Notice2026-10808
Paxos Securities Settlement Company, LLC; Order Granting an Application for Temporary Registration as a Clearing Agency Under Section 17A of the Securities Exchange Act of 1934
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
May 29, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 103 (Friday, May 29, 2026)</title>
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[Federal Register Volume 91, Number 103 (Friday, May 29, 2026)]
[Notices]
[Pages 32151-32171]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-10808]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-105562; File No. 600-39]
Paxos Securities Settlement Company, LLC; Order Granting an
Application for Temporary Registration as a Clearing Agency Under
Section 17A of the Securities Exchange Act of 1934
May 27, 2026.
I. Introduction
On July 14, 2025, Paxos Securities Settlement Company, LLC
(``PSSC'') filed with the Securities and Exchange Commission
(``Commission'') an application on Form CA-1 (``Application'') under
Section 17A of the Securities Exchange Act of 1934 (``Exchange Act'')
seeking to register as a clearing agency to provide clearance and
settlement services as a central securities depository (``CSD'') and
securities settlement system.\1\ Notice of the Application was
published for comment in the Federal Register on August 6, 2025.\2\ On
November 4, 2025, the Commission instituted proceedings pursuant to
Section 19(a)(1)(B) of the Exchange Act to determine whether to grant
or deny the Application.\3\ On January 30, 2026, the Commission
designated a longer period for Commission action on the OIP.\4\
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\1\ 15 U.S.C. 78q-1. If PSSC determines in the future to provide
other clearing agency services or to perform the functions of a
clearing agency for transactions in other types of securities, PSSC
would need to amend its application on Form CA-1 to so reflect and
submit any related proposed rule changes as required under Section
19(b) of the Exchange Act. For a discussion of the securities
eligible for settlement by PSSC, see infra Part III.A.3.
\2\ Release No. 34-103624 (Aug. 1, 2025), 90 FR 37940 (Aug. 6,
2025).
\3\ Release No. 34-104174 (Nov. 4, 2025), 90 FR 51416 (Nov. 17,
2025) (``OIP'').
\4\ Release No. 34-104757 (Jan. 30, 2026), 91 FR 4974 (Feb. 3,
2026).
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On February 27, 2026, PSSC filed an amendment to its Application
that, pursuant to Rule 17Ab2-1(d),\5\ served as PSSC's consent to
extend the time for the Commission's review of the Application to 90
days from the filing of the amendment.\6\ Notice of the amendment to
the Application was published on March 11, 2026.\7\
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\5\ 17 CFR 240.17ab2-1(d) (``Rule 17Ab2-1'').
\6\ Non-confidential aspects of the Application and the exhibits
thereto cited in this order, are available on the Commission's
website at <a href="https://www.sec.gov/rules-regulations/other-commission-orders-notices-information/pssc-form-ca-1">https://www.sec.gov/rules-regulations/other-commission-orders-notices-information/pssc-form-ca-1</a>. References to the
Application throughout this order refer to the Application as
amended on February 27, 2026.
\7\ Release No. 34-104977 (Mar. 11, 2026), 91 FR 12660 (Mar. 16,
2026) (``Notice of Amendment''). The Notice of Amendment summarizes
the changes made to the Application by the amendment, which included
modifications to Exhibits C, E, and J.
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The Commission received two comment letters on the Application,\8\
as well as a response letter from PSSC.\9\ One comment letter expressed
support for innovation and competition generally and expressed support
for approval of the Application specifically.\10\ Another comment
letter, by the Depository Trust and Clearing Corporation (``DTCC''),
expressed support for the development of innovative solutions to
enhance the efficiency and effectiveness of financial markets and also
sought clarity regarding PSSC's approach to corporate actions
processing, its proposed netting arrangement, and the sufficiency of
its recovery and wind-down plans under Commission rules.\11\ In its
response letter, PSSC explained that it and DTCC are in discussion
regarding PSSC's application to become a participant in The Depository
Trust Company (``DTC''),\12\ and that it welcomes good faith engagement
with DTCC regarding its DTC participant application and planned
clearing agency operations as a new market entrant.\13\ It also
addresses each of the topics raised in the DTCC Letter. The comment
letters and PSSC's response thereto are discussed further in Part III.
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\8\ Letter from Matt Billings, Vice President of Brokerage,
President, Robinhood Markets, Inc., dated Oct. 7, 2025 (``Robinhood
Letter''); letter from Brian Steele, Managing Director, President,
DTCC Clearing & Securities Services, The Depository Trust and
Clearing Corporation, dated Mar. 31, 2026 (``DTCC Letter''). The
public comment file for the Application is available on the
Commission's website at: <a href="https://www.sec.gov/comments/600-39/600-39.htm">https://www.sec.gov/comments/600-39/600-39.htm</a>.
\9\ Letter from Chad Cascarilla, Chief Executive Officer, Paxos
Securities Settlement Company, LLC, dated April 16, 2026 (``PSSC
Response Letter'').
\10\ Robinhood Letter at 1.
\11\ DTCC Letter at 1, 2-4.
\12\ DTC, a subsidiary of DTCC, is a clearing agency registered
with the Commission that provides central securities depository
services. See DTCC Letter at 1.
\13\ PSSC Response Letter at 2.
