NSCC.
    The term ``Buy-In Amount'' would mean a net amount equal to (x) the
Buy-In Costs or Deemed Buy-In Costs (as defined below and in the
proposed rule change) of the SFT Securities in respect of which a
Transferor has effected a Buy-In, less (y) the amount of the SFT Cash
for the relevant SFT (unless the Transferor effected a Buy-In in
respect of some, but not all, of the SFT Securities that are the
subject of the SFT, in which case (y) shall be the amount of the
Corresponding SFT Cash (as defined below and in the proposed rule
change)).
    The term ``Contract Price'' would mean, with respect to SFT
Securities

subject to an SFT, the price of such securities at the time the SFT is
submitted to NSCC for novation, which price shall be determined by the
SFT Member parties to the relevant SFT and provided by an Approved SFT
Submitter to NSCC in accordance with the communication links, formats,
timeframes and deadlines established by NSCC for such purpose; provided
that if no such price is provided by the time required by NSCC, the
``Contract Price'' shall be the Current Market Price of the SFT
Securities.
    The term ``Corresponding SFT Cash'' would mean (a) in respect of a
Recalled SFT (as defined below and in the proposed rule change) for
which a Transferor has effected a Buy-In in respect of some, but not
all, of the SFT Securities that are the subject of the SFT, the portion
of the SFT Cash for such SFT equal to the product of (i) the percentage
of the SFT Securities in respect of which the Transferor effected a
Buy-In and (ii) the SFT Cash of the SFT; and (b) in respect of a
Settling SFT which has a greater quantity of SFT Securities as its
subject than the corresponding Linked SFT, the portion of the SFT Cash
of the Settling SFT equal to the product of (i) the percentage of the
SFT Securities of the Settling SFT that the Linked SFT has as its
subject and (ii) the SFT Cash of the Settling SFT.
    The term ``Deemed Buy-In Costs'' would mean the product of the
number of SFT Securities subject to the relevant Buy-In and the per-
share price therefor on the date of the Buy-In obtained from a
generally recognized source or the last bid quotation from such a
source at the most recent close of trading for the SFT Security.
    The term ``Defaulting SFT Member'' would mean an SFT Member for
which NSCC has declined or ceased to act in accordance with Section 14
of proposed Rule 56, as described below.
    The term ``Distribution'' would mean, with respect to any SFT
Security at any time, any cash payment of amounts equivalent to
dividends and other distributions on the SFT Security.
    The term ``Distribution Amount'' would mean, in respect of an SFT,
an amount of cash equal to the product of: (a) The amount per security
in respect of (x) a cash dividend on the SFT Securities that are the
subject of the SFT or (y) an exchange of the SFT Securities that are
the subject of the SFT for cash; and (b) the number of the relevant SFT
Securities subject to the SFT.
    The term ``Distribution Payment'' would mean an amount payable by
one party to an SFT to the other party to the SFT during the term of
the SFT in respect of a Distribution on the SFT Securities subject to
the SFT.
    The term ``Existing Master Agreement'' would mean, in respect of an
SFT, a written agreement that (i) exists at the time transaction data
for the SFT is submitted to NSCC by an Approved SFT Submitter, (ii)
provides for, among other things, terms governing the payment and
delivery obligations of the parties and (iii) the parties have
established (by written agreement, oral agreement, course of conduct or
otherwise) would govern such SFT.
    The term ``Final Settlement'' would mean the exchange of SFT
Securities for SFT Cash described in clause (b) of the proposed
definition of Securities Financing Transaction.
    The term ``Final Settlement Date'' would mean the Business Day on
which the final settlement of a transaction is scheduled to occur. If
the transaction is an SFT, the Final Settlement Date means the Business
Day on which the Final Settlement of the SFT is scheduled to occur in
accordance with proposed Rule 56 or, if the SFT is accelerated in
accordance with proposed Rule 56, the date to which the Final
Settlement obligations have been accelerated.
    The term ``Incremental Additional Independent Amount SFT Cash''
would mean, (a) in respect of a Linked SFT, the excess, if any, of the
Independent Amount SFT Cash of the Linked SFT over the Independent
Amount SFT Cash of the Settling SFT; (b) in respect of a Non-Returned
SFT, the portion of the Price Differential payable by the Transferee,
if any, that is attributable to the Independent Amount SFT Cash of the
SFT (which shall be calculated by multiplying such Priced Differential
by the excess, if any, of the Independent Amount Percentage (as defined
below and in the proposed rule change) over 100%); and (c) in respect
of any other SFT, the Independent Amount SFT Cash of such SFT.
    The term ``Independent Amount Percentage'' would mean, in respect
of an SFT, a percentage obtained by dividing the SFT Cash of such SFT
by the Market Value SFT Cash (as defined below and in the proposed rule
change) of such SFT.
    The term ``Independent Amount SFT Cash'' would mean the portion, if
any, of the SFT Cash for an SFT equal to the amount by which the SFT
Cash for such SFT at the time of the Initial Settlement exceeds the
Contract Price of the SFT Securities that are the subject of such SFT.
    The term ``Ineligibility Date'' would mean, with respect to an SFT,
the date on which the SFT Security that is the subject of the SFT
becomes an Ineligible SFT Security (as defined below and in the
proposed rule change).
    The term ``Ineligible SFT'' would mean an SFT that has, as its
subject, SFT Securities that have become Ineligible SFT Securities.
    The term ``Ineligible SFT Security'' would mean an SFT Security
that is not eligible to be the subject of a novated SFT.
    The term ``Initial Settlement'' would mean the exchange of SFT
Securities for SFT Cash described in clause (a) of the proposed
definition of Securities Financing Transaction.
    The term ``Linked SFT'' would mean an SFT entered into by the pre-
novation SFT Member parties to a Settling SFT that has the same
Transferor, Transferee and subject SFT Securities (including CUSIP) as
the Settling SFT. As proposed, a Linked SFT would include an SFT that
has as its subject fewer SFT Securities than the corresponding Settling
SFT but would not include an SFT that has as its subject more SFT
Securities than the corresponding Settling SFT.
    The term ``Market Value SFT Cash'' would mean the portion of the
SFT Cash for an SFT equal to the amount of the SFT Cash for such SFT
minus the Independent Amount SFT Cash of such SFT.
    The term ``Price Differential'' would mean (a) for purposes of the
discharge of offsetting Final Settlement and Initial Settlement
obligations, (i) the SFT Cash for the Settling SFT (or if the Settling
SFT has a greater quantity of SFT Securities as its subject than the
corresponding Linked SFT, the Corresponding SFT Cash) minus (ii) the
SFT Cash for the Linked SFT; and (b) for all other purposes, (i) the
SFT Cash for the SFT minus (ii) the product of the Independent Amount
Percentage, if any, and the Current Market Price of the SFT Securities.
