Clearing Fund in the other Rules shall include and apply to SFT
Deposit, and references to Required Fund Deposit shall include and
apply to Required SFT Deposit, unless specifically noted otherwise in
proposed Rule 56 or in such other Rules.
Proposed Rule 56, Section 13 (Ineligible SFT Securities and Supported
Corporate Actions)
    Section 13 of proposed Rule 56 would govern the processing of SFTs
where the underlying securities become ineligible SFT Securities and
the processing of SFTs in the context of supported corporate actions.
    Specifically, Section 13(a) of proposed Rule 56 would provide that
NSCC would remove an Ineligible SFT Security from the list maintained
by NSCC as set forth in Rule 3 (Lists to be Maintained); provided that
NSCC may not be able to identify that an SFT Security is an Ineligible
SFT Security and remove such SFT Security from the list maintained by
NSCC if the reason for the ineligibility is that the SFT Security is
undergoing a corporate action or distribution not supported by NSCC and
NSCC is not in receipt of reasonably advanced notice of such corporate
action or distribution.
    Section 13(b) of proposed Rule 56 would provide that
notwithstanding Section 12 of proposed Rule 56, as described above, if
an SFT Security becomes an Ineligible SFT Security because the Current
Market Price of the SFT Security falls below the threshold established
by NSCC from time to time, the Required SFT Deposit of each SFT Member
party to an SFT which has such Ineligible SFT Security as its subject
shall include an additional amount equal to the product of 100% of the
Current Market Price of such Ineligible SFT Security and the number of
such Ineligible SFT Securities that the SFT has as its subject.\84\ The
threshold that would be established by NSCC is currently $5.00, which
could be modified by NSCC \85\ at a later date after

NSCC gains more experience with the nature of the SFT portfolios
submitted for clearing, as discussed above.
---------------------------------------------------------------------------

    \84\ If the Current Market Price of the SFT Security falls below
the threshold established by NSCC from time to time, NSCC would
assess the additional amount as part of the Required SFT Deposit.
    \85\ Supra note 23.
---------------------------------------------------------------------------

    Section 13(c) of proposed Rule 56 would provide that if NSCC
declares that an SFT Security has or would become an Ineligible SFT
Security because the security is or would become ineligible for
processing or is or would be undergoing a corporate action or
distribution that is not supported by NSCC, the Final Settlement of all
SFTs that have been novated to NSCC and have such SFT Security as their
subject must occur before the Ineligibility Date.\86\ In addition,
Section 13(c) would provide that if following such declaration the
Transferee does not satisfy its Final Settlement obligations in respect
of any such SFT as provided in Section 7 of proposed Rule 56, as
described above, by the Ineligibility Date, NSCC shall, unless NSCC has
previously debited and credited the Price Differential from and to the
SFT Accounts of the SFT Member parties to the SFT in accordance with
Section 8 of proposed Rule 56, as described above, on Ineligibility
Date, debit and credit the Price Differential 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).\87\ Section 13(c) 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. Section 13(c) would
also provide that 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. Furthermore, Section 13(c) would provide that following the
application of Price Differential to an Ineligible SFT on or after the
relevant Ineligibility Date, all rights and obligations as between NSCC
and the SFT Member parties thereto with respect to such SFT shall be
discharged.
---------------------------------------------------------------------------

    \86\ The duration between the declaration and Ineligibility Date
would vary. If the ineligibility is because the SFT Security will
become ineligible for processing (i.e., no longer CNS eligible), the
duration would depend on the timing of the CNS ineligibility
triggering event (e.g., compliance with regulatory orders, risk
concerns, trading suspension, etc.).
    If the ineligibility is because the SFT Security will be
undergoing an unsupported corporate action or distribution, then it
would depend on when the issuer of the relevant SFT Security
announces the particular corporate action or distribution event and
the record date for such corporate action or distribution.
Specifically, when announcements from the issuers are received by
DTC, DTC would announce the corporate action or distribution event.
NSCC would notify Members of such event when it is announced by DTC
and would generally tie the Ineligibility Date to shortly before or
on the record date for the corporate action or distribution.
    \87\ NSCC is proposing this simplified process for applying
Price Differentials to Ineligible SFTs because NSCC anticipates such
instances would occur on a much less frequent basis than those in
connection with Linked SFTs pursuant to Section 8(a) of proposed
Rule 56 and Non-Returned SFTs pursuant to Section 9(a) of proposed
Rule 56.
---------------------------------------------------------------------------

    Section 13(d) of proposed Rule 56 would provide that if a corporate
action supported by NSCC in respect of the SFT Securities that are the
subject of an SFT is scheduled to occur, NSCC may cease to permit the
discharge of the SFT's Final Settlement obligations, whether pursuant
to Section 8 of proposed Rule 56, as described above, or otherwise, and
treat the SFT as a Non-Returned SFT for such period of time determined
by NSCC as necessary to process the corporate action, except that the
additional SFT Deposit required for Non-Returned SFTs under Section
12(c) of proposed Rule 56, as described above, shall not apply. Section
13(d) would further provide that notwithstanding the foregoing, NSCC
shall not limit the ability of a Member to accelerate the Final
Settlement of an SFT in accordance with Section 11 of proposed Rule 56,
as described above, provided that any Price Differential for the SFT
has settled in accordance with Section 9(a) of proposed Rule 56, as
described above, and that such accelerated Final Settlement is
permitted in accordance with the rules and procedures of DTC.
Proposed Rule 56, Section 14 (Cease To Act Procedures for SFT Members
With Open Securities Financing Transactions)
    Section 14 of proposed Rule 56 would establish NSCC's procedures
for when it ceases to act for an SFT Member with open SFTs, including
recalling a non-defaulting SFT Member that is a Transferee and
liquidating the Defaulting SFT Member's SFT Positions by deeming NSCC
to have bought in or sold out some or all the SFT Securities that are
the subject of such SFTs at prevailing market price or by crossing
(including on a delayed basis).
    Section 14(a) of proposed Rule 56 would provide that the provisions
of Rule 18 (Procedures for When the Corporation Declines or Ceases to
Act) shall not apply to the SFTs except for Sections 1 and 8 of Rule
18.
    Section 14(b) of proposed Rule 56 would provide that if NSCC has
declined or ceased to act for an SFT Member and subject to Section 14
of proposed Rule 2C, as described above:
    (i) Except as otherwise may be determined by the Board of
Directors, any SFT entered into by the SFT Member that, at the time
NSCC declined or ceased to act for such SFT Member, has not been
novated to NSCC pursuant to proposed Rule 56, shall be excluded from
all operations of NSCC applicable to such SFT.
    (ii) NSCC may decline to act upon any instructions, transaction
data or notices submitted by such SFT Member or an Approved SFT
Submitter on behalf of such SFT Member.
    (iii) NSCC shall close-out such SFT Member's proprietary SFT
Positions as well as any SFT Positions established in the SFT Member's
Agent Clearing Member Customer Omnibus Account by (x) buying in or
selling out, as applicable, some or all of the SFT Securities that are
the subject of each SFT of the SFT Member that has been novated to NSCC
but for which the Final Settlement has not occurred, (y) deeming NSCC
to have bought in or sold out some or all such SFT Securities at the
bid or ask price therefor, respectively, from a generally recognized
source or at such price or prices as NSCC is able to purchase or sell,
respectively, some such SFT Securities, or (z) otherwise liquidating
such SFT Member's SFT Positions; provided, however, if in the opinion
of NSCC, the close-out of such SFT Member's SFT Position would create a
disorderly market in the relevant SFT Security, then the timing of the
completion of such close-out shall be in the discretion of NSCC.
    (iv) Any Sponsored Member Transactions for which a Defaulting SFT
Member is the Sponsoring Member and which have been novated to NSCC
shall continue to be processed by NSCC. NSCC, in its sole discretion,
would determine whether to close-out the SFT Positions established in a
Defaulting SFT Member's Sponsored Member Sub-Accounts (if any), which
close out shall be effected in accordance with the provisions of
Section 14(b)(iii), as described above, or instead permit the relevant
Sponsored Members to complete settlement of the relevant Sponsored
Member Transactions.
    (v) If, in the aggregate, the close-out of a Defaulting SFT
Member's proprietary SFT Positions results in a profit to NSCC, such
profit shall be applied to any loss to NSCC arising from the closing
out of such Defaulting SFT Member (including losses arising from
closing out the SFT Positions established in any of the Defaulting SFT
Member's Agent Clearing Member

