[Federal Register Volume 81, Number 246 (Thursday, December 22, 2016)]
[Notices]
[Pages 93994-94005]
[FR Doc No: 2016-30853]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79577; File No. 601-01]

Euroclear Bank SA/NV; Order of the Commission Approving an
Application To Modify an Existing Exemption From Clearing Agency
Registration

December 16, 2016

I. Introduction

    Euroclear Bank SA/NV (``EB'') filed with the Securities and
Exchange Commission (``Commission'') on May 9, 2016, an application on
Form CA-1 requesting to modify an existing exemption \1\ from
registration as a clearing agency (``Modification Application'') \2\
pursuant to Section 17A \3\ of the Securities Exchange Act of 1934
(``Exchange Act'') and Rule 17Ab2-1 thereunder.\4\ Notice of EB's
Modification Application was published for comment in the Federal
Register on September 6, 2016 (``Modification Application Notice'').\5\
The comment period closed on October 6, 2016, and the Commission
received four comments, all of which were broadly supportive of the
application.\6\
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    \1\ See Self-Regulatory Organizations; Morgan Guaranty Trust
Company of New York, Brussels Office, as Operator of the Euroclear
System; Order Approving Application for Exemption From Registration
as a Clearing Agency, Exchange Act Release No. 39643 (Feb. 11,
1998), 63 FR 8232 (Feb. 18, 1998) (``Original Exemption Order'');
and Self-Regulatory Organizations; Morgan Guaranty Trust Company,
Brussels Office, as Operator of the Euroclear System and Euroclear
Bank, S.A.; Order Approving Application to Modify an Existing
Exemption From Clearing Agency Registration, Exchange Act Release
No. 43775 (Dec. 28, 2000), 66 FR 819 (Jan. 4, 2001) (``2001
Exemption Modification Order'') (together the ``Existing
Exemption'').
    \2\ The descriptions set forth in this notice regarding the
structure and operations of EB have been derived primarily from
information contained in EB's amended Form CA-1 application and
publicly available sources. The redacted Modification Application
and non-confidential exhibits thereto are available on the
Commission's Web site.
    \3\ 15 U.S.C. 78q-1.
    \4\ 17 CFR 240.17Ab2-1.
    \5\ See Euroclear Bank SA/NV; Notice of Filing of Application To
Modify an Existing Exemption From Clearing Agency Registration,
Exchange Act Release No. 34-78710 (Aug. 29, 2016), 81 FR 61271
(Sept. 6, 2016).
    \6\ See letters from Mark Jennis, Managing Director, DTCC (Sept.
13, 2016) (``DTCC letter''); Oscar A. Huettner, Managing Principal,
LGM Financial Consulting LLC (Sept. 12, 2016) (``LGM letter'');
Charles Cascarilla, Chief Executive Officer and Co-Founder, Paxos
(Oct. 6, 2016) (``Paxos letter''); Kyle Brandon, Managing Director,
and Robert Toomey, Esq., Managing Director and Associate General
Counsel, Securities Industry and Financial Markets Association (Oct.
6, 2016) (``SIFMA letter'').
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    Subject to certain limitations and conditions, the Existing
Exemption enables EB, as operator of the Euroclear System,\7\ to
perform the functions of a clearing agency with respect to transactions
involving certain U.S. government securities \8\ for its U.S.
participants \9\ without registering as a

clearing agency (``U.S. Government Securities Clearing Agency
Activities'').\10\ The Commission originally granted the Existing
Exemption in 1998 to EB's predecessor, Morgan Guaranty Trust Company of
New York, Brussels Office (``MGT-Brussels''), as operator of the
Euroclear System (the Original Exemption Order).\11\ Under the Existing
Exemption, EB may provide the U.S. Government Securities Clearing
Agency Activities to U.S. Participants.\12\
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    \7\ ``Euroclear System'' means the securities settlement system
that has been operated by EB or its predecessor since 1968 and the
assets, means, and rights related to such services. All services
performed by EB that relate to securities settlement and custody are
part of the Euroclear System. See Modification Application, Exhibit
S-1 at 1.
    \8\ As used herein, the term ``U.S. Government Securities'' has
the same meaning as the term ``eligible U.S. government securities''
used in the Existing Exemption, which consists of government
securities described in Section 3(a)(42) of the Exchange Act, except
that it does not include any (i) foreign-targeted U.S. government or
agency securities or (ii) securities issued or guaranteed by the
International Bank for Reconstruction and Development (i.e., the
World Bank) or any other similar international organization, and
that are (i) Fedwire-eligible U.S. government securities, (ii)
mortgage-backed pass through securities that are guaranteed by the
Government National Mortgage Association (``GNMA''), and (iii) any
collateralized mortgage obligation whose underlying securities are
Fedwire-eligible U.S. government securities or GNMA guaranteed
mortgage-backed pass through securities and which are depository
eligible securities. For reference purposes, Fedwire is a large-
value transfer system operated by the Board of Governors of the
Federal Reserve System that supports the electronic transfer of
funds and of book-entry securities. See Original Exemption Order,
supra note 1, at 8239.
    \9\ As used herein, the term ``U.S. Participant'' refers to any
Euroclear System participant having a U.S. residence, based upon the
location of its executive office or principal place of business,
including, without limitation, (i) a U.S. bank (as defined by
Section 3(a)(6) of the Exchange Act), (ii) a foreign branch of a
U.S. bank or U.S.-registered broker-dealer, and (iii) any broker-
dealer registered as such with the Commission, even if such broker-
dealer does not have a U.S. residence.
    \10\ See Original Exemption Order, supra note 1, at 8232.
    \11\ See supra note 1. Before EB replaced MGT-Brussels as the
operator of the Euroclear System, the Commission approved a
modification to the Original Exemption Order to reflect the change
in control of the Euroclear System from MGT-Brussels to EB. See 2001
Exemption Modification Order, supra note 1.
    \12\ See Original Exemption Order, supra note 1, at 8239.
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    In the Modification Application, EB has requested that the
Commission broaden the Existing Exemption to permit EB to perform
certain additional clearing agency services (such as certain central
securities depository (``CSD'') services \13\ and collateral management
services) for equity securities issued by U.S. Issuers (``U.S. Equity
Securities'') for its U.S. Participants to fulfill certain collateral
obligations. The Modification Application specifies these additional
clearing agency functions, referred to herein as the ``U.S. Equities
Clearing Agency Activities,'' as follows:
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    \13\ As used herein, the term ``CSD services'' has the meaning
set forth in 17 CFR 240.17Ad-22(a)(3). See Exchange Act Release No.
34-78961 (Sept. 28, 2016), 81 FR 70786, 70901 (Oct. 13, 2016)
(adopting final rules that, among other things, move the definition
of ``central securities depository services'' from Rule 17Ad-
22(a)(2) to (a)(3)).

    (a) The provision of clearing agency services (such as certain
CSD services and collateral management services) in relation to U.S.
Participants' use and reuse of U.S. Equity Securities issued by U.S.
Issuers in support of collateral obligations utilizing the
collateral management services provided by EB in relation to any
securities or cash account held at EB that is used to receive
collateral (``Collateral Accounts'') in connection with the services
described in (b) below and in connection with receipt and delivery
from other Euroclear System participants that are users of such
collateral management services provided by EB; and
    (b) solely for the purpose of implementing the services
described in (a) above, the provision of certain clearing agency
services for U.S. Participants' receipt and delivery of U.S. Equity
Securities in relation to collateral management services through
accounts held at EB that are linked to EB's account held at DTC.\14\
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    \14\ See Modification Application, Exhibit S-1, at 40.

EB's clearing agency functions under the U.S. Equities Clearing Agency
Activities will therefore entail only the movement of U.S. Equity
Securities for collateral management purposes, as opposed to the
relatively broader range of clearing agency functions permitted under
the U.S. Government Securities Clearing Agency Activities. For example,
the U.S. Government Securities Clearing Agency Activities include the
settlement of purchase and sale transactions in U.S. Government
Securities as well as the movement of U.S. Government Securities for
collateral management purposes.
    To facilitate the movement of U.S. Equity Securities for collateral
management purposes, Euroclear SA/NV (``ESA''), the parent company of
EB, and The Depository Trust and Clearing Corporation (``DTCC'') have
entered into a joint venture known as DTCC-Euroclear Global Collateral
Ltd. (``DEGCL''). As further described in Part II.D, DEGCL would
provide an inventory management service (``JV-IMS'') to facilitate,
among other things, the repositioning and crediting of assets necessary
to perform the U.S. Equities Clearing Agency Activities.
    EB has requested that it be permitted to provide the U.S. Equities
Clearing Agency Activities without registering as a clearing agency and
subject to the applicable conditions specified below. In addition, EB
has requested that it be permitted to continue providing the U.S.
Government Securities Clearing Agency Activities without registering as
a clearing agency and under substantially the same conditions as those
set forth in the Existing Exemption. After careful review of the
comments received and the details and information provided in the
Modification Application, the Commission concludes that it has
sufficient information to decide whether the Modification Application
should be approved. For the reasons discussed below, the Commission
believes the Modification Application is consistent with the public
interest, the protection of investors, and the purposes of Section 17A,
and therefore grants EB's request to modify the Existing Exemption,
subject to the conditions and limitations described further below.