    The term ``Rate Payment'' would mean an amount payable from one
party to an SFT to the other party to the SFT at the Final Settlement
expressed as a percentage of the amount of SFT Cash for the SFT. As an
example, if the Rate Payment is specified as 0.02%, the amount payable
would be the product 0.02% and the SFT Cash for the SFT.
    The term ``Recall Date'' would mean, in respect of a Recall Notice,
the second Business Day following NSCC's receipt of such Recall Notice.
    The term ``Recall Notice'' would mean a notice that triggers the
provisions of Section 9(b) of proposed Rule 56, relating to a Buy-In in
respect of an SFT and that is submitted by an Approved SFT Submitter on
behalf of a Transferor

in accordance with the communication links, formats, timeframes and
deadlines established by NSCC for such purpose.
    The term ``Recalled SFT'' would mean an SFT that has been novated
to NSCC in respect of which a Recall Notice has been submitted.
    The term ``Securities Financing Transaction'' or ``SFT'' would mean
a transaction between two SFT Members pursuant to which (a) one SFT
Member agrees to transfer specified SFT Securities to another SFT
Member versus the SFT Cash; and (b) the Transferee agrees to retransfer
such specified SFT Securities or equivalent SFT Securities (including
quantity and CUSIP) to the Transferor versus the SFT Cash on the
following Business Day.
    The term ``Settling SFT'' would mean, as of any Business Day, an
SFT that has been novated to NSCC, the Final Settlement of which is
scheduled to occur on that Business Day.
    The term ``SFT Account'' would mean a ledger maintained on the
books and records of NSCC that reflects the outstanding SFTs that an
SFT Member enters into and that have been novated to NSCC, the SFT
Positions or SFT Cash associated with those transactions and any debits
or credits of cash associated with such transactions effected pursuant
to Rule 12 (Settlement). As proposed, the term ``SFT Account'' would
include any Agent Clearing Member Customer Omnibus Account and any
Sponsored Member Sub-Account.
    The term ``SFT Cash'' would mean the specified amount of U.S.
dollars that the Transferee agrees to transfer to the Transferor at the
Initial Settlement of an SFT, (i) plus any Price Differential paid by
NSCC to the SFT Member as Transferor or by the SFT Member as Transferee
to NSCC during the term of the SFT and (ii) less any Price Differential
paid by NSCC to the SFT Member as Transferee or by the SFT Member as
Transferor to NSCC during the term of the SFT.
    The term ``SFT Close-out Value'' would mean, with respect to an SFT
Position of an SFT Member, an amount equal to: (i) If the SFT Member is
the Transferor of the SFT Securities that are the subject of such SFT,
(a) the CNS Market Value of the SFT Securities that are the subject of
such SFT minus (b) the SFT Cash for such SFT; and (ii) if the SFT
Member is a Transferee of the SFT Securities that are the subject of
such SFT, (a) the SFT Cash for such SFT minus (b) the CNS Market Value
of the SFT Securities that are the subject of such SFT.
    The term ``SFT Long Position'' would mean the number of units of an
SFT Security which an SFT Member is entitled to receive from NSCC at
Final Settlement of an SFT against payment of the SFT Cash.
    The term ``SFT Member'' would mean any Member, Sponsored Member
acting in its principal capacity, Sponsoring Member acting in its
principal capacity or Agent Clearing Member acting on behalf of a
Customer, in each case that is a party to an SFT, permitted to
participate in NSCC's SFT Clearing Service.
    The term ``SFT Position'' would mean an SFT Member's SFT Long
Position or SFT Short Position (as defined below and in the proposed
rule change) in an SFT Security that is the subject of an SFT that has
been novated to NSCC.
    The term ``SFT Security'' would mean a security that is eligible to
be the subject of an SFT novated to NSCC and is included in the list
for which provision is made in proposed Section 1(g) of Rule 3 (Lists
to be Maintained), as described below. As proposed, if any new or
different security is exchanged for any SFT Security in connection with
a recapitalization, merger, consolidation or other corporate action,
such new or different security shall, effective upon such exchange,
become an SFT Security in substitution for the former SFT Security for
which such exchange is made.
    The term ``SFT Short Position'' would mean the number of units of
an SFT Security that an SFT Member is obligated to deliver to NSCC at
Final Settlement of an SFT against payment of the SFT Cash.
    The term ``Transferee'' would mean the SFT Member party to an SFT
that agrees to receive SFT Securities from the other SFT Member party
to the SFT in exchange for SFT Cash in connection with the Initial
Settlement of the SFT.
    The term ``Transferor'' would mean the SFT Member party to an SFT
that agrees to transfer SFT Securities to the other SFT Member party to
the SFT in exchange for SFT Cash in connection with the Initial
Settlement of the SFT.
Proposed Rule 56, Section 1 (General)
    Section 1 of proposed Rule 56 would be a general provision
regarding the SFT Clearing Service applicable to Members, Sponsoring
Members and Agent Clearing Members that participate in the proposed SFT
Clearing Service.
    Section 1(a) of proposed Rule 56 would establish that NSCC may
accept for novation SFTs entered into between (i) a Member and another
Member, (ii) a Sponsoring Member and its Sponsored Member, or (iii) an
Agent Clearing Member acting on behalf of a Customer and either (x) a
Member or (y) the same or another Agent Clearing Member acting on
behalf of a Customer.
    Section 1(b) of proposed Rule 56 would provide that any SFT that is
submitted to NSCC for novation, and any Member and Sponsored Member
that enters into an SFT (and any Customer on behalf of whom an Agent
Clearing Member enters into an SFT) shall be subject to the provisions
of proposed Rule 56; provided that Sections 15 and 16 of proposed Rule
56 shall only apply to Sponsoring Members, Agent Clearing Members,
Sponsored Members and Customers, as applicable.
    Section 1(c) of proposed Rule 56 would further provide that any
amount of cash described in proposed Rule 56 may be rounded up to the
nearest one cent, five cents, 10 cents, 25 cents or dollar according to
the rounding convention requested by the SFT Member parties to the
relevant SFT as conveyed to NSCC in accordance with the communication
links, formats, timeframes and deadlines established by NSCC for such
purpose.
Proposed Rule 56, Section 2 (Eligibility for SFT Clearing Service: SFT
Member)
    Section 2 of proposed Rule 56 would establish the eligibility
requirements for using the proposed SFT Clearing Service.
    Under Section 2 of proposed Rule 56, NSCC may permit any Member
acting in its principal capacity, Sponsored Member acting in its
principal capacity, or Agent Clearing Member acting on behalf of a
Customer to be an SFT Member and participate in the proposed SFT
Clearing Service.
    Section 2 of proposed Rule 56 would provide that the rights,
liabilities and obligations of SFT Members in their capacity as such
shall be governed by the proposed Rule 56. References to a Member would
not apply to an SFT Member in its capacity as such, unless specifically
noted in the proposed Rule 56 or in such other Rules as applicable to
an SFT Member.