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On April 28, 2026, PSSC requested that the Commission grant
temporary registration pursuant to Rule 17Ab2-1(c). This order grants
PSSC's Application and request for temporary registration as a clearing
agency with an exemption from Sections 17A(b)(3)(A) and 17A(b)(3)(F) of
the Exchange Act for a period not to exceed 18 months, for the reasons
set forth below.
II. Statutory Standard for Registration as a Clearing Agency
Clearing agencies are broadly defined under the Exchange Act and
undertake a variety of functions,\14\ including providing the services
of a CSD.\15\ Pursuant to Section 17A of the Exchange Act and Rule
17Ab2-1 thereunder, an entity that meets the definition of a clearing
agency must register with the Commission.\16\ Section 17A(b)(1) also
states that, upon the Commission's motion or upon a clearing agency's
application, the Commission may conditionally or unconditionally exempt
a clearing agency from any
[[Page 32152]]
provisions of section 17A or the rules or regulations thereunder if the
Commission finds that such exemption is consistent with the public
interest, the protection of investors, and the purposes of section 17A,
including the prompt and accurate clearance and settlement of
securities transactions and the safeguarding of securities and
funds.\17\
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\14\ 15 U.S.C. 78c(a)(23)(A) (providing the definition of
``clearing agency''); see also Release No. 34-78961 (Sept. 28,
2016), 81 FR 70786, 70897 (Oct 13, 2016) (``CCA Standards Adopting
Release'') (stating that clearing agencies are broadly defined in
the Exchange Act and undertake a variety of functions).
\15\ See 17 CFR 240.17ad-22(a)(2) (defining ``central securities
depository'').
\16\ 15 U.S.C. 78q-1(b); 17 CFR 240.17ab2-1 (``Rule 17Ab2-1'').
\17\ 15 U.S.C. 78q-1(b)(1)
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In addition to the requirements set forth in Rule 17Ab2-1, Section
19(a)(1) of the Exchange Act establishes the standard for Commission
review of an application for registration as a clearing agency.
Pursuant thereto, the Commission shall grant registration of a clearing
agency if it finds that the requirements of the Exchange Act and the
rules and regulations thereunder with respect to the applicant are
satisfied.\18\ The Commission shall deny such registration if it does
not make such finding.\19\
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\18\ 15 U.S.C. 78q-1; 15 U.S.C. 78s(a)(1).
\19\ 15 U.S.C. 78s(a)(1).
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The requirements of the Exchange Act applicable to clearing
agencies are set forth in Section 17A of the Exchange Act and the rules
and regulations thereunder.\20\ Accordingly, to grant PSSC's
Application for registration as a clearing agency, the Commission must
find that the Application satisfies the requirements of Section 17A(b)
of the Exchange Act and rules and regulations thereunder, including the
determinations set forth in paragraphs (A) through (I) of Section
17A(b)(3) of the Exchange Act.\21\ Pursuant to Rule 17Ab2-1(c), the
Commission, upon the request of a clearing agency, may grant
registration of the clearing agency but exempt the registrant from one
or more of the requirements as to which the Commission is directed to
make a determination pursuant to Section 17A(b)(3) of the Exchange Act,
provided that any such registration shall be effective only for
eighteen months from the date the registration is made effective (or
such longer period as the Commission may provide by order).\22\
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\20\ Rules for registered clearing agencies include
recordkeeping requirements, 17 CFR 240.17a-1; the filing process for
proposed rule changes, 17 CFR 240.19b-4; rules addressing operations
and risk management, governance and conflicts of interest, and plans
for recovery and wind-down at, respectively, 17 CFR 240.17ad-22
(``Rule 17Ad-22''), 240.17ad-25 (``Rule 17Ad-25''), and 240.17ad-26
(``Rule 17Ad-26''); and the requirements set forth in Regulation
Systems Compliance and Integrity, 17 CFR 242.1000 et seq.
(``Regulation SCI''). The Commission conducts ongoing monitoring of
registered clearing agencies through its supervisory program for
registered clearing agencies. The Commission also assesses
compliance with Commission rules by conducting examinations and
investigations. See 15 U.S.C. 78q(b); 15 U.S.C. 78u(a).
\21\ 15 U.S.C. 78s(a); 15 U.S.C. 78q-1(b)(3)(A)-(I). The
determinations are described further below.
\22\ See 17 CFR 240.17ab2-1(c)(1); see also, e.g., Release No.
34-25740 (May 24, 1988), 53 FR 19839 (May 31, 1988) (granting
temporary registration to the Government Securities Clearing
Corporation in 1988 for a period of 36 months) (``GSCC Order'').
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After a clearing agency's application for registration is granted,
the clearing agency must continue to satisfy the requirements of the
Exchange Act and the rules and regulations thereunder. In the context
of temporary registration, the clearing agency must satisfy the
requirements of the Exchange Act and the rules and regulations
thereunder, except as to requirements, rules, or regulations to which
an exemption has been provided. The Commission has explained that
``[a]n approval of clearing agency registration does not mean that no
further modifications of the applicant's rules, systems, procedures, or
practices are needed.'' \23\ Rather, the Commission stated that a
registered clearing agency's obligation to continue to satisfy the
requirements of the Exchange Act and the rules and regulations
thereunder means that [even] ``[t]he self-regulatory obligations of [a]
fully registered clearing agenc[y] cannot end'' after registration.\24\
To ensure such compliance, the Commission stated that it ``will
continue to use its oversight, inspection, and enforcement authority as
necessary and appropriate to further the purposes of the [Exchange]
Act.'' \25\
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\23\ See Release No. 34-69838 (June 24, 2013), 78 FR 39027,
39029 (June 28, 2013) (``FICC Registration'') (approving an
application by the Fixed Income Clearing Corporation (``FICC'') for
permanent registration as a clearing agency).
