Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Advance Notice To Establish the Securities Financing Transaction Clearing Service and Make Other Changes
Citation: "87 FR 23328"
Document Number: "Release No. 34-94695; File No. SR-
Page Number: "23328"
"Notices"
Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act entitled the Payment, Clearing, and Settlement Supervision Act of 2010 ("Clearing Supervision Act") /1/ and Rule 19b-4(n)(1)(i) under the Securities Exchange Act of 1934 ("Act"), /2/ notice is hereby given that on
FOOTNOTE 1 12 U.S.C. 5465(e)(1). END FOOTNOTE
FOOTNOTE 2 17 CFR 240.19b-4(n)(1)(i). END FOOTNOTE
FOOTNOTE 3
I. Clearing Agency's Statement of the Terms of Substance of the Advance Notice
This advance notice consists of proposed modifications to the NSCC Rules & Procedures ("Rules") /4/ that would (i) establish new membership categories and requirements for sponsoring members and sponsored members whereby existing Members would be permitted to sponsor certain institutional firms into membership, (ii) establish a new membership category and requirements for agent clearing members whereby existing Members would be permitted to submit, on behalf of their customers, transactions to
FOOTNOTE 4 Capitalized terms not defined herein are defined in the Rules, available at https://www.dtcc.com/~/media/Files/Downloads/legal/rules/nscc_rules.pdf. END FOOTNOTE
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Advance Notice
In its filing with the Commission, the clearing agency included statements concerning the purpose of and basis for the advance notice and discussed any comments it received on the advance notice. The text of these statements may be examined at the places specified in Item IV below. The clearing agency has prepared summaries, set forth in sections A and B below, of the most significant aspects of such statements.
(A)
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
(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing Supervision Act
Nature of the Proposed Change
The purpose of this proposed rule change is to (i) establish new membership categories and requirements for sponsoring members and sponsored members whereby existing Members would be permitted to sponsor certain institutional firms into membership, (ii) establish a new membership category and requirements for agent clearing members whereby existing Members would be permitted to submit, on behalf of their customers, transactions to
(i) Background
SFTs involve the owner of securities (typically a registered investment company, pension plan, sovereign wealth fund or other institutional firm) transferring those securities temporarily to a borrower (typically a hedge fund). SFTs are often facilitated and intermediated by broker-dealers and agent lenders (i.e., custodial banks or other institutions that lend out securities as agent on behalf of institutional firms). In return for the lent securities, the borrower transfers collateral, and a net rate payment is typically transferred to either the lender or the borrower that reflects the liquidity of the lent securities, as well as interest on any cash collateral. /5/
FOOTNOTE 5 This rate payment is typically calculated in a manner similar to interest on the principal balance of a loan and accrues on a daily basis. As a result, the rate payment is typically calculated as the product of a specified balance (typically the amount of cash collateral unless the collateral consists of securities) and a specified rate (reflecting both the liquidity of the securities and the ability of the lender to re-use the cash collateral), divided by 360 or a similar day count fraction. END FOOTNOTE
Capital Efficiency Opportunities
The Basel III /6/ capital and leverage requirements, as implemented by the
FOOTNOTE 6 Basel III is an internationally agreed set of measures developed by the
FOOTNOTE 7 See, e.g., 12 CFR part 3 (Office of the Comptroller of the Currency--
For example,
FOOTNOTE 8 See 12 CFR 217.10(c)(4)(ii)(E)-(F). END FOOTNOTE
In addition, under Basel III, bank holding companies that have broker-dealer subsidiary borrowers are required to reserve capital against their exposures to institutional firm lenders of securities in relation to the cash collateral posted by such borrowers. Those capital requirements can vary depending on the credit profile of the institutional firm lender, and generally are well in excess of those applied to exposures to qualifying central counterparties, such as
FOOTNOTE 9 See 12 CFR 217.32 and 217.37 generally. END FOOTNOTE
FOOTNOTE 10 See 12 CFR 217.35(c)(3). END FOOTNOTE
Moreover, agent lending banks and bank holding company parents of broker-dealer borrowers that participate in central clearing could receive beneficial treatment under the single counterparty credit limits, which exempt exposures to qualifying central counterparties. /11/
FOOTNOTE 11 See 12 CFR 252.77(a)(3). END FOOTNOTE
In light of the potential for central clearing to alleviate the aforementioned capital constraints otherwise applicable to bilateral SFTs,
FOOTNOTE 12 Members should discuss this matter with their accounting and regulatory capital experts. END FOOTNOTE
Fire Sale Risk Mitigation
In addition to creating capital efficiency opportunities for market participants,
In the case of securities lending transactions, the primary risk of fire sales /13/ relates to the reinvestment of cash collateral by institutional firms that are the lenders in securities lending transactions. Those institutional firms will typically reinvest the cash collateral they receive from the borrower into other securities. If the borrower of the securities thereafter defaults, the institutional firm lenders generally need to quickly liquidate the securities representing the reinvestment in order to raise cash to purchase the originally lent security. A substantial number of disconnected and competing liquidations by multiple lenders can create fire sale conditions for the securities being liquidated, which can harm not only the institutional firm lenders by potentially lowering the amount of cash they can raise in the sale of such securities, but also create market losses for all holders of such securities. /14/
FOOTNOTE 13 Fire sale risk is the risk of rapid sales of assets in large amounts that temporarily depress market prices of such assets and create financial instability. END FOOTNOTE
FOOTNOTE 14 See Financial Stability Board, Strengthening Oversight and Regulation of Shadow Banking: Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos, at 5 (
Moreover, if an institutional firm lender should default and fail to return the cash collateral back to its borrowers, the borrowers would typically be looking to liquidate the borrowed securities in order to make themselves whole for the cash collateral they delivered to the institutional firm lender. Competing and disconnected sales of such securities could similarly create fire sale conditions and not only harm the borrowers to the extent the value of the securities decline, but also create market losses for all holders of the borrowed securities.
Liquidity Drain Risk Mitigation
Liquidity risk may also arise if, in the context of a stressed market scenario, borrowers or lenders concerned about their counterparties' creditworthiness seek to unwind their securities lending transactions and obtain the return of their cash collateral or securities. This occurred to a certain extent in 2008, when borrowers began demanding to return borrowed securities in exchange for the cash collateral the borrowers had posted to institutional firm lenders. /15/ These "runs" may require institutional firm lenders to quickly sell off securities that are the subject of their cash reinvestments to raise cash to return to the borrowers, thereby also creating potential fire sale conditions with respect to the reinvestment securities, as described above. Similarly, borrowers may need to purchase or re-borrow securities in stressed market conditions, leading to potentially significant losses.
FOOTNOTE 15 See, e.g.,id. END FOOTNOTE
Addition of New Membership Categories for Institutional Firm SFT Activity
When evaluating the opportunity to expand its cleared offerings to SFTs,
There was a considerable amount of discussion between
FOOTNOTE 16 See Rule 3A (Sponsoring Members and Sponsored Members) of the FICC GSD Rulebook ("GSD Rules"), available at https://dtcc.com/~media/Files/Downloads/legal/rules/ficc_gov_rules.pdf. END FOOTNOTE
FOOTNOTE 17 FICC's Sponsoring Member/Sponsored Member Program also allows sponsoring members to submit to FICC transactions entered into between a sponsored member and a third-party netting member. However, based on feedback from market participants,
FOOTNOTE 18 In addition, certain other agent lenders who are not themselves banks or broker-dealers (and so are not eligible to become Members of
FOOTNOTE 19 See Securities Exchange Act Release Nos. 80563 (
FOOTNOTE 20
The proposed SFT Clearing Service would also allow for the submission of broker-to-broker activity as well as client-to-client activity (credit intermediated by Sponsoring Members and/or Agent Clearing Members) into the
(ii) Key Parameters of the Proposed SFT Clearing Service
Overnight SFTs
For example, assume that a Transferor (as defined below and in the proposed rule change) and Transferee (as defined below and in the proposed rule change) enter into an SFT pursuant to which: (i) In the Initial Settlement (as defined below and in the proposed rule change) on Monday, the Transferor will transfer 100 shares of security X to the Transferee against
SFT Counterparties
The proposed SFT Clearing Service would only be available for SFTs entered into between (i) a Member and another Member, (ii) a Sponsoring Member and its Sponsored Member (as defined below and in the proposed rule change), and (iii) an Agent Clearing Member acting on behalf of a Customer and either (x) a Member or (y) the same or another Agent Clearing Member acting on behalf of a Customer. As used in the Rules, "Member" includes full-service
FOOTNOTE 21 As defined in Rule 1 (Definitions and Descriptions), the term "Member" means any Person specified in Section 2.(i) of Rule 2 who has qualified pursuant to the provisions of Rule 2A. As such, the term "Member" does not include a Sponsored Member. Supra note 4. END FOOTNOTE
FOOTNOTE 22 See Section 5 of proposed Rule 56, which provides that a Sponsoring Member shall be permitted to submit to NSCC SFTs between itself and its Sponsored Members. END FOOTNOTE
Approved SFT Submitters
Consistent with the manner in which
Eligible
In light of the fact that central clearing of SFTs would be a new service for
This proposed share price limitation would be implemented systemically by
FOOTNOTE 23 The per share price limitation could be modified by
Cash Collateral
Consistent with the cash market transactions
FOOTNOTE 24 This is referred to as "SFT Cash" in the proposed rule text. END FOOTNOTE
FOOTNOTE 25 See Section 5(a) of proposed Rule 56 and the definition of "Securities Financing Transaction". END FOOTNOTE
As described above, each SFT would be collateralized by cash equal to no less than 100% of the market value of the lent securities. In addition, in order to address regulatory and investment guideline requirements applicable to certain institutional firms, /26/ a Member would be permitted (but not required) to transfer an additional cash haircut above 100% (e.g., 102%) to such institutional firms, i.e., Independent Amount SFT Cash (as defined below and in the proposed rule change), as part of the Initial Settlement of the SFT. The Sponsoring Member or Agent Clearing Member, as applicable, that receives the Independent Amount SFT Cash in the Initial Settlement would also receive a commensurate
FOOTNOTE 26 As an example, a registered investment company that lends securities through an agent may be required under Section 17(f) of the Investment Company Act of 1940 and Rule 17f-2 thereunder to collect cash collateral equal to no less than 102% of the market value of the lent securities. See, e.g.,
RVP/DVP Settlement at DTC
The Final Settlement obligations of each SFT, other than a Sponsored Member Transaction, that is novated to
FOOTNOTE 27 As described below, the Final Settlement and other obligations of each Sponsored Member Transaction would, at the direction of
FOOTNOTE 28 On
Pre-novation counterparties to an SFT that is due to settle may elect to pair off (i.e., offset) the Final Settlement obligations of such SFT against the Initial Settlement obligations of a new SFT between the same parties on the same securities.