    Section 2 of proposed Rule 56 would also provide that an SFT Member
that participates in NSCC in another capacity pursuant to another Rule,
or which has entered into an agreement with NSCC independent from
proposed Rule 56, shall continue to have all the rights, liabilities
and obligations set forth in such other Rule or pursuant to such
agreement, and such rights, liabilities and obligations shall be
separate from its rights, liabilities and obligations as an SFT Member,
except as contemplated under Sections 15 and 16 of proposed Rule 56, as
described below.

Proposed Rule 56, Section 3 (Membership Documents)
    Section 3 of proposed Rule 56 would govern the documents that SFT
Member applicants would be required to complete and deliver to NSCC.
Specifically, Section 3 of proposed Rule 56 would provide that to
become an SFT Member, each applicant shall complete and deliver to NSCC
documents in such forms as may be prescribed by NSCC from time to time
and any other information requested by NSCC.
Proposed Rule 56, Section 4 (Securities Financing Transaction Data
Submission)
    Section 4 of proposed Rule 56 would govern the submission of
transaction data for SFTs into NSCC for novation by Approved SFT
Submitters on behalf of Transferors (e.g., lenders) and Transferees
(e.g., borrowers).
    Section 4(a) of proposed Rule 56 would provide that in order for an
SFT to be submitted to NSCC, the transaction data for the SFT must be
submitted to NSCC by an Approved SFT Submitter in accordance with the
communication links, formats, timeframes and deadlines established by
NSCC for such purpose. Any such transaction data shall be submitted to
NSCC on a locked-in basis. In determining whether to accept transaction
data from an Approved SFT Submitter, NSCC may require the Approved SFT
Submitter to provide a Cybersecurity Confirmation. This is consistent
with the existing requirement in Section 6 of Rule 7 (Comparison and
Trade Recording Operation (Including Special Representative/Index
Receipt Agent)) for organizations reporting trade data to NSCC.\73\
---------------------------------------------------------------------------

    \73\ Section 6 of Rule 7 (Comparison and Trade Recording
Operation (Including Special Representative/Index Receipt Agent))
provides that NSCC may require organizations that deliver trade data
to NSCC as described in that Rule to provide a Cybersecurity
Confirmation before agreeing to accept such trade data. Supra note
4.
---------------------------------------------------------------------------

    Section 4(b) of proposed Rule 56 would provide that NSCC would not
act upon any instruction received from an Approved SFT Submitter in
respect of an SFT unless each SFT Member (other than an SFT Member that
is a Sponsored Member) designated by the Approved SFT Submitter as a
party to such SFT has consented, in a writing delivered to NSCC, to the
Approved SFT Submitter acting on behalf of the SFT Member in respect of
SFTs.
    Section 4(c) of proposed Rule 56 would provide that the obligations
reflected in the transaction data on an SFT shall be deemed to have
been confirmed and acknowledged by each SFT Member designated by the
Approved SFT Submitter as a party thereto and to have been adopted by
such SFT Member and, for the purposes of determining the rights and
obligations between NSCC and such SFT Member under the proposed Rule 56
and such other Rules applicable to SFTs, shall be valid and binding
upon such SFT Member. In addition, Section 4(c) would provide that an
SFT Member which has been so designated by an Approved SFT Submitter
shall resolve any differences or claims regarding the rights and
obligations reflected in the transaction data submitted by the Approved
SFT Submitter with the Approved SFT Submitter, and NSCC shall have no
responsibility in respect thereof or to adjust its records or the
accounts of the SFT Member in any way, other than pursuant to the
instructions of the Approved SFT Submitter. Section 4(c) would also
provide that any such adjustment shall be in the sole discretion of
NSCC.
    Section 4(d) of proposed Rule 56 would provide that NSCC makes no
representation, whether expressed or implied, as to the complete and
timely performance of an Approved SFT Submitter's duties and
obligations. Section 4(d) would also provide that NSCC assumes no
liability to any SFT Member for any act or failure to act by an
Approved SFT Submitter in connection with any information received by
NSCC or given to the SFT Member by NSCC via the Approved SFT Submitter,
as the case may be.
    Section 4(e) of proposed Rule 56 would provide that the submission
of each SFT to NSCC and the performance of any obligation under such
SFT shall constitute a representation to NSCC and covenant by the
Transferor and the Transferee, any Sponsoring Member that is acting on
behalf of the Transferor or Transferee and any Agent Clearing Member
that is acting on behalf of a Customer in connection with such SFT that
its participation in such SFT is in compliance, and would continue to
comply, with all applicable laws and regulations, including without
limitation Rule 15c3-3 and all other applicable rules and regulations
of the Commission, any applicable provisions of Regulation T,
Regulation U and Regulation X of the Board of Governors of the Federal
Reserve System, and the rules of FINRA and any other regulatory or
self-regulatory organization to which the Transferor, the Transferee,
any Sponsoring Member that is acting on behalf of the Transferor or
Transferee or any Agent Clearing Member that is acting on behalf of a
Customer is subject.
    Section 4(f) of proposed Rule 56 would provide that the submission
of each SFT to NSCC shall constitute an authorization to NSCC by the
Transferor, the Transferee and any Agent Clearing Member that is acting
on behalf of a Customer for NSCC to give instructions regarding the SFT
to DTC in respect of the relevant accounts of the Transferor,
Transferee and Agent Clearing Member at DTC.
Proposed Rule 56, Section 5 (Novation of Securities Financing
Transactions)
    Section 5 of proposed Rule 56 would govern the nature and timing of
the novation to NSCC of obligations related to an SFT.
    Section 5(a) of proposed Rule 56 would provide that NSCC to only
novate an SFT if, at the time of novation, the Final Settlement of such
transaction is scheduled to occur one Business Day following the
Initial Settlement and the SFT Cash is no less than 100% of the
Contract Price of the SFT.
    Section 5(b) of proposed Rule 56 would provide that each SFT that
is a Bilaterally Initiated SFT, including any Sponsored Member
Transaction, and validated pursuant to the Rules shall be novated to
NSCC as of the time NSCC provides the Approved SFT Submitter for such
SFT a report confirming such novation in accordance with the
communication links, formats, timeframes and deadlines established by
NSCC for such purpose. Section 5(b) would also provide that each SFT
that is neither a Bilaterally Initiated SFT nor a Sponsored Member
Transaction and that is validated pursuant to the Rules shall be
novated to NSCC as of the time (x) the Initial Settlement of such SFT
has completed by (i) the Transferor instructing DTC to deliver from the
relevant DTC account of the Transferor to NSCC's account at DTC the
subject SFT Securities versus payment of the amount of the SFT Cash,
(ii) NSCC instructing DTC to deliver from NSCC's account at DTC to the
relevant DTC account of the Transferee the subject SFT Securities
versus payment of the amount of SFT Cash and (iii) DTC processes the
deliveries in accordance with the rules and procedures of DTC, or (y)
the Initial Settlement obligations of such SFT have been discharged in
accordance with Section 8 of proposed Rule 56, as described below. In
addition, Section 5(b) would provide that if the Initial Settlement
obligations of an SFT that is neither a Bilaterally Initiated SFT nor a
Sponsored Member Transaction are not discharged in accordance with
clause (x) or (y), then such SFT shall be deemed void ab initio.