\24\ See Release No. 34-20221 (Sept. 23, 1983), 48 FR 45167,
45171 (Oct. 3, 1983) (approving nine applications for permanent
registration as a clearing agency).
\25\ Id.
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III. Review of Application Under Statutory Standard for Registration
Consistent with the requirements in Sections 17A and 19(a)(1) of
the Exchange Act described above, the Commission below analyzes the
Application against each of the statutory requirements under Sections
17A(b)(3)(A) through (I) to be registered as a clearing agency.\26\
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\26\ See 15 U.S.C. 78q-1(b)(3)(A)-(I) (describing the statutory
determinations that the Commission must make regarding the rules and
structure of a clearing agency to grant registration). In 1980, the
Commission published a statement of the views and positions of
Commission staff regarding the requirements of Section 17A. See
Release No. 34-16900 (June 17, 1980), 45 FR 41920 (June 23, 1980)
(``Standards Release'').
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A. Organization and Capacity
1. Statutory Standard: Section 17A(b)(3)(A)
Section 17A(b)(3)(A) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
such clearing agency is so organized and has the capacity to be able to
facilitate the prompt and accurate clearance and settlement of
securities transactions and derivative agreements, contracts, and
transactions for which it is responsible, to safeguard securities and
funds in its custody or control or for which it is responsible, to
comply with the provisions of the Exchange Act and the rules and
regulations thereunder, to enforce (subject to any rule or order of the
Commission pursuant to Section 17(d) or 19(g)(2) of the Exchange Act)
compliance by its participants with the rules of the clearing agency,
and to carry out the purposes of Section 17A of the Exchange Act.\27\
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\27\ 15 U.S.C. 78q-1(b)(3)(A).
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Consistent with this standard, the Commission does not assess in
this order whether PSSC's ultimate implementation of the rules,
policies, and procedures set forth in its Application will comply with
each of the Commission's rules for clearing agencies, as PSSC is not
yet operating as a clearing agency.\28\ Rather, the Commission assesses
whether PSSC is so organized and has the capacity to comply with the
provisions of the Exchange Act and the rules and regulations
thereunder,\29\ by analyzing PSSC's organization and governance, as
well as its operational arrangements.\30\ Under this standard, the
registration of
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a clearing agency ``depends on a prediction about compliance with the
law.'' \31\ Section 17A assumes that ``an applicant would produce a
business plan that, if faithfully executed, would comply'' with the
Exchange Act.\32\ To make its required statutory determination under
Section 17A(b)(3)(A), the Commission must ``find[ ] that the applicant
is able and likely to comply,'' and upon registration and commencement
of operations as a registered clearing agency, compliance with Section
17A(b)(3)(A) ``is likely to be carried out.'' \33\
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\28\ See supra notes 23-24 and accompanying text (explaining
that approval of clearing agency registration does not mean that no
further modifications of the applicant's rules, systems, procedures,
or practices are needed and that the obligations of a fully
registered clearing agency cannot end after registration).
\29\ With respect to PSSC's ability to safeguard securities and
funds for which it is responsible, the Commission addresses that
topic in Part III.E, in conjunction with discussing Section
17A(b)(3)(F) of the Exchange Act, which requires, among other
things, that the rules of the clearing agency are designed to assure
the safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible. With
respect to PSSC's ability to enforce compliance by its participants
with the rules of the clearing agency, the Commission addresses that
topic in Part III.F, in conjunction with discussing Section
17A(b)(3)(G) of the Exchange Act, which requires that the rules of
the clearing agency provide that its participants shall be
appropriately disciplined for violation of any provision of the
rules of the clearing agency.
\30\ In Part III.E, the Commission further analyzes PSSC's
capacity to conduct risk management consistent with the statutory
requirements for safeguarding securities and funds set forth in
Section 17A(b)(3)(F) of the Exchange Act.
\31\ Bd. of Trade of City of Chicago v. SEC., 883 F.2d 525, 533
(7th Cir. 1989) (vacating Delta Government Options Corporation
(``Delta'')'s temporary registration as a clearing agency and
remanding to the Commission to decide whether Delta's proprietary
trading system would operate as an unregistered national securities
exchange in violation of Sections 5 and 6 of the Exchange Act).
\32\ Id. at 533-34.
\33\ Id. at 534 (emphasis in original).
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2. Summary of Organization and Governance
PSSC is a limited liability company formed under Delaware law \34\
and a wholly owned subsidiary of Kabompo Holdings, Ltd. (``Kabompo''),
which is also the holding company for Paxos Holdings LLC (``Paxos
Holdings'').\35\ Kabompo is the holding company of 20 U.S. and non-U.S.
subsidiaries, including PSSC.\36\ Kabompo is incorporated in the Cayman
Islands.\37\
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\34\ See Application, Exhibit E.1. PSSC was formed on June 23,
2020, and subsequently entered into a Limited Liability Company
Agreement with Kabompo on October 20, 2021.