Customer Omnibus Accounts or Sponsored Member Sub-Accounts or losses
arising from closing out any Net Close Out Positions of the Defaulting
SFT Member). If, in the aggregate, the close-out of a Defaulting SFT
Member's proprietary SFT Positions results in a loss to NSCC, such loss
shall be netted against, or otherwise applied to, any amounts owed by
NSCC to such SFT Member in its proprietary capacity and thereafter
debited from such Defaulting SFT Member's Clearing Fund deposit at
NSCC.
    (vi) If, in the aggregate, the close-out of the SFT Positions
established in the Agent Clearing Member Customer Omnibus Accounts of a
Defaulting SFT Member results in a profit to NSCC, such profit shall be
credited to the Agent Clearing Member Customer Omnibus Accounts. If, in
the aggregate, the close-out of the SFT Positions established in the
Agent Clearing Member Customer Omnibus Accounts of a Defaulting SFT
Member results in a loss to NSCC, such loss shall be netted against, or
otherwise applied to, any amounts owed by the NSCC to such SFT Member
in its proprietary capacity, and thereafter debited from the Defaulting
SFT Member's Clearing Fund deposit at NSCC.
    (vii) If, in the aggregate, the close-out of the SFT Positions
established in a Defaulting SFT Member's Sponsored Member Sub-Accounts
results in a profit to NSCC, such profit shall be credited to the
Sponsored Member Sub-Accounts. If, in the aggregate, the closing out of
the SFT Positions established in a Defaulting SFT Member's Sponsored
Member Sub-Accounts results in a loss to NSCC, such loss shall be
netted against, or otherwise applied to, any amounts owed by NSCC to
such SFT Member in its proprietary capacity and thereafter debited from
such Defaulting SFT Member's Clearing Fund deposit at NSCC.
    (viii) The Final Settlement of each SFT that has been novated to
NSCC and that, prior to novation, was with a Defaulting SFT Member
(each, a ``Default-Related SFT'') shall occur in accordance with the
normal settlement cycle for the purchase or sale of securities, as
applicable; provided that NSCC may in its discretion accelerate Final
Settlement of a Default-Related SFT to a Business Day no earlier than
the scheduled Final Settlement Date of the Default-Related SFT; and
provided further that, if NSCC delays the close-out of any or all of a
Defaulting SFT Member's SFT Positions on the basis that such a close-
out would create a disorderly market in the relevant SFT Securities,
then NSCC may elect to correspondingly delay Final Settlement of any
Default-Related SFTs that have the same SFT Securities as their
subject.
    As proposed, if doing an immediate buy-in or sell-out (as
applicable) of a defaulter's novated SFT Positions would create a
disorderly market, then NSCC may delay in executing such buy-in or
sell-out. This is because, as a systemically important financial market
utility, NSCC has regulatory obligations not to create disorderly
markets or fire sale risk in the course of its liquidation of a
defaulted Member. If NSCC were to delay in executing any buy-in or
sell-out, NSCC may correspondingly delay physical settlement of the
SFTs with the Defaulting Member's pre-novation counterparties.
    (ix) Until Final Settlement, each Default-Related SFT shall be
treated as a Non-Returned SFT, and NSCC would pay and collect the Price
Differential amounts described in Section 9(a) of proposed Rule 56, as
described above. NSCC shall have all of the rights of a Transferor in
relation to any Default-Related SFT in respect of which the Defaulting
SFT Member was the Transferor, including the ability to deliver a
Recall Notice in relation to such Default-Related SFT and to effect a
Buy-In. However, no additional SFT Deposit required for Non-Returned
SFTs under Section 12(c) of proposed Rule 56, as described above, shall
apply to any Default-Related SFT, and no Rate Payments shall accrue on
Default-Related SFTs after the date on which NSCC ceases to act for the
Defaulting SFT Member.
    Accordingly, as proposed, during the pendency of any delay in
executing any buy-in or sell-out, NSCC would continue to satisfy any
Price Differential (i.e., the mark-to-market of the SFT Securities)
owing to the non-defaulting party.
Proposed Rule 56, Section 15 (Sponsored Member SFT Clearing)
    Section 15 of proposed Rule 56 would govern the requirements for
Sponsored Member participation in the proposed SFT Clearing Service.
    Section 15(a) of proposed Rule 56 would provide that a Sponsoring
Member shall be permitted to submit, either directly as an Approved SFT
Submitter or via another Approved SFT Submitter, to NSCC Sponsored
Member Transactions between itself and its Sponsored Member in
accordance with the provisions of proposed Rule 56 and proposed Rule
2C.
    Section 15(b) of proposed Rule 56 would provide that NSCC shall
maintain for the Sponsoring Member one or more Sponsored Member Sub-
Accounts. Section 15(b) would further provide that the SFT Deposits for
each Sponsored Member Sub-Account shall be calculated separately based
on the SFT Positions in such Sponsored Member Sub-Account, and the
Sponsoring Member, as principal, shall be required to satisfy the SFT
Deposits for each of the Sponsoring Member's Sponsored Member Sub-
Accounts.
    Section 15(c) of proposed Rule 56 would provide that settlement of
the Final Settlement, Rate Payment, Price Differential, Distribution
Payment and other obligations of a Sponsored Member Transaction that
have been novated to NSCC shall be effected by the Sponsoring Member,
as settlement agent for the relevant Sponsored Member, crediting and
debiting the account the Sponsoring Member maintains for the Sponsored
Member on the Sponsoring Member's books and records.
Proposed Rule 56, Section 16 (Customer SFT Clearing)
    Section 16 of proposed Rule 56 would govern the requirements for
participation by Agent Clearing Members and their Customers in the
proposed SFT Clearing Service.
    Section 16(a) of proposed Rule 56 would provide that an Agent
Clearing Member shall be permitted to submit, either directly as an
Approved SFT Submitter or via another Approved SFT Submitter, to NSCC
for novation SFTs that are Agent Clearing Member Transactions. Section
16(a) would further provide that any such submission shall be in
accordance with proposed Rule 56 and proposed Rule 2D.
    Section 16(b) of proposed Rule 56 would provide that with respect
to an Agent Clearing Member that submits SFTs 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 in which all SFT Positions and
SFT Cash carried by the Agent Clearing Member on behalf of its
Customers are reflected; provided, that each Agent Clearing Member
Customer Omnibus Account may only contain activity where the Agent
Clearing Member is acting as Transferor on behalf of its Customers, or
as Transferee on behalf of its Customers, but not both.
    Section 16(c) of proposed Rule 56 would provide that with respect
to SFTs entered into on behalf of its Customers and maintained in the
Agent Clearing Member Customer Omnibus Account, the Agent Clearing
Member shall act solely as agent of its Customers in

connection with the clearing of such SFTs; provided, that the Agent
Clearing Member shall remain fully liable for the performance of all
obligations to NSCC arising in connection with such SFTs; and provided
further, that the liabilities and obligations of NSCC with respect to
such SFTs entered into by the Agent Clearing Member on behalf of its
Customers shall extend only to the Agent Clearing Member. Without
limiting the generality of the foregoing, NSCC shall not have any
liability or obligation arising out of or with respect to any SFT to
any Customer of an Agent Clearing Member.
    Section 16(d) of proposed Rule 56 would provide the SFT Deposits
for each Agent Clearing Member Customer Omnibus Account shall be
calculated separately based on the SFT Positions in such Agent Clearing
Member Customer Omnibus Account, and the Agent Clearing Member shall,
as principal, be required to satisfy the SFT Deposit for each of Agent
Clearing Member's Agent Clearing Member Customer Omnibus Accounts.
Proposed Rule 56, Section 17 (Corporation Default)
    Section 17 of proposed Rule 56 would govern the close-out netting
process that would apply with respect to SFTs that have been novated to
NSCC in the event of a default of NSCC.
    Section 17(a) of proposed Rule 56 would provide that if a
``Corporation Default'' occurs pursuant to Section 2 of Rule 41
(Corporation Default), all SFTs that have been novated to NSCC but not
yet settled, and all obligations and rights arising thereunder which
have been assumed by NSCC pursuant to proposed Rule 56, shall be
immediately terminated, and the Board of Directors shall determine the
Aggregate Net SFT Close-out Value owed by or to each SFT Member with
respect to each of its SFT Positions.
    Section 17(b) of proposed Rule 56 would provide that for purposes
of Section 17 of proposed Rule 56, a Member shall be considered a
different SFT Member in respect of each of (i) its proprietary SFT
Positions; (ii) the SFT Positions established in its Agent Clearing
Member Customer Omnibus Accounts (if any); and (iii) the SFT Positions
established in its Sponsored Member Sub-Accounts (if any).
    Section 17(c) of proposed Rule 56 would provide that each SFT
Member's Aggregate Net SFT Close-out Value shall be netted and offset
as described in Section 14(b)(iv) through Section 14(b)(vi) of proposed
Rule 56, as though NSCC had ceased to act for each SFT Member.
    Section 17(d) of proposed Rule 56 would provide that the Board of
Directors shall notify each SFT Member of the Aggregate SFT Close-out
Value, taking into account the netting and offsetting provided for
above. SFT Members that have been notified that they owe an amount to
NSCC shall pay that amount on or prior to the date specified by the
Board of Directors, subject to any applicable setoff rights. SFT
Members who have a net claim against NSCC shall be entitled to payment
thereof along with other Members' and any other creditors' claims
pursuant to the underlying contracts with respect thereto, the Rules
and applicable law. Section 17(d) would further provide that nothing
therein shall limit the rights of NSCC upon an SFT Member default
(including following a Corporation Default), including any rights under
any Clearing Agency Cross-Guaranty Agreement or otherwise.
Proposed Rule 56, Section 18 (Other Applicable Rules, Procedures, and
Addendums)
    Section 18 of proposed Rule 56 would establish certain other Rules
as being applicable to SFTs and SFT Members, unless expressly stated
otherwise.
    Specifically, Section 18 of proposed Rule 56 would provide that
Rule 1 (Definitions and Descriptions), Rule 2 (Members, Limited Members
and Sponsored Members), Rule 5 (General Provisions), Rule 12
(Settlement), Rule 13 (Exception Processing), Rule 17 (Fine Payments),
Rule 19 (Miscellaneous Rights of the Corporation), Rule 21 (Honest
Broker), Rule 22 (Suspension of Rules), Rule 23 (Action by the
Corporation), Rule 24 (Charges for Services Rendered), Rule 26 (Bills
Rendered), Rule 27 (Admission to Premises of the Corporation--Powers of
Attorney, Etc.), Rule 28 (Forms), Rule 29 (Qualified Securities
Depositories), Rule 32 (Signatures), Rule 33 (Procedures), Rule 34
(Insurance), Rule 35 (Financial Reports), Rule 36 (Rule Changes), Rule
37 (Hearing Procedures), Rule 38 (Governing Law and Captions), Rule 39
(Reliance on Instructions), Rule 40 (Wind-Down of a Member, Fund Member
or Insurance Carrier/Retirement Services Member), Rule 41 (Corporation
Default), Rule 42 (Wind-down of the Corporation), Rule 45 (Notice),
Rule 47 (Interpretation of Rules), Rule 48 (Disciplinary Proceedings),
Rule 49 (Release of Clearing Data and Clearing Fund Data), Rule 55
(Settling Banks and AIP Settling Banks), Rule 58 (Limitations on
Liability), Rule 60 (Market Disruption and Force Majeure), Rule 60A
(Systems Disconnect: Threat of Significant Impact to the Corporation's
Systems), Rule 63 (SRO Regulatory Reporting), Procedure I
(Introduction), Procedure VIII (Money Settlement Service), Procedure
XII (Time Schedule), Procedure XIII (Definitions), Procedure XIV
(Forms, Media and Technical Specifications), Procedure XV (Clearing
Fund Formula and Other Matters), Addendum B (Qualifications and
Standards of Financial Responsibility, Operational Capability and
Business History), Addendum H (Interpretation of the Board of Directors
Release of Clearing Data), Addendum L (Statement of Policy Pertaining
to Information Sharing), and Addendum P (Fine Schedule) shall apply to
SFTs and SFT Members, unless the context otherwise requires.
(D) Other Rule Changes
    In connection with proposed Rules 2C, 2D and 56, NSCC is also
proposing to make conforming and technical changes to the following
Rules to accommodate the proposed introduction of the new membership
categories and the proposed SFT Clearing Service.
Rule 1 (Definitions and Descriptions)
    In connection with proposed Rules 2C, 2D and 56, NSCC is proposing
to add the following defined terms to Rule 1, in alphabetical order:
Agent Clearing Member, Agent Clearing Member Agreement, Agent Clearing
Member Customer Omnibus Account, Agent Clearing Member Required Fund
Deposit, Agent Clearing Member Termination Date, Agent Clearing Member
Transaction, Agent Clearing Member Voluntary Termination Notice,
Aggregate Net SFT Close-out Value, Approved SFT Submitter, Bilaterally
Initiated SFT, Buy-In, Buy-In Amount, Buy-In Costs, Buy-In Indemnified
Parties, Contract Price, Corresponding SFT Cash, Customer, Customer
Clearing Service, Deemed Buy-In Costs, Defaulting SFT Member, Default-
Related SFT, Distribution, Distribution Amount, Distribution Payment,
Existing Master Agreement, Final Net Settlement Position, Final
Settlement, Final Settlement Date, Former Sponsored Member, Incremental
Additional Independent Amount SFT Cash, Independent Amount Percentage,
Independent Amount SFT Cash, Independent Amount SFT Cash Deposit,
Independent Amount SFT Cash Deposit Requirement, Ineligibility Date,
Ineligible SFT, Ineligible SFT Security, Initial Settlement, Linked
SFT, Market Value SFT Cash, Net Capital, Net Member Capital, Net Worth,
Non-Returned SFT, Price Differential, Rate Payment, Recall Date, Recall
Notice,