    Section 5(c) of proposed Rule 56 would provide that, subject to
Sections 5(d) and 5(e) of proposed Rule 56 as described below, the
novation of SFTs shall consist of the termination of the Final
Settlement, Rate Payment and Distribution Payment obligations and
entitlements between the parties to the SFT with respect to such SFT
and their replacement with obligations and entitlements to and from
NSCC to perform, in accordance with the Rules, the Final Settlement,
Rate Payment, and Distribution Payment obligations and entitlements
under the SFT.
    Section 5(d) of proposed Rule 56 would govern the novation of SFTs
having Incremental Additional Independent Amount SFT Cash and provides
when the obligation to return Independent Amount SFT Cash for which an
associated Clearing Fund deposit has not been made will be novated away
from a Transferor to NSCC. Specifically, Section 5(d)(i) of proposed
Rule 56 would provide that if an SFT has Incremental Additional
Independent Amount SFT Cash, then, unless the SFT is a Sponsored Member
Transaction and the Sponsoring Member is the Transferee,\74\ the
obligation of the Transferor to return the Incremental Additional
Independent Amount SFT Cash to the Transferee shall not be terminated
and novated to NSCC (nor shall NSCC otherwise be required to return
such Incremental Additional Independent Amount SFT Cash), except to the
extent that the Transferor, Sponsoring Member or Agent Clearing Member,
as applicable, has satisfied the associated Independent Amount SFT Cash
Deposit Requirement. As proposed, to the extent the associated Clearing
Fund deposit has not been made in respect of Independent Amount SFT
Cash at the time of the Initial Settlement, the obligation to return
the Independent Amount SFT Cash would not be novated to NSCC.
---------------------------------------------------------------------------

    \74\ Where the Transferor is a Sponsored Member receiving
Independent Amount SFT Cash, NSCC would not be requiring Independent
Amount SFT Cash Deposit Requirement. This is because in the case of
the Sponsored Member's default, the party giving the Independent
Amount SFT Cash, i.e., Sponsoring Member, is the guarantor of the
settlement obligation of the Sponsored Member Independent Amount SFT
Cash back to NSCC.
---------------------------------------------------------------------------

    Section 5(d)(ii) of proposed Rule 56 would provide that to the
extent the Transferor, Sponsoring Member or Agent Clearing Member has
not satisfied the associated Independent Amount SFT Cash Deposit
Requirement, the Transferor's (or in the case of a Non-Returned SFT,
NSCC's) obligation to return the Incremental Additional Independent
Amount SFT Cash shall: (1) If the SFT is an Agent Clearing Member
Transaction for which the Agent Clearing Member, acting on behalf of
the Customer, is the Transferor, be terminated and replaced with an
obligation of the Agent Clearing Member, in its capacity as principal,
to return the Incremental Additional Independent Amount SFT Cash to the
Transferee; or (2) otherwise, remain (or in the context of a Non-
Returned SFT, be terminated and replaced with) a bilateral obligation
of the Transferor to the Transferee. As proposed, if the associated
Clearing Fund deposit has not been made in respect of Independent
Amount SFT Cash, the Independent Amount SFT Cash would be owed by the
Transferor to the Transferee as a bilateral principal-to-principal
obligation, unless the Transferor is a Customer of an Agent Clearing
Member, in which case the obligation to return the Independent Amount
SFT Cash in respect of which the Clearing Fund has not been made would
be novated from the Customer to the Agent Clearing Member, and the
Agent Clearing Member would owe the Independent Amount SFT Cash back to
the Transferee as principal.\75\
---------------------------------------------------------------------------

    \75\ This interim novation is designed to avoid any credit
concerns that would manifest if the Customer and the Transferee had
to have a principal bilateral obligation to each other for the
Independent Amount SFT Cash.
---------------------------------------------------------------------------

    Section 5(d)(iii) of proposed Rule 56 would provide that each SFT
Member agrees that any obligation to return Incremental Additional
Independent Amount SFT Cash that is novated to an Agent Clearing Member
or that remains (or becomes) a bilateral obligation of the Transferor
to the Transferee in accordance with Section 5(d)(ii) of proposed Rule
56, is a binding and enforceable obligation of the Agent Clearing
Member or Transferor, as applicable, regardless of whether the
Transferee has entered into an Existing Master Agreement with the Agent
Clearing Member or Transferor. In addition, Section 5(d)(iii) would
provide that each SFT Member further agrees that any such obligation
shall only be due and payable to the Transferee upon the final
discharge of NSCC's Final Settlement obligations to the Transferor
under the portion of the SFT that has been novated to NSCC in
accordance with Section 5(b) of proposed Rule 56, as described above.
    Section 5(d)(iv) of proposed Rule 56 would provide that, until the
Transferor, Sponsoring Member or Agent Clearing Member has satisfied in
full its Independent Amount SFT Cash Deposit Requirement, the SFT Cash
of the SFT shall, for purposes of determining the obligations owing to
and from NSCC under such SFT, equal the SFT Cash of the SFT less the
Incremental Additional Independent Amount SFT Cash.
    Section 5(d)(v) of proposed Rule 56 would provide that once the
Transferor, Sponsoring Member or Agent Clearing Member, as applicable,
has satisfied in full its Independent Amount SFT Cash Deposit
Requirement, the obligation of the Transferor to return the Incremental
Additional Independent Amount SFT Cash to the Transferee (or, in the
case of an SFT that is an Agent Clearing Member Transaction, any
obligation of the Agent Clearing Member to return the Incremental
Additional Independent Amount SFT Cash to the Transferee) shall be
novated to NSCC, and the SFT Cash of the SFT shall, for purposes of
determining the obligations owing to and from NSCC under the SFT,
include the full amount of the SFT Cash of such SFT.
    Section 5(e) of proposed Rule 56 would govern novation in respect
of certain corporate actions and provide that NSCC would (i) have an
obligation to pay the cash distribution to the Transferor and the
Transferee would have an obligation to pay the cash distribution to
NSCC, and (ii) not novate any obligations related to unsupported
corporate actions and distributions. Specifically, Section 5(e)(i) of
proposed Rule 56 would provide that regardless of anything to the
contrary in any Existing Master Agreement (including a provision
addressing when an issuer pays different amounts to different security
holders due to withholding tax or other reasons), the Distribution
Payment obligations and entitlements between NSCC and each party to an
SFT that has been novated to NSCC shall be the obligation of NSCC to
pay to the Transferor and the obligation of the Transferee to pay to
NSCC the Distribution Amount in respect of each Distribution and the
corresponding entitlements of the Transferor and NSCC, in each case, in
accordance with the Rules.