\35\ See Application, Exhibit E.1. Paxos Holdings holds 100% of
the membership interest in PSSC. See id. Kabompo is the sole member
of Paxos Holdings. See Application, Exhibit C.1.
\36\ See Application, Exhibit E.1. The Application describes
PSSC as a wholly owned single member limited liability company,
operating as a stand-alone entity with no divisions or segregable
entities or subsidiaries.
\37\ See Application, Exhibit C.2. In addition to PSSC, Kabompo,
through its ownership of Paxos Holdings, is the parent holding
company for a number of other U.S. and non-U.S. subsidiaries,
including Paxos Trust Company (``PTC''); Paxos Technology Solutions,
LLC (``PTS''); Paxos Technology Limited; Paxos Services Limited;
Paxos Canada Inc.; Lomami Intermediacao (dba Paxos Brazil); Bruntal
SA (dba Paxos Uruguay); Molopo, Sociedad de Responsabilidad Limitada
de CV (dba Paxos Mexico); Kabompo Lending Ltd.; Paxos Digital
Singapore Pte. Ltd.; Paxos Lending LLC; Paxos Issuance MENA Ltd.;
Paxos Insurance Company Ltd.; Paxos Singapore Pte. Ltd.; Paxos
Middle East Ltd.; Paxos Issuance Europe Oy; Castor Pollux Holdings
SARL (``Castor''); and HRQ, LLC. Paxos Global PTE, Ltd. (``PTE'') is
a wholly owned subsidiary of Castor. In addition, the chairman of
PSSC's Board of Directors (``Board'') would also be PSSC's Chief
Executive Officer (``CEO'') and is one of the three owners of
Kabompo. Another of the three owners of Kabompo is LCV Digital
Currency II, LLC. The PSSC CEO is a majority stakeholder in both
Kabompo and LCV Digital Currency II, LLC. See Application, Exhibits
C.1 and C.2. respectively, for more information about each of these
affiliates and PSSC's governance and ownership arrangements.
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(a) Board of Directors
PSSC's Board would comprise ten directors.\38\ To assist the Board,
PSSC would have five Board-level committees and one Participant
Advisory Committee (``PAC'').\39\ Three of the ten directors would be
``member directors,'' selected by Paxos Holdings. Five directors would
be ``public directors,'' initially specified in PSSC's bylaws and
thereafter elected annually by the PSSC's Board from among nominees
selected by the Board's Governance Committee.\40\ Two directors would
be ``participant directors,'' affiliated with a PSSC participant and
nominated by participant representatives serving on the Board's PAC.
PSSC's Board would not initially include the participant directors.
PSSC's bylaws provide that within 180 calendar days of PSSC commencing
operations and having at least two participants (or a different time
that is agreed to by PSSC and its PAC), two participant directors
selected by the PAC would be added to the Board.\41\ In addition, a
Board quorum for conducting business requires at least one participant
director and one member director, as well as a majority of directors
then serving on the Board. As a result, at no time would the member
directors ever have majority voting power to control the Board as a
voting block.\42\
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\38\ See Application, Exhibit C.1.
\39\ See Application, Exhibit C.2.
\40\ See Application, Exhibit B.I.
\41\ Id.
\42\ See Application, Exhibit C.1, at 12.
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(b) Board Committees
To assist the Board in carrying out its responsibilities, PSSC
would establish five Board level committees: (i) Governance, Nominating
and Policy Committee; (ii) Audit Committee; (iii) Compliance and Risk
Management Committee; (iv) Business, Technology and Operations
Committee: and (v) Compensation Committee. Each committee would be
composed of at least one member director, one public director, and one
participant director. As explained in Exhibit C.1, a member director
serving as a PSSC corporate officer cannot also serve on a Board
committee.
After the admission of the first participant to PSSC, the PAC would
be established as a ``non-Board level'' advisory committee.\43\ The
charter governing the PAC requires the Chairman of the Board
(``Chair''), CEO, and Secretary (or their appointees) to attend all
meetings.\44\ The primary function of the PAC, as specified in the
charter, would be to nominate and elect the two participant directors
and provide advice and recommendations to the Board regarding the needs
and interests of participants, including but not limited to PSSC's
governance structure, participation standards, disciplinary practices,
margin practices and regulatory compliance matters. Under the charter,
the PAC may by majority vote of the PAC representatives call for a
meeting with the Board at any time regarding any matter.\45\
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\43\ Application, Exhibit C.1, at 2; see also Application,
Exhibit E.10 (providing the PAC charter).
\44\ See Application, Exhibit E.10.
\45\ Id. In addition, Exhibit C.1 of the Application also
discusses how this governance structure provides fair representation
among the shareholder and PSSC participants. See Application,
Exhibit C.1, at 3-5; see also infra Part III.C (further discussing
the fair representation standard).