Recalled SFT, Required SFT Deposit, Securities Financing Transaction or
SFT, Securities Financing Transaction Clearing Service or SFT Clearing
Service, Settling SFT, SFT Account, SFT Cash, SFT Close-out Value, SFT
Deposit, SFT Long Position, SFT Member, SFT Position, SFT Security, SFT
Short Position, Sponsored Member, Sponsored Member Agreement, Sponsored
Member Liquidation Amount, Sponsored Member Sub-Account, Sponsored
Member Termination Date, Sponsored Member Transaction, Sponsored Member
Voluntary Termination Notice, Sponsoring Member, Sponsoring Member
Agreement, Sponsoring Member Guaranty, Sponsoring Member Liquidation
Amount, Sponsoring Member Required Fund Deposit, Sponsoring Member
Settling Bank Omnibus Account, Sponsoring Member Termination Date,
Sponsoring Member Voluntary Termination Notice, Sponsoring/Sponsored
Membership Program Indemnified Parties or SMP Indemnified Parties,
Transferee, Transferor and Volatility Charge.
    In addition, NSCC is proposing to add three defined terms: ``CNS
Market Value'', which is already defined in Rule 41 (Corporation
Default), ``CNS Transaction'', which is already defined in Rule 11 (CNS
System), and ``Corporation Default'', which is already defined in Rule
41 (Corporation Default).
    NSCC is also proposing to add the defined term ``FICC'' to mean
Fixed Income Clearing Corporation. The term ``FICC'' is already used in
Addendum P (Fine Schedule) but has not been defined.
    Furthermore, NSCC is proposing to reorder the defined term Index
Receipt Agent so it would be in alphabetical order.
    In connection with proposed Rules 2C, 2D and 56, NSCC is also
proposing to modify the definitions for the following defined terms in
Rule 1, in alphabetical order: Clearing Fund, FFI Member, Qualified
Securities Depository, and Required Fund Deposit. Specifically, NSCC is
proposing to expand the definition of Clearing Fund to include SFT
Deposit, unless noted otherwise in the Rules. NSCC is also proposing to
revise the definition of FFI Member and the proposed definition of Tax
Certification \88\ to add references to Sponsored Members. Furthermore,
NSCC is proposing to revise the definition of Qualified Securities
Depository to include a reference to transfer of securities in respect
of the proposed SFT Clearing Service. Lastly, NSCC is proposing to
expand the definition of Required Fund Deposit to include Sponsoring
Member Required Fund Deposit, the Agent Clearing Member Required Fund
Deposit, and the Required SFT Deposit, unless noted otherwise in the
Rules.
---------------------------------------------------------------------------

    \88\ NSCC has proposed to add Tax Certification as a defined
term in Rule 1 (Definitions and Descriptions) under a separate
proposal. See SR-NSCC-2021-009, which was filed with the Commission
but has not yet been published in the Federal Register. A copy of
this proposed rule change is available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------

Rule 2 (Members and Limited Members)
    NSCC is proposing to revise the title of Rule 2 to include a
reference to Sponsored Members. As proposed, Rule 2 would be retitled
as ``Members, Limited Members and Sponsored Members''.
    NSCC is also proposing to revise Section 2 of Rule 2. Specifically,
NSCC is proposing to clarify in Section 2(i) that a Member shall
include a Member in its capacity as a Sponsoring Member to the extent
specified in proposed Rule 2C and an Agent Clearing Member to the
extent specified in proposed Rule 2D. In addition, NSCC is proposing to
add a new subsection (iii) to Section 2 that would describe Sponsored
Members as any Person that has been approved by NSCC to become a
Sponsored Member and only participates in NSCC's SFT Clearing Service
as provided for in proposed Rule 56. In addition, NSCC is proposing to
add references to Sponsored Members in the last paragraph of Section 2,
Sections 4(i) and 4(ii), and proposed Section 5 \89\ of Rule 2.
---------------------------------------------------------------------------

    \89\ NSCC has proposed to add Section 5 to Rule 2 in a separate
proposal that has been filed with the Commission. See Securities
Exchange Act Release No. 92334 (July 7, 2021), 86 FR 36815 (July 13,
2021) (SR-NSCC-2021-007).
---------------------------------------------------------------------------

Rule 3 (Lists To Be Maintained)
    NSCC is proposing to add subsection (g) to Section 1 of Rule 3 to
provide that NSCC shall maintain a list of the securities that may be
the subject of a novated SFT and may from time to time add securities
to such list or remove securities therefrom.
    NSCC is also proposing to modify Sections 3(b) and 4 of Rule 3 to
include references to Sponsored Members.
Rule 4 (Clearing Fund)
    NSCC is proposing to modify Section 1 of Rule 4 in order to make it
clear that the minimum Required Fund Deposit amount provided therein
shall not include Required SFT Deposit, which is subject to a separate
minimum $250,000 deposit requirement pursuant to Section 12(c) of
proposed Rule 56, as described above.
Rule 5 (General Provisions)
    NSCC is proposing to modify Section 1 of Rule 5 in order to provide
that delivery of SFT Securities and SFT Cash to NSCC shall be made
through the facilities of a Qualified Securities Depository. In
addition, NSCC is also proposing changes in Section 1 of Rule 5 to
provide that delivery and payment with respect to SFT Securities and
SFT Cash shall be effected as prescribed in the Rules and regulations
as NSCC may from time to time adopt.
Rule 24 (Charges for Services Rendered)
    NSCC is proposing to modify Section 1 of Rule 24 to include a
reference to Sponsored Members. In addition, NSCC is proposing to add
an additional paragraph in Section 1 to clarify that Members shall be
responsible for all fees pertaining to their respective Sponsoring
Member activity or Agent Clearing Member activity, if applicable, as
set forth in NSCC's Fee Structure.\90\
---------------------------------------------------------------------------

    \90\ See Addendum A (Fee Structure), supra note 4.
---------------------------------------------------------------------------

Rule 26 (Bills Rendered)
    NSCC is proposing to modify the first paragraph of Rule 26 to
include a reference to Sponsored Members. In addition, NSCC is
proposing to add a sentence in that paragraph to clarify that Members
shall receive bills for their respective aggregate Sponsoring Member
activity and Agent Clearing Member activity, if applicable, as set
forth in NSCC's Fee Structure.\91\
---------------------------------------------------------------------------

    \91\ Id.
---------------------------------------------------------------------------

Rule 39 (Reliance on Instructions)
    NSCC is proposing to modify Rule 39 to include references to
Sponsored Member and Approved SFT Submitter, where applicable.
Specifically, NSCC is proposing to modify the first paragraph of Rule
39 to provide that NSCC may accept or rely upon instructions given to
NSCC by a Sponsored Member or Approved SFT Submitter, in addition to
the various participant types currently provided in Rule 39. Similarly,
NSCC is proposing to add references to Approved SFT Submitter in the
second and last paragraphs of Rule 39 so that those paragraphs would
also apply to instructions submitted by an Approved SFT Submitter.
Rule 42 (Wind-Down of the Corporation)
    NSCC is proposing to modify Rule 42 to include references to
Sponsored Members. Specifically, for purposes of