Settlement of the Rate Payment obligations and payment obligations arising from certain mandatory corporate actions and cash dividends would be processed as part of
As an example of an SFT with a full pair off (i.e., offset), assume that a Transferor and Transferee enter into an SFT pursuant to which: (i) In the Initial Settlement on Monday, the Transferor will transfer 100 shares of security X to the Transferee against
As an example of an SFT with a partial pair off (i.e., offset), assume that a Transferor and Transferee enter into an SFT pursuant to which: (i) In the Initial Settlement on Monday, the Transferor will transfer 100 shares of security X to the Transferee against
Buy-In, Recall and Accelerated Settlement
It is occasionally the case in the securities lending market that a borrower is solvent and able to satisfy its general obligations as they become due but unable to deliver the lent securities to the lender within the timeline requested by the lender. The contractual remedy that has developed in the bilateral securities lending market for these situations is a "buy-in." Under this remedy, the lender may purchase securities equivalent to the borrowed securities in the market and charge the borrower for the cost of this purchase. This serves to benefit the lender because it allows the lender to recover the securities within its required timeline, and it benefits the borrower by avoiding a situation in which the borrower's failure to perform under a single transaction results in an event of default and close-out of all of its securities lending transactions (and potentially other positions through a cross-default). Similarly, in the bilateral space, securities borrowers may have the need to accelerate settlement of securities lending transactions if they lose a "permitted purpose" for such loans under Regulation T. The proposed SFT Clearing Service would seek to retain the buy-in and acceleration mechanisms, as they ensure the smooth functioning of securities markets without causing unnecessary and disorderly defaults or regulatory violations. /29/
FOOTNOTE 29
Consistent with their rights under industry-standard documentation for bilateral SFTs, as proposed, Transferors would have the right to submit a Recall Notice (as defined below and in the proposed rule change) to
For example, assume that a Transferor and Transferee enter into an SFT pursuant to which: (i) In the Initial Settlement on Monday, the Transferor will transfer 100 shares of security X to the Transferee against
Later in the day on Tuesday, the Transferor determines it now needs 100 shares of security X back in its inventory, and so the Approved SFT Submitter submits a Recall Notice to
Assume further that the Transferee does not transfer the 100 shares of security X on Wednesday and that the end of day price of security X on Wednesday is
Similarly, consistent with their rights under industry-standard documentation for bilateral SFTs, Transferees would have the right to accelerate the scheduled Final Settlement of a novated SFT through notice from the Approved SFT Submitter to
For example, assume that a Transferor and Transferee enter into an SFT pursuant to which: (i) In the Initial Settlement on Monday, the Transferor will transfer 100 shares of security X to the Transferee against
Risk Management of SFT Positions
Under the proposal,
FOOTNOTE 30 As currently defined in Rule 1 (Definitions and Descriptions), the term "Clearing Fund" means the fund created pursuant to Rule 4. Supra note 4. END FOOTNOTE
FOOTNOTE 31
FOOTNOTE 32 This
For the purpose of applying Section I.(A)(1)(a)(i) of Procedure XV (Value-at-Risk (VaR) charge), unlike the current calculation of the volatility of a Member's Net Unsettled Positions /33/ in CNS Transactions,
FOOTNOTE 33 "Net Unsettled Positions" means a Member's net of unsettled
In addition,
Consistent with the manner in which clearing fund requirements are satisfied by members of FICC for their cleared securities financing transactions,
FOOTNOTE 34 This
FOOTNOTE 35 These requirements are designed to be consistent with FICC GSD's clearing fund requirements of its members given that
The Sponsoring Member Required Fund Deposits (as defined below and in the proposed rule change) and Agent Clearing Member Required Fund Deposits (as defined below and in the proposed rule change) would each be calculated on a gross basis, and no offsets for netting of positions as between different Sponsored Members or different Customers, /36/ as applicable, would be permitted. This is to ensure that
FOOTNOTE 36 See Section 7(c) of proposed Rule 2C and Section 6(c) of proposed 2D. END FOOTNOTE
As proposed and as described above, the Final Settlement obligations and Price Differential of each SFT, other than a Sponsored Member Transaction, that is novated to
FOOTNOTE 37 Supra note 27. END FOOTNOTE
To the extent the Price Differential is not processed by DTC, for example if a receiver does not satisfy DTC's risk controls,
In the event
Until
FOOTNOTE 38 See proposed Rule 56, Section 14(b)(ix). END FOOTNOTE
FOOTNOTE 39 See Securities Exchange Act Release Nos. 82377 (
FOOTNOTE 40 For example, assume that a Transferor and Transferee enter into an SFT pursuant to which: (i) In the Initial Settlement on Monday, the Transferor will transfer 100 shares of security X to the Transferee against
On Tuesday,
Pursuant to Section 14(b)(viii) of proposed Rule 56 (Securities Financing Transaction Clearing Service),
Assume further that the end-of-day price of security X on Tuesday is
On Thursday,
NSCC would incur a net loss of
(iii) Sponsoring Members and Sponsored Members
Sponsoring Members
Under the proposal, all Members would be eligible to apply to become Sponsoring Members in
FOOTNOTE 41 If a Member is a Registered Broker-Dealer, then such Member would only be eligible to apply to become a Sponsoring Member if it satisfies the credit criteria in proposed Rule 2C (Sponsoring Members and Sponsored Members) (i.e., if it has (i)
In addition,
Furthermore, as proposed, the application of a Member to be a Sponsoring Member at
Consistent with the requirements applicable to sponsoring members in FICC's Sponsoring Member/Sponsored Member Program for the reasons described above in Item II(B)(iii) "Sponsoring Members and Sponsored Members," a Sponsoring Member would be responsible for (i) submitting data on its Sponsored Members' SFTs to
Specifically, as proposed, a Sponsoring Member would be permitted to submit to
The Sponsoring Member would establish one or more accounts at
Sponsoring Members would be responsible for providing
In addition, a Sponsoring Member would be responsible for posting to
FOOTNOTE 42 The following example illustrates how loss allocation would occur with respect to Sponsoring Members and Sponsored Members: Assume NSCC incurs a
As proposed, consistent with FICC's Sponsoring Member/Sponsored Member Program for the reasons described above in Item II(B)(iii) "Sponsoring Members and Sponsored Members,"
FOOTNOTE 43 See Section 14 of proposed Rule 2C (Sponsoring Members and Sponsored Members). END FOOTNOTE
Sponsored Members
Consistent with the requirements applicable to sponsored members in FICC's Sponsoring Member/Sponsored Member Program for the reasons described above in Item II(B)(iii) "Sponsoring Members and Sponsored Members," any Person that has been approved by
FOOTNOTE 44 17 CFR 230.144A. END FOOTNOTE
FOOTNOTE 45 15 U.S.C. 77a et seq. END FOOTNOTE
(iv) Agent Clearing Members and Customers
All Members would be eligible to apply to become Agent Clearing Members in
FOOTNOTE 46 If a Member is a Registered Broker-Dealer, then such Member would only be eligible to apply to become an Agent Clearing Member if it satisfies the credit criteria in proposed Rule 2D (i.e., if it has (i)
In addition,
Furthermore, as proposed, the application of a Member to be an Agent Clearing Member at
Under the proposal, the requirements to be imposed on Agent Clearing Members would largely mirror those imposed on Sponsoring Members. However,
Specifically, as proposed, an Agent Clearing Member would be permitted to submit to
The Agent Clearing Member would establish one or more accounts at
In addition, as proposed under the sponsoring/sponsored membership model, the Agent Clearing Member would be responsible for posting to
FOOTNOTE 47 The following example illustrates how loss allocation would occur with respect to Agent Clearing Members: Assume NSCC incurs a
As proposed,
FOOTNOTE 48 See Section 11 of proposed Rule 2D (Agent Clearing Members). END FOOTNOTE
(v) Sponsoring Member/Sponsored Member vs. Agent Clearing Member/Customers
The direct costs of central clearing (i.e.,
FOOTNOTE 49 Supra note 12. END FOOTNOTE
However, the sponsoring/sponsored membership model allows for principal-style trading between a Sponsoring Member and its Sponsored Member where the Sponsoring Member and Sponsored Member are pre-novation counterparties, which would generally create the opportunity for a Sponsoring Member to make an economic spread between its trade with its Sponsored Member and its offsetting trades with other NSCC Members or Sponsored Members. The opportunity for such economic spread and the ability of a Sponsoring Member to achieve balance sheet netting and capital efficiency on such trading activity through the novation of SFTs to
On the other hand, as
From the perspective of an institutional firm client, the costs of clearing that may be passed through to it by its intermediary (depending on their commercial arrangements) would be largely equivalent. That said, some institutional firms that engage in securities lending may be prohibited from acting as Sponsored Members and engaging in principal-style trading with their intermediary in clearing for regulatory and/or investment guideline reasons. For those institutional firms, being able to transact SFTs as a Customer within an Agent Clearing Member Customer Omnibus Account would offer them a means to access central clearing that would otherwise not be available to them if the sponsoring/sponsored membership model were the only model available for buy-side clearing.