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(c) Intercompany Agreements
PSSC would maintain a Master Intercompany Services Agreement
(``MISA'') under which PTE and PTS would provide certain supplemental
vendor support services to PSCC.\46\ PTE would provide business
continuity and redundancy services, including support services related
to legal, compliance, and business continuity. PTS would provide
technology services and administrative support services. The technology
support services include staffing, computer hardware and software,
information security, communications systems, server/mainframe/
infrastructure support, engineering and development services,
maintenance, and operations. The administrative support services
include services related to employment, legal and compliance, business
continuity, tax, accounting, human resources, management of insurance
needs, marketing and physical office space. The PSCC Application states
that all such services would require PTE and PTS to maintain complete
and accurate books and records consistent with PSSC's recordkeeping
obligation under Exchange Act Rule 17a-1 \47\ and Regulation SCI.\48\
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\46\ See Application, Exhibit C.4.
\47\ See 17 CFR 240.17a-1.
\48\ Application, Exhibit C.4, at 5; see also 17 CFR 242.1000 et
seq. (setting forth the requirements under Regulation SCI).
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PSSC states that the terms of the MISA and its internal control
over procurement procedures would be designed to ensure that none of
the affiliated service providers would themselves perform clearing
agency functions or constitute operating any ``SCI system or indirect
SCI system'' of PSSC, or exert material control over
[[Page 32154]]
PSSC's activities.\49\ For example, PSSC states that the MISA provides
that PTE or PTS would not be permitted to enter into an agreement to
provide support services to PSSC unless such an arrangement is approved
in writing by PSSC, which may be given by the CEO, Chief Financial
Officer (``CFO'') or Chief Technology Officer (``CTO'') of PTE or PTS,
provided that such officer is also a co-employee of PSSC.\50\
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\49\ Application, Exhibit C.1, at 4-5.
\50\ Id, at 6. While a number of PSSC employees are dual
employees, only one of those dual employees is also a PSSC Board
member (currently Chairman of the Board) and co-owner of Kabompo.
See Application, Exhibit D.
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(d) Role of Member Directors and Dual Employees
In addition to Board participation, the Application indicates that
one or more member directors may also serve on Board committees, in
management positions within PSSC, or in both capacities.\51\ For
example, pursuant to PSSC's committee charters, at least one member
director would maintain membership on each Board committee.\52\
However, as noted above and explained in Exhibit C.1, a member director
serving as a PSSC corporate officer cannot also serve on a Board
committee.\53\ In addition, the Chairman of the Board and the CEO (of
which, both positions initially will be held by one individual that is
also a member director), as well as the Secretary, also must attend all
meetings of the PAC.\54\
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\51\ See Application, Exhibits E.3, A, B, and D respectively.
Currently, one member director is serving as the Chief Executive
Officer. See Application, Exhibits A and B.
\52\ Exhibit E.3 of the Application provides a general
description of participation by member directors in Board
committees, and Exhibits E.4 though E.9 provide the charters for
each Board committee.
\53\ Application, Exhibit C.1, at VI.D.
\54\ Application, Exhibit E.10 at II.C.
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The PSSC Application also indicates that several of PSSC's key
employees would serve as dual employees of PSSC and one of its
affiliates, which currently includes employees acting as Treasurer,
General Counsel, Chief Compliance Officer, Chief Information Security
Officer, Head of Engineering, Audit and Exam Director, and in Business
Development.\55\
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\55\ See Application, Exhibit D.
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3. Summary of Operations
As described below, PSSC would, if PSSC's participant application
is approved by DTC, provide clearance and settlement services as a DTC
participant and through its Paxos Settlement Service (``PSS''), a
private and permissioned system developed and operated by PSSC to
conduct delivery versus payment (``DVP'') settlement, on a bilateral
basis, of securities transactions between counterparties.\56\ The
software related to PSS would support a distributed ledger (``Paxos
Ledger'') that would record the ownership of participants' eligible
securities and cash. Below is a summary description of certain aspects
of the Application that relate to the PSS and PSSC's proposed
operations more generally.
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\56\ See Application, Exhibit J, at 11.
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(a) Counterparty Pairs
PSSC participants would not be permitted to settle settlement
obligations with another participant unless the participants are a
counterparty pair (``CP Pair'').\57\ Only trades received by CP Pairs
established pursuant to PSCC rules would be eligible for settlement in
PSSC. Prior to commencing participation in PSSC, each participant would
be required to notify PSSC in writing of other participants with which
it agrees to settle settlement obligations in PSSC. Correspondingly,
each existing participant must notify the Company in writing whether it
agrees to settle settlement obligations with the new participant. By
providing such notices, participants and PSCC would agree between and
among themselves that: (i) each participant will be a CP Pair of the
other such participant as provided in PSSC Rules for the purposes of
settling settlement obligations between them through PSSC; (ii) the
settlement obligations are determined by PSSC pursuant to its rules;
(iii) each participant in the CP Pair agree to be obligated to the
other participant to settle the settlement obligations pursuant to PSSC
Rules; and (iv) PSCC and each participant in the CP Pair will have all
the rights and obligations as against each other as specified in PSSC
Rules.\58\
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\57\ See Application, Exhibit E.12 (``PSSC Rules''), at Rule
2.2D; see also Application, Exhibit J, at 12.
\58\ See PSSC Rules, at Rule 2.1D (also providing that, absent
such notice, PSSC would not treat the participants as a CP Pair).