Rule 42, NSCC is proposing to revise the defined term ``Limited
Member'' to include Sponsored Members.
Rule 49 (Release of Clearing Data and Clearing Fund Data)
    NSCC is proposing to modify Rule 49 to clarify that NSCC would
release Clearing Data of a Sponsored Member to its Sponsoring Member
upon the Sponsoring Member's written request. Specifically, as
proposed, Section (a) of Rule 49 would provide that if the participant
is a Sponsored Member, NSCC would also release Clearing Data relating
to transactions of such participant to such participant's Sponsoring
Member upon the Sponsoring Member's written request.
Rule 58 (Limitations on Liability)
    NSCC is proposing to modify Rule 58 to clarify that NSCC would not
be responsible for the completeness or accuracy of the transaction data
received from the Approved SFT Submitters, nor shall NSCC, absent gross
negligence on NSCC's part, be responsible for any errors, omissions or
delays that may occur in the transmission of transaction data from an
Approved SFT Submitter.
Rule 64 (DTCC Shareholders Agreement)
    The proposed changes to Section 4 of Rule 64 and footnote 4 thereto
would provide that Rule 64 would not be applicable to a Sponsored
Member. However, if the Sponsored Member is also a member or
participant of another clearing agency subsidiary of DTCC, the
Sponsored Member may be a Mandatory Purchaser Participant or a
Voluntary Purchaser Participant pursuant to the terms of the
Shareholders Agreement and the rules and procedures of such other
subsidiary.
Procedure XV (Clearing Fund Formula and Other Matters)
    NSCC is proposing to modify subsection A of Section II (Minimum
Clearing Fund and Additional Deposit Requirements) in Procedure XV in
order to make it clear that the minimum contribution amount provided
therein shall not include Required SFT Deposit, which is subject to a
separate minimum $250,000 deposit requirement pursuant to Section 12(c)
of proposed Rule 56, as described above. In addition, NSCC is proposing
to modify Section II.A of Procedure XV to make it clear that
calculation of a Member's Required Fund Deposit amount that must be in
cash shall exclude the Required SFT Deposit, which is subject to a
separate $250,000 minimum cash requirement pursuant to Section 12(c) of
proposed Rule 56, as described above.
Addendum B (Qualifications and Standards of Financial Responsibility,
Operational Capability and Business History)
    NSCC is proposing an additional section for the Sponsored Members.
Specifically, NSCC is proposing to add Section 13 to Addendum B that
would describe the qualification and operational capability that NSCC
would require from Sponsored Members.
    In addition, NSCC is proposing a conforming change to replace ``net
worth'' in Section 3.B.4. with ``Net Worth'' to reflect the proposed
defined term in Rule 1 (Definitions).
    Furthermore, NSCC is proposing a technical change to correct a
footnote numbering in Section 12.B.
Addendum P (Fine Schedule)
    NSCC is proposing to modify paragraph (2) of Addendum P to reflect
the proposed notification obligations of Sponsoring Members, Sponsored
Members and Agent Clearing Members as proposed under Sections 2(i) and
3(d) of proposed Rule 2C and Section 2(i) of proposed Rule 2D.
(vii) Impact of the Proposed SFT Clearing Service on Various Persons
    The proposed SFT Clearing Service would be voluntary. Institutional
firm clients that wish to become Sponsored Members, and Members that
wish to participate in the proposed SFT Clearing Service would have an
opportunity to review the proposed rule change and determine if they
would like to participate. Choosing to participate would make these
entities subject to all of the rule changes that would be applicable to
the proposed SFT Clearing Service and membership type, as described
below.
    The proposed SFT Clearing Service would affect institutional firm
clients that choose to become Sponsored Members because it would impose
various requirements on them. These requirements include, but are not
limited to, proposed Rule 56 and the following sections of proposed
Rule 2C: (1) Eligibility, approval process and on-going membership
requirements as specified in Sections 3 and 4, (2) requirements related
to restriction on access to NSCC services in Section 11, (3)
requirements related to insolvency of a Sponsored Member in Section 13,
and (4) requirements related to liquidation of positions resulting from
Sponsored Member Transactions in Section 14. Specific details on the
requirements and the manner in which the proposed SFT Clearing Service
would affect institutional firm clients that choose to become Sponsored
Members can be found above in Item II(A)1(vi)(A)--Proposed Rule
Changes--Proposed Rule 2C--Sponsoring Members and Sponsored Members.
    The proposed SFT Clearing Service would affect Members that choose
to participate in the service because it would impose various
requirements on them, depending on whether they are participating in
the service as a Sponsoring Member, an Agent Clearing Member and/or as
a Member. These requirements include, but are not limited to, the
requirements specified in proposed Rule 2C for Members participating in
the service as a Sponsoring Member; the requirements specified in
proposed Rule 2D for Members participating in the service as an Agent
Clearing Member; and for all Members participating in the service, the
requirements specified in proposed Rule 56. Specific details on these
requirements and the manner in which the proposed SFT Clearing Service
would affect Members that choose to participate in the proposed SFT
Clearing Service are described above in Items II(A)1(vi)(A)--Proposed
Rule Changes--Proposed Rule 2C--Sponsoring Members and Sponsored
Members, (vi)(B)--Proposed Rule Changes--Proposed Rule 2D--Agent
Clearing Members, and (vi)(C)--Proposed Rule Changes--Proposed Rule
56--Securities Financing Transaction Clearing Service.
    The proposed SFT Clearing Service would not materially affect
existing Members that do not choose to participate in it. First, the
proposed SFT Clearing Service would not materially affect the operation
of CNS or any other services offered by NSCC. In addition, SFT Members
would be subject to the same or higher credit standards and market risk
management requirements as those applicable to Members that choose not
to participate in the proposed SFT Clearing Service, as described
above. Moreover, although Members who choose not to participate in the
proposed SFT Clearing Service would be subject to potential loss
allocation in the event of an SFT Member default (just as SFT Members
would be subject to potential loss allocation in the event of the
default of a Member that chooses not to participate in the proposed SFT
Clearing Service), the underlying securities that would be subject of
any such default-related liquidation of an SFT Member are a subset of
the same CNS-eligible securities with respect to which NSCC today
guarantees settlement in the cash

equity market, thus not materially affecting the nature of the loss
allocation risk applicable to Members.
2. Statutory Basis
    NSCC believes this proposal is consistent with the requirements of
the Act, and the rules and regulations thereunder applicable to a
registered clearing agency for the reasons described below.
Establishing New Membership Categories and Requirements for Sponsoring
Members and Sponsored Members
    NSCC believes the proposed changes to establish new membership
categories and requirements for Sponsoring Members and Sponsored
Members are consistent with Section 17A(b)(3)(F) \92\ of the Act and
Rule 17Ad-22(e)(18),\93\ as promulgated under the Act.
---------------------------------------------------------------------------

    \92\ 15 U.S.C. 78q-1(b)(3)(F).
    \93\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to (i) assure the safeguarding of securities and funds
which are in the custody or control of the clearing agency or for which
it is responsible, (ii) remove impediments to and perfect the mechanism
of a national system for the prompt and accurate clearance and
settlement of securities transactions, and, in general, to protect
investors and the public interest, and (iii) promote the prompt and
accurate clearance and settlement of securities transactions.\94\ NSCC
believes the proposed changes to establish new membership categories
and requirements for Sponsoring Members and Sponsored Members are
consistent with these requirements for the reasons described below.
---------------------------------------------------------------------------

    \94\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

Safeguarding of Securities and Funds
    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to assure the safeguarding of securities and funds which
are in the custody or control of the clearing agency or for which it is
responsible.\95\ NSCC believes the proposed changes to establish new
membership categories and requirements for Sponsoring Members and
Sponsored Members would allow NSCC to help assure the safeguarding of
securities and funds which are in the custody or control of NSCC or for
which it is responsible. Specifically, as proposed, all Sponsoring
Member applicants would be subject to an approval process that is
separate from their original Member applications, ongoing credit
surveillance in their capacity as Sponsoring Members, as well as the
calculation of the Sponsoring Member Required Fund Deposits on a gross
basis with no offsets for netting of positions as between different
Sponsored Members.
---------------------------------------------------------------------------

    \95\ Id.
---------------------------------------------------------------------------

    In addition, as proposed, all Sponsoring Member applicants would be
subject to the same or higher financial requirements as those that
apply to them with respect to their respective Member category.
Furthermore, NSCC would reserve the right to impose greater financial
requirements based upon the level of the anticipated positions and
obligations of such applicant, the anticipated risk associated with the
volume and types of transactions such applicant proposes to process
through NSCC, and the overall financial condition of such applicant. An
activity limit would also be imposed on a Sponsoring Member's Sponsored
Member activity so that the Sponsoring Member would only be permitted
to submit new Sponsored Member activity to NSCC to the extent its
aggregate Volatility Charges do not exceed its Net Member Capital,
unless otherwise determined by NSCC in order to promote orderly
settlement.
    Moreover, as proposed, NSCC would reserve the right to require each
Sponsoring Member, or any Member applicant to become such, to furnish
to NSCC such adequate assurances of its financial responsibility and
operational capability within the meaning of Rule 15 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.
    By structuring the proposal in a way that addresses potential
market and credit risks, NSCC believes that the proposed changes to
establish new membership categories and requirements for Sponsoring
Members and Sponsored Members would assure the safeguarding of
securities and funds which are in the custody or control of NSCC or for
which it is responsible, consistent with Section 17A(b)(3)(F) of the
Act.\96\
---------------------------------------------------------------------------

    \96\ Id.
---------------------------------------------------------------------------

    Remove Impediments to and Perfect the Mechanism of a National
System; Protect Investors and Public Interest
    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions, and, in general, to protect investors and the
public interest.\97\ NSCC believes the proposed changes to establish
new membership categories and requirements for Sponsoring Members and
Sponsored Members would allow NSCC to help remove impediments to and
perfect the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------

    \97\ Id.
---------------------------------------------------------------------------

    Specifically, NSCC believes the proposal would help alleviate
capital constraints and decrease settlement and operational risk that
market participants would otherwise face. This is because the proposal
would expand access to central clearing for institutional firms and
thus enable a greater number of securities transactions to be cleared
and settled by a central counterparty. As described above, NSCC
believes that having securities transactions cleared through a central
counterparty may create capital benefits for market participants and
thereby help alleviate capital constraints otherwise applicable to
bilateral securities transactions. In addition, by having a greater
number of securities transactions cleared through a central
counterparty, the proposal would decrease the settlement and
operational risks that market participants would otherwise face to the
extent they were required to clear and settle their securities
transactions bilaterally because those securities transactions would be
subject to novation and independent risk management by the central
counterparty. By alleviating capital constraints and decreasing
settlement and operational risk that market participants would
otherwise face, NSCC believes the proposed changes to establish new
membership categories and requirements for Sponsoring Members and
Sponsored Members would remove impediments to and perfect the mechanism
of a national system for the prompt and accurate clearance and
settlement of securities transactions, consistent with Section
17A(b)(3)(F) of the Act.\98\
---------------------------------------------------------------------------