II. Summary of EB's Organization, Current Activities, and the
Modification Application

A. Organization and Supervision

    EB is a limited liability company headquartered in Brussels,
Belgium,\15\ organized under the laws of Belgium, and authorized in
Belgium as a Belgian credit institution. EB is an international CSD and
a global provider of clearance, settlement, collateral management, and
related services. In particular, EB provides its participants with a
means of acquiring, holding, transferring, and pledging security
entitlements by electronic book-entry on its records outside of the
U.S., either free-of-payment or against payment, in multiple
currencies.\16\
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    \15\ EB also has a secondary office in Braine l'Alleund,
Belgium, branch offices in Wanchai, Hong Kong and Krakow, Poland,
and a representative office in New York City. See Modification
Application, Exhibit I-1.
    \16\ See Modification Application, Exhibit S-1 at 3.
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    EB is part of a group of companies that serve as market
infrastructures by offering clearing agency services to the domestic
markets in Belgium, Netherlands, France, England, Ireland, Sweden, and
Finland (collectively with EB, the ``Euroclear Group'').\17\ CSD
entities in the Euroclear Group are subsidiaries of ESA, a Belgian
limited liability company.\18\ Control and direction of the Euroclear
Group strategic decisions are vested in ESA. ESA provides common
services to EB and other affiliated companies of the Euroclear
Group.\19\ ESA maintains intercompany agreements with EB that set forth
respective services and obligations.\20\
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    \17\ In 2015, the Euroclear Group had assets under custody of
[euro]27.5 trillion, turnover equivalent to [euro]674.7 trillion,
and a settlement volume of 190.7 million netted transactions.
Euroclear Group's collateral management platform, the Collateral
Highway, processed collateralized transactions in 2015 for an amount
of [euro]1.068 trillion on a daily basis. See Modification
Application, Exhibit S-1 at 3.
    \18\ See Modification Application, Exhibit A-2.
    \19\ See Modification Application, Exhibit S-1 at 3.
    \20\ Id.
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    As previously noted, all services performed by EB that relate to
securities settlement and custody are part of the Euroclear System,
which is designated as a securities settlement system under the Belgian
Settlement Finality Act.\21\ According to EB, Belgian law provides for
robust asset protection rights for assets deposited in the Euroclear
System and for the protection of the holding of assets on the books of
EB.\22\ EB further

represents that Belgian law and EB's arrangements provide a high degree
of certainty with regards to finality of transfers on EB's books, the
holding of collateral in accounts, the contractual framework of
participants in the Euroclear System, and default procedures.\23\
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    \21\ See Modification Application, Exhibit K-5 at 22.
    \22\ See Modification Application, Exhibit S-1 at 35.
    \23\ See Modification Application, Exhibit S-1 at 35.
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    To utilize the Euroclear System, EB participants enter into a
contractual relationship with EB to open and maintain securities and
cash accounts at EB.\24\ EB participants agree that their rights to
assets held in the Euroclear System are defined and governed by Belgian
law.\25\ EB states that, under Belgian law, EB generally is the
beneficiary of a statutory lien on assets in accounts held at EB to
secure any claim it has against EB participants arising in connection
with the clearance or the settlement of transactions through, or in
connection with, the Euroclear System, including claims resulting from
loans or advances.\26\
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    \24\ See Modification Application, Exhibit J.
    \25\ Specifically, EB represents that EB participants' rights in
securities held in the Euroclear System are defined and governed by
Belgian Royal Decree No. 62 dated Nov. 10, 1967 on the Deposit of
Fungible Financial Instruments and the Settlement of Transactions
involving such Instruments or similar Belgian legislation. EB states
that the applicable Belgian law is effectively similar to securities
entitlements under Revised Article 8 of the Uniform Commercial Code.
See Modification Application, Exhibit S-1 at 36.
    \26\ See Modification Application, Exhibit E-5 at 34.
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    EB represents that it is subject to consolidated supervision by the
National Bank of Belgium (``NBB'') and the Belgian Financial Services
Market Authority (``FSMA'').\27\ EB also represents that NBB supervises
ESA, due to its status as an authorized holding company of a regulated
credit institution (i.e., EB) and as an institution assimilated to a
securities settlement system (i.e., the Euroclear System).\28\
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    \27\ See Modification Application, Exhibit S-1 at 20.
    \28\ See Modification Application, Exhibit S-1 at 20. According
to EB, pursuant to Article 20, Sec.  2 of the Belgian Royal Decree
of September 26, 2005, institutions assimilated to a settlement
institution may not have shareholdings in commercial companies
without the prior approval of the NBB, unless the shareholding is
taken in companies whose activities consist, in whole or in part, in
the activities that a settlement institution or an institution
assimilated thereto may carry out.
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    According to EB, the NBB exercises its supervision over EB and ESA
on a consolidated basis.\29\ Specifically, the NBB has prudential
supervision and oversight over EB as a licensed credit institution
operating in Belgium. Furthermore, the NBB supervises EB in its role as
operator of the Euroclear System and as a recognized CSD. EB states
that the NBB is required to ensure: (1) That EB's clearance,
settlement, and payment systems operate properly; (2) that those
systems are efficient and sound; and (3) that EB meets the obligations
applicable to credit institutions under applicable European law, as
adopted into Belgian law.\30\ EB represents that the NBB has the
authority to order EB to limit, suspend, or stop activities if EB does
not comply with the regulatory requirements of its various
authorizations.\31\ EB also states that the NBB assesses EB under the
Principles for Financial Market Infrastructures (``PFMI'') and
considers best practices where appropriate.\32\
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    \29\ Id. In addition, EB is submitted to the Regulation 575/2013
of 26 June 2013 on prudential requirements for credit institutions
and investment firms (CRR) IV, and Regulation 909/2014 of 23 July
2014 on improving securities settlement in the European Union and on
central securities depositaries (CSDR). See Modification
Application, Exhibit K-5 at 16.
    \30\ See Modification Application, Exhibit S-1 at 20.
    \31\ Id.
    \32\ See Modification Application, Exhibit S-1 at 20. The PFMI
are standards applicable to financial market infrastructures, such
as CSDs and securities settlement systems. Committee on Payment and
Settlement Systems (now the Committee on Payment and Market
Infrastructure) and Technical Committee of the International
Organization of Securities Commissions, Principles for financial
market infrastructures (Apr. 16, 2012), available at http://www.bis.org/publ/cpss101a.pdf.
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    EB further represents that the FSMA regulates EB for the purposes
of compliance with investor protection rules and rules on the
operation, integrity, and transparency of the Belgian financial
markets.\33\ These include requirements relating to conflicts of
interest with clients, customer protection in case of insolvencies, and
enforcement of conduct requirements.
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    \33\ See Modification Application, Exhibit S-1 at 20-21.
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B. Current Activities

    The Existing Exemption permits EB to provide the U.S. Government
Securities Clearing Agency Activities to U.S. Participants.\34\ Under
the terms of the Existing Exemption, the Commission places a limit on
the volume of transactions in U.S. Government Securities conducted by
U.S. Participants that can be settled through the Euroclear System.
Specifically, the average daily volume of U.S. Government Securities
settled through the Euroclear System for U.S. Participants may not
exceed five percent of the total average daily dollar value of the
aggregate volume in U.S. Government Securities.\35\ To facilitate the
monitoring of compliance with the volume limit and the impact of EB's
operations on the U.S. Government Securities market under the Existing
Exemption, EB is required to provide the Commission with quarterly
reports, calculated on a twelve-month rolling basis, of (i) the average
daily volume of transactions in eligible U.S. Government Securities for
U.S. Participants that are subject to the volume limit and (ii) the
average daily volume of transactions in eligible U.S. Government
Securities for all Euroclear System participants, whether or not
subject to the volume limit.\36\ EB is also required to notify the
Commission regarding material adverse changes in any account maintained
in the Euroclear System for U.S. Participants.\37\ In addition, EB is
required to respond to Commission requests for information regarding
any U.S. Participant about whom the Commission has financial solvency
concerns, including, for example, a settlement default by a U.S.
Participant.\38\ The Commission also requires a satisfactory memorandum
of understanding with the Belgian banking and securities regulator
(currently the NBB) to facilitate the provision of information by EB to
the Commission.\39\
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    \34\ See Original Exemption Order, supra note 1, at 8239.
    \35\ See id. at 8239.
    \36\ See Original Exemption Order, supra note 1, at 8240. EB's
non-U.S. participants are not subject to any restrictions under the
Existing Exemption.
    \37\ For purposes of the Original Exemption Order, the term
``material adverse changes'' included (i) the termination of any
U.S. Participant; (ii) the liquidation of any securities collateral
pledged by a U.S. Participant to secure an extension of credit made
through the Euroclear System; (iii) the institution of any
proceedings to have a U.S. Participant declared insolvent or
bankrupt; or (iv) the disruption or failure in whole or in part in
the operations of the Euroclear System either at its regular
operating location or at its contingency center. See Original
Exemption Order, supra note 1, at 8240, n.78.
    \38\ See Original Exemption Order, supra note 1, at 8240.
    \39\ See 2001 Exemption Modification Order, supra note 1, at
821; see also Understanding Regarding an Application of Euroclear
Bank for an Exemption Under U.S. Federal Securities Laws (January
30, 2001) available at https://www.nbb.be/doc/cp/nl/aboutcbfa/mou/pdf/mou_2001-01-30_euroclearbank.pdf.
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    EB participants are able to utilize various clearance and
settlement services through the Euroclear System.\40\ Among those
services are the EB collateral management services (``EB-CMS''), which
provide a framework for exchanging collateral to fulfill bilateral
obligations between counterparties.\41\ Parties to bilateral
arrangements that require the posting of collateral by one party
(``Collateral Giver'') in favor of the other party