    Section 5(e)(ii) of proposed Rule 56 would provide that NSCC shall
maintain a list of corporate actions and distributions that NSCC does
not support with respect to SFTs. Section 5(e)(ii) would further
provide that no Final Settlement, Rate Payment, Distribution Payment or
other obligation resulting from a corporate action or distribution that
is not supported by NSCC shall be novated to NSCC. In addition, Section
5(e)(ii) would provide that none of such unsupported corporate action
shall modify the Final Settlement, Rate Payment, Distribution

Payment or other obligations of NSCC, Transferor and Transferee under
an SFT that has been novated to NSCC. Section 5(e)(ii) would also
provide that each SFT Member agrees that any obligation under an SFT
resulting from a corporate action or distribution not supported by NSCC
shall remain a binding and enforceable bilateral obligation between the
Transferor and the Transferee, regardless of whether the Transferor and
Transferee have entered into an Existing Master Agreement.
    Section 5(f) of proposed Rule 56 would provide that the novation of
SFTs shall not affect the fundamental substance of the SFT as a
transfer of securities by one party in exchange for a transfer of cash
by the other party and an agreement by each party to return the
property it received and shall not affect the economic obligations or
entitlements of the parties under the SFT except that following
novation, the Final Settlement, Rate Payment and Distribution Payment
obligations and entitlements shall be owed to and by NSCC rather than
the original counterparty under the SFT.
    Section 5(g) of proposed Rule 56 would provide that the
representations and warranties made by each of the parties to an SFT
that has been novated to NSCC under the parties' Existing Master
Agreement, if any, shall (x) to the extent that they are inconsistent
with the Rules, be eliminated and replaced with the Rules and (y) to
the extent that they are not inconsistent with the Rules, remain in
effect as between the parties to the original SFT, but shall not impose
any additional obligations on NSCC.
Proposed Rule 56, Section 6 (Rate and Distributions)
    Section 6 of proposed Rule 56 would govern the settlement of Rate
Payments and supported Distributions by NSCC for novated SFTs. Section
6(a) of proposed Rule 56 would provide that NSCC shall debit and credit
the Rate Payment from and to the SFT Accounts of the SFT Member parties
to an SFT that has been novated to NSCC as part of its end of day final
money settlement process in accordance with Rule 12 (Settlement) and
Procedure VIII (Money Settlement Service) on the scheduled Final
Settlement Date for the SFT, irrespective of whether Final Settlement
of such SFT occurs on such date.
    Section 6(b) of proposed Rule 56 would provide that if (x) a cash
dividend is made on or in respect of an SFT Security that is the
subject of an SFT that has been novated to NSCC or (y) cash is
exchanged, in whole or in part, for such an SFT Security in a merger,
consolidation or similar transaction, and the Transferor under the SFT
would have been entitled to a cash payment related to the event
described in clause (x) or (y) had it not transferred the SFT
Securities that are the subject of the SFT to the Transferee in the
Initial Settlement, then NSCC shall, within the time period determined
by NSCC from time to time, credit the Distribution Amount to the
Transferor's SFT Account and debit the Distribution Amount from the
Transferee's SFT Account as part of its end of day final money
settlement process in accordance with Rule 12 and Procedure VIII.
Section 6(b) would further provide that if cash is exchanged in whole
for such an SFT Security, then the completion of the actions described
in the preceding sentence shall discharge NSCC's Final Settlement
obligations to the relevant Transferor and the Transferee's Final
Settlement obligations to NSCC.
Proposed Rule 56, Section 7 (Final Settlement of Securities Financing
Transactions)
    Section 7 of proposed Rule 56 would govern the mechanics of Final
Settlement of SFTs by providing that, subject to Section 11 of proposed
Rule 56, as described below, the Final Settlement of an SFT that has
been novated to NSCC shall be scheduled to occur on the Business Day
immediately following the date the SFT was novated to NSCC. Section 7
would further provide that unless the Final Settlement obligations
under such an SFT are discharged in accordance with Section 8 of
proposed Rule 56, as described below, Final Settlement of the SFT shall
occur by (x) NSCC instructing DTC to (i) deliver from the relevant DTC
account of the Transferee to NSCC's account at DTC the subject SFT
Securities versus payment of the amount of SFT Cash and (ii) deliver
from NSCC's account at DTC to the relevant DTC account of the
Transferor the subject SFT Securities versus payment of the amount of
SFT Cash, and (y) the processing of such deliveries by DTC in
accordance to the rules and procedures of DTC; provided that if such
transfers do not occur and a Buy-In does not occur in respect of the
SFT, then the Final Settlement Date shall be rescheduled for the
following Business Day as described in Section 9 of proposed Rule 56,
as described below. The obligation of a Transferor (or a Sponsoring
Member that guarantees to NSCC the obligation of a Transferor or an
Agent Clearing Member that is responsible for the performance of the
obligation under an SFT that is an Agent Clearing Member Transaction to
return SFT Cash to NSCC) in respect of the Final Settlement of an SFT
that has been novated to NSCC shall be to pay the SFT Cash and, if
applicable, the Rate Payment to NSCC against the transfer of the
relevant SFT Securities by NSCC. The obligation of a Transferee (or a
Sponsoring Member that guarantees to NSCC the obligation of a
Transferee or an Agent Clearing Member that is responsible for the
performance of the obligation under an SFT that is an Agent Clearing
Member Transaction to return SFT Securities to NSCC) in respect of the
Final Settlement of an SFT that has been novated to NSCC shall be to
transfer the SFT Securities and, if applicable, the Rate Payment to
NSCC against the transfer of SFT Cash by NSCC.
    Section 7 of proposed Rule 56 would also provide that an SFT, or a
portion thereof, shall be deemed complete and final upon Final
Settlement of the SFT, or such portion, whether pursuant to Sections 7,
8, 9(d) or 13(c) of proposed Rule 56. Section 7 would also provide that
from and after the Final Settlement of an SFT, or a portion thereof,
pursuant to any Sections 7, 8, 9(d) or 13(c) of proposed Rule 56, NSCC
shall be discharged from its obligations to the Transferor and the
Transferee, and NSCC shall have no further obligation in respect of the
SFT or such portion. This is to make it clear to SFT Members the point
at which settlement of an SFT is deemed to be complete and final.\76\
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    \76\ With respect to an SFT between a Sponsoring Member and its
Sponsored Member, the SFT would settle on the books of the
Sponsoring Member because the Sponsored Member are not participants
at DTC and thus would not have accounts at DTC. Accordingly, the
finality of the settlement of such SFT would occur when the
Sponsoring Member credits the securities and cash on its or the
relevant custodian's books and records.