(vi) Proposed Rule Changes
(A) Proposed Rule 2C--Sponsoring Members and Sponsored Members
Proposed Rule 2C, Section 1 (General)
Section 1 of proposed Rule 2C would be a general provision regarding the Rules applicable to Sponsoring Members and Sponsored Members.
Section 1 of proposed Rule 2C would provide that
Section 1 of proposed Rule 2C would also provide that a Sponsoring Member shall continue to have all of the rights, liabilities and obligations as set forth in the Rules and in any agreement between it and
Proposed Rule 2C, Section 2 (Qualifications of Sponsoring Members, the Application Process and Continuance Standards)
Section 2 of proposed Rule 2C would establish the eligibility requirements for Members that wish to become Sponsoring Members, the membership application process that would be required of each Member to become a Sponsoring Member, the on-going membership requirements that would apply to Sponsoring Members, as well as the requirements regarding a Sponsoring Member's election to voluntarily terminate its membership.
Under Section 2(a) of proposed Rule 2C, any Member would be eligible to apply to become a Sponsoring Member; however, if a Member is a Registered Broker-Dealer, such Member would only be permitted to apply to become a Sponsoring Member if it has (1)
FOOTNOTE 50
FOOTNOTE 51 17 CFR 240.15c3-1d. END FOOTNOTE
Section 2(b) of proposed Rule 2C would provide that each Member applicant to become a Sponsoring Member would be required to provide an application and other information requested by
FOOTNOTE 52 It is
Under Section 2(c) of proposed Rule 2C, if the Sponsoring Member application is denied, such denial would be handled in accordance with Section 1 of Rule 2A (Initial Membership Requirements).
As proposed in Section 2(d) of proposed Rule 2C,
FOOTNOTE 53 If the increased financial requirements are imposed in connection with a Sponsoring Member application that does not require the Board of Directors' approval, the increased financial requirements would not be subject to the Board of Directors' approval. Nonetheless, once a Sponsoring Member application is approved with increased financial requirements,
In addition, under Section 2(e) of proposed Rule 2C,
FOOTNOTE 54 As an example,
Section 2(f) of proposed Rule 2C would provide that each Member whose Sponsoring Member application is approved would sign and deliver to
Section 2(g) of proposed Rule 2C would provide that each Sponsoring Member shall submit to
Section 2(h) of proposed Rule 2C would provide that a Sponsoring Member's books and records, insofar as they relate to the Sponsored Member Transactions submitted to
Section 2(i) of proposed Rule 2C would provide that a Sponsoring Member shall promptly inform
FOOTNOTE 55 See Addendum P (Fine Schedule), supra note 4. END FOOTNOTE
Section 2(j) of proposed Rule 2C would provide that in the event that a Sponsoring Member fails to remain in compliance with the relevant requirements of the Rules, the Sponsoring Member Agreement or the Sponsoring Member Guaranty,
Section 2(k) of proposed Rule 2C would provide that if the sum of the Volatility Charges applicable to a Sponsoring Member's Sponsored Member Sub-Accounts and its other accounts at
FOOTNOTE 56
FOOTNOTE 57 17 CFR 240.15c3-1(c)(2). END FOOTNOTE
Section 2(l) of proposed Rule 2C would provide that a Sponsoring Member may voluntarily elect to terminate its status as a Sponsoring Member, with respect to all Sponsored Members or with respect to one or more Sponsored Members from time to time, by providing
Section 2(l) of proposed Rule 2C would also provide that such termination would not be effective until accepted by
Section 2(m) of proposed Rule 2C would provide that a Sponsoring Member's voluntary termination of its status as such, in whole or in part, shall not affect its obligations to
Section 2(n) of proposed Rule 2C would provide that any non-public information furnished to
FOOTNOTE 58 Section 2(n) of proposed Rule 2C is designed to be consistent with provisions in the Rules relating to the confidentiality of information furnished by participants. See Rule 2A (Initial Membership Requirements), supra note 4. END FOOTNOTE
Proposed Rule 2C, Section 3 (Qualifications of Sponsored Members, Approval Process and Continuance Standards)
Section 3 of proposed Rule 2C would establish the eligibility requirements for Sponsored Members, the membership application process that would be required of each Sponsored Member, the on-going membership requirements that would apply to Sponsored Members, as well as the requirements regarding a Sponsored Member's election to voluntarily terminate its membership.
Section 3(a) of proposed Rule 2C would provide that a Person shall be eligible to apply to become a Sponsored Member if: (x) It is sponsored into membership by a Sponsoring Member, and (y) it (1) is a "qualified institutional buyer" as defined by Rule 144A /59/ under the Securities Act, /60/ or (2) is 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.
FOOTNOTE 59 17 CFR 230.144A. END FOOTNOTE
FOOTNOTE 60 15 U.S.C. 77a et seq. END FOOTNOTE
Section 3(b) of proposed Rule 2C would provide that each time that a Sponsoring Member wishes to sponsor a Person into membership, it shall provide
Section 3(c) of proposed Rule 2C would provide that each Person to become a Sponsored Member shall sign and deliver to
Section 3(d) of proposed Rule 2C would provide that a Sponsored Member shall immediately inform its Sponsoring Member, both orally and in writing, if the Sponsored Member is no longer in compliance with the requirements of Section 3(a) of proposed Rule 2C. A Sponsoring Member shall promptly inform
FOOTNOTE 61 See Addendum P (Fine Schedule), supra note 4. END FOOTNOTE
Section 3(e) of proposed Rule 2C would provide that a Sponsored Member may voluntarily elect to terminate its membership by providing
In addition, Section 3(e) of proposed Rule 2C would provide that such termination would not be effective until accepted by
Section 3(f) of proposed Rule 2C would provide that a Sponsored Member's voluntary termination shall not affect its obligations to
Proposed Rule 2C, Section 4 (Compliance With Laws)
Section 4 of proposed Rule 2C would provide that each Sponsoring Member and Sponsored Member shall comply in all material respects with all applicable laws, including applicable laws relating to securities, taxation and money laundering, as well as global sanctions laws, in connection with the use of
Proposed Rule 2C, Section 5 (Sponsored Member Transactions)
Section 5 of proposed Rule 2C would provide that a Sponsoring Member shall be permitted to submit to NSCC SFTs between itself and its Sponsored Members ("Sponsored Member Transactions") in accordance with proposed Rule 56, as described below. Section 5 of proposed Rule 2C would further provide that
Proposed Rule 2C, Section 6 (Sponsoring Member Agent Obligations)
Section 6 of proposed Rule 2C would provide that a Sponsored Member shall appoint its Sponsoring Member to act as agent with respect to the Sponsored Member's satisfaction of its settlement obligations arising under Sponsored Member Transactions between the Sponsored Member and the Sponsoring Member and for performing all functions and receiving reports and information set forth in the Rules.
Proposed Rule 2C, Section 7 (Clearing Fund Obligations)
Section 7 of proposed Rule 2C would set forth the
Section 7(a) of proposed Rule 2C would provide that
Under Section 7(a), each Sponsoring Member, so long as such Member is a Sponsoring Member, shall also provide SLD to the
Section 7(a) would also propose that deposits to the
Section 7(b) of proposed Rule 2C would provide that, in the ordinary course, for purposes of satisfying the Sponsoring Member's
FOOTNOTE 62
NSCC believes this is appropriate because the
Section 7(c) of proposed Rule 2C would provide that the Sponsoring Member Required Fund Deposit for each Sponsored Member Sub-Account shall be calculated separately based on the Sponsored Member Transactions in such Sponsored Member Sub-Account, and the Sponsoring Member shall, as principal, be required to satisfy the Sponsoring Member Required Fund Deposit for each of the Sponsoring Member's Sponsored Member Sub-Accounts.