    \98\ Id.
---------------------------------------------------------------------------

    The proposal would also protect investors and the public interest
by lowering the risk of liquidity drain and protecting against fire
sale risks as it would expand access to central clearing for
institutional firms and thus enable a

greater number of securities transactions to be cleared and settled by
a central counterparty. Specifically, NSCC believes that having
securities transactions cleared and settled by a central counterparty
would lower the risk of liquidity drain in the U.S. financial market by
lessening counterparties' likely inclination to unwind transactions in
a stressed market scenario. The central counterparty would use its risk
management resources to provide confidence to market participants that
they will receive back their cash or securities, as applicable, which
should limit the propensity for market participants to seek to unwind
their transactions in a stressed market scenario. In addition, NSCC
believes that having securities transactions cleared and settled by a
central counterparty would protect against fire sale risk through the
central counterparty's ability to centralize and control the hedging
and liquidation of a defaulting counterparty's portfolio. By lowering
the risk of liquidity drain in the U.S. financial market and protecting
against fire sale risk, NSCC believes the proposed changes to establish
new membership categories and requirements for Sponsoring Members and
Sponsored Members would protect investors and the public interest,
consistent with the Section 17(A)(b)(3)(F) of the Act.\99\
---------------------------------------------------------------------------

    \99\ Id.
---------------------------------------------------------------------------

Promote Prompt and Accurate Clearance and Settlement
    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to promote the prompt and accurate clearance and settlement
of securities transactions.\100\ NSCC believes the proposed changes to
establish new membership categories and requirements for Sponsoring
Members and Sponsored Members would allow NSCC to help promote the
prompt and accurate clearance and settlement of securities
transactions. Specifically, by expanding the access of central clearing
for institutional firms and thus enable a greater number of securities
transactions to be cleared and settled by a central counterparty, NSCC
believes the proposal would help decrease settlement and operational
risk that market participants would otherwise face to the extent they
were required to clear and settle their securities transactions
bilaterally because those securities transactions would be subject to
novation and independent risk management by the central counterparty.
By decreasing settlement and operational risk, NSCC believes the
proposed changes to establish new membership categories and
requirements for Sponsoring Members and Sponsored Members would promote
the prompt and accurate clearance and settlement of securities
transactions, consistent with Section 17A(b)(3)(F) of the Act.\101\
---------------------------------------------------------------------------

    \100\ Id.
    \101\ Id.
---------------------------------------------------------------------------

    By structuring the proposal in a way that would allow NSCC to help
(i) assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible, (ii) remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions, and, in general, to protect investors and the
public interest, and (iii) promote the prompt and accurate clearance
and settlement of securities transactions, NSCC believes the proposed
changes to establish new membership categories and requirements for
Sponsoring Members and Sponsored Members are consistent with Section
17A(b)(3)(F) of the Act.\102\
---------------------------------------------------------------------------

    \102\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(18) under the Act requires, in part, that NSCC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to establish objective, risk-based, and
publicly disclosed criteria for participation.\103\ NSCC believes the
proposed changes to establish new membership categories and
requirements for Sponsoring Members and Sponsored Members would
establish objective, risk-based, and publicly disclosed criteria for
participation in NSCC as Sponsoring Members and Sponsored Members.
Specifically, as proposed, in order for an applicant to become a
Sponsoring Member, the applicant would be required to satisfy a number
of objective and risk-based eligibility criteria. First, the applicant
must be a Member. In addition, if the applicant is a Registered-Broker-
Dealer, then it would be required to have (i) Net Worth of at least $25
million and (ii) excess net capital over the minimum net capital
requirement imposed by the SEC (or such higher minimum capital
requirement imposed by the applicant's designated examining authority)
of at least $10 million. Likewise, in order for an applicant to become
a Sponsored Member, the applicant would be required to meet certain
objective, risk-based eligibility criteria. Specifically, an applicant
would be eligible to apply to become a Sponsored Member if it is either
a ``qualified institutional buyer'' as defined by Rule 144A \104\ under
the Securities Act,\105\ or a legal entity that, although not organized
as an entity specifically listed in paragraph (a)(1)(i)(H) of Rule 144A
under the Securities Act, satisfies the financial requirements
necessary to be a ``qualified institutional buyer'' as specified in
that paragraph. If approved, the requirements for proposed new
Sponsoring Member and Sponsored Member membership categories would
become part of the Rules, which are publicly available on DTCC's
website (www.dtcc.com), and market participants would be able to review
them in connection with their evaluation of potential participation in
NSCC as Sponsoring Members and Sponsored Members. Therefore, NSCC
believes that the proposed changes to establish new membership
categories and requirements for Sponsoring Members and Sponsored
Members are consistent with Rule 17Ad-22(e)(18) under the Act.\106\
---------------------------------------------------------------------------

    \103\ 17 CFR 240.17Ad-22(e)(18).
    \104\ 17 CFR 230.144A.
    \105\ 15 U.S.C. 77a et seq.
    \106\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

Establishing a New Membership Category and Requirements for Agent
Clearing Members
    NSCC believes the proposed changes to establish a new membership
category and requirements for Agent Clearing Members are consistent
with Section 17A(b)(3)(F) \107\ of the Act and Rule 17Ad-
22(e)(18),\108\ as promulgated under the Act.
---------------------------------------------------------------------------

    \107\ 15 U.S.C. 78q-1(b)(3)(F).
    \108\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to (i) assure the safeguarding of securities and funds
which are in the custody or control of the clearing agency or for which
it is responsible, (ii) remove impediments to and perfect the mechanism
of a national system for the prompt and accurate clearance and
settlement of securities transactions, and, in general, to protect
investors and the public interest, and (iii) promote the prompt and
accurate clearance and settlement of securities transactions.\109\ NSCC
believes the proposed changes to establish a new membership category
and requirements for Agent Clearing Members are consistent with these
requirements for the reasons described below.
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78q-1(b)(3)(F).

---------------------------------------------------------------------------

Safeguarding of Securities and Funds
    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to assure the safeguarding of securities and funds which
are in the custody or control of the clearing agency or for which it is
responsible.\110\ NSCC believes the proposed changes to establish a new
membership category and requirements for Agent Clearing Members would
allow NSCC to help assure the safeguarding of securities and funds
which are in the custody or control of NSCC or for which it is
responsible. Specifically, as proposed, all Agent Clearing Member
applicants would be subject to an approval process that is separate
from their original Member applications, ongoing credit surveillance in
their capacity as Agent Clearing Members, as well as the calculation of
the Agent Clearing Member Required Fund Deposits on a gross basis with
no offsets for netting of positions as between different Customers.
---------------------------------------------------------------------------

    \110\ Id.
---------------------------------------------------------------------------

    In addition, as proposed, all Agent Clearing Member applicants
would be subject to the same or higher financial requirements as those
that apply to them with respect to their respective Member category.
Furthermore, NSCC would reserve the right to impose greater financial
requirements based upon the level of the anticipated positions and
obligations of such applicant, the anticipated risk associated with the
volume and types of transactions such applicant proposes to process
through NSCC, and the overall financial condition of such applicant. An
activity limit would also be imposed on an Agent Clearing Member's
Customer activity so that the Agent Clearing Member would only be
permitted to submit new Customer activity to NSCC to the extent its
aggregate Volatility Charges do not exceed its Net Member Capital,
unless otherwise determined by NSCC in order to promote orderly
settlement.
    Moreover, as proposed, NSCC would reserve the right to require each
Agent Clearing Member, or any Member applicant to become such, to
furnish to NSCC such adequate assurances of its financial
responsibility and operational capability within the meaning of Rule 15
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.
    By structuring the proposal in a way that addresses potential
market and credit risks, NSCC believes that the proposed changes to
establish a new membership category and requirements for Agent Clearing
Members would assure the safeguarding of securities and funds which are
in the custody or control of NSCC or for which it is responsible,
consistent with Section 17A(b)(3)(F) of the Act.\111\
---------------------------------------------------------------------------

    \111\ Id.
---------------------------------------------------------------------------

Remove Impediments to and Perfect the Mechanism of a National System;
Protect Investors and Public Interest
    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions, and, in general, to protect investors and the
public interest.\112\ NSCC believes the proposed changes to establish a
new membership category and requirements for Agent Clearing Members
would allow NSCC to help remove impediments to and perfect the
mechanism of a national system for the prompt and accurate clearance
and settlement of securities transactions and, in general, to protect
investors and the public interest.
---------------------------------------------------------------------------

    \112\ Id.
---------------------------------------------------------------------------

    Specifically, NSCC believes the proposal would help alleviate
capital constraints and decrease settlement and operational risk that
market participants would otherwise face. This is because the proposal
would expand access to central clearing for institutional firms and
thus enable a greater number of securities transactions to be cleared
and settled by a central counterparty. As described above, NSCC
believes that having securities transactions cleared through a central
counterparty may create capital benefits for market participants and
thereby help alleviate capital constraints otherwise applicable to
bilateral securities transactions. In addition, by having a greater
number of securities transactions cleared through a central
counterparty, the proposal would decrease the settlement and
operational risks that market participants would otherwise face to the
extent they were required to clear and settle their securities
transactions bilaterally because those securities transactions would be
subject to novation and independent risk management by the central
counterparty. By alleviating capital constraints and decreasing
settlement and operational risk that market participants would
otherwise face, NSCC believes the proposed changes to establish a new
membership category and requirements for Agent Clearing Members would
remove impediments to and perfect the mechanism of a national system
for the prompt and accurate clearance and settlement of securities
transactions, consistent with Section 17A(b)(3)(F) of the Act.\113\
---------------------------------------------------------------------------