(``Collateral Taker'') may use the EB-CMS to secure credit exposures
arising under such bilateral arrangements. The terms of such bilateral
arrangements and related collateral needs (including the credit
exposure, collateral requirements, and collateral terms) are negotiated
and agreed between the parties independently of EB. After such
arrangements are agreed, the parties then enter into an agreement with
EB to provide the EB-CMS.
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    \40\ See Modification Application, Ex. J.
    \41\ See Modification Application, Ex. S-1 at 3.
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    EB states that its non-U.S. participants use the EB-CMS to meet
collateral obligations with a variety of assets, including U.S.
Government Securities and U.S. Equity Securities.\42\ EB also
represents that U.S. Participants currently use the EB-CMS to meet
collateral obligations with a wide variety of assets including U.S.
Government Securities, but not including U.S. Equity Securities, as EB
prohibits U.S. Participants from holding U.S. Equity Securities in an
account at EB for any purpose as part of its contractual documentation
with its participants, consistent with the terms of the Existing
Exemption (``Current Equities Restrictions'').\43\ EB represents that
automated systems protocols and control procedures are implemented in
the Euroclear System to enforce the Current Equities Restrictions. The
systems protocols consist of coded validation rules that are part of
EB's fully automated and standard processes that run prior to the
settlement of any securities movement to or from an account held at
EB.\44\
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    \42\ See Modification Application, Exhibit S-1 at 34.
    \43\ Id. EB's customer contracts provide that: ``Due to
restrictions imposed on Euroclear Bank by the United States
Securities and Exchange Commission (S.E.C.) following SEC Rule
17Ab2-1, equities, ETFs and REITs issued by companies incorporated
in a state or territory of the United States can be held in
Euroclear Bank by non-US Participants only.'' See Modification
Application, Exhibit S-1 at 6.
    \44\ See Modification Application, Exhibit S-1 at 34.
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C. Modification Application

    EB has requested that the Commission broaden the Existing Exemption
to allow it to provide the EB-CMS to its U.S. Participants using U.S.
Equity Securities. Specifically, EB has requested that the Commission:
(1) Continue the Existing Exemption under substantially similar
conditions except as otherwise specified herein, (2) broaden the
Existing Exemption to allow EB to provide the U.S. Equities Clearing
Agency Activities under new conditions applicable to those activities,
and (3) apply conditions to EB that are largely harmonized between the
U.S. Government Securities Clearing Agency Activities and U.S. Equities
Clearing Agency Activities (collectively, the ``Clearing Agency
Activities'').\45\ Below the Commission discusses each of these
requests in turn.
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    \45\ In harmonizing the conditions between the Clearing Agency
Activities, new operational risk conditions, set forth in Part IV.C,
and certain additional other conditions, set forth in Part IV.D,
would also apply to the U.S. Government Securities Clearing Agency
Activities.
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    First, EB has requested that the Commission continue the Existing
Exemption to conduct the U.S. Government Securities Clearing Agency
Activities without: (i) Requiring EB to register as a clearing agency
with the Commission; (ii) changing the definition of the terms U.S.
Government Securities or U.S. Participants, as set forth in the
Existing Exemption; or (iii) changing the conditions set forth in the
Existing Exemption with regards to the U.S. Government Securities
Clearing Agency Activities, listed below:

    (a) Volume Limit. The average daily volume of transactions in
eligible U.S. Government Securities for U.S. Participants processed
through EB as operator of the Euroclear System may not exceed five
percent of the total average daily dollar value of the aggregate
volume in eligible U.S. Government Securities.
    (b) Commission Access to Information regarding U.S. Government
Securities Clearing Agency Activities. EB will continue to provide
the Commission with quarterly reports, calculated on a twelve-month
rolling basis, of (a) the average daily volume of transactions in
eligible U.S. Government Securities for U.S. Participants that are
subject to the volume limit as described in Section IV.C.2 of the
Original Exemption Order and (b) the average daily volume of
transactions in eligible government securities for all Euroclear
System participants, whether or not subject to the volume limit as
described in Section IV.C.2 of the Original Exemption Order.\46\
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    \46\ See Modification Application, Exhibit S-1 at 39.

    Second, EB has requested that the following conditions of the
Existing Exemption with regards to the U.S. Government Securities
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Clearing Agency Activities be replaced and superseded:

    (a) The obligations in Section IV.C.3 of the Original Exemption
Order to provide disclosure documents to the Commission;
    (b) the obligations in Section IV.C.3 of the Original Exemption
Order to file with the Commission amendments to its application for
exemption on Form CA-1; and
    (c) the obligations in Section IV.C.3 of the Original Exemption
Order to notify the Commission regarding material adverse changes in
any account maintained by Euroclear for its U.S. Participants and to
respond to a Commission request for information about any U.S.
Participant about whom the Commission has financial solvency
concerns.\47\
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    \47\ See id.

The conditions set forth in Part IV.D would replace the above and
include, among other things, substantially similar obligations to the
above.
    Third, EB has requested that the Commission permit EB to provide,
without registering as a clearing agency with the Commission, the U.S.
Equities Clearing Agency Activities, subject to certain conditions. As
described in the Modification Application, EB's provision of U.S.
Equities Clearing Agency Activities would entail activities such as
custody and safekeeping,\48\ settlement,\49\ and asset servicing \50\
on behalf of U.S. Participants with respect to U.S. Equity Securities.
For example, EB would maintain securities accounts on its books,\51\
provide safekeeping of and recordkeeping for those securities
accounts,\52\ settle instructions by participants,\53\ and provide
recordkeeping and reporting in real time on the status of settlement to
participants.\54\ EB also would process corporate actions as part of
its asset servicing business for any U.S. Equity Securities that remain
in EB's account held at DTC on the record date.\55\
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    \48\ See Modification Application, Exhibit S-1 at 4.
    \49\ See Modification Application, Exhibit S-1 at 5.
    \50\ See Modification Application, Exhibit S-1 at J-3.
    \51\ See Modification Application, Exhibit S-1 at 2.
    \52\ See Modification Application, Exhibit K-5 at 80-81.
    \53\ See Modification Application, Exhibit K-5 at 76, 83.
    \54\ See Modification Application, Exhibit K-5 at 76.
    \55\ See Modification Application, Exhibit J-3.
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    The EB-CMS would be offered to U.S. Participants in support of
their obligations under security-based swap transactions, securities
lending transactions, and repurchase agreements, among other
transactions.\56\ The EB-CMS would independently verify that the
collateral proposed and provided by the Collateral Giver meets the
terms reported by the counterparties for the duration of the collateral
obligation.\57\ EB would do this by calculating the exchange of value
necessary to meet the collateral obligation information entered in by
the users of the EB-CMS, including by making value determinations, such
as marking to market the value of the

collateral based on reference data.\58\ Also, EB would generate
instructions and communicate the instructions to EB's settlement
processing infrastructure to transfer collateral among the Collateral
Accounts.\59\ Under the Existing Exemption, EB may already offer the
EB-CMS for U.S. Government Securities to U.S. Participants, but EB may
only offer the EB-CMS for U.S. Equity Securities to its non-U.S.
participants, because non-U.S. participants are not covered by the
scope of the Existing Exemption.
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    \56\ See, e.g., Modification Application, Exhibit P-2
(describing necessary revisions to its Operating Procedures related
to collateral services, derivatives services, loan services,
repurchase services, and securities lending services arising out of
the proposed U.S. Equities Clearing Agency Activities).
    \57\ See Modification Application, Exhibit J-3.
    \58\ See Modification Application, Exhibit K-5 at 60
(referencing obtaining the market value of a security. The EB-CMS
system does not apply any further haircuts or adjustments once the
market value is obtained from third party data providers); see also
Euroclear plc, Risk Management at Euroclear: Including Pillar 3
Disclosure 2012--Euroclear plc, at 43 (2012) (``Securities for which
Euroclear Bank does not obtain external quotations regularly can
also be valued according to the price associated with securities
transactions in the Euroclear system, or according to theoretical
models.''), available at https://www.euroclear.com/dam/Brochures/Pillar3_2012.pdf.
    \59\ See Modification Application, Exhibit J-3.
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D. Collateral Regulations and Related Infrastructure