Section 7(d) of proposed Rule 2C would provide that Sections 1, 2, 4, 5, 6, 7, 8, 9, 10, 11 and 12 of Rule 4 (
Section 7(e) of proposed Rule 2C would provide that a Sponsoring Member shall be subject to such fines as may be imposed in accordance with the Rules for any late satisfaction of a
Proposed Rule 2C, Section 8 (Right of Offset)
Section 8 of proposed Rule 2C would provide that in the ordinary course, with respect to satisfaction of any Sponsored Member's obligations under the Rules, the Sponsoring Member's Sponsored Member Sub-Accounts, the Sponsoring Member's proprietary accounts, and the Sponsoring Member's Agent Clearing Member Customer Omnibus Accounts, if any, at
FOOTNOTE 63
Proposed Rule 2C, Section 9 (Loss Allocation Obligations)
Section 9 of proposed Rule 2C would establish loss allocation obligations under the sponsored membership model.
Section 9(a) of proposed Rule 2C would provide that Sponsored Members shall not be obligated for allocations, pursuant to Rule 4 (
Section 9(b) of proposed Rule 2C would provide that, to the extent
Section 9(c) of proposed Rule 2C would provide that the entire amount of the Required Fund Deposit associated with the Sponsoring Member's proprietary accounts at
Proposed Rule 2C, Section 10 (Restrictions on Access to Services by a Sponsoring Member)
Section 10 of proposed Rule 2C would establish the rights of
Section 10(a) of proposed Rule 2C would provide that the Board of Directors may at any time, upon
Section 10(b) of proposed Rule 2C would provide that Rule 46 shall apply with respect to a Sponsoring Member in the same way as it applies to Members, including the Board of Directors' right to summarily suspend the Sponsoring Member and to cease to act for such Sponsoring Member. As under Rule 46, the Board of Directors would need to make the determination of whether to suspend, prohibit or limit a Sponsoring Member's access to services offered by
Section 10(c) of proposed Rule 2C would provide that if
This is different from how
Proposed Rule 2C, Section 11 (Restrictions on Access to Services by a Sponsored Member)
Section 11 of proposed Rule 2C would establish the rights of
Section 11(a) of proposed Rule 2C would provide that the Board of Directors may at any time upon
Section 11(b) of proposed Rule 2C would provide that Rule 46 shall apply with respect to a Sponsored Member in the same way as it applies to Members, including the Board of Directors' right to summarily suspend a Sponsored Member and to cease to act for such Sponsored Member. As under Rule 46, the Board of Directors would need to make the determination of whether to suspend, prohibit or limit a Sponsored Member's access to services offered by
Section 11(c) of proposed Rule 2C would provide that if
Section 11(d) of proposed Rule 2C would provide that
Proposed Rule 2C, Section 12 (Insolvency of a Sponsoring Member)
Section 12(a) of proposed Rule 2C would provide that a Sponsoring Member shall be obligated to immediately notify
Section 12(b) of proposed Rule 2C would provide that in the event that
Proposed Rule 2C, Section 13 (Insolvency of a Sponsored Member)
Section 13 of proposed Rule 2C would establish
Section 13(a) of proposed Rule 2C would provide that a Sponsored Member and its Sponsoring Member (to the extent it has knowledge thereof) shall be obligated to immediately notify
Section 13(b) of proposed Rule 2C would provide that in the event that
Proposed Rule 2C, Section 14 (Liquidation of Sponsored Member and Related Sponsoring Member Positions)
Section 14 of proposed Rule 2C would provide a mechanism by which a Sponsoring Member may cause the termination and liquidation of a Sponsored Member's positions arising from Sponsored Member Transactions between the Sponsoring Member and its Sponsored Member that have been novated to
Section 14(a) of proposed Rule 2C would specify the scope of positions to which Section 14 of proposed Rule 2C applies. It would state that Section 14 only applies with respect to the liquidation of positions resulting from Sponsored Member Transactions that have been novated to
Section 14(a) of proposed Rule 2C would further state that such section would only apply if (i) a Sponsoring Member is a Defaulting Member and
Section 14(b) of proposed Rule 2C would set out the process by which a Sponsoring Member or
FOOTNOTE 64 It bears noting in this regard that termination of the Sponsored Member's positions would not be the exclusive mechanism by which a Sponsoring Member may limit its credit risk. As described above, under Section 2(m) of proposed Rule 2C, a Sponsoring Member may voluntarily elect to terminate its status as a Sponsoring Member in respect of one or more Sponsored Members. Such a termination would not affect the settlement of the Sponsored Member's existing positions but would restrict the ability of the Sponsored Member to have its future trades accepted for novation by
The notice submitted by a Sponsoring Member to
Section 14(b) of proposed Rule 2C would also provide that the termination of the Sponsored Member's positions (and the Sponsoring Member's corresponding positions) would be effected by the Sponsoring Member's establishment of a final net settlement position for each eligible security with a distinct CUSIP number ("Final Net Settlement Position").
Section 14(c) of proposed Rule 2C would specify how the Final Net Settlement Positions established pursuant to Section 14(b) of proposed Rule 2C would be liquidated (i.e., how such positions would be converted into an amount payable). It would also provide how the amount payable arising from the liquidation of the Final Net Settlement Positions would be discharged.
Specifically, Section 14(c) of proposed Rule 2C would first provide that the Sponsoring Member would liquidate the Final Net Settlement Positions established pursuant to Section 14(b) of proposed Rule 2C by establishing (i) a single liquidation amount in respect of the Sponsored Member's Final Net Settlement Positions (a "Sponsored Member Liquidation Amount") and (ii) a single liquidation amount in respect of the Sponsoring Member's Final Net Settlement Positions (a "Sponsoring Member Liquidation Amount"). The Sponsored Member Liquidation Amount would be owed either by
Because the Final Net Settlement Positions of the Sponsoring Member would be identical to, but in the opposite direction of, the Final Net Settlement Positions of the Sponsored Member, the Sponsored Member Liquidation Amount would equal the Sponsoring Member Liquidation Amount. Therefore, if
Section 14(c) of proposed Rule 2C would also provide how the Sponsoring Member may calculate the Sponsoring Member Liquidation Amount. It would state that the Sponsoring Member may calculate the Sponsoring Member Liquidation Amount based on prevailing market prices of the relevant securities and/or the gains realized and losses incurred by the Sponsoring Member in hedging its risk associated with the liquidation of the Sponsoring Member's Final Net Settlement Positions. Section 14(c) of proposed Rule 2C would further clarify that such Sponsoring Member Liquidation Amount may also take into account any losses and expenses incurred by the Sponsoring Member in connection with the liquidation of the positions.
Section 14(c) of proposed Rule 2C would further provide that, if a Sponsored Member Liquidation Amount is due to
If a Sponsored Member Liquidation Amount were owed by
Section 14(d) of proposed Rule 2C would provide for the Sponsoring Member to indemnify
Section 14(e) of proposed Rule 2C would provide that
(B) Proposed Rule 2D--Agent Clearing Members
Proposed Rule 2D, Section 1 (General)
Section 1 of proposed Rule 2D would be a general provision regarding the Rules applicable to Agent Clearing Members.
Section 1 of proposed Rule 2D would provide that
Section 1 of proposed Rule 2D would also provide that an Agent Clearing Member shall continue to have all of the rights, liabilities and obligations as set forth in the Rules and in any agreement between it and
Proposed Rule 2D, Section 2 (Qualifications of Agent Clearing Members, the Application Process and Continuance Standards)
Section 2 of proposed Rule 2D would establish the eligibility requirements for Members that wish to become Agent Clearing Members, the membership application process that would be required of each Member to become an Agent Clearing Member, the on-going membership requirements that would apply to Agent Clearing Members, as well as the requirements regarding an Agent Clearing Member's election to voluntarily terminate its membership.
Under Section 2(a) of proposed Rule 2D, any Member would be eligible to apply to become an Agent Clearing Member; however, if a Member is a Registered Broker-Dealer, such Member would only be permitted to apply to become an Agent Clearing Member if it has (1)
FOOTNOTE 65
Section 2(b) of proposed Rule 2D would provide that each Member applicant to become an Agent Clearing Member would be required to provide an application and other information requested by
Under Section 2(c) of proposed Rule 2D, if the Agent Clearing Member application is denied, such denial would be handled in accordance with Section 1 of Rule 2A (Initial Membership Requirements).
As proposed in Section 2(d) of proposed Rule 2D,
FOOTNOTE 66 If the increased financial requirements are imposed in connection with an Agent Clearing Member application that does not require the Board of Directors' approval, the increased financial requirements would not be subject to the Board of Directors' approval. Nonetheless, once an Agent Clearing Member application is approved with increased financial requirements,
In addition, under Section 2(e) of proposed Rule 2D,
FOOTNOTE 67 As an example,
Section 2(f) of proposed Rule 2D would provide that each Member whose Agent Clearing Member application is approved would sign and deliver to
Section 2(g) of proposed Rule 2D would provide that each Agent Clearing Member shall submit to
Section 2(h) of proposed Rule 2D would provide that an Agent Clearing Member's books and records, insofar as they relate to the Agent Clearing Member Transactions submitted to
Section 2(i) of proposed Rule 2D would provide that an Agent Clearing Member shall promptly inform
FOOTNOTE 68 See Addendum P (Fine Schedule), supra note 4. END FOOTNOTE
Section 2(j) of proposed Rule 2D would provide that in the event that an Agent Clearing Member fails to remain in compliance with the relevant requirements of the Rules or the Agent Clearing Member Agreement,
Section 2(k) of proposed Rule 2D would provide that if the sum of the Volatility Charges applicable to an Agent Clearing Member's Agent Clearing Member Customer Omnibus Account(s) and its other accounts at
FOOTNOTE 69
Section 2(l) of proposed Rule 2D would provide that an Agent Clearing Member may voluntarily elect to terminate its status as an Agent Clearing Member by providing
Section 2(l) of proposed Rule 2D would also provide that such termination would not be effective until accepted by
Section 2(m) of proposed Rule 2D would provide that an Agent Clearing Member's voluntary termination of its status as such shall not affect its obligations to
Section 2(n) of proposed Rule 2D would provide that any non-public information furnished to
FOOTNOTE 70 Section 2(n) of proposed Rule 2D is designed to be consistent with provisions in the Rules relating to the confidentiality of information furnished by participants. See Rule 2A (Initial Membership Requirements), supra note 4. END FOOTNOTE
Proposed Rule 2D, Section 3 (Compliance With Laws)
Section 3 of proposed Rule 2D would provide that each Agent Clearing Member shall comply in all material respects with all applicable laws, including applicable laws relating to securities, taxation and money laundering, as well as global sanctions laws, in connection with the use of
Proposed Rule 2D, Section 4 (Agent Clearing Member Transactions)
Section 4 of proposed Rule 2D would provide that an Agent Clearing Member shall be permitted to submit to
Proposed Rule 2D, Section 5 (Agent Clearing Member Agent Obligations)
Section 5 of proposed Rule 2D would establish rules-based obligations for Agent Clearing Members and the establishment of Agent Clearing Member Customer Omnibus Accounts.