    \113\ Id.
---------------------------------------------------------------------------

    The proposal would also protect investors and the public interest
by lowering the risk of liquidity drain and protecting against fire
sale risks as it would expand access to central clearing for
institutional firms and thus enable a greater number of securities
transactions to be cleared and settled by a central counterparty.
Specifically, NSCC believes that having securities transactions cleared
and settled by a central counterparty would lower the risk of liquidity
drain in the U.S. financial market by lessening counterparties' likely
inclination to unwind transactions in a stressed market scenario. The
central counterparty would use its risk management resources to provide
confidence to market participants that they will receive back their
cash or securities, as applicable, which should limit the propensity
for market participants to seek to unwind their transactions in a
stressed market scenario. In addition, NSCC believes that having
securities transactions cleared and settled by a central counterparty
would protect against fire sale risk through the central counterparty's
ability to centralize and control the hedging and liquidation of a
defaulting counterparty's portfolio. By lowering the risk of liquidity
drain in the U.S. financial market and protecting against fire sale
risk, NSCC believes the proposed changes to establish a new membership
category and requirements for Agent Clearing Members would protect
investors and the public interest, consistent with the Section
17(A)(b)(3)(F) of the Act.\114\
---------------------------------------------------------------------------

    \114\ Id.
---------------------------------------------------------------------------

Promote Prompt and Accurate Clearance and Settlement
    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to promote the prompt and accurate clearance and settlement
of securities transactions.\115\ NSCC believes the proposed changes to
establish a new membership category and requirements for Agent Clearing
Members would allow NSCC to help

promote the prompt and accurate clearance and settlement of securities
transactions. Specifically, by expanding the access of central clearing
for institutional firms and thus enable a greater number of securities
transactions to be cleared and settled by a central counterparty, NSCC
believes the proposal would help decrease settlement and operational
risk that market participants would otherwise face to the extent they
were required to clear and settle their securities transactions
bilaterally because those securities transactions would be subject to
novation and independent risk management by the central counterparty.
By decreasing settlement and operational risk, NSCC believes the
proposed changes to establish a new membership category and
requirements for Agent Clearing Members would promote the prompt and
accurate clearance and settlement of securities transactions,
consistent with Section 17A(b)(3)(F) of the Act.\116\
---------------------------------------------------------------------------

    \115\ Id.
    \116\ Id.
---------------------------------------------------------------------------

    By structuring the proposal in a way that would allow NSCC to help
(i) assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible, (ii) remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions, and, in general, to protect investors and the
public interest, and (iii) promote the prompt and accurate clearance
and settlement of securities transactions, NSCC believes the proposed
changes to establish a new membership category and requirements for
Agent Clearing Members are consistent with Section 17A(b)(3)(F) of
Act.\117\
---------------------------------------------------------------------------

    \117\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(18) under the Act requires, in part, that NSCC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to establish objective, risk-based, and
publicly disclosed criteria for participation.\118\ NSCC believes the
proposed changes to establish new a membership category and
requirements for Agent Clearing Members would establish objective,
risk-based, and publicly disclosed criteria for participation in NSCC
as Agent Clearing Members. Specifically, as proposed, in order for an
applicant to become an Agent Clearing Member, the applicant would be
required to satisfy a number of objective and risk-based eligibility
criteria. First, the applicant must be a Member. In addition, if the
applicant is a Registered-Broker-Dealer, then it would be required to
have (i) Net Worth of at least $25 million and (ii) excess net capital
over the minimum net capital requirement imposed by the SEC (or such
higher minimum capital requirement imposed by the applicant's
designated examining authority) of at least $10 million. If approved,
the requirements for proposed new Agent Clearing Member membership
category would become part of the Rules, which are publicly available
on DTCC's website (www.dtcc.com), and market participants would be able
to review them in connection with their evaluation of potential
participation in NSCC as Agent Clearing Members. Therefore, NSCC
believes that the proposed changes to establish a new membership
category and requirements for Agent Clearing Members are consistent
with Rule 17Ad-22(e)(18) under the Act.\119\
---------------------------------------------------------------------------

    \118\ 17 CFR 240.17Ad-22(e)(18).
    \119\ Id.
---------------------------------------------------------------------------

Establishing the SFT Clearing Service
    NSCC believes the proposed changes to establish the SFT Clearing
Service are consistent with Section 17A(b)(3)(F) \120\ of the Act and
Rules 17Ad-22(e)(7) and (e)(8),\121\ as promulgated under the Act.
---------------------------------------------------------------------------

    \120\ 15 U.S.C. 78q-1(b)(3)(F).
    \121\ 17 CFR 240.17Ad-22(e)(7) and (e)(8).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to (i) assure the safeguarding of securities and funds
which are in the custody or control of the clearing agency or for which
it is responsible, (ii) remove impediments to and perfect the mechanism
of a national system for the prompt and accurate clearance and
settlement of securities transactions, and, in general, to protect
investors and the public interest, and (iii) promote the prompt and
accurate clearance and settlement of securities transactions.\122\ NSCC
believes the proposed changes to establish the SFT Clearing Service are
consistent with these requirements for the reasons described below.
---------------------------------------------------------------------------

    \122\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

Safeguarding of Securities and Funds
    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to assure the safeguarding of securities and funds which
are in the custody or control of NSCC or for which it is
responsible.\123\ NSCC believes that the proposed changes to establish
the SFT Clearing Service would allow NSCC to help assure the
safeguarding of securities and funds which are in the custody or
control of NSCC or for which it is responsible.
---------------------------------------------------------------------------

    \123\ Id.
---------------------------------------------------------------------------

    The proposal is structured in a manner that allows NSCC to protect
itself from associated market risk. Specifically, as described above,
SFT activity would be risk managed by NSCC in a manner consistent with
NSCC Member's CNS positions. Moreover, all SFT Positions would be
margined independently of the Member's other positions, i.e., Required
SFT Deposit. The Required SFT Deposit would generally be calculated
using the same procedure applicable to CNS positions, but with a
separate $250,000 minimum.\124\
---------------------------------------------------------------------------

    \124\ See Section 12(c) of proposed Rule 56.
---------------------------------------------------------------------------

    Moreover, consistent with the manner in which clearing fund
requirements are satisfied by members of FICC for their cleared
securities financing transactions, NSCC would require that (i) a
minimum of 40% of an SFT Member's Required SFT Deposit consist of a
combination of cash and Eligible Clearing Fund Treasury Securities and
(ii) the lesser of $5,000,000 or 10% of an SFT Member's Required SFT
Deposit (but not less than $250,000) consist of cash.\125\ NSCC would
also have the discretion to require a Member to post its Required SFT
Deposit in proportion of cash higher than would otherwise be
required.\126\ NSCC's determination to impose any such requirement
would be made in view of market conditions and other financial and
operational capabilities of the relevant SFT Member.
---------------------------------------------------------------------------

    \125\ Id.
    \126\ See Section 12(d) of proposed Rule 56.
---------------------------------------------------------------------------

    Furthermore, NSCC would require additional Clearing Fund deposits
to address two situations that may present unique risk. First, if the
share price of underlying securities of an SFT that has already been
novated to NSCC falls below the threshold established by NSCC from time
to time, NSCC would require both pre-novation counterparties to the SFT
to post Clearing Fund equal to 100% of the market value of such
underlying securities until such time as the per share price of the
underlying securities equals or exceeds such threshold.\127\ Second, in
the event an SFT is subject to a collateral haircut (i.e., the SFT Cash
exceeds the market value of the securities), NSCC would require the
Transferor (or in the case of an Agent Clearing Member Transaction, the
Agent Clearing Member) to post Clearing Fund equal to such excess.\128\
---------------------------------------------------------------------------

    \127\ See Section 13(b) of proposed Rule 56.
    \128\ See Section 12(e) of proposed Rule 56.
---------------------------------------------------------------------------

    NSCC is also proposing to limit the SFTs eligible for clearing to
overnight transactions on securities that are CNS-

eligible equity securities with a share price that equals or exceeds
the threshold established by NSCC from time to time and that are fully
collateralized by cash. NSCC believes these limitations, in addition to
the Clearing Fund requirements, would limit the potential market risk
associated with SFTs.
    The proposal is also structured in a manner that allows NSCC to
protect itself from associated liquidity risk. Specifically, the
proposal would mitigate NSCC's liquidity risk associated with an SFT
Member default by providing that the Final Settlement obligations owing
to non-defaulting SFT Members under SFTs to which the Defaulting SFT
Member was a party will be settled in accordance with the normal
settlement cycle for the purchase or sale of securities, as
applicable.\129\ NSCC would accordingly be able to satisfy such Final
Settlement obligations through market action (if necessary) rather than
through its own liquidity resources. More specifically, NSCC would be
able to sell the securities lent by a Defaulting SFT Member and/or
purchase the securities borrowed by a Defaulting SFT Member and use the
proceeds of such sales and/or the securities purchased to satisfy the
Defaulting SFT Member's Final Settlement obligations to non-defaulting
SFT Members. In the absence of this provision, NSCC would need to rely
exclusively on its liquidity resources to satisfy Final Settlement
obligations owing to non-defaulting SFT Members, since it would not
receive the proceeds of any market action to liquidate the Defaulting
SFT Member's SFT Positions until after Final Settlement obligations
were due.
---------------------------------------------------------------------------

    \129\ See proposed Rule 56, Section 14(b)(viii).
---------------------------------------------------------------------------

    The proposal would also provide that NSCC could further delay its
satisfaction of Final Settlement obligations to non-defaulting SFT
Members beyond the normal settlement cycle for the purchase or sale of
securities to the extent NSCC determines that taking market action to
close-out some or all of the Defaulting SFT Member's novated SFT
Positions would create a disorderly market in the relevant SFT
Securities.\130\
---------------------------------------------------------------------------

    \130\ Id.
---------------------------------------------------------------------------