    According to the Modification Application, new and enhanced
regulatory requirements (``New Collateral Regulations'') are leading
counterparties to derivative and financing transactions to seek
streamlined margin processing and increased efficiency in the
availability and deployment of collateral.\60\ These New Collateral
Regulations are expected to be implemented in the European Union in the
near future.\61\ EB states that the regulatory changes include new
restrictions on eligible collateral, requiring the use of highly liquid
assets, prescribed haircuts, and segregation requirements, as well as a
prohibition on rehypothecation for initial margin. EB believes that,
when fully implemented, the New Collateral Regulations will result in
increased capital requirements, mandatory central clearing of more
derivative transactions, and new margining rules for bilateral trades,
which will increase demand for high quality collateral. EB projects
that the requirement for more transactions and exposures to be
collateralized globally will result in a significant increase in the
number of required collateral movements between market participants,
which will have implications for counterparty credit risk, funding and
capital charges, and reputational and operational risk.
---------------------------------------------------------------------------

    \60\ See Modification Application, Exhibit S-1 at 6.
    \61\ Id.; see also Peter Madigan, EU non-cleared margin regime
set to take effect in January 2017, Risk.net (Sept. 27, 2016)
(regarding the adoption and implementation of the draft Regulatory
Technical Standards on risk mitigation techniques for non-centrally
cleared OTC derivatives), available at http://www.risk.net/risk-magazine/news/2472246/eu-non-cleared-margin-regime-set-to-take-effect-in-january-2017.
---------------------------------------------------------------------------

    EB also represents that these regulatory changes include
requirements for initial margin for counterparties to certain
derivative and financing transactions, as well as a reduction or
removal of unsecured thresholds for variation margin. EB expects that
these new initial margin requirements will significantly increase the
amount of collateral required to support a number of derivative and
financing transactions. In addition, EB represents that it is expected
that the removal or reduction of unsecured thresholds for variation
margin will mean any changes in underlying transaction valuations may
trigger increased margin calls, requiring market participants to hold
additional collateral available for posting.
    EB represents that the New Collateral Regulations therefore are
expected to greatly increase the complexity of collateral management
and create new competition for collateral.\62\ Industry research cited
by EB indicates that as these regulatory changes take effect, the
volume of required collateral movements will increase and the number of
collateral settlement fails and associated costs are likely to rise
proportionally.\63\ EB has requested to broaden its exempt clearing
agency activities for the purpose of assisting its participants'
compliance with these regulations, which, as stated earlier, are
scheduled to take effect in the near future and which will
significantly affect the use of collateral. In connection with its
request, EB has taken preparatory measures to create the infrastructure
necessary to accommodate the U.S. Equities Clearing Agency Activities,
including the formation in 2014 of DEGCL, the joint venture between
Euroclear and DTCC. DEGCL describes itself as an open architecture
infrastructure designed to streamline collateral processing globally,
providing solutions for both over-the-counter derivatives and financing
that deliver transparency, collateral mobility, efficiency, and
security through its utility offerings.\64\ DEGCL is authorized as a
service company by the Financial Conduct Authority (``FCA'') in the
United Kingdom.\65\ EB represents that DEGCL seeks to provide services
to its users, including buy-side and sell-side financial institutions,
in meeting their risk management and regulatory requirements for the
holding and exchange of collateral as required by the New Collateral
Regulations.\66\ These services will be offered to users located
primarily in Europe and the U.S.\67\
---------------------------------------------------------------------------

    \62\ EB states that collateral movements will need to be tracked
and applied against a growing number and type of credit support
documentation, while segregation rules will multiply the number of
collateral accounts needed and correspondingly increase the
complexity of accurately processing collateral movements across
account types, fragmented central clearing, and collateral delivery
channels. See Modification Application, Exhibit S-1 at 7; see also
Implications of Collateral Settlement Fails: An Industry Perspective
on Bilateral OTC Derivatives (Feb. 2016), available at http://www.imas.org.sg/uploads/media/2016/03/03/1046_Implications_of_Collateral_Settlement__FINAL.pdf
(``Implications of Collateral Settlement Fails''); Collateral
Management in Europe: Searching for Central Intelligence (May 2015),
available at https://www.euroclear.com/dam/Brochures/Euroclear-Collateral-Management-Aite-Paper.pdf; The Economics of Collateral
(Dec. 2013), available at http://dtcc.com/~/media/Files/Downloads/
WhitePapers/LSE%20Report.ashx.
    \63\ See, e.g., Implications of Collateral Settlement Fails,
supra note 61, at 5.
    \64\ See ``State street to pilot GlobalCollateral ltd's margin
settlement messaging service,'' DEGCL Press Release (July 11, 2016),
available at http://www.globalcollateral.net/press5-statestreet.html.
    \65\ DEGCL's reference number as an authorized service company
is 686269. See FCA Financial Services Register, available at https://www.fca.org.uk/register.
    \66\ See Modification Application, Exhibit S-1 at 7.
    \67\ See id.
---------------------------------------------------------------------------

    With respect to the U.S. Equities Clearing Agency Activities, DEGCL
will facilitate a U.S. Participant's repositioning of assets in U.S.
Participant-held accounts at The Depository Trust Company (``DTC'') for
use in the U.S. Participant's corresponding Collateral Account at EB in
the EB-CMS. In particular, these activities will be provided by the JV-
IMS, a DEGCL service offering that, according to DEGCL, will automate
certain collateral management tasks, reposition inventory across
settlement locations in the U.S. and Europe, and thereby make
collateral more readily available.\68\ EB represents that the JV-IMS
would provide an automated mechanism for an entity that is both a
participant of EB and DTC (``JV-IMS User'') \69\ to receive
recommendations on how to reposition assets in the JV-IMS User's
account held at DTC, including U.S. Equity Securities, for subsequent
crediting of those assets to its Collateral Accounts within the EB-CMS
(and for the return of such assets to the JV-IMS User's account held at
DTC). To facilitate the JV-IMS, EB will become a participant at DTC,
subject to

approval by DTC, its standard membership requirements and certain
heightened requirements for a non-U.S. entity.\70\
---------------------------------------------------------------------------

    \68\ See Modification Application, Exhibit S-1 at 8; ``State
street to pilot GlobalCollateral ltd's margin settlement messaging
service,'' DEGCL Press Release (July 11, 2016), available at: http://www.globalcollateral.net/press5-statestreet.html.
    \69\ See id.
    \70\ EB has signed a DTC Participant's Agreement pursuant to
which it agreed that the DTC rules shall be a part of the terms and
conditions of every contract or transaction that EB may make or have
with DTC. See id.; see also DTC Policy Statements on the Admissions
of Participants (June 2013).
---------------------------------------------------------------------------

    To initially establish its sub-account held at DTC for the JV-IMS
prior to its initial use, a JV-IMS User will set parameters that
specify which types of assets in its account held at DTC (and in what
amounts) it will make available for the JV-IMS, including any limits or
criteria on those assets (such as ratings).\71\ The JV-IMS User will
then transfer assets that meet the parameters to a sub-account held at
DTC that is designated for, and dedicated to, the JV-IMS. The JV-IMS
will then monitor that information and independently verify that the
assets identified by the JV-IMS User meet its own parameters, as well
as the EB eligibility requirements (such as an accepted CUSIP number).
If so, the JV-IMS will prepare and submit to EB free-of-payment
delivery instructions (which EB will in turn submit to DTC on the JV-
IMS User's behalf) to transfer the assets identified by the JV-IMS User
in its designated sub-account held at DTC to EB's account held at
DTC.\72\ The JV-IMS will also prepare and submit instructions to EB to
credit such transferred assets from EB's account held at DTC to the
relevant JV-IMS User's Collateral Accounts.
---------------------------------------------------------------------------

    \71\ See Modification Application, Exhibit S-1 at 8.
    \72\ This process is subject to DTC rules governing EB's role in
repositioning assets. See Self-Regulatory Organizations; The
Depository Trust Company; Order Approving Proposed Rule Change to
Establish a Link with Euroclear, Exchange Act Release No. 78358
(July 19, 2016), 81 FR 48482 (July 25, 2016) (``DTC EB Link Rule'').
---------------------------------------------------------------------------

    Additionally, the JV-IMS would facilitate the automated return of
such assets to the JV-IMS User's account held at DTC when necessary to
meet other settlement obligations and for corporate actions by
preparing and submitting to EB (for eventual forwarding by EB to DTC)
free-of-payment delivery instructions to transfer such assets from EB's
account held at DTC to the relevant JV-IMS User's sub-account held at
DTC. Finally, the JV-IMS would report to the JV-IMS User all settlement
instructions generated via the JV-IMS, the status of the generated
settlement instructions, and other relevant information in regards to
such settlement instructions. All of the foregoing would be subject to
the DTC rules regarding a link with EB that was approved by the
Commission in July 2016.\73\
---------------------------------------------------------------------------

    \73\ See id.
---------------------------------------------------------------------------

    After the JV-IMS User's assets are credited to EB's account held at
DTC via the JV-IMS processes described above, the assets would then be
credited to the Collateral Accounts for the relevant EB
participant.\74\ As stated above, with respect to the U.S. Equities
Clearing Agency Activities, EB's internal protocols would structure
these Collateral Accounts to allow U.S. Participants to: (1) Take
receipt of U.S. Equity Securities credited to the account via the JV-
IMS process described immediately above; (2) deliver U.S. Equity
Securities out of the Collateral Accounts for mobilization as
collateral through the EB-CMS infrastructure and to receive U.S. Equity
Securities into the Collateral Accounts mobilized from other
participants of the EB-CMS; and (3) deliver U.S. Equity Securities back
to the relevant JV-IMS User's sub-account at DTC. EB represents that
these transfer and use restrictions on Collateral Accounts would
prevent a U.S. Participant's U.S. Equity Securities held in Collateral
Accounts from being used for any other purposes in the Euroclear
System, such as normal settlement activity, except under certain
circumstances involving the default of a Collateral Giver.\75\
---------------------------------------------------------------------------