Section 5(a) of proposed Rule 2D would provide that an Agent Clearing Member shall be permitted to submit to
Section 5(b) of proposed Rule 2D would provide that, with respect to an Agent Clearing Member that submits Agent Clearing Member Transactions to
FOOTNOTE 71 If an Agent Clearing Member were permitted to maintain SFTs entered into as both Transferee and Transferor in the same Agent Clearing Member Customer Omnibus Account, the Required Fund Deposit obligations of the Agent Clearing Member could potentially be reduced by offsetting SFT Positions of different Customers in the same SFT Security. END FOOTNOTE
Section 5(c) of proposed Rule 2D would provide that an Agent Clearing Member shall act solely as agent of its Customers in connection with the clearing of Agent Clearing Member Transactions; provided that the Agent Clearing Member shall remain fully liable for the performance of all obligations to
Section 5(d) of proposed Rule 2D would provide that nothing in the Rules shall prohibit an Agent Clearing Member from seeking reimbursement from a Customer for payments made by the Agent Clearing Member (whether out of
Proposed Rule 2D, Section 6 (Clearing Fund Obligations)
Section 6 of proposed Rule 2D would set forth the
Section 6(a) of proposed Rule 2D would provide that
Section 6(b) of proposed Rule 2D would provide that, in the ordinary course, for purposes of satisfying the Agent Clearing Member's
FOOTNOTE 72
Section 6(c) of proposed Rule 2D would provide that the Agent Clearing Member Required Fund Deposit for each Agent Clearing Member Customer Omnibus Account shall be calculated separately based on the Agent Clearing Member Transactions in such Agent Clearing Member Customer Omnibus Account, and the Agent Clearing Member shall, as principal, be required to satisfy the Agent Clearing Member Required Fund Deposit for each of the Agent Clearing Member's Agent Clearing Member Customer Omnibus Accounts.
Section 6(d) of proposed Rule 2D would provide that Sections 1, 2, 4, 5, 6, 7, 8, 9, 10, 11 and 12 of Rule 4 (
Section 6(e) of proposed Rule 2D would provide that an Agent Clearing Member shall be subject to such fines as may be imposed in accordance with the Rules for any late satisfaction of a
Proposed Rule 2D, Section 7 (Right of Offset)
Section 7 of proposed Rule 2D would provide that in the ordinary course, with respect to satisfaction of any Agent Clearing Member's obligations under the Rules, the Agent Clearing Member's Agent Clearing Member Customer Omnibus Accounts, the Agent Clearing Member's proprietary accounts, and the Agent Clearing Member's Sponsored Member Sub-Accounts, if any, at
Proposed Rule 2D, Section 8 (Loss Allocation Obligations)
Section 8 of proposed Rule 2D would establish loss allocation obligations for Agent Clearing Members.
Section 8(a) of proposed Rule 2D would provide that, to the extent
Section 8(b) of proposed Rule 2D would provide that the entire amount of the Required Fund Deposit associated with the Agent Clearing Member's proprietary accounts at
Proposed Rule 2D, Section 9 (Restrictions on Access to Services by an Agent Clearing Member)
Section 9 of proposed Rule 2D would establish the rights of
Section 9(a) of proposed Rule 2D would provide that the Board of Directors may at any time upon
Section 9(b) of proposed Rule 2D would provide that Rule 46 shall apply with respect to an Agent Clearing Member in the same way as it applies to Members, including the Board of Directors' right to summarily suspend the Agent Clearing Member and to cease to act for such Agent Clearing Member. As under Rule 46, the Board of Directors would need to make the determination of whether to suspend, prohibit or limit an Agent Clearing Member's access to services offered by
Section 9(c) of proposed Rule 2D would provide that if
This is different from how
Proposed Rule 2D, Section 10 (Insolvency of an Agent Clearing Member)
Section 10(a) of proposed Rule 2D would provide that an Agent Clearing Member shall be obligated to immediately notify
Section 10(b) of proposed Rule 2D would provide that in the event that
This is different from how
Proposed Rule 2D, Section 11 (Transfer of Agent Clearing Member Transactions in Agent Clearing Member Customer Omnibus Accounts)
Section 11 of proposed Rule 2D would (i) permit an Agent Clearing Member, upon a default of a Customer and consent of
Section 11(a) of proposed Rule 2D would clarify the scope to which Section 11 of proposed Rule 2D applies. It would state that Section 11 would not apply if either (i) the relevant Agent Clearing Member is a Defaulting Member or (ii) a Corporation Default has occurred. This is because, as described above with respect to Section 10(b) of proposed Rule 2D,
Section 11(b) of proposed Rule 2D would set out the process by which an Agent Clearing Member may transfer the Agent Clearing Member Transactions of a defaulting Customer in one or more of Agent Clearing Member's Agent Clearing Member Customer Omnibus Accounts. It would provide that, to the extent permitted under applicable laws and regulations, an Agent Clearing Member may, upon a default of a Customer and the consent of
Proposed Rule 2D, Section 12 (Customer Acknowledgments)
Section 12 of proposed Rule 2D would provide that each Agent Clearing Member on behalf of each of its Customers agrees that such Customer, by participating in and entering into Agent Clearing Member Transactions through the Agent Clearing Member, understands, acknowledges, and agrees that: (a) The service provided by
(C) Proposed Rule 56--Securities Financing Transaction Clearing Service
In connection with the proposed SFT Clearing Service,
The term "Aggregate Net SFT Close-out Value" would mean, with respect to an SFT Member, the sum of the SFT Close-out Value (as defined below and in the proposed rule change) for each SFT Position to which the SFT Member is a party.
The term "Approved SFT Submitter" would mean a provider of transaction data on an SFT that the parties to the SFT have selected and
The term "Bilaterally Initiated SFT" would mean an SFT, the Initial Settlement of which occurred prior to the submission of such SFT to
The term "Buy-In Amount" would mean a net amount equal to (x) the Buy-In Costs or Deemed Buy-In Costs (as defined below and in the proposed rule change) of the
The term "Contract Price" would mean, with respect to
The term "Corresponding SFT Cash" would mean (a) in respect of a Recalled SFT (as defined below and in the proposed rule change) for which a Transferor has effected a Buy-In in respect of some, but not all, of the
The term "Deemed Buy-In Costs" would mean the product of the number of
The term "Defaulting SFT Member" would mean an SFT Member for which
The term "Distribution" would mean, with respect to any SFT Security at any time, any cash payment of amounts equivalent to dividends and other distributions on the SFT Security.
The term "Distribution Amount" would mean, in respect of an SFT, an amount of cash equal to the product of: (a) The amount per security in respect of (x) a cash dividend on the
The term "Distribution Payment" would mean an amount payable by one party to an SFT to the other party to the SFT during the term of the SFT in respect of a Distribution on the
The term "Existing Master Agreement" would mean, in respect of an SFT, a written agreement that (i) exists at the time transaction data for the SFT is submitted to
The term "Final Settlement" would mean the exchange of
The term "Final Settlement Date" would mean the Business Day on which the final settlement of a transaction is scheduled to occur. If the transaction is an SFT, the Final Settlement Date means the Business Day on which the Final Settlement of the SFT is scheduled to occur in accordance with proposed Rule 56 or, if the SFT is accelerated in accordance with proposed Rule 56, the date to which the Final Settlement obligations have been accelerated.
The term "Incremental Additional Independent Amount SFT Cash" would mean, (a) in respect of a Linked SFT, the excess, if any, of the Independent Amount SFT Cash of the Linked SFT over the Independent Amount SFT Cash of the Settling SFT; (b) in respect of a Non-Returned SFT, the portion of the Price Differential payable by the Transferee, if any, that is attributable to the Independent Amount SFT Cash of the SFT (which shall be calculated by multiplying such Priced Differential by the excess, if any, of the Independent Amount Percentage (as defined below and in the proposed rule change) over 100%); and (c) in respect of any other SFT, the Independent Amount SFT Cash of such SFT.