    However, in any case, until NSCC has satisfied the Final Settlement
obligations owing to non-defaulting SFT Members, NSCC would continue
paying to and receiving from non-defaulting SFT Members the applicable
Price Differential (i.e., the change in market value of the relevant
securities) with respect to their novated SFTs.\131\ NSCC would take
into account such Price Differential payment obligations when
calculating the amount of liquidity resources that NSCC may require in
the event of the default of the participant family that would generate
the largest aggregate payment obligation for NSCC in extreme but
plausible market conditions.132 133 By continuing to process
these Payment Differential payments until Final Settlement occurs, NSCC
would ensure that non-defaulting SFT Members are kept in the same
position as if the Defaulting SFT Member had not defaulted and the pre-
novation counterparties had instead agreed to roll the SFTs. To the
extent NSCC is required to pay a Price Differential to a non-defaulting
SFT Member, NSCC would rely on the NSCC Clearing Fund, including the
Required SFT Deposit, in order to cover the liquidity need associated
with any such Price Differential obligation.
---------------------------------------------------------------------------

    \131\ See proposed Rule 56, Section 14(b)(ix).
    \132\ Id.
    \133\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------

    The proposal is also structured in a manner that allows NSCC to
protect itself from associated credit risk. In addition to the Clearing
Fund requirements discussed above, any Member that elects to
participate in the proposed SFT Clearing Service would be subject to
the same initial membership requirements and ongoing membership
requirements and monitoring as any other Member.
    The proposal is also structured in a manner that allows NSCC to
protect itself from associated operational risk. NSCC proposes to
utilize to a significant extent the same processes and infrastructure
as it has used for many years to clear and settle cash market
transactions for purposes of clearing and settling SFTs. NSCC staff is
well versed in such processes and infrastructure and has been actively
involved in the development of the proposed SFT Clearing Service,
thereby allowing for ready integration of support for the proposed SFT
Clearing Service into NSCC staff's current workflows.
    By structuring the proposal in a way that addresses potential
market, liquidity, credit and operational risks, NSCC believes that the
proposed changes to establish the SFT Clearing Service would help
assure the safeguarding of securities and funds which are in the
custody or control of NSCC or for which it is responsible, consistent
with Section 17A(b)(3)(F) of the Act.\134\
---------------------------------------------------------------------------

    \134\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

Remove Impediments to and Perfect the Mechanism of a National System;
Protect Investors and Public Interest
    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions, and, in general, to protect investors and the
public interest.\135\ NSCC believes the proposed changes to establish
the SFT Clearing Service would allow NSCC to help remove impediments to
and perfect the mechanism of a national system for the prompt and
accurate clearance and settlement of securities transactions and, in
general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \135\ Id.
---------------------------------------------------------------------------

    Specifically, NSCC believes the proposal would help alleviate
capital constraints and decrease settlement and operational risk that
market participants would otherwise face. As described above, NSCC
believes, by expanding the availability of NSCC's infrastructure to
SFTs via the proposed SFT Clearing Service, the proposal may create
capital benefits for market participants and thereby help alleviate
capital constraints otherwise applicable to bilateral SFTs. In
addition, the proposal would decrease settlement and operational risk
that market participants would otherwise face by making a greater
number of securities transactions eligible to be cleared, settled and
risk managed through NSCC via the proposed SFT Clearing Service. By
alleviating capital constraints and decreasing settlement and
operational risk that market participants would otherwise face, NSCC
believes the proposed changes to establish the SFT Clearing Service
would remove impediments to and perfect the mechanism of a national
system for the prompt and accurate clearance and settlement of
securities transactions, consistent with Section 17A(b)(3)(F) of the
Act.\136\
---------------------------------------------------------------------------

    \136\ Id.
---------------------------------------------------------------------------

    The proposal would also protect investors and the public interest
by lowering the risk of liquidity drain and protecting against fire
sale risks. Specifically, the proposal would lower the risk of
liquidity drain in the U.S. equity securities financing market by
lessening counterparties' likely inclination to unwind transactions in
a stressed market scenario. NSCC would use its risk management
resources to provide confidence to market participants that they will
receive back

their cash or securities, as applicable, which should limit the
propensity for market participants to seek to unwind their transactions
in a stressed market scenario. In addition, the proposal would protect
against fire sale risk. As described above, in the event of a default,
NSCC would conduct a centralized, orderly liquidation of the
defaulter's SFT Positions. Such an organized liquidation should result
in substantially less price depreciation and market disruption than
multiple independent non-defaulting parties racing against one another
to liquidate the positions. In addition, NSCC would only need to
liquidate the defaulter's net positions. Limiting the positions that
need to be liquidated to the defaulter's net positions should reduce
the volume of required sales activity, which in turn should limit the
price and market impact of the close-out of the defaulter's positions.
NSCC would also use its risk management resources to provide confidence
to market participants that they will receive back their cash or
securities, as applicable, which should limit the propensity for market
participants to seek to unwind their transactions in a stressed market
scenario. By lowering the risk of liquidity drain in the U.S. equity
securities financing market and protecting against fire sale risk, NSCC
believes the proposed changes to establish the SFT Clearing Service
would protect investors and the public interest, consistent with the
Section 17(A)(b)(3)(F) of the Act.\137\
---------------------------------------------------------------------------

    \137\ Id.
---------------------------------------------------------------------------

Promote Prompt and Accurate Clearance and Settlement
    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to promote the prompt and accurate clearance and settlement
of securities transactions.\138\ NSCC believes the proposed changes to
establish the SFT Clearing Service would allow NSCC to help promote the
prompt and accurate clearance and settlement of securities
transactions. Specifically, by expanding the availability of NSCC's
infrastructure to SFTs via the proposed SFT Clearing Service, NSCC
believes the proposal would help decrease settlement and operational
risk that market participants would otherwise face by making a greater
number of securities transactions eligible to be cleared, settled and
risk managed through NSCC. By decreasing settlement and operational
risk, NSCC believes the proposed changes to establish the SFT Clearing
Service would promote the prompt and accurate clearance and settlement
of securities transactions, consistent with Section 17A(b)(3)(F) of the
Act.\139\
---------------------------------------------------------------------------

    \138\ Id.
    \139\ Id.
---------------------------------------------------------------------------

    By structuring the proposal in a way that would allow NSCC to help
(i) assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible, (ii) remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions, and, in general, to protect investors and the
public interest, and (iii) promote the prompt and accurate clearance
and settlement of securities transactions, NSCC believes the proposed
changes to establish the SFT Clearing Service are consistent with
Section 17A(b)(3)(F) of the Act.\140\
---------------------------------------------------------------------------

    \140\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7) under the Act requires NSCC to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to effectively measure, monitor, and manage the
liquidity risk that arises in or is borne by the covered clearing
agency.\141\ NSCC believes that the proposed changes to establish the
SFT Clearing Service are consistent with Rule 17Ad-22(e)(7) because, as
described above, the proposal is structured in a manner that allows
NSCC to protect itself from associated liquidity risk. Specifically,
the proposal would mitigate NSCC's liquidity risk associated with an
SFT Member default by providing that the Final Settlement obligations
owing to non-defaulting SFT Members under SFTs to which the Defaulting
SFT Member was a party will be settled in accordance with the normal
settlement cycle for the purchase or sale of securities, as
applicable.\142\ NSCC would accordingly be able to satisfy such Final
Settlement obligations through market action (if necessary) rather than
through its own liquidity resources. More specifically, NSCC would be
able to sell the securities lent by a Defaulting SFT Member and/or
purchase the securities borrowed by a Defaulting SFT Member and use the
proceeds of such sales and/or the securities purchased to satisfy the
Defaulting SFT Member's Final Settlement obligations to non-defaulting
SFT Members. In the absence of this provision, NSCC would need to rely
exclusively on its liquidity resources to satisfy Final Settlement
obligations owing to non-defaulting SFT Members, since it would not
receive the proceeds of any market action to liquidate the Defaulting
SFT Member's SFT Positions until after Final Settlement obligations
were due.
---------------------------------------------------------------------------

    \141\ 17 CFR 240.17Ad-22(e)(7).
    \142\ See proposed Rule 56, Section 14(b)(viii).
---------------------------------------------------------------------------

    The proposal would also provide that NSCC could further delay its
satisfaction of Final Settlement obligations to non-defaulting SFT
Members beyond the normal settlement cycle for the purchase or sale of
securities to the extent NSCC determines that taking market action to
close-out some or all of the Defaulting SFT Member's novated SFT
Positions would create a disorderly market in the relevant SFT
Securities.\143\ However, in any case, until NSCC has satisfied the
Final Settlement obligations owing to non-defaulting SFT Members, NSCC
would continue paying to and receiving from non-defaulting SFT Members
the applicable Price Differential (i.e., the change in market value of
the relevant securities) with respect to their novated SFTs.\144\ NSCC
would take into account such Price Differential payment obligations
when calculating the amount of liquidity resources that NSCC may
require in the event of the default of the participant family that
would generate the largest aggregate payment obligation for NSCC in
extreme but plausible market conditions.145 146 By
continuing to process these Price Differential payments until Final
Settlement occurs, NSCC would ensure that non-defaulting SFT Members
are kept in the same position as if the Defaulting SFT Member had not
defaulted and the pre-novation counterparties had instead agreed to
roll the SFTs. To the extent NSCC is required to pay a Price
Differential to a non-defaulting SFT Member, NSCC would rely on the
NSCC Clearing Fund, including the Required SFT Deposit, in order to
cover the liquidity need associated with any such Price Differential
obligation. Therefore, NSCC believes that the proposed changes to
establish the SFT Clearing Service are consistent with Rule 17Ad-
22(e)(7) under the Act.\147\
---------------------------------------------------------------------------