    \74\ All settlement activity related to the JV-IMS that occurs
on the books of DTC is governed exclusively by DTC procedures. All
activity related to the use of assets that occurs on the books of EB
is governed exclusively by the EB contractual framework. See
Modification Application, Exhibit S-1 at 9.
    \75\ See Modification Application, Exhibit S-1 at 11.
---------------------------------------------------------------------------

    Currently, non-U.S. JV-IMS Users may move U.S. Equity Securities
from DTC to EB by transferring the securities to an account held at DTC
for EB's custodian. Approving the Modification Application would expand
the options available to non-U.S. participants, such that non-U.S. JV-
IMS Users holding U.S. Equity Securities at DTC could also transfer
U.S. Equity Securities to EB's DTC account. If a user of the EB-CMS
defaults, either a Collateral Taker or a Collateral Giver can notify EB
of a default under their bilateral transaction. EB's operations staff
would then initiate a process to override the regular controls that
govern use of U.S. Equity Securities as collateral and would instruct
DTC to debit those securities from EB's DTC Account and to credit them
to the account held at DTC for EB's custodian, while still being
credited to the non-defaulting party's account at EB.\76\
---------------------------------------------------------------------------

    \76\ Id.
---------------------------------------------------------------------------

    In the Modification Application, EB has proposed to amend the
Current Equities Restrictions\77\ to permit the use by U.S.
Participants of U.S. Equity Securities subject to the transfer and use
restrictions described above. In all other circumstances, the Current
Equities Restrictions would otherwise remain applicable.
---------------------------------------------------------------------------

    \77\ See supra Part II.B.
---------------------------------------------------------------------------

III. Discussion

A. Statutory Standards

    Section 17A of the Exchange Act directs the Commission to
facilitate the establishment of (i) a national system for the prompt
and accurate clearance and settlement of securities transactions and
(ii) linked or coordinated facilities for clearance and settlement of
securities transactions.\78\ In facilitating the establishment of the
national clearance and settlement system, the Commission must have due
regard for the public interest, the protection of investors, the
safeguarding of securities and funds, and maintenance of fair
competition among brokers and dealers, clearing agencies, and transfer
agents.\79\ Section 17A(b)(1) of the Exchange Act requires all clearing
agencies to register with the Commission.\80\ It also states that, upon
the Commission's motion or upon a clearing agency's application, the
Commission may conditionally or unconditionally exempt a clearing
agency from any provision of Section 17A of the Exchange Act or the
rules or regulations thereunder if the Commission finds that such
exemption is consistent with the public interest, the protection of
investors, and the purposes of Section 17A, including the prompt and
accurate clearance and settlement of securities and funds.\81\ The
Commission notes that it has previously found an exemption from
clearing agency registration under Section 17A(b)(1) to be an
appropriate response in instances where an entity has engaged in a
limited scope of clearing agency activity.\82\
---------------------------------------------------------------------------

    \78\ See 15 U.S.C. 78q-1(a)(2).
    \79\ See 15 U.S.C. 78q-1(a)(2)(A).
    \80\ See 15 U.S.C. 78q-1(b); 17 CFR 240.17Ab2-1.
    \81\ See 15 U.S.C. 78q-1(b)(1).
    \82\ See Modification Application Notice, supra note 5, at
61277.
---------------------------------------------------------------------------

B. Comments Received

    The Commission received four comment letters in response to the
Modification Application Notice.\83\ Commenters included U.S. market
participants and an industry representative. Among the commenters was
DTCC, which is the holding company for three clearing agencies
registered with the Commission and co-

owner of DEGCL. All of the commenters expressed support for the
Modification Application.
---------------------------------------------------------------------------

    \83\ See supra note 6.
---------------------------------------------------------------------------

    Each of the commenters stated that the proposed broadening of EB's
exempted clearing agency activity would benefit U.S. market
participants. One commenter stated that the Modification Application
would provide U.S. market participants with more options to meet
collateral and liquidity demands by providing access to an expanded
pool of high quality collateral.\84\ The commenter further explained
that the use of U.S. Equity Securities as collateral by non-U.S.
participants is common in the European Union, and the Modification
Application would help provide a level playing field between U.S.
Participants and non-U.S. participants in the types of U.S. securities
that can be offered as collateral in the EB-CMS.\85\ Another commenter
noted that the U.S. Equities Clearing Agency Activities would enable
U.S. market participants to optimize their management of U.S. Equity
Securities inventory by effectively and efficiently addressing
collateral management needs in other markets and time zones.\86\
Several commenters also stated that expanding the scope of activity
under the Existing Exemption to include U.S. Equity Securities would
result in lower costs for U.S. market participants and more efficient
capital management.\87\
---------------------------------------------------------------------------

    \84\ See SIFMA letter at 2 (also noting that the Modification
Application would improve asset mobility for U.S. banks and broker-
dealers engaging in securities financing transactions); see also LGM
letter at 1 (stating that U.S. institutions would significantly
benefit from being allowed to use U.S. Equity Securities as
collateral in the international environment).
    \85\ See SIFMA letter at 2.
    \86\ See Paxos letter at 2-3; see also DTCC letter at 3 (stating
that the Modification Application would provide U.S participants
with the ability to optimize collateral globally).
    \87\ See SIFMA letter at 2; DTCC letter at 3; Paxos letter at 3;
---------------------------------------------------------------------------

    Each of the commenters also stated that the U.S. Equities Clearing
Agency Activities would reduce risk. One commenter stated that the
Modification Application would reduce systemic risk by supporting more
efficient allocation of collateral, thus reducing transaction costs and
the risk of settlement failures.\88\ Another commenter stated that the
effective management of collateral inventory on a real-time basis, as
described in the Modification Application, would reduce operational
risk and increase efficiency.\89\ A third commenter stated that
allowing U.S. Participants to use U.S. Equity Securities in the EB-CMS
would reduce settlement and liquidity risks across the broader
securities markets.\90\
---------------------------------------------------------------------------

    \88\ See SIFMA letter at 3; see also DTCC letter at 3 (stating
that the JV-IMS will reduce systemic risk by supporting the more
efficient allocation of collateral, reducing transaction costs and
the risk of settlement failures.).
    \89\ See Paxos letter at 2.
    \90\ See LGM letter at 1.
---------------------------------------------------------------------------

    In addition, the commenters more generally endorsed the
Modification Application based on EB's reputation as a market
infrastructure provider.\91\ One commenter explained that EB provides
its participants with an efficient means of acquiring, holding,
transferring, and pledging security entitlements by electronic book
entry on its records outside the U.S., either free of or versus
payment, in multiple currencies.\92\ Commenters also noted more
generally that EB is well-known and well-regulated,\93\ and that it
operates in a manner consistent with the PFMI.\94\
---------------------------------------------------------------------------

    \91\ See DTCC letter at 3; Paxos letter at 1; SIFMA letter at 3.
    \92\ See Paxos letter at 1.
    \93\ See LGM letter at 2-3.
    \94\ See DTCC letter at 3; Paxos letter at 1; SIFMA letter at 3.
---------------------------------------------------------------------------

    Finally, one commenter expressed views regarding the specific terms
and conditions in the Modification Application Notice. The commenter
expressed a favorable view of the Modification Application, stating
that, given the limited scope of the modification request, and in light
of the increased transparency that would result from the additional
monitoring, reporting, and other conditions proposed by EB in the
Modification Application, the Commission should consider EB compliant
with applicable regulatory standards.\95\ The commenter also requested
that the Commission use the proposed reporting conditions to monitor
the growth of the U.S. Equities Clearing Agency Activities rather than
establish a fixed volume limit at this time, noting that the proposed
reporting conditions would provide the Commission with greater
transparency and broader visibility into cross-border collateral
management.\96\ In addition, the commenter stated that it did not see
other providers being disadvantaged by an expansion of EB's exempted
activity.\97\
---------------------------------------------------------------------------

    \95\ See Paxos letter at 1-2.
    \96\ See id.
    \97\ See id.
---------------------------------------------------------------------------

C. Evaluation of the Modification Application

    With respect to the U.S. Government Securities Clearing Agency
Activities, the Modification Application does not propose to make any
material changes to the U.S. Government Securities Clearing Agency
Activities, and therefore the Commission is not reconsidering the
appropriateness of an exemption for those activities in this order. In
addition, EB has represented in the Modification Application that it
continues to meet the standards previously applied when the Commission
approved the Existing Exemption,\98\ and for the purposes of its
consideration of the Modification Application, the Commission is taking
those representations into account.\99\
---------------------------------------------------------------------------

    \98\ See Modification Application, Exhibit S-1 at 13.
    \99\ The Commission also notes that it has no basis to believe
that EB has not operated within and otherwise performed in
accordance with the terms and conditions of the Existing Exemption.
---------------------------------------------------------------------------