The term "Independent Amount Percentage" would mean, in respect of an SFT, a percentage obtained by dividing the SFT Cash of such SFT by the Market Value SFT Cash (as defined below and in the proposed rule change) of such SFT.
The term "Independent Amount SFT Cash" would mean the portion, if any, of the SFT Cash for an SFT equal to the amount by which the SFT Cash for such SFT at the time of the Initial Settlement exceeds the Contract Price of the
The term "Ineligibility Date" would mean, with respect to an SFT, the date on which the SFT Security that is the subject of the SFT becomes an Ineligible SFT Security (as defined below and in the proposed rule change).
The term "Ineligible SFT" would mean an SFT that has, as its subject,
The term "Ineligible SFT Security" would mean an SFT Security that is not eligible to be the subject of a novated SFT.
The term "Initial Settlement" would mean the exchange of
The term "Linked SFT" would mean an SFT entered into by the pre-novation SFT Member parties to a Settling SFT that has the same Transferor, Transferee and subject
The term "Market Value SFT Cash" would mean the portion of the SFT Cash for an SFT equal to the amount of the SFT Cash for such SFT minus the Independent Amount SFT Cash of such SFT.
The term "Price Differential" would mean (a) for purposes of the discharge of offsetting Final Settlement and Initial Settlement obligations, (i) the SFT Cash for the Settling SFT (or if the Settling SFT has a greater quantity of
The term "Rate Payment" would mean an amount payable from one party to an SFT to the other party to the SFT at the Final Settlement expressed as a percentage of the amount of SFT Cash for the SFT. As an example, if the Rate Payment is specified as 0.02%, the amount payable would be the product 0.02% and the SFT Cash for the SFT.
The term "Recall Date" would mean, in respect of a Recall Notice, the second Business Day following
The term "Recall Notice" would mean a notice that triggers the provisions of Section 9(b) of proposed Rule 56, relating to a Buy-In in respect of an SFT and that is submitted by an Approved SFT Submitter on behalf of a Transferor in accordance with the communication links, formats, timeframes and deadlines established by
The term "Recalled SFT" would mean an SFT that has been novated to
The term "Securities Financing Transaction" or "SFT" would mean a transaction between two SFT Members pursuant to which (a) one SFT Member agrees to transfer specified
The term "Settling SFT" would mean, as of any Business Day, an SFT that has been novated to
The term "SFT Account" would mean a ledger maintained on the books and records of
The term "SFT Cash" would mean the specified amount of
The term "SFT Close-out Value" would mean, with respect to an SFT Position of an SFT Member, an amount equal to: (i) If the SFT Member is the Transferor of the
The term "SFT Long Position" would mean the number of units of an SFT Security which an SFT Member is entitled to receive from
The term "SFT Member" would mean any Member, Sponsored Member acting in its principal capacity, Sponsoring Member acting in its principal capacity or Agent Clearing Member acting on behalf of a Customer, in each case that is a party to an SFT, permitted to participate in
The term "SFT Position" would mean an SFT Member's SFT Long Position or SFT Short Position (as defined below and in the proposed rule change) in an SFT Security that is the subject of an SFT that has been novated to
The term "SFT Security" would mean a security that is eligible to be the subject of an SFT novated to
The term "SFT Short Position" would mean the number of units of an SFT Security that an SFT Member is obligated to deliver to
The term "Transferee" would mean the SFT Member party to an SFT that agrees to receive
The term "Transferor" would mean the SFT Member party to an SFT that agrees to transfer
Proposed Rule 56, Section 1 (General)
Section 1 of proposed Rule 56 would be a general provision regarding the SFT Clearing Service applicable to Members, Sponsoring Members and Agent Clearing Members that participate in the proposed SFT Clearing Service.
Section 1(a) of proposed Rule 56 would establish that
Section 1(b) of proposed Rule 56 would provide that any SFT that is submitted to
Section 1(c) of proposed Rule 56 would further provide that any amount of cash described in proposed Rule 56 may be rounded up to the nearest
Proposed Rule 56, Section 2 (Eligibility for SFT Clearing Service: SFT Member)
Section 2 of proposed Rule 56 would establish the eligibility requirements for using the proposed SFT Clearing Service.
Under Section 2 of proposed Rule 56,
Section 2 of proposed Rule 56 would provide that the rights, liabilities and obligations of SFT Members in their capacity as such shall be governed by the proposed Rule 56. References to a Member would not apply to an SFT Member in its capacity as such, unless specifically noted in the proposed Rule 56 or in such other Rules as applicable to an SFT Member.
Section 2 of proposed Rule 56 would also provide that an SFT Member that participates in
Proposed Rule 56, Section 3 (Membership Documents)
Section 3 of proposed Rule 56 would govern the documents that SFT Member applicants would be required to complete and deliver to
Proposed Rule 56, Section 4 (Securities Financing Transaction Data Submission)
Section 4 of proposed Rule 56 would govern the submission of transaction data for SFTs into
Section 4(a) of proposed Rule 56 would provide that in order for an SFT to be submitted to
FOOTNOTE 73 Section 6 of Rule 7 (Comparison and Trade Recording Operation (Including Special Representative/Index Receipt Agent)) provides that
Section 4(b) of proposed Rule 56 would provide that
Section 4(c) of proposed Rule 56 would provide that the obligations reflected in the transaction data on an SFT shall be deemed to have been confirmed and acknowledged by each SFT Member designated by the Approved SFT Submitter as a party thereto and to have been adopted by such SFT Member and, for the purposes of determining the rights and obligations between
Section 4(d) of proposed Rule 56 would provide that
Section 4(e) of proposed Rule 56 would provide that the submission of each SFT to
Section 4(f) of proposed Rule 56 would provide that the submission of each SFT to
Proposed Rule 56, Section 5 (Novation of Securities Financing Transactions)
Section 5 of proposed Rule 56 would govern the nature and timing of the novation to
Section 5(a) of proposed Rule 56 would provide that
Section 5(b) of proposed Rule 56 would provide that each SFT that is a Bilaterally Initiated SFT, including any Sponsored Member Transaction, and validated pursuant to the Rules shall be novated to
Section 5(c) of proposed Rule 56 would provide that, subject to Sections 5(d) and 5(e) of proposed Rule 56 as described below, the novation of SFTs shall consist of the termination of the Final Settlement, Rate Payment and Distribution Payment obligations and entitlements between the parties to the SFT with respect to such SFT and their replacement with obligations and entitlements to and from
Section 5(d) of proposed Rule 56 would govern the novation of SFTs having Incremental Additional Independent Amount SFT Cash and provides when the obligation to return Independent Amount SFT Cash for which an associated
FOOTNOTE 74 Where the Transferor is a Sponsored Member receiving Independent Amount SFT Cash,
Section 5(d)(ii) of proposed Rule 56 would provide that to the extent the Transferor, Sponsoring Member or Agent Clearing Member has not satisfied the associated Independent Amount SFT Cash Deposit Requirement, the Transferor's (or in the case of a Non-Returned SFT,
FOOTNOTE 75 This interim novation is designed to avoid any credit concerns that would manifest if the Customer and the Transferee had to have a principal bilateral obligation to each other for the Independent Amount SFT Cash. END FOOTNOTE
Section 5(d)(iii) of proposed Rule 56 would provide that each SFT Member agrees that any obligation to return Incremental Additional Independent Amount SFT Cash that is novated to an Agent Clearing Member or that remains (or becomes) a bilateral obligation of the Transferor to the Transferee in accordance with Section 5(d)(ii) of proposed Rule 56, is a binding and enforceable obligation of the Agent Clearing Member or Transferor, as applicable, regardless of whether the Transferee has entered into an Existing Master Agreement with the Agent Clearing Member or Transferor. In addition, Section 5(d)(iii) would provide that each SFT Member further agrees that any such obligation shall only be due and payable to the Transferee upon the final discharge of
Section 5(d)(iv) of proposed Rule 56 would provide that, until the Transferor, Sponsoring Member or Agent Clearing Member has satisfied in full its Independent Amount SFT Cash Deposit Requirement, the SFT Cash of the SFT shall, for purposes of determining the obligations owing to and from
Section 5(d)(v) of proposed Rule 56 would provide that once the Transferor, Sponsoring Member or Agent Clearing Member, as applicable, has satisfied in full its Independent Amount SFT Cash Deposit Requirement, the obligation of the Transferor to return the Incremental Additional Independent Amount SFT Cash to the Transferee (or, in the case of an SFT that is an Agent Clearing Member Transaction, any obligation of the Agent Clearing Member to return the Incremental Additional Independent Amount SFT Cash to the Transferee) shall be novated to
Section 5(e) of proposed Rule 56 would govern novation in respect of certain corporate actions and provide that
Section 5(e)(ii) of proposed Rule 56 would provide that
Section 5(f) of proposed Rule 56 would provide that the novation of SFTs shall not affect the fundamental substance of the SFT as a transfer of securities by one party in exchange for a transfer of cash by the other party and an agreement by each party to return the property it received and shall not affect the economic obligations or entitlements of the parties under the SFT except that following novation, the Final Settlement, Rate Payment and Distribution Payment obligations and entitlements shall be owed to and by
Section 5(g) of proposed Rule 56 would provide that the representations and warranties made by each of the parties to an SFT that has been novated to
Proposed Rule 56, Section 6 (Rate and Distributions)
Section 6 of proposed Rule 56 would govern the settlement of Rate Payments and supported Distributions by
Section 6(b) of proposed Rule 56 would provide that if (x) a cash dividend is made on or in respect of an SFT Security that is the subject of an SFT that has been novated to
Proposed Rule 56, Section 7 (Final Settlement of Securities Financing Transactions)
Section 7 of proposed Rule 56 would govern the mechanics of Final Settlement of SFTs by providing that, subject to Section 11 of proposed Rule 56, as described below, the Final Settlement of an SFT that has been novated to
Section 7 of proposed Rule 56 would also provide that an SFT, or a portion thereof, shall be deemed complete and final upon Final Settlement of the SFT, or such portion, whether pursuant to Sections 7, 8, 9(d) or 13(c) of proposed Rule 56. Section 7 would also provide that from and after the Final Settlement of an SFT, or a portion thereof, pursuant to any Sections 7, 8, 9(d) or 13(c) of proposed Rule 56,
FOOTNOTE 76 With respect to an SFT between a Sponsoring Member and its Sponsored Member, the SFT would settle on the books of the Sponsoring Member because the Sponsored Member are not participants at DTC and thus would not have accounts at DTC. Accordingly, the finality of the settlement of such SFT would occur when the Sponsoring Member credits the securities and cash on its or the relevant custodian's books and records. END FOOTNOTE
Proposed Rule 56, Section 8 (Discharge of Offsetting Final Settlement and Initial Settlement Obligations)
Section 8 of proposed Rule 56 would govern the "roll" (i.e., pair off or offset) process whereby the Final Settlement obligations on one SFT (i.e., the Settling SFT) between two parties can be offset with the Initial Settlement obligations on another SFT between the same parties (i.e., the Linked SFT) through the debiting and crediting of the difference in cash collateral between the two offsetting SFTs (i.e., the Price Differential).