    \143\ Id.
    \144\ See proposed Rule 56, Section 14(b)(ix).
    \145\ Id.
    \146\ 17 CFR 240.17Ad-22(e)(7).
    \147\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(8) under the Act \148\ requires NSCC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to define the point at which settlement is final to
be no later than the end of the day on which the payment or obligation
is due. NSCC believes that the proposed

changes to establish the SFT Clearing Service are consistent with Rule
17Ad-22(e)(8) because, as described above, the proposal would make it
clear to SFT Members the point at which settlement is final with
respect to SFTs cleared through NSCC. Specifically, Section 7 in the
proposed Rule 56 (Securities Financing Transaction Clearing Service)
provides that an SFT, or a portion thereof, shall be deemed complete
and final upon Final Settlement of the SFT, or such portion.\149\
Having clear provisions in this regard would enable SFT Members to
better identify the point at which settlement is final with respect to
their SFTs. As such, NSCC believes the proposed changes to establish
the SFT Clearing Service are consistent with Rule 17Ad-22(e)(8) under
the Act.\150\
---------------------------------------------------------------------------

    \148\ 17 CFR 240.17Ad-22(e)(8).
    \149\ The proposed changes to establish the SFT Clearing Service
would provide that NSCC may delay the close-out of a Defaulting SFT
Member's SFT Positions if such a close-out would create a disorderly
market. In such a situation, the proposed changes would allow NSCC
to correspondingly delay Final Settlement of any Default-Related
SFTs on the same SFT Securities. NSCC does not believe this
provision would affect settlement finality because if NSCC delays
Final Settlement following an SFT Member Default, the Non-Defaulting
Member's related payment or delivery obligation is correspondingly
delayed. As a result, the provision would not allow a settlement to
be final after the due date of the relevant payment obligations.
Rather, consistent with the approach of many clearing agency and
derivatives clearing organization rules, it simply allows NSCC to
postpone those due dates in order to minimize market
destabilization. See, e.g., The Options Clearing Corporation
(``OCC'') Rule 903 (Obligation to Deliver) (https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf) and ICE
Clear Credit LLC Rule 20-605(e) (https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Rules.pdf).
    \150\ 17 CFR 240.17Ad-22(e)(8).
---------------------------------------------------------------------------

Making Other Amendments and Clarifications
    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to promote the prompt and accurate clearance and settlement
of securities transactions.\151\ NSCC believes that the proposed
changes to make other amendments and clarifications to the Rules would
allow NSCC to help promote prompt and accurate clearance and settlement
of securities transactions. This is because the proposed amendments and
clarifications to the Rules are conforming and technical changes that
would ensure consistency in the Rules and that the Rules remain clear
and accurate. Having clear and accurate Rules would help Members to
better understand their rights and obligations regarding NSCC's
clearance and settlement services. NSCC believes that when Members
better understand their rights and obligations regarding NSCC's
clearance and settlement services, they can act in accordance with the
Rules. NSCC believes that better enabling Members to comply with the
Rules would promote the prompt and accurate clearance and settlement of
securities transactions by NSCC. As such, NSCC believes the proposed
changes to make other amendments and clarifications are consistent with
Section 17A(b)(3)(F) of the Act.\152\
---------------------------------------------------------------------------

    \151\ 15 U.S.C. 78q-1(b)(3)(F).
    \152\ Id.
---------------------------------------------------------------------------

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

    NSCC believes that the proposed rule change to establish the SFT
Clearing Service and the additional membership categories in connection
therewith would promote competition by increasing the types of entities
that may participate in NSCC and therefore permit more market
participants to utilize NSCC's services.
    At the same time, the proposed rule change may impose a burden on
competition by limiting participation in the proposed SFT Clearing
Service to institutions that are eligible to participate in the
service. The proposed rule change may also impose a burden on
competition by (i) calculating Required Fund Deposits for Sponsoring
Members and Agent Clearing Members on a gross basis with no offsets for
netting of positions between different Sponsored Members or different
Customers, as applicable, and (ii) imposing an additional charge with
respect to any Non-Returned SFT that is calculated based on the
relevant SFT Member's Credit Risk Rating Matrix rating. However, NSCC
believes any burden on competition that may result from the proposed
rule change would not be significant and would be necessary and
appropriate in furtherance of the purposes of the Act,\153\ for the
reasons described below.
---------------------------------------------------------------------------

    \153\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    Although the proposal would limit full participation in the
proposed SFT Clearing Service to Members, and such limitation may
impact institutional firm clients that are unable to satisfy such
eligibility requirements by excluding them from being able to directly
submit their equity securities financing activity in SFT eligible
securities to NSCC for novation (and avail themselves of the
commensurate benefits described above in Item II(A)1(i)--Background),
NSCC believes that any related burden on competition would be necessary
and appropriate in furtherance of the purposes of the Act. This is
because such eligibility requirements are designed to allow NSCC to
prudently manage the risks associated with SFT Members' participation
in the proposed SFT Clearing Service by ensuring that SFT Members are
able to satisfy their obligations to NSCC. In addition, although the
proposal would limit the scope of entities eligible to be Sponsored
Members to those institutions that are able to satisfy the eligibility
criteria discussed above, NSCC does not believe such limit would
materially impact market participants that are unable to satisfy such
eligibility requirements because such market participants would be able
to have their equity securities financing activity in SFT eligible
securities submitted to NSCC for novation through an Agent Clearing
Member. Moreover, any burden on competition would be necessary and
appropriate in furtherance of the purposes of the Act because the
eligibility requirements applicable to Sponsored Members are designed
to ensure the financial sophistication of Sponsored Members and to
prudently manage the risk associated with Sponsored Members'
participation in NSCC. Additionally, although the proposal would limit
the scope of entities able to submit equity securities financing
activity in SFT eligible securities to NSCC on behalf of others to
entities that are able to satisfy the eligibility criteria for
Sponsoring Members and Agent Clearing Members, as specified in proposed
Rules 2C and 2D (i.e., be an existing Member and, if the Member
applicant is a Registered Broker-Dealer, having to satisfy certain
minimum financial threshold amounts), and such limitation may impact
institutions that are unable to satisfy such eligibility requirements
by excluding them from being able to submit transactions on behalf of
others (and avail themselves of the commensurate benefits described
above in Item II(A)1(i)--Background), NSCC believes that any related
burden on competition would be necessary and appropriate in furtherance
of the purposes of the Act. This is because such eligibility
requirements are designed to allow NSCC to prudently manage the risks
associated with Sponsoring Members' and Agent Clearing Members'
participation in the proposed SFT Clearing Service by ensuring that
such institutions have the operational capability and sufficient
financial ability to meet all of their anticipated obligations to NSCC.
Furthermore, NSCC believes any related burden on competition would not
be significant because, as described above

in Item II(A)1(vii)--Impact of the Proposed SFT Clearing Service on
Various Persons, participation in the proposed SFT Clearing Service
would be entirely voluntary and would not restrict the ability of firms
to enter into bilateral securities financing transactions outside of
NSCC.
    Although the proposal would require the Sponsoring Member Required
Fund Deposits and Agent Clearing Member Required Fund Deposits to be
calculated on a gross basis with no offsets for netting of positions
across different Sponsored Members or different Customers, as
applicable, and such requirement may limit the ability of certain
Members to participate as a Sponsoring Member and/or an Agent Clearing
Member in the proposed SFT Clearing Service, NSCC believes that any
related burden on competition would be necessary and appropriate in
furtherance of the purposes of the Act. This is because such
requirement is designed to allow NSCC to prudently manage the risks
associated with these Members' participation in the proposed SFT
Clearing Service by ensuring that NSCC's volatility-based Clearing Fund
deposit requirements represent the sum of each individual institutional
firm's activity. Furthermore, NSCC believes any related burden on
competition would not be significant because, as described above in
Item II(A)1(vii)--Impact of the Proposed SFT Clearing Service on
Various Persons, participation in the proposed SFT Clearing Service
would be entirely voluntary and would not restrict the ability of firms
to enter into bilateral securities financing transactions outside of
NSCC.
    Although the proposal would impose an additional charge with
respect to any Non-Returned SFT that is calculated based on the
relevant SFT Member's Credit Risk Rating Matrix rating and such
requirement may limit the ability of certain Members to participate in
the proposed SFT Clearing Service, NSCC believes that any related
burden on competition would be necessary and appropriate in furtherance
of the purposes of the Act. This is because such requirement is
designed to allow NSCC to prudently manage increased risks associated
with Non-Returned SFTs. As described above, 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 in accordance with
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. The proposed requirement
would help to ensure that NSCC's Clearing Fund deposit requirements
take into account increased market risk that NSCC may face in
connection with Non-Returned SFTs. Furthermore, NSCC believes any
related burden on competition would not be significant because, as
described above in Item II(A)1(vii)--Impact of the Proposed SFT
Clearing Service on Various Persons, participation in the proposed SFT
Clearing Service would be entirely voluntary and would not restrict the
ability of firms to enter into bilateral securities financing
transactions outside of NSCC.
    NSCC does not believe the proposal to make technical and conforming
changes would impact competition. These changes are being proposed to
ensure consistency in the Rules. They would not change NSCC's current
practices or affect Members' rights and obligations. As such, NSCC
believes the proposal to make technical and conforming changes would
not have any impact on competition.

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

    NSCC reviewed the proposed rule change with various Members and
market participants (e.g., agent lenders, brokers, matching service
providers, and books and records service providers) in order to benefit
from their expertise and industry knowledge. Written comments relating
to this proposed rule change have not been received from Members or any
other person. If any written comments are received, they will be
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
    All prospective commenters should follow the Commission's
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General
questions regarding the rule filing process or logistical questions
regarding this filing should be directed to the Main Office of the
Commission's Division of Trading and Markets at
<EMAIL_ADDRESS>or<PHONE_NUMBER>.
    NSCC reserves the right not to respond to any comments received.

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

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be disapproved.
    The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form(http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-NSCC-2021-010 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NSCC-2021-010. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the

public in accordance with the provisions of 5 U.S.C. 552, will be
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549 on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of NSCC and on DTCC's website (http://dtcc.com/legal/sec-rule-filings.aspx). All comments received will be posted without
change. Persons submitting comments are cautioned that we do not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-NSCC-2021-010
and should be submitted on or before September 2, 2021.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\154\
---------------------------------------------------------------------------

    \154\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-17076 Filed 8-11-21; 8:45 am]
 BILLING CODE 8011-01-P