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Proposed Rule 56, Section 8 (Discharge of Offsetting Final Settlement
and Initial Settlement Obligations)
    Section 8 of proposed Rule 56 would govern the ``roll'' (i.e., pair
off or offset) process whereby the Final Settlement obligations on one
SFT (i.e., the Settling SFT) between two parties can be offset with the
Initial Settlement obligations on another SFT between the same parties
(i.e., the Linked SFT) through the debiting and crediting of the
difference in cash collateral between the two offsetting SFTs (i.e.,
the Price Differential).
    Section 8(a) of proposed Rule 56 would provide that, subject to the
provisions of Section 13(c) of proposed Rule 56, as described below,
if, on any Business Day, the pre-novation SFT Member parties to a
Settling SFT enter

into a Linked SFT and the Approved SFT Submitter provides an
appropriate instruction to NSCC in accordance with the communication
links, formats, timeframes and deadlines established by NSCC for such
purpose, the Final Settlement obligations of the parties to the
Settling SFT and the Initial Settlement obligations of the parties to
the Linked SFT shall be discharged once NSCC has instructed DTC to
debit and credit the relevant DTC accounts, of the SFT Member parties,
as described below in Section 8(b) of proposed Rule 56, and DTC
processes such debits and credits in accordance with the rules and
procedures of DTC. To the extent the Price Differential is not
processed by DTC in accordance with the rules and procedures of DTC,
NSCC shall debit and credit the Price Differential from and to the SFT
Accounts of the SFT Member parties as part of its end of day final
money settlement process in accordance with Rule 12 (Settlement) and
Procedure VIII (Money Settlement Service). If the Price Differential is
positive, NSCC shall (x) credit an amount equal to the Price
Differential to the Transferee's SFT Account and (y) debit an amount
equal to the Price Differential from the Transferor's SFT Account. If
the Price Differential is negative, NSCC shall (x) credit an amount
equal to the absolute value of the Price Differential to the
Transferor's SFT Account and (y) debit an amount equal to the absolute
value of the Price Differential from the Transferee's SFT Account.
However, if the Linked SFT has as its subject fewer SFT Securities than
the Settling SFT, then only the following Final Settlement obligations
under the Settling SFT shall be discharged in accordance with Section 8
of proposed Rule 56: (i) the Transferee's and NSCC's Final Settlement
obligations in respect of a quantity of SFT Securities equal to the
quantity of SFT Securities that are the subject of the Linked SFT and
(ii) the Transferor's and NSCC's Final Settlement obligations in
respect of the Corresponding SFT Cash.
    Section 8(b) of proposed Rule 56 would provide that if the Price
Differential is positive, NSCC shall (x) instruct DTC to debit an
amount equal to the Price Differential from NSCC's account at DTC and
credit such amount to the relevant DTC account of the Transferee and
(y) instruct DTC to debit an amount equal to the Price Differential
from the relevant DTC account of the Transferor and credit such amount
to NSCC's account at DTC. If the Price Differential is negative, NSCC
shall (x) instruct DTC to debit an amount equal to the absolute value
of the Price Differential from NSCC's account at DTC and credit such
amount to the relevant DTC account of the Transferor and (y) instruct
DTC to debit an amount equal to the absolute value of the Price
Differential from the relevant DTC account of the Transferee and credit
such amount to NSCC's account at DTC.
Proposed Rule 56, Section 9 (Non-Returned Securities Financing
Transactions and Recalls)
    Section 9 of proposed Rule 56 would govern the processing of a
novated SFT for which the Final Settlement obligations have not been
discharged either through Final Settlement in accordance with Section 7
of proposed Rule 56 (as described above) or a pair off in accordance
with Section 8 of proposed Rule 56 (as described above), and the recall
and buy-in process for such an SFT.
    Specifically, Section 9(a) of proposed Rule 56 would provide that
if (x) the Transferee does not satisfy its Final Settlement obligations
in respect of an SFT that has been novated to NSCC on the Final
Settlement Date, (y) such Final Settlement obligations have not been
discharged in accordance with the provisions of Section 8 of proposed
Rule 56, as described above, and (z) a Buy-In has not occurred in
respect of such SFT or a portion thereof (such SFT, a ``Non-Returned
SFT''), the Final Settlement Date of the Non-Returned SFT shall be
rescheduled for the following Business Day, and NSCC shall instruct DTC
to debit and credit the relevant DTC accounts of the SFT Member
parties, as described in subsection (b) of Section 8 above. To the
extent the Price Differential is not processed by DTC in accordance
with the rules and procedures of DTC, NSCC shall debit and credit the
Price Differential from and to the SFT Accounts of the SFT Member
parties to the Non-Returned SFT as part of its end of day final money
settlement process in accordance with Rule 12 (Settlement) and
Procedure VIII (Money Settlement Service). Section 9(a) would further
provide that if the Price Differential is positive, NSCC shall (x)
credit an amount equal to the Price Differential to the Transferee's
SFT Account and (y) debit an amount equal to the Price Differential
from the Transferor's SFT Account; if the Price Differential is
negative, NSCC shall (x) credit an amount equal to the absolute value
of the Price Differential to the Transferor's SFT Account and (y) debit
an amount equal to the absolute value of the Price Differential from
the Transferee's SFT Account. This process would continue until Final
Settlement, a pair off in accordance with Section 8 of proposed Rule 56
(as discussed above), or a Buy-In.
    Section 9(b) of proposed Rule 56 would provide that if NSCC
receives a Recall Notice in respect of an SFT that has been novated to
NSCC and the Transferee does not satisfy its Final Settlement
obligations by the Recall Date for the Recall Notice, the Transferor
may, in a commercially reasonable manner,\77\ purchase some or all of
the SFT Securities that are the subject of the SFT \78\ or elect to be
deemed to have purchased the SFT Securities, in each case in accordance
with such timeframes and deadlines as established by NSCC for such
purpose (a ``Buy-In''). Following such purchase or deemed purchase, the
Transferor shall (x) give written notice to NSCC of the Transferor's
costs to purchase the relevant SFT Securities (including the price paid
by the Transferor and any broker's fees and commissions and reasonable
out-of-pocket transaction costs, fees or interest expenses incurred in
connection with such purchase) (such costs, the ``Buy-In Costs'') or,
if the Transferor elects to be deemed to have purchased the SFT
Securities, the Deemed Buy-In Costs, and (y) indemnify NSCC, and its
employees, officers, directors, shareholders, agents and Members
(collectively the ``Buy-In Indemnified Parties''), for any and all
losses, liability or expenses of a Buy-In Indemnified Party arising
from any claim disputing the calculation of the Buy-In Costs, the
Deemed Buy-In Costs or the method or manner of effecting the Buy-In.