    With respect to the U.S. Equities Clearing Agency Activities, the
Commission believes that, while such activities reflect an expansion of
the range of securities for which EB may perform clearing agency
functions relative to the Existing Exemption, those additional clearing
agency functions would remain limited because EB would necessarily rely
on its link with DTC to perform them. For example, the Modification
Application requests only that EB be permitted to settle collateral
movements involving U.S. Equity Securities and that the settlement of
those collateral movements occur through the use of dedicated accounts
at EB and DTC structured so that a U.S. Participant can only: (i)
Receive U.S. Equity Securities in these accounts; (ii) deliver U.S.
Equity Securities out of these accounts for mobilization as collateral
in the EB infrastructure; and (iii) deliver U.S. Equity Securities back
to the relevant user's account at DTC.\100\ The Modification
Application does not request that EB be permitted to provide the full
range of CSD and securities settlement activities for the purchase or
sale of such securities. Finally, the Commission believes that the
terms and conditions of the exemption set forth in this order would, as
noted by one of the commenters,\101\ assist the Commission in
evaluating and monitoring the U.S. Equities Clearing Agency Activities
on an ongoing basis to assess, among other considerations, how such
limited

activity interacts with other aspects of the national clearance and
settlement system and whether the exemption and its conditions remain
appropriate. Accordingly, the Commission believes that an exemption
subject to the terms and conditions set forth herein, rather than full
registration as a clearing agency, continues to be the appropriate
regulatory status for EB.
---------------------------------------------------------------------------

    \100\ See Modification Application, Exhibit S-1, at 9-10.
    \101\ See Paxos letter at 3 (responding to a request for comment
in the Modification Application Notice regarding whether the
Commission should include among the conditions for the U.S. Equities
Clearing Agency Activities a volume limit similar to the volume
limit under the Existing Exemption that applies to the U.S.
Government Securities Clearing Agency Activities and stating that a
fixed volume limit should not be added as a condition). The
Commission does not believe that such a condition is necessary and
has declined to include it.
---------------------------------------------------------------------------

    Below, the Commission evaluates EB's request for an exemption from
registration as a clearing agency for the U.S. Equities Clearing Agency
Activities under Section 17A(b)(1) of the Exchange Act, including
whether the Modification Application is consistent with the public
interest, the protection of investors, and the purposes of Section 17A
of the Exchange Act. The Commission also describes the specific
conditions that will be imposed in connection with the approval of EB's
request for an exemption and explains its rationale for such
conditions.
1. Facilitating the Establishment of Linked or Coordinated Facilities
for the Settlement of Transactions
    Congress found that the linking of settlement facilities and the
development of uniform standards and procedures for settlement will
reduce unnecessary costs and increase the protection of investors, and
directed the Commission to use its authority to facilitate the
establishment of linked or coordinated facilities for settlement of
transactions in securities.\102\ As previously described, EB will
perform the U.S. Equities Clearing Agency Activities using settlement
facilities linked between DTC, a clearing agency registered with the
Commission, and EB.\103\ For the reasons discussed in the Modification
Application Notice and as discussed further below, the Commission
believes that links and coordination between these two settlement
providers will foster the establishment of uniform standards and
procedures, which in turn may result in benefits to participants of
both DTC and EB resulting from such standardization.
---------------------------------------------------------------------------

    \102\ See 15 U.S.C. 78q-1(a)(1)(D), (a)(2)(A)(ii).
    \103\ See Self-Regulatory Organizations; The Depository Trust
Company; Order Approving Proposed Rule Change to Establish a Link
with Euroclear, Exchange Act Release No. 34-78358 (July 19, 2016),
81 FR 48482 (July 25, 2016).
---------------------------------------------------------------------------

    Commenters generally agreed that the proposed link between EB and
DTC would provide benefits to U.S. market participants. One commenter
explained that the U.S. Equities Clearing Agency Activities could help
U.S. market participants optimize the management of their U.S. Equity
Securities inventory by efficiently addressing management needs in
other markets and time zones.\104\ Another commenter stated that adding
the ability to reposition equity assets held at DTC for transactions on
the books at EB would provide common participants of DTC and EB with
the ability to optimize collateral globally, reduce costs, and manage
their balance sheets in a capital efficient manner.\105\ The Commission
agrees that the greater coordination among settlement providers in
performing the U.S. Equities Clearing Agency Activities is consistent
with the public interest because it could facilitate improved asset
mobilization generally, benefiting U.S. market participants.
---------------------------------------------------------------------------

    \104\ See Paxos letter at 2.
    \105\ See DTCC letter at 3.
---------------------------------------------------------------------------

2. Safeguarding Securities and Funds Related to the Settlement of
Securities Transactions
    Congress found that the safeguarding of securities and funds
related to the settlement of securities transactions is necessary for
the protection of investors, and directed the Commission to have due
regard for the safeguarding of securities and funds in the use of its
authority under Section 17A of the Exchange Act.\106\ Accordingly, the
Commission has reviewed EB's representations with respect to its rules,
procedures, and controls on the rights of securities issuers and
holders; the creation of securities positions within client accounts;
the regular review of such procedures and controls by EB's internal
audit department and external auditor; the enterprise risk management
framework EB operates under; and the role that DTC will play as a
depository for U.S. Equity Securities. As discussed in the Modification
Application Notice, the Commission has adopted rules under Section 17A
of the Exchange Act that, among other things, help facilitate the
safeguarding of funds and securities by registered clearing
agencies.\107\ For example, the Commission's rules require certain
registered clearing agencies to have policies and procedures to, among
other things, immobilize or dematerialize securities certificates and
transfer them by book entry to the greatest extent possible; eliminate
principal risk by linking securities transfers to funds transfers;
identify sources of operational risk and minimize them through the
development of appropriate systems, controls and procedures; and have
business continuity plans that allow for timely recovery of operations
and fulfillment of a clearing agency's obligations.\108\ The Commission
has also noted that registered clearing agencies develop and maintain
plans to assure the safeguarding of securities and funds; the integrity
of automated data processing systems; the recovery of securities,
funds, or data under a variety of loss or destruction scenarios; and
have business continuity plans that allow for the timely recovery of
operations and the fulfillment of a registered clearing agency's
obligations.\109\
---------------------------------------------------------------------------

    \106\ See 15 U.S.C. 78q-1(a)(1)(A), (2)(A).
    \107\ See 12 CFR 240.17Ad-22(d); 12 CFR 242.1000 et seq.; see
also 12 CFR 240.17Ad-22(e) (adopted subsequent to publication of the
Modification Application Notice with a compliance date of April 11,
2017).
    \108\ See 12 CFR 240.17Ad-22(d)(4), (10), and (13).
    \109\ See Exchange Act Release No. 34-68080 (Oct. 22, 2012), 77
FR 66219, 66268 (Nov. 2, 2012).
---------------------------------------------------------------------------

    EB has rules and procedures in place to ensure that the creation of
securities positions is only performed upon receipt of securities to be
credited to client accounts, and that removal of these securities
positions is processed without manual intervention and upon final
maturity or in accordance with a corporate event. Additionally, EB
represents that it reports movements in client accounts to clients on a
daily basis, and that it regularly reviews its procedures and
controls.\110\ EB's risk mitigation practices and internal controls are
also subject to regulatory oversight by the NBB. The Commission notes
that commenters also viewed favorably EB's ability to safeguard
securities and funds, stating that EB is a well-known and well-
regulated market infrastructure provider that operates under
internationally developed standards,\111\ and that EB has a 40-plus-
year record of efficiently managing settlements and custody across
numerous markets.\112\ Finally, the conditions set forth below will
allow the Commission to examine EB and monitor the U.S. Equities
Clearing Agency Activities so that the Commission can assess any impact
the activities may have on U.S. market participants and the U.S.
securities markets. In this respect, the Commission believes that EB's
operations are consistent with the Commission's current regulatory
approach to the safeguarding of securities and funds related to the
settlement of securities transactions, and consistent with the
protection of investors, because the transfer of securities will take
place via book entry at EB. As described in the Modification

Application Notice, the Commission has previously stated its belief
that the immobilization and dematerialization of securities and their
transfer by book entry results in reduced costs and risks associated
with securities settlements and custody by removing the need to hold
and transfer many, if not most, physical certificates.\113\
Accordingly, the Commission believes that approval of the Modification
Application would be consistent with the public interest and the
protection of investors generally, and specifically, the safeguarding
of securities and funds under EB's provision of the U.S. Equities
Clearing Agency Activities.
---------------------------------------------------------------------------

    \110\ Part of this review includes an International Standard on
Assurance Engagements 3402 report, which, pursuant to the conditions
set forth in Part IV.C, will be provided to the Commission on an
annual basis.
    \111\ See DTC letter at 3; SIFMA letter at 3.
    \112\ See LGM letter at 1.
    \113\ See Exchange Act Release No. 34-68080 (Oct. 22, 2012), 77
FR 66219, 66253 (Nov. 2, 2012).
---------------------------------------------------------------------------