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Existing PSSC participants would be permitted to elect at any time
to form a CP Pair with another existing PSSC participant. Any trade
submitted to PSSC for settlement that PSCC does not recognize as a CP
Pair would be rejected.\59\ A participant would be permitted to
terminate any CP Pair by providing written notice to PSSC, which would
in turn provide corresponding notice to the relevant participants and
any relevant trading venue, as necessary.\60\
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\59\ PSSC Rules, at Rule 2.2D.
\60\ PSSC Rules, at Rule 2.4D; see also Application, Exhibit J,
at 12.
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(b) Deposits of Eligible Securities and Cash
To facilitate settlement of obligations between CP Pair
participants, each participant would be required to deposit eligible
securities into its PSSC participant account by instructing DTC to move
its securities from the PSSC participant's account at DTC to PSSC's
account at DTC, which in turn would hold such securities for the
benefit of the PSSC participant.\61\ Upon receipt, PSSC, through a
process called ``securities digitization,'' would create a security
entitlement on the Paxos Ledger credited to the relevant participant's
account that is a representation of the eligible security held in
PSSC's DTC account. Upon instructions from a PSSC participant, PSSC
would facilitate a withdrawal of securities from the participant's PSSC
account by removing the security entitlement to the securities credited
to that participant's account on the Paxos Ledger and initiating
relevant instructions through DTC to remove the security from PSSC's
DTC account and deliver it to the PSCC participant's DTC account. PSSC
would not remove the security entitlement to the securities credited to
the participant's PSSC account without also transferring the securities
``in rapid succession'' to a DTC account designated by the PSSC
participant.\62\
---------------------------------------------------------------------------
\61\ See PSSC Rules, at Rule 4.4.
\62\ Id.
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With regard to the deposit of cash into a PSSC participant account,
PSSC would maintain two types of omnibus cash custody accounts for the
benefit of participants at a settling bank: (i) an operating cash
account (``Operating Cash Account'') which would be used to settle PSSC
participant settlement obligations and fees owed to PSSC,\63\ and (ii)
a margin cash account, which would be used to satisfy PSSC
participants' margin obligations (``Margin Cash Account'').\64\ Upon
[[Page 32155]]
receipt of cash from a participant into the Operating Cash Account or
Margin Cash Account, PSSC, through a process called ``cash
digitization,'' would create a securities entitlement on the Paxos
Ledger credited to the participant account that would be a
representation of the cash in the Operating Cash Account or Margin Cash
Account, as applicable.\65\ Upon instruction from a participant, PSSC
would also facilitate the withdrawal of operating cash or margin cash
from the participant's account by removing the security entitlement
credited to the participant in its account on the Paxos Ledger and
initiating a transfer from PSSC to an account designated by the
participant. PSSC would not remove the security entitlement to cash
without also transferring the cash ``in rapid succession'' to the
account designated by the participant.\66\
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\63\ PSSC Rules, at Rule 4.5.2. PSSC defines the term
``Operating Cash Account'' to mean an omnibus cash custody account
at each settling bank that holds operating cash deposited by
participant for the purpose of settling obligations to purchase
securities from CP Pairs and to settle fees owed to PSSC. PSSC
Rules, at Rule 1.
\64\ PSSC Rules, at Rule 4.5.3; see also PSSC Rules, at Rule 13
(describing eligibility and ongoing obligations of PSSC-approved
settling banks). PSSC defines the term ``Margin Cash Account'' to
mean an omnibus cash custody account at a settling bank that is
maintained in PSSC's name for the purpose of holding cash that
represents the margin assets of each participant. PSSC Rules, at
Rule 1.
\65\ PSSC Rules, at Rule 4.5.4.
\66\ Id.
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(c) Trade Submission
Trades submitted to PSSC by CP Pairs would be required to be
submitted in accordance with the terms of the operating procedures of
any relevant ``eligible trading venue'' \67\ on which the transaction
was executed or, if there is no eligible trading venue (i.e., the trade
is an over-the-counter trade), then in near real-time by the relevant
participants upon execution, and in accordance with PSSC Rules.\68\
PSSC Rules specify further details regarding submissions of over-the-
counter trades, requiring written notification of which participant
will be designated as the submission party (``designated trade
submission participant''), which in turn would trigger compliance with
additional PSSC Rules.\69\ If trade information from either an eligible
trading venue or designated trade submission participant does not
comport with PSSC Rules, PSSC would immediately notify the relevant
submission source and would not accept the trade for settlement until
the discrepancy is resolved and the trade is properly resubmitted.\70\
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\67\ As defined in PSCC Rules, an ``eligible trading venue''
means a trading venue approved by and integrated by PSCC. See PSSC
Rules, at Rule 1.
\68\ PSSC Rules, at Rule 4.7; see also Application, Exhibit J,
at 14-15. If the submission comports with Rule 4, PSSC would not
make any modification to the transaction detail as submitted. Id.
\69\ PSSC Rules, at Rule 4.7.
\70\ Id.