Section 9(b) would further provide that each SFT Member acknowledges
and agrees that each SFT Security is of a type traded in a recognized
market and that, in the absence of a generally recognized source for
prices or bid or offer quotations for any SFT Security, the Transferor
may, for purposes of a Buy-In, establish the source therefor in its
commercially reasonable discretion. In addition, Section 9(b) would
provide that each SFT Member further acknowledges and agrees that NSCC
would not calculate

any Buy-In Costs or Deemed Buy-In Costs and shall have no liability for
any such calculation. Section 9(b) would also provide that NSCC would
assign to any Transferee whose SFT is subject to a Buy-In any rights it
may have against the Transferor to dispute the Transferor's calculation
of the Buy-In Costs or Deemed Buy-In Costs.
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    \77\ The requirement that a party exercising buy-in rights do so
in a ``commercially reasonable manner'' is market standard. See,
e.g., Section 13.1 of the Master Securities Loan Agreement published
by Securities Industry and Financial Markets Association
(``SIFMA''). NSCC has proposed to include this language in order to
align the standards applicable to an exercise of remedies in
relation to SFTs with those applicable in the bilateral uncleared
space. NSCC believes that such alignment will increase certainty for
SFT Members and allow them to follow standards with which they are
familiar.
    \78\ The Transferor would purchase these securities from one or
more third parties.
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    Section 9(c) of proposed Rule 56 would provide that on the Business
Day following NSCC's receipt of written notice of the Transferor's Buy-
In Costs, NSCC shall debit and credit the Buy-In Amount from and to the
SFT Accounts of the SFT Member parties to the SFT as part of its end of
day final money settlement process in accordance with Rule 12
(Settlement) and Procedure VIII (Money Settlement Service). Section
9(c) would provide that if the Buy-In Amount is positive, NSCC would
(x) credit the value of the Buy-In Amount to the Transferor's SFT
Account and (y) debit the value of the Buy-In Amount from the
Transferee's SFT Account. Section 9(c) would further provide that if
the Buy-In Amount is negative, NSCC would (x) credit the value of the
Buy-In Amount to the Transferee's SFT Account and (y) debit the value
of the Buy-In Amount from the Transferor's SFT Account.
    Section 9(d) of proposed Rule 56 would provide that following the
application of such Buy-In Amount, the Final Settlement obligations
under the SFT shall be discharged; provided that if the Transferor
effected a Buy-In in respect of some but not all of the SFT Securities
that are the subject of an SFT, then only the following obligations
shall be discharged: (i) The Transferee's and NSCC's Final Settlement
obligations in respect of the SFT Securities for which the Transferor
effected the Buy-In and (ii) the Transferor's and NSCC's Final
Settlement obligations in respect of the Corresponding SFT Cash.
    Section 9(e) of proposed Rule 56 would provide that a Recalled SFT
shall be treated as a Non-Returned SFT by NSCC until the earlier of the
time that the SFT settles or a Buy-In is processed by NSCC in
accordance with Section 9 of proposed Rule 56, except that the
additional SFT Deposit required for Non-Returned SFTs under Section
12(c) of proposed Rule 56, as described below, shall not apply. Section
9(e) would further provide that if the Transferor effects the Buy-In in
respect of some, but not all, of the SFT Securities that are the
subject of a Recalled SFT, the Final Settlement obligations of the
Recalled SFT that are not discharged in accordance with Section 9(d) of
proposed Rule 56 shall be treated as a Non-Returned SFT until the SFT
settles or a Buy-In is processed by NSCC in accordance with Section 9
of proposed Rule 56, and the additional SFT Deposit required under
Section 12(c) of proposed Rule 56, as described below, for Non-Returned
SFTs shall apply.
Proposed Rule 56, Section 10 (Cancellation, Modification and
Termination of Securities Financing Transactions)
    Section 10 of proposed Rule 56 would govern the process for
cancellations, modifications and terminations of SFTs in NSCC's
systems.
    Section 10(a) of proposed Rule 56 would provide that transaction
data on an SFT that has not been novated to NSCC may be cancelled upon
receipt by NSCC of appropriate instructions from the Approved SFT
Submitter with respect to such SFT on behalf of both SFT Member parties
thereto, submitted in accordance with the communication links, formats,
timeframes and deadlines established by NSCC for such purpose. Section
10(a) would further provide that an SFT that is so cancelled by NSCC
would be deemed to be void ab initio.
    Section 10(b) of proposed Rule 56 would provide the Rate Payment on
an SFT that has been novated to NSCC may be modified upon receipt by
NSCC of appropriate instructions from the Approved SFT Submitter with
respect to such SFT, submitted in accordance with the communication
links, formats, timeframes and deadlines established by NSCC for such
purpose. Section 10(b) would further provide that any instructions
submitted by an Approved SFT Submitter to modify the Rate Payment of an
SFT must be submitted on behalf of both SFT Member parties to the SFT.
    Section 10(c) of proposed Rule 56 would provide an SFT that has
been novated to NSCC in accordance with Section 5 of proposed Rule 56,
as described above, may be terminated upon receipt by NSCC of
appropriate instructions from the Approved SFT Submitter with respect
to such SFT on behalf of both SFT Member parties thereto, submitted in
accordance with the communication links, formats, timeframes and
deadlines established by NSCC for such purposes. Section 10(c) would
further provide that following any such termination, no amounts or
further obligations shall be owing in respect of the SFT between NSCC
and Transferor or NSCC and the Transferee.
Proposed Rule 56, Section 11 (Accelerated Final Settlement)
    Section 11 of proposed Rule 56 would allow a Transferee (i.e., the
borrower) to do a same day return of borrowed securities, if necessary,
to satisfy its regulatory purpose requirements by accelerating the
Final Settlement of an SFT that has been novated to NSCC. Specifically,
Section 11 would provide that the Transferee may accelerate the
scheduled Final Settlement of an SFT that has been novated to NSCC upon
receipt by NSCC of appropriate instruction from the Approved SFT
Submitter with respect to such SFT, submitted in accordance with the
communication links, formats, timeframes and deadlines established by
NSCC for such purpose. Section 11 would further provide that such
accelerated Final Settlement shall be effected by NSCC in accordance
with the provisions of Section 7 of proposed Rule 56, as described
above.
Proposed Rule 56, Section 12 (Clearing Fund Requirements)
    Section 12 of proposed Rule 56 would set out the Clearing Fund
requirements for SFT Members with respect to their SFT activity.
    Section 12(a) of proposed Rule 56 would provide each SFT Member,
other than an SFT Member that is a Sponsored Member, shall make and
maintain on an ongoing basis a deposit to the Clearing Fund with
respect to its SFT Positions (the ``SFT Deposit''). Section 12(a) would
provide that, for the avoidance of doubt, the SFT Positions for an SFT
Member that is a Sponsoring Member shall include all SFT Positions held
in its Sponsored Member Sub-Account(s) in addition to its proprietary
account(s).