Section 8(a) of proposed Rule 56 would provide that, subject to the provisions of Section 13(c) of proposed Rule 56, as described below, if, on any Business Day, the pre-novation SFT Member parties to a Settling SFT enter into a Linked SFT and the Approved SFT Submitter provides an appropriate instruction to
Section 8(b) of proposed Rule 56 would provide that if the Price Differential is positive,
Proposed Rule 56, Section 9 (Non-Returned Securities Financing Transactions and Recalls)
Section 9 of proposed Rule 56 would govern the processing of a novated SFT for which the Final Settlement obligations have not been discharged either through Final Settlement in accordance with Section 7 of proposed Rule 56 (as described above) or a pair off in accordance with Section 8 of proposed Rule 56 (as described above), and the recall and buy-in process for such an SFT.
Specifically, Section 9(a) of proposed Rule 56 would provide that if (x) the Transferee does not satisfy its Final Settlement obligations in respect of an SFT that has been novated to
Section 9(b) of proposed Rule 56 would provide that if
FOOTNOTE 77 The requirement that a party exercising buy-in rights do so in a "commercially reasonable manner" is market standard. See, e.g., Section 13.1 of the Master Securities Loan Agreement published by
FOOTNOTE 78 The Transferor would purchase these securities from one or more third parties. END FOOTNOTE
Section 9(c) of proposed Rule 56 would provide that on the Business Day following
Section 9(d) of proposed Rule 56 would provide that following the application of such Buy-In Amount, the Final Settlement obligations under the SFT shall be discharged; provided that if the Transferor effected a Buy-In in respect of some but not all of the
Section 9(e) of proposed Rule 56 would provide that a Recalled SFT shall be treated as a Non-Returned SFT by
Proposed Rule 56, Section 10 (Cancellation, Modification and Termination of Securities Financing Transactions)
Section 10 of proposed Rule 56 would govern the process for cancellations, modifications and terminations of SFTs in
Section 10(a) of proposed Rule 56 would provide that transaction data on an SFT that has not been novated to
Section 10(b) of proposed Rule 56 would provide the Rate Payment on an SFT that has been novated to
Section 10(c) of proposed Rule 56 would provide an SFT that has been novated to
Proposed Rule 56, Section 11 (Accelerated Final Settlement)
Section 11 of proposed Rule 56 would allow a Transferee (i.e., the borrower) to do a same day return of borrowed securities, if necessary, to satisfy its regulatory purpose requirements by accelerating the Final Settlement of an SFT that has been novated to
Proposed Rule 56, Section 12 (Clearing Fund Obligations)
Section 12 of proposed Rule 56 would set out the
Section 12(a) of proposed Rule 56 would provide each SFT Member, other than an SFT Member that is a Sponsored Member, shall make and maintain on an ongoing basis a deposit to the
Section 12(b) of proposed Rule 56 would provide that the SFT Deposit shall be held by
Section 12(c) of proposed Rule 56 would provide that
FOOTNOTE 79 Supra note 32. END FOOTNOTE
FOOTNOTE 80 The Required SFT Deposit multipliers proposed for Non-Returned SFTs are identical to the Required Fund Deposit multipliers applied to CNS Fails Positions. See Procedure XV (Clearing Fund Formula and Other Matters), Section I.(A)(1)(d)), supra note 4. While the concept of a "fail" does not exist in the securities lending market in the same manner as it does in the cash market, to the extent that the Final Settlement of an SFT is scheduled on a particular date but does not occur, whether directly or through a pair off as described in Section 8 of proposed Rule 56 (as discussed above), that could potentially be a result of a "squeeze" or other market dislocation whereby
The Credit Risk Rating Matrix is a financial model utilized by
FOOTNOTE 81 Supra note 34. END FOOTNOTE
FOOTNOTE 82 Supra note 33. END FOOTNOTE
Section 12(d) of proposed Rule 56 would provide that
Section 12(e) of proposed Rule 56 would provide that if an SFT has Incremental Additional Independent Amount SFT Cash, the Transferor shall make an additional deposit to the
FOOTNOTE 83 This could occur in a situation in which an existing SFT settles and then the Transferor enters into a new SFT with the same Transferee (e.g., in a pair off as described in Section 8 of proposed Rule 56, discussed above). In that situation, if the Transferee (or Sponsoring Member or Agent Clearing Member) has not yet called back the Independent Amount SFT Cash Deposit it posted in respect of the Settling SFT, then
Section 12(f) of proposed Rule 56 would provide that each SFT Member, other than an SFT Member that is a Sponsored Member, so long as such Member is an SFT Member, shall also provide Supplemental Liquidity Deposits to the Clearing Fund, as may be required pursuant to Rule 4A. In addition, Section 12(f) would also provide that references to 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
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
FOOTNOTE 84 If the Current Market Price of the SFT Security falls below the threshold established by
FOOTNOTE 85 Supra note 23. END FOOTNOTE
Section 13(c) of proposed Rule 56 would provide that if
FOOTNOTE 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.
FOOTNOTE 87
Section 13(d) of proposed Rule 56 would provide that if a corporate action supported by
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
Section 14(a) of proposed Rule 56 would provide that the provisions of Rule 18 (Procedures for When the Corporation 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
(i) Except as otherwise may be determined by the Board of Directors, any SFT entered into by the SFT Member that, at the time
(ii)
(iii)
(iv) Any Sponsored Member Transactions for which a Defaulting SFT Member is the Sponsoring Member and which have been novated to
(v) If, in the aggregate, the close-out of a Defaulting SFT Member's proprietary SFT Positions results in a profit to
(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
(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
(viii) The Final Settlement Date of each SFT that has been novated to
(ix) Until Final Settlement, each Default-Related SFT shall be treated as a Non-Returned SFT, and
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
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
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
Section 16(b) of proposed Rule 56 would provide that with respect to an Agent Clearing Member that submits SFTs to
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
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
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
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)(v) through Section 14(b)(vii) of proposed Rule 56, as though
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
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,
Rule 1 (Definitions and Descriptions)
In connection with proposed Rules 2C, 2D and 56,
In addition,
Furthermore,
In connection with proposed Rules 2C, 2D and 56,
FOOTNOTE 88
Rule 2 (Members and Limited Members)
Rule 2B (Ongoing Membership Requirements and Monitoring)
FOOTNOTE 89
Rule 3 (Lists To Be Maintained)
Rule 4 (Clearing Fund)
Rule 5 (General Provisions)
Rule 24 (Charges for Services Rendered)
FOOTNOTE 90 See Addendum A (Fee Structure), supra note 4. END FOOTNOTE
Rule 26 (Bills Rendered)
FOOTNOTE 91 Id. END FOOTNOTE
Rule 32 (Signatures)
Rule 38 (Governing Law and Captions)
Rule 39 (Reliance on Instructions)
Rule 42 (Wind-Down of the Corporation)
Rule 49 (Release of Clearing Data and Clearing Fund Data)
Rule 58 (Limitations on Liability)
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)
Addendum B (Qualifications and Standards of Financial Responsibility, Operational Capability and Business History)
In addition,
Addendum P (Fine Schedule)
(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
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 Sections 10(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
Expected Effect on, and Management of, Risks to the Clearing Agency, Its Participants and the Market
Market Risk
The proposal is structured in a manner that allows
FOOTNOTE 92 Supra note 32. END FOOTNOTE
As described above, consistent with the manner in which clearing fund requirements are satisfied by members of FICC for their cleared securities financing transactions,
FOOTNOTE 93 Supra note 34. END FOOTNOTE
FOOTNOTE 94 Supra note 35. END FOOTNOTE
FOOTNOTE 95 See Section 12(d) of proposed Rule 56. END FOOTNOTE
Furthermore,
FOOTNOTE 96 See Section 13(b) of proposed Rule 56. END FOOTNOTE
FOOTNOTE 97 See Section 12(e) of proposed Rule 56. END FOOTNOTE
Additionally, the Sponsoring Member Required Fund Deposits and Agent Clearing Member Required Fund Deposits would each be calculated on a gross basis, and no offsets for netting of positions as between different Sponsored Members or different Customers, as applicable, would be permitted. Moreover, any Member that opts to apply to become a Sponsoring Member or an Agent Clearing Member would be subject to an activity limit (as described above).