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(d) Settlement
As mentioned above, PSSC proposes to conduct DVP settlement on a
bilateral basis of settlement obligations between pre-determined CP
Pairs.\71\ PSSC would not serve as a central counterparty to its
participants and would not extend any form of intraday or overnight
credit.\72\ As a result, PSSC participants would have credit exposure
to only those participant counterparties that they approve in advance
and would have no counterparty credit exposure to PSSC.\73\ The
Application states that participants would have the ability to process
settlements on the trade date that is a Business Day (T+0), on the
Business Day after the trade date (T+1), or on any other Business Day
after the trade date as they may agree.\74\
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\71\ All transactions accepted by PSSC would settle bilaterally
on a net basis per CP Pair, unless both participants in that CP Pair
notify PSSC prior to acceptance of the transaction that the
participants have elected to have a specified transaction settled on
a gross basis. PSSC Rules, at Rule 4A.
\72\ Application, Exhibit J, at 3.
\73\ Id.
\74\ Application, Exhibit J, at 25; see also PSSC Rules, at Rule
4.10.
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Settlement would occur through the movement of cash and eligible
securities on the Paxos Ledger between the relevant participant
accounts maintained by PSSC.\75\ To meet settlement obligations, each
participant would be required to have the securities or cash in its
participant account with PSSC no later than the ``Daily Settlement Cut-
Off Time'' on the relevant settlement date.\76\ Participants, however,
would not be required to fund securities or cash in advance of the
relevant date.\77\
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\75\ See Application, Exhibit J, at 3-4.
\76\ PSSC Rules, at Rules 4.9 and 6.1. The term ``Daily
Settlement Cut-Off Time'' is defined to mean 3:10 p.m. and is the
time by which a participant is required to make sufficient operating
cash or securities available in its participant account to
facilitate timely settlement of its obligations on settlement date.
PSSC Rules, at Rule 1. The definition provides PSSC flexibility to
specify a different cut-off time as may be necessary to accommodate
exceptional circumstances. Unless otherwise noted, all references to
a specific time in the PSSC Rules means Eastern Time. PSSC Rules, at
Rule 1A.
\77\ Id.
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On a continuous basis over the course of the settlement date,
beginning at 12:00 a.m. on each given settlement date, PSSC would
settle any pending settlement obligation when the relevant security
entitlements to cash and eligible securities become available on the
Paxos Ledger.\78\ At settlement, the entitlements to the relevant cash
and eligible securities would be transferred between the participant
accounts to record the settlement on the Paxos Ledger.\79\ At least
daily, each participant would be required under PSSC Rules to reconcile
its settlement obligations and any other activity that occurs in PSS
based on any related reports made available to the participant from
PSSC, and promptly report any discrepancies.\80\ Once settlement is
final, participants would have immediate access to settlement proceeds
and would not need to wait until the end-of-day batch processes have
been completed before accessing such proceeds.\81\ After settlement,
PSSC would permit participants to withdraw the settled cash and
eligible securities, while also allowing for any residual cash or
securities to remain digitized and available for use to meet the
participant's settlement obligation.\82\
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\78\ Application, Exhibit J, at 3-4 and 25.
\79\ Application, Exhibit J, at 4; see also PSSC Rules, at Rule
6.1.
\80\ See PSSC Rules, at Rule 4.13.
\81\ Application, Exhibit J, at 2.
\82\ Id.
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On the settlement date, PSSC would use its settlement
prioritization rules to determine the order in which to use a
participant's available operating cash (i.e., cash from the Cash
Operating Account) and securities to settle the participant's
outstanding settlement obligations.\83\ As described in more detail
below, PSSC would first settle all settlement obligations that
represent ``Close-Out Liability Obligations.'' \84\ Any Close-Out
Liability Obligation that PSSC has started to settle but that remains
partially settled would be completed before settlement of any Close-Out
Liability Obligations that have not been partially settled. If the
order of priority for settlement cannot be determined based on whether
the Close-Out Liability Obligations have been partially settled, then
priority for settlement would be according to the largest remaining
Close-Out Liability Obligation ranked in descending order.\85\ If the
order of priority for settlement cannot be determined based on whether
the Close-out Liability Obligations have been partially settled or
based on the size of the exposures in descending order, then the
priority for settlement would be according to a random order determined
in ``lexicographical order'' using an identifier that is assigned by
PSSC to each Close-Out Liability Obligation at the time it is recorded
on PSSC's books and records.\86\
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\83\ Application, Exhibit J, at 26-29; see also PSSC Rules, at
Rule 6.1.2.
\84\ A Close-Out Liability Obligation is defined as a cash
settlement obligation created by PSSC that is due to be paid by a
failing participant to a non-failing participant in relation to the
relevant non-failing participant's ``Close-Out Execution.'' PSSC
Rules, at Rule 1.
\85\ Application, Exhibit J, at 26; see also PSSC Rules, at Rule
6.7.
\86\ Id.; see also PSSC Rules, at Rule 6.1.2.1.