3. Prompt and Accurate Settlement of Securities Transactions
    Congress found that the prompt and accurate clearance and
settlement of securities transactions is necessary for the protection
of investors and that inefficient procedures for settlement imposed
unnecessary costs on investors.\114\ For the reasons discussed in the
Modification Application Notice and as discussed further below, the
Commission believes that approval of the Modification Application would
promote the prompt and accurate clearance and settlement of securities
transactions and the protection of investors because EB's settlement
process is consistent with prior Commission observations regarding
delivery versus payment (``DVP'') systems. The Commission has
previously stated that DVP reduces the risk that a party would lose
some or its entire principal because payment is made only if securities
are delivered.\115\ The Commission also believes that a DVP method
reduces the potential that delivery of the security is not
appropriately matched with payment for a security. Therefore, the
Commission believes the use of a DVP method promotes the clearing
agency's ability to facilitate prompt and accurate clearance and
settlement.\116\ One commenter addressed how EB eliminates the
principal risk described above in noting that EB currently provides its
participants with an efficient means of acquiring, holding,
transferring, and pledging security entitlements by electronic book
entry on its records outside the U.S., either free of or versus
payment, in multiple currencies.\117\ The Commission notes that the EB
system has controls in place requiring the availability of the cash and
securities before executing instructions (i.e., positioning),
preventing settlement of the transaction if the cash and/or the
securities are not available.\118\ These rules and controls help
address the principal risk inherent in settling linked obligations.
---------------------------------------------------------------------------

    \114\ See 15 U.S.C. 78q-1(a)(1)(A), (B).
    \115\ See 77 FR at 66256.
    \116\ See id.
    \117\ See Paxos letter at 1.
    \118\ In addition, EB represents that the Euroclear System is a
delivery-versus-payment system, which settles instructions between
clients with finality of the transfer of securities from the seller
to the buyer occurring at the same time as the finality of transfer
of funds from the buyer to the seller.
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    Multiple commenters noted the potential gains in efficiency to be
had by U.S. Participants if EB were to expand its current services to
include U.S. Equity Securities. One commenter cited EB's real-time
management of collateral inventory as being integral to reducing
operational risk and increasing efficiencies,\119\ while another cited
positively EB's ability to facilitate the efficient deployment of
collateral at a time where new regulatory regimes significantly
increase the demand for high-grade assets.\120\ The Commission believes
that EB's operations, as represented to the Commission, are conducted
in a manner that is consistent with the promptness and accuracy
requirements under Section 17A of the Exchange Act. This will enable
the efficient transfer of assets, which helps protect investors and
provides benefits to U.S. market participants.
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    \119\ See Paxos letter at 2.
    \120\ See SIFMA letter at 2.
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4. Maintenance of Fair Competition Among Market Participants
    The Commission is directed to have due regard for the maintenance
of fair competition in the use of its authority under Section 17A of
the Exchange Act.\121\ One commenter stated that the Modification
Application would provide a level playing field between U.S.
Participants and non-U.S. participants in the types of U.S. securities
they can offer as collateral in the EB-CMS, noting that the use of U.S.
Equity Securities as collateral within the EB-CMS is already common
among EB's non-U.S. participants in the European Union.\122\ Another
commenter stated that it did not foresee other providers of collateral
management services to be disadvantaged by approval of EB's
Modification Application; rather, the commenter expected the
Modification Application to be beneficial by expanding the options that
participants and their clients have for addressing collateral
demands.\123\ The Commission notes that approval will reduce the
disparity between U.S. Participant and non-U.S. participant utilization
of the EB-CMS, but the Commission does not believe EB's proposal will
have a direct impact on the current competitive landscape for the
provision of settlement of transactions in U.S. Equity Securities for
U.S. market participants more generally because Euroclear will not
provide settlement for purchase and sale transactions in U.S. Equity
Securities. Accordingly, the Commission believes that the Modification
Application is consistent with Section 17A of the Exchange Act because
it should facilitate fair competition between U.S. Participants and
non-U.S. participants, consistent with the public interest, and would
not prevent U.S. market participants from using other comparable
services that may be (or become) available.
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    \121\ See 15 U.S.C. 78q-1(a)(2)(A).
    \122\ See SIFMA Letter at 2.
    \123\ See Paxos Letter at 3.
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IV. Terms and Conditions of Exemption

    This order grants EB an exemption from registration as a clearing
agency under Section 17A of the Exchange Act to perform the Clearing
Agency Activities described above. The exemption is granted subject to
the conditions set forth below, which the Commission believes are
necessary and appropriate in light of the statutory requirements of
Section 17A. The Commission is including specific conditions to this
exemption designed to facilitate the establishment of a national system
for the prompt and accurate clearance and settlement of securities
transactions and the establishment of linked and coordinated facilities
for the clearance and settlement of securities transactions. In the
Modification Application, the Commission discussed the origin and
purpose of each of these conditions.\124\ The conditions are designed
to promote coordination, the safeguarding of securities and funds, and
fair competition among market participants. The conditions replace and
supersede all conditions set forth in the Existing Exemption.
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    \124\ See Modification Application Notice, supra note 5, at
61280-81.
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A. Continuation of Conditions Applicable to the U.S. Government
Securities Clearing Agency Activities

    (1) The average daily volume of eligible U.S. Government Securities
processed for U.S. Participants through EB as operator of the Euroclear
System may not exceed five percent of the total average daily dollar
value of the

aggregate volume in eligible U.S. Government Securities.
    (2) EB will provide the Commission with quarterly reports,
calculated on a twelve-month rolling basis, of: (a) The average daily
volume of transactions in eligible U.S. Government Securities for U.S.
Participants that are subject to the volume limit; and (b) the average
daily volume of transactions in eligible U.S. Government Securities for
all Euroclear System participants.

B. Condition Applicable to the U.S. Equities Clearing Agency Activities

    EB shall provide to the Commission quarterly reports, calculated on
a twelve-month rolling basis, of: (1) The average daily value of U.S.
Equity Securities that are held in Collateral Accounts at EB for U.S.
Participants and a break-down of the general types of EB collateral
agreements in respect of which such value is given as collateral; (2)
the average daily value of U.S. Equity Securities that are held in EB's
account at DTC relating to inventory management services; and (3) the
total value, and a break-down of the general types of EB collateral
agreements in respect of which such value is given as collateral, of
U.S. Equity Securities that are transferred from Collateral Accounts of
U.S. Participants at EB to other Securities Clearance Accounts at EB
(other than IMS-Linked Accounts) pursuant to a liquidation of such
collateral.

C. Operational Risk Conditions Applicable to the Clearing Agency
Activities

    (1) Prior to commencing the U.S. Equities Clearing Agency
Activities,\125\ EB shall demonstrate to the Commission that EB
maintains written policies and procedures applicable to those systems
that support or are integrally related to the Clearing Agency
Activities (the ``Systems'') that, on an ongoing basis, are reasonably
designed to:
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    \125\ In the Modification Application Notice, this condition
stated: ``EB shall demonstrate to the Commission or its designee
prior to commencing the U.S. Equities Clearing Agency Activities
that EB maintains written policies and procedures applicable to
those systems that support or are integrally related to the Clearing
Agency Activities (the ``Systems'') that, on an ongoing basis, are
reasonably designed to.'' The Commission has modified this condition
to improve clarity. In addition, here and below the Commission has
removed references to ``or its designee'' because the reference is
not necessary.
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    (a) Establish a robust operational risk-management framework
applicable to the Systems with appropriate systems, policies,
procedures, and controls to identify, monitor, and manage operational
risks;
    (b) Clearly define the roles and responsibilities of EB personnel
for addressing operational risk (e.g., identify a senior manager
responsible for compliance with the operational conditions applicable
to the Systems);
    (c) Review operational policies, procedures, and controls
applicable to the Systems;
    (d) Audit the Systems, and test the Systems periodically and at
implementation of significant changes;
    (e) Clearly define operational reliability objectives for the
Systems;
    (f) Ensure that the Systems have scalable capacity adequate to
handle increasing stress volumes and achieve the Systems service-level
objectives;
    (g) Establish comprehensive physical and information security
policies that address all potential vulnerabilities and threats to the
Systems;
    (h) Establish a business continuity plan for the Systems that
addresses events posing a significant risk of disrupting the Systems'
operations, including events that could cause a wide-scale or major
disruption in the provision of the Clearing Agency Activities;
    (i) Incorporate the use of a secondary site in EB's business
continuity plan that is designed to ensure that the Systems can resume
operations within two hours following disruptive events; and
    (j) Regularly test or otherwise validate EB's business continuity
plans; and identify, monitor, and manage the risks that key
participants, other financial market infrastructures, and service and
utility providers might pose to the Systems' operations in relation to
the Clearing Agency Activities.
    (2) For purposes of condition C.1, such policies and procedures
shall be consistent with current information technology industry
standards, which shall be comprised of information technology practices
that are widely available to information technology professionals in
the financial sector and issued by a widely recognized organization. EB
shall inform the Commission of the information technology industry
standards that EB has chosen to use, affirm that choice on an annual
basis, and provide advance notice of the use of different standards as
soon as practicable.
    (3) EB shall provide the Commission with an annual update on the
status of the items set forth in condition C.1.
    (4) EB shall establish, implement, maintain, and enforce written
policies and procedures reasonably designed to ensure that the Systems
operate on an ongoing basis in a manner that complies with the
conditions applicable to the Systems and with EB's rules and governing
documents applicable to the Clearing Agency Activities.
    (5)(a) Upon EB having a reasonable basis to conclude that a
disruption, compliance issue, or intrusion of the Systems that impacts,
or is reasonably likely to impact, the Clearing Agency Activities has
occurred (a ``Systems Event''), EB shall:
    (i) Take appropriate corrective action, which shall include, at a
minimum, devoting adequate resources to remedy the Systems Event as
soon as reasonably practical;
    (ii) Notify the Commission of such Systems Event within 24 hours
after occurrence;
    (iii) Until such time as a Systems Event is resolved and EB's
investigation of the Systems Event is closed, provide updates
pertaining to such Systems Event to the Commission on a regular basis;
    (iv) Within 48 hours after the occurrence of a Systems Event or
where EB reasonably determines that such deadline cannot be met and so
notifies the Commission, promptly thereafter, submit an interim written
notification pertaining to such Systems Event to the Commission
containing: (A) A detailed description of: The relevant discovery and
duration times, detection, root cause, and remedial actions taken or
planned regarding the Systems Event (to the extent known at report
time); EB's assessment of the entities (including types of market
participants) and EB services affected by the Systems Event; EB's
assessment of the impact of the Systems Event on the Participants; and
any other pertinent information known by the EB about the Systems
Event; and (B) a copy of any information disseminated to EB's U.S.
Participants in accordance with EB's notification practices regarding
the Systems Event;
    (v) Within ten business days after the occurrence of a Systems
Event, or where EB reasonably determines that such deadline cannot be
met and so notifies the Commission, promptly thereafter, submit a
written final report regarding the matters covered in the interim
report required under (iv) above to the Commission; and
    (vi) For Systems Events characterized as ``Bronze level'' events
(i.e., a Systems Event in which the incident is clearly understood,
almost immediately under control, involves only one business unit and/
or entity, and is resolved within a few hours), in lieu of the
reporting in (i) through (v) above, provide on a quarterly basis an
aggregated list of Bronze level events.
    (b) As used herein: (i) A ``disruption'' means an event in the
Systems that