Liquidity Risk
The proposal is also structured in a manner that allows
FOOTNOTE 98 Supra note 27. END FOOTNOTE
To the extent the Price Differential is not processed by DTC, for example if a receiver does not satisfy DTC's risk controls,
In the event
Until
FOOTNOTE 99 See proposed Rule 56, Section 14(b)(ix). END FOOTNOTE
FOOTNOTE 100 Id. END FOOTNOTE
FOOTNOTE 101 17 CFR 240.17Ad-22(e)(7). END FOOTNOTE
FOOTNOTE 102 Supra note 39. END FOOTNOTE
Credit Risk
The proposal is also structured in a manner that allows
Operational Risk
The proposal is also structured in a manner that allows
Accordingly,
Consistency With the Clearing Supervision Act
The proposed rule change would be consistent with Section 805(b) of the Clearing Supervision Act. /103/ The objectives and principles of Section 805(b) of the Clearing Supervision Act are to promote robust risk management, promote safety and soundness, reduce systemic risks, and support the stability of the broader financial system. /104/
FOOTNOTE 103 12 U.S.C. 5464(b). END FOOTNOTE
FOOTNOTE 104 Id. END FOOTNOTE
Promoting Robust Risk Management and Promoting Safety and Soundness
The proposal is structured in a manner that allows
FOOTNOTE 105 See Section 12(c) of proposed Rule 56. END FOOTNOTE
As described above, consistent with the manner in which clearing fund requirements are satisfied by members of FICC for their cleared securities financing transactions,
FOOTNOTE 106 Supra note 34. END FOOTNOTE
FOOTNOTE 107 Supra note 35. END FOOTNOTE
FOOTNOTE 108 See Section 12(d) of proposed Rule 56. END FOOTNOTE
Furthermore,
FOOTNOTE 109 See Section 13(b) of proposed Rule 56. END FOOTNOTE
FOOTNOTE 110 See Section 12(e) of proposed Rule 56. END FOOTNOTE
Additionally, the Sponsoring Member Required Fund Deposits and Agent Clearing Member Required Fund Deposits would each be calculated on a gross basis, and no offsets for netting of positions as between different Sponsored Members or different Customers, as applicable, would be permitted. Moreover, any Member that opts to apply to become a Sponsoring Member or an Agent Clearing Member would be subject to an activity limit (as described above).
The proposal is also structured in a manner that allows
FOOTNOTE 111 Supra note 27. END FOOTNOTE
To the extent the Price Differential is not processed by DTC, for example if a receiver does not satisfy DTC's risk controls,
In the event
Until
FOOTNOTE 112 See proposed Rule 56, Section 14(b)(ix). END FOOTNOTE
FOOTNOTE 113 Id. END FOOTNOTE
FOOTNOTE 114 17 CFR 240.17Ad-22(e)(7). END FOOTNOTE
FOOTNOTE 115 Supra note 39. END FOOTNOTE
The proposal is also structured in a manner that allows
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.
For these reasons NSCC believes the proposal would help promote robust risk management at NSCC, consistent with the objective and principles of Section 805(b) of the Clearing Supervision Act.
Reducing Systemic Risks and Supporting the Stability of the Broader Financial System
NSCC also believes that the proposal is consistent with reducing systemic risks and supporting the stability of the broader financial system. As described above, 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 proposal would help reduce systemic risks, which in turn helps support the stability of the broader financial system, consistent with the objectives and principles of Section 805(b) of the Clearing Supervision Act.
NSCC also believes that the proposed rule change is consistent with Rules 17Ad-22(e)(7), (8), and (18), promulgated under the Act, /116/ for the reasons stated below.
FOOTNOTE 116 17 CFR 240.17Ad-22(e)(7), (8), and (18). END FOOTNOTE
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. /117/ 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 provide that the Final Settlement obligations and Price Differential of each SFT, other than a Sponsored Member Transaction, that is novated to NSCC would settle RVP/DVP at DTC. /118/ SFT deliver orders would be processed in accordance with DTC's rules and procedures, including provisions relating to risk controls. Therefore each DTC participant's Final Settlement obligation would complete at DTC on a fully collateralized basis, and the associated debits (if any) would be subject to DTC's risk controls.
FOOTNOTE 117 17 CFR 240.17Ad-22(e)(7). END FOOTNOTE
FOOTNOTE 118 Supra note 27. END FOOTNOTE
To the extent the Price Differential is not processed by DTC, for example if a receiver does not satisfy DTC's risk controls, NSCC would 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.
In the event NSCC ceases to act for a Defaulting SFT Member, on the Business Day that NSCC ceased to act, NSCC's daily liquidity need calculation would include all Price Differential debits owed by the Defaulting SFT Member not processed at DTC. On subsequent days of the liquidation of the Defaulting SFT Member's SFT Positions, NSCC's total liquidity need calculations would include all novated SFT activity that has not reached Final Settlement on the Business Day NSCC ceased to act, netted together with all other outstanding settlement activity of the Defaulting SFT Member at NSCC.
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. /119/ NSCC would take into account such Price Differential payment obligations, as well as any Final Settlement obligations to non-defaulting SFT Members, 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. /120/ /121/ By continuing to process these Price Differential payments until Final Settlement occurs, NSCC would ensure that non-defaulting SFT Members are kept in largely the same position as if the Defaulting SFT Member had not defaulted and the pre-novation counterparties had instead agreed to roll the SFTs. This is because even though the non-payment of the Rate Payment in an SFT Member default context may have an impact on non-defaulting SFT Members, such impact is generally de minimis. To the extent NSCC is required to pay a Price Differential, as well as any Final Settlement obligations, to a non-defaulting SFT Member, NSCC would rely on NSCC's liquidity resources, including the Required SFT Deposit and any SLD that may be collected, when applicable, in order to cover the liquidity need associated with any such Price Differential and Final Settlement obligations, consistent with the Clearing Agency Liquidity Risk Management Framework. /122/ Therefore, NSCC believes that the proposed changes to establish the SFT Clearing Service are consistent with Rule 17Ad-22(e)(7) under the Act. /123/
FOOTNOTE 119 See proposed Rule 56, Section 14(b)(ix). END FOOTNOTE
FOOTNOTE 120 Id. END FOOTNOTE
FOOTNOTE 121 17 CFR 240.17Ad-22(e)(7). END FOOTNOTE
FOOTNOTE 122 Supra note 39. END FOOTNOTE
FOOTNOTE 123 17 CFR 240.17Ad-22(e)(7). END FOOTNOTE
Rule 17Ad-22(e)(8) under the Act /124/ 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) /125/ 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. 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. /126/
FOOTNOTE 124 17 CFR 240.17Ad-22(e)(8). END FOOTNOTE
FOOTNOTE 125 Id. END FOOTNOTE
FOOTNOTE 126 Id. END FOOTNOTE
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. /127/ 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 /128/ under the Securities Act, /129/ 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. /130/
FOOTNOTE 127 17 CFR 240.17Ad-22(e)(18). END FOOTNOTE
FOOTNOTE 128 17 CFR 230.144A. END FOOTNOTE
FOOTNOTE 129 15 U.S.C. 77a et seq. END FOOTNOTE
FOOTNOTE 130 17 CFR 240.17Ad-22(e)(18). END FOOTNOTE
Similarly, 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. /131/
FOOTNOTE 131 Id. END FOOTNOTE
III. Date of Effectiveness of the Advance Notice, and Timing for Commission Action
The proposed change may be implemented if the Commission does not object to the proposed change within 60 days of the later of (i) the date that the proposed change was filed with the Commission or (ii) the date that any additional information requested by the Commission is received. The clearing agency shall not implement the proposed change if the Commission has any objection to the proposed change.
The Commission may extend the period for review by an additional 60 days if the proposed change raises novel or complex issues, subject to the Commission providing the clearing agency with prompt written notice of the extension. A proposed change may be implemented in less than 60 days from the date the advance notice is filed, or the date further information requested by the Commission is received, if the Commission notifies the clearing agency in writing that it does not object to the proposed change and authorizes the clearing agency to implement the proposed change on an earlier date, subject to any conditions imposed by the Commission.
The clearing agency shall post notice on its website of proposed changes that are implemented.
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 advance notice is consistent with the Clearing Supervision Act. Comments may be submitted by any of the following methods:
Electronic Comments
* Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
* Send an email to [email protected]. Please include File NumberSR-NSCC-2022-801 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-2022-801. 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 (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the advance notice that are filed with the Commission, and all written communications relating to the advance notice 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 (https://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-2022-801 and should be submitted on or before May 4, 2022.
FOOTNOTE 132 17 CFR 200.30-3(a)(91). END FOOTNOTE
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.132
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-08171 Filed 4-18-22; 8:45 am]
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