    Section 12(b) of proposed Rule 56 would provide that the SFT
Deposit shall be held by NSCC or its designated agents as part of the
Clearing Fund, to be applied as provided in Sections 1 through 12 of
Rule 4 (Clearing Fund).
    Section 12(c) of proposed Rule 56 would provide that NSCC shall
calculate the amount of each such SFT Member's required deposit for SFT
Positions, subject to a $250,000 \79\ minimum (excluding the minimum
contribution to the Clearing Fund as required by Procedure XV (Clearing
Fund Formula and Other Matters), Section II.(A)), by applying the
Clearing Fund formula for CNS Transactions in Sections I.(A)(1)(a),
(b), (d), (f) (g), (h) of Procedure XV as well as the additional
Clearing Fund formula in Section I.(B)(5) (Intraday Mark-to-Market
Charge) of Procedure XV in the same manner as such sections apply to
CNS Transactions submitted to NSCC for regular way settlement, plus,
with

respect to any Non-Returned SFT, an additional charge that is
calculated by (x) multiplying the Current Market Price of the SFT
Securities that are the subject of such Non-Returned SFTs by the number
of such SFT Securities that are the subject of the SFT and (y)
multiplying such product by (i) 5% for SFT Members rated 1 through 4 on
the Credit Risk Rating Matrix, (ii) 10% for SFT Members rated 5 or 6 on
the Credit Risk Rating Matrix, or (iii) 20% for SFT Members rated 7 on
the Credit Risk Rating Matrix shall be applied to each SFT Member that
is a party thereto \80\ (collectively and includes any and all
Independent Amount SFT Cash Deposit Requirements, the ``Required SFT
Deposit''); provided, however, notwithstanding anything to the
contrary, (A) a minimum of 40% of an SFT Member's Required SFT Deposit
shall be made in the form of cash and/or Eligible Clearing Fund
Treasury Securities and (y) the lesser of $5,000,000 or 10% of an SFT
Member's Required SFT Deposit, with a minimum of $250,000,\81\ must be
made and maintained in cash; provided, further, the additional Clearing
Fund formula in Sections I.(B)(1) (Additional Deposits for Members on
the Watch List); (2) (Excess Capital Premium); (3) (Backtesting
Charge); (4) (Bank Holiday Charge); Minimum Clearing Fund and
Additional Deposit Requirements in Sections II.(A)1(a)--(b), II.(B),
and II.(C); as well as Section III (Collateral Value of Eligible
Clearing Fund Securities) of Procedure XV shall apply to SFT Members in
the same manner as such sections apply to Members. As noted in the
proposed rule text, for the purpose of applying Section I.(A)(1)(h) of
Procedure XV (Margin Liquidity Adjustment (``MLA'') charge), SFT
Positions shall be netted with Net Unsettled Positions, as defined in
Procedure XV.\82\
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    \79\ Supra note 32.
    \80\ The Required SFT Deposit multipliers proposed for Non-
Returned SFTs are identical to the Required Fund Deposit multipliers
applied to CNS Fails Positions. See Procedure XV (Clearing Fund
Formula and Other Matters), Section I.(A)(1)(e)), supra note 4.
While the concept of a ``fail'' does not exist in the securities
lending market in the same manner as it does in the cash market, to
the extent that the Final Settlement of an SFT is scheduled on a
particular date but does not occur, whether directly or through a
pair off as described in Section 8 of proposed Rule 56 (as discussed
above), that could potentially be a result of a ``squeeze'' or other
market dislocation whereby NSCC may face increased market risk in
the event of the default of either the Transferor or the Transferee.
As a result, NSCC believes it is prudent to apply the same Required
Fund Deposit multiplier to a Non-Returned SFT as it does to CNS
Fails Positions.
     The Credit Risk Rating Matrix is a financial model utilized by
NSCC in its ongoing monitoring of Members based on various risk
criteria. Each Member is rated by the Credit Risk Rating Matrix on a
7-point rating system, with ``1'' being the strongest credit rating
and ``7'' being the weakest credit rating. As described above, to
the extent that the Final Settlement of an SFT is scheduled on a
particular date but does not occur, NSCC, as a central counterparty,
is exposed to market risks. Such exposures generally increase when
the SFT Member's risk of default increases, as reflected by the SFT
Member's Credit Risk Rating Matrix credit rating. As such, the
Required SFT Deposit multipliers proposed for Non-Returned SFTs vary
based on the SFT Member's credit rating to reflect the potential
increase in market risk from SFT Members with higher risk of
default.
    \81\ Supra note 34.
    \82\ Supra note 33.
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    Section 12(d) of proposed Rule 56 would provide that NSCC shall
have the discretion to require an SFT Member to post its Required SFT
Deposit in proportion of cash higher than as required under subsection
(c) of proposed Section 12, as determined by NSCC from time to time in
view of market conditions and other financial and operational
capabilities of the SFT Member. Section 12(d) would further provide
that NSCC shall make any such determination based on such factors as
NSCC determines to be appropriate from time to time.
    Section 12(e) of proposed Rule 56 would provide that if an SFT has
Incremental Additional Independent Amount SFT Cash, the Transferor
shall make an additional deposit to the Clearing Fund that equals the
amount of the Incremental Additional Independent Amount SFT Cash for
such SFT (``Independent Amount SFT Cash Deposit, and such requirement
the ``Independent Amount SFT Cash Deposit Requirement''). Section 12(e)
would also provide that the Independent Amount SFT Cash Deposit
Requirement must be satisfied in cash and may, at the discretion of
NSCC, be satisfied using Independent Amount SFT Cash Deposits that have
previously been made by the Transferor in respect of SFTs with the same
Transferee that have since settled.\83\ Section 12(e) would further
provide that the Transferor shall satisfy any Independent Amount SFT
Cash Deposit Requirement in respect of an SFT on the date that the SFT
is novated to NSCC pursuant to the timeframes and deadlines established
by NSCC for such purpose. In addition, Section 12(e) would provide that
if, on a given day, the Transferor satisfies its Independent Amount SFT
Cash Deposit Requirement for some, but not all, SFTs novated to NSCC on
that day, NSCC will consider the Transferor to have satisfied its
Independent Amount SFT Cash Deposit Requirement for none of the SFTs
that were novated to NSCC on that day.
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    \83\ This could occur in a situation in which an existing SFT
settles and then the Transferor enters into a new SFT with the same
Transferee (e.g., in a pair off as described in Section 8 of
proposed Rule 56, discussed above). In that situation, if the
Transferee (or Sponsoring Member or Agent Clearing Member) has not
yet called back the Independent Amount SFT Cash Deposit it posted in
respect of the Settling SFT, then NSCC may apply the deposit to the
Independent Amount SFT Cash Deposit obligation associated with the
new SFT.
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    Section 12(f) of proposed Rule 56 would provide that references to