disrupts, or significantly degrades, the normal operation of the
Systems in relation to the Clearing Agency Activities; (ii) a
``compliance issue'' means an event at EB that has caused any System to
operate in a manner that does not comply with the applicable conditions
or EB's rules and governing documents applicable to the Clearing Agency
Activities; and (iii) an ``intrusion'' means any unauthorized entry
into the Systems in relation to the Clearing Agency Activities.
    (6) EB shall, within 30 calendar days after the end of each
quarter, submit to the Commission a report describing completed,
ongoing, and planned material changes to the Systems that support or
are related to the Clearing Agency Activities during the prior,
current, and subsequent calendar quarters, including the dates or
expected dates of commencement and completion. EB shall establish
reasonable written criteria for identifying a change to the Systems as
material and report such changes in accordance with such criteria.
    (7) EB shall provide the Commission with: (a) Annually, the audited
control report made available to EB's Participants prepared in
accordance with internationally accepted standards for assurance
reports on controls at a service organization (such as the
International Standard on Assurance Engagements (ISAE) Standard No.
3402); (b) annually, copies of those portions of any annual control
report provided by EB to its primary Belgian regulator that describes
controls applicable to the Systems as used to support or in relation to
the Clearing Agency Activities; and (c) copies of agendas, reports and
presentation materials relating to the capacity, integrity, resiliency,
availability, and security or compliance of the Systems that are
provided by EB or its primary Belgian regulator to any committee of
regulators that implements the memorandum of understanding among
regulators of Euroclear Group's CSD entities that provides for the
coordinated and common oversight and supervision of the Euroclear
Group.
    (8) EB shall make, keep, and preserve at least one copy of all
documents relating to its compliance with the operational risk
conditions; keep all such documents for a period of not less than five
years, the first two years in an easily accessible place (which may be
located in the European Union); and upon request of the Commission,
promptly furnish to the possession of the Commission copies of any such
documents.

D. Additional Conditions Applicable to the Clearing Agency Activities

    (1) EB shall provide to the Commission its annual audited financial
statements prepared by competent independent audit personnel.
    (2) EB shall notify the Commission of any material changes to any
service agreement between EB and any other entity that is performing
Clearing Agency Activities on behalf of EB if such changes are
reasonably expected to materially affect the Clearing Agency
Activities.
    (3) EB will notify the Commission (a) promptly following
termination of any U.S. Participant as a participant in the Euroclear
System, (b) promptly following the liquidation by EB of any securities
collateral pledged by a U.S. Participant to EB to secure an extension
of credit made through the Euroclear System, and (c) promptly following
EB becoming aware of the institution of any proceedings to have a U.S.
Participant declared insolvent or bankrupt, and will respond to
Commission requests for information about any U.S. Participant about
whom the Commission has financial solvency concerns, including, for
example, a settlement default by a U.S. Participant.
    (4) EB shall annually provide to the Commission a report
describing: (a) Material changes to the representations made by EB in
support of the approval of this Order that would not otherwise require
amendment of EB's application for exemption on Form CA-1 in accordance
with these conditions; (b) the functioning of EB's policies and
procedures for monitoring its own compliance with the conditions of
this order regarding the Clearing Agency Activities (and the compliance
of any affiliated or third-party service provider referred to in
condition D.2); and (c) the management by EB of any conflicts of
interest of such affiliated or third-party service provider that EB
becomes aware have arisen since the prior report with respect to the
performance of the Clearing Agency Activities.
    (5) EB shall keep records relating to the Clearing Agency
Activities regarding settlement details, account details, service
agreements, and service notices sent to U.S. Participants pertaining to
the operation of the Clearing Agency Activities, retain such records
for a period of not less than five years, the first two years in an
easily accessible place (which may be located in the European Union),
and upon request of any representative of the Commission promptly
furnish, or require its service providers to furnish, copies thereof to
the possession of such representative.\126\
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    \126\ The Commission has modified this condition to clarify
that, upon request of any representative of the Commission, EB shall
promptly furnish, or require its service providers to promptly
furnish, copies of the records described in the condition to the
possession of such representative.
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    (6) EB shall respond to and require its service providers to
respond to a request from the Commission for additional information
relating to the Clearing Agency Activities and provide access to the
Commission to conduct on-site inspections of all facilities (including
automated systems and systems environment), records, and personnel
related to the Clearing Agency Activities. The request for information
shall be made and the inspections shall be conducted solely for the
purpose of reviewing the Clearing Agency Activities' operations and
compliance with the federal securities laws and the terms and
conditions in any order exempting EB from registration as a clearing
agency with regard to the Clearing Agency Activities.
    (7) EB shall file with the Commission amendments to its application
for exemption on Form CA-1 if it makes any material change to the
Clearing Agency Activities or any change materially affecting the
Clearing Agency Activities as summarized in the relevant exemption
order, EB's amended Form CA-1 or in any subsequently filed amendments
to its Form CA-1 that would make such previously provided information
incomplete or inaccurate.

E. Modifications to Exemption

    EB is required to file with the Commission amendments to its
application for exemption on Form CA-1 if it makes any material change
affecting the Clearing Agency Activities--as summarized in this order,
in its application on Form CA-1 dated May 9, 2016, or in any
subsequently filed amendments to its application on Form CA-1--that
would make such previously provided information incomplete or
inaccurate.
    In addition, the Commission may modify by order the terms, scope,
or conditions of EB's exemption from registration as a clearing agency
if it determines that such modification is necessary or appropriate in
the public interest, the protection of investors, or otherwise in
furtherance of the purposes of the Exchange Act. Furthermore, the
Commission may limit, suspend, or revoke this exemption if it finds
that EB has violated or is unable to comply with any of the provisions
set forth in this order if such action is necessary or appropriate in
the public interest, for

the protection of investors, or otherwise in furtherance of the
purposes of the Exchange Act.

V. Conclusion

    The Commission believes that the Modification Application
demonstrates that EB will have sufficient operational capabilities to
facilitate prompt and accurate collateral management services and to
support the establishment of linked and coordinated facilities for the
settlement of obligations under its collateral management services in
support of securities transactions. The Commission also notes that EB's
exemption will be subject to conditions that are designed to enable the
Commission to monitor EB's operational capacity and safeguards,
corporate structure, and ability to operate in a manner to further the
purposes of Section 17A of the Exchange Act. Further, the conditions
include a robust set of reporting requirements that will allow the
Commission to monitor the growth and development of EB's exempted
clearing agency activities so that the Commission will be well
positioned to evaluate whether and when any modifications to the terms
and conditions set forth above are necessary. Therefore, for the
reasons discussed throughout this order, the Commission finds that the
Modification Application is consistent with the public interest, the
protection of investors, and the purposes of Section 17A of the
Exchange Act.
    It is hereby ordered, pursuant to Section 17A(b)(1) of the Exchange
Act, that the application for a modification of EB's exemption from
registration as a clearing agency under Section 17A(b)(1) of the
Exchange Act filed by EB on May 9, 2016 (File No. 601-01) be, and
hereby is, approved within the scope described in this order and
subject to the terms and conditions contained in this order.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-30853 Filed 12-21-16; 8:45 am]
 BILLING CODE 8011-01-P