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[[Page 32156]]
Second, PSSC would prioritize Settlement Failures, which would be
prioritized in descending order from ``oldest age to youngest'' based
on the original settlement date.\87\ When the settlement obligations
that represent a Settlement Failure for which the priority of the fail
cannot be determined solely based on age, PSSC would use available cash
or securities, as applicable, in the participant's accounts in the
following order: (i) any settlement obligation that PSSC has started to
settle but remains partially settled would be completed before any
settlement obligation that has not been partially settled; (ii) if the
order of priority for settlement cannot be determined based on whether
the settlement obligations have been partially settled, then priority
for settlement will be according to the largest remaining exposure
measured by dollar value and ranked in descending order; and (iii) if
the order of priority for settlement cannot be determined based on
whether the settlement obligations have been partially settled or based
on notional exposures measured by dollar value, then the priority for
settlement will be according to the random ordering determined in
lexicographical order using an identifier that is assigned by the
company to each settlement obligation at the time it is recorded on
PSSC's books and records.\88\
---------------------------------------------------------------------------
\87\ Application, Exhibit J, at 27; see also PSSC Rules, at Rule
6.1.2.1. Under PSSC Rule 1, ``Settlement Failure'' means ``a
Settlement Obligation for which a Participant fails to make
sufficient Operating Cash or Eligible Securities available in its
Participant Account on a Settlement Date by the Daily Settlement
Cut-Off Time.''
\88\ Application, Exhibit J, at 27; see also PSSC Rules, at Rule
6.1.2.4.
---------------------------------------------------------------------------
Third, after all outstanding Settlement Failures have been settled
using the available cash or securities in a participant's account, PSSC
would next settle all settlement obligations that are not Settlement
Failures in the order specified above for Settlement Failures.\89\
---------------------------------------------------------------------------
\89\ Application, Exhibit J, at 27; see also PSSC Rules, at Rule
6.1.2.3.
---------------------------------------------------------------------------
(e) Failure To Deliver Cash or Securities and Defaults
The failure of any participant to have sufficient cash or
securities in its PSSC account by the Daily Settlement Cut-Off Time on
settlement date would constitute a Settlement Failure, which would
subject the participant to certain fines as specified under PSSC
Rules.\90\ In addition, PSSC would impose certain fees and surcharges
on responsible participants for Settlement Failures in accordance with
its fee schedule \91\ and certain margin charges in accordance with its
rules.\92\ Each Settlement Failure would be allocated to the relevant
non-failing participant in the CP Pair following the Daily Settlement
Cut-Off Time on settlement date.\93\ PSSC would make available to
participants in a CP Pair a report that reflects the existence of any
Settlement Failure.\94\
---------------------------------------------------------------------------
\90\ Application, Exhibit J, at 25-26; see also PSSC Rules, at
Rule 6.2.
\91\ PSSC Rules, at Rule 6.2.2.
\92\ See PSSC Rules, at Rules 6.2.3 and 5.4B.
\93\ PSSC Rules, at Rule 6.2.
\94\ Id.
---------------------------------------------------------------------------
Except as otherwise provided in its rules, PSSC would continue to
attempt to settle any outstanding Settlement Failure using any
operating cash (i.e., cash available in the Operating Cash Account) or
securities that become(s) available in the failing participant's
account until such time as the settlement obligation has been settled
or closed out through a ``buy-in or sell-out'' process (i.e., a close-
out execution).\95\ A Settlement Failure relating to a participant's
obligation to deliver operating cash where there is not any
corresponding settlement obligation of a CP Pair to deliver securities
to the failing participant (which may arise in connection with the
Enhance Netting Process described below) would not be governed by
PSSC's close-out requirements.\96\ Instead such Settlement Failure
would be a Close-Out Liability Obligation, subject to PSSC's settlement
prioritization process.\97\
---------------------------------------------------------------------------
\95\ PSSC Rules, at Rule 6.2.1.
\96\ Application, Exhibit J, at 26; see also, PSSC Rules, at
Rule 6.2.1. PSSC distinguishes between close-out requirements, which
are governed by Rules 6.3, 6.4, and 6.5, and a Close-Out Liability
Obligation, which is governed by Rules 6.6 and 6.7.
\97\ See PSSC Rules, at Rule 6.1.2.
---------------------------------------------------------------------------
PSSC Rules state that the close out requirements are designed to
require participants to responsibly manage Settlement Failures.\98\ A
close-out execution may be either a buy-in (in the case of a Settlement
Failure regarding securities) or a sell-out (in the case of a
Settlement Failure involving cash) and may be discretionary or
mandatory. Unless and until a Settlement Failure is settled, a non-
failing participant may close-out the Settlement Failure by the failing
participant after delivering notice to PSSC and the failing participant
of its intent to close-out the Settlement Failure (``Notice of Intent
to Close-Out''), otherwise referred to in PSSC Rules as a
``Discretionary Close-Out Execution.'' \99\ A non-failing participant
must close-out a Settlement Failure by a failing participant where it
receives notice from PSSC that a participant has failed to satisfy a
margin requirement, otherwise referred to in PSSC Rules as a
``Mandatory Close-Out Execution.'' \100\ In such a case, the non-
failing participant must close-out the Settlement Failure not later
than the daily settlement cut-off time on the second business day after
the notice is provided.\101\
---------------------------------------------------------------------------
\98\ PSSC Rules, at Rule 6.3.
\99\ Id.; see also Application, Exhibit J, at 27-29. In both a
Discretionary and Mandatory Close-Out Execution, the non-failing
participant must provide Notice. The Notice must include specified
information, including counterparty, quantity, price, net money
paid/received, trade date, settlement date, identification of the
Settlement Fail to which the close out relates, (e.g., CUSIPs and
money difference between the Settlement Fail and the Close-Out
Execution).
\100\ Id.
\101\ Id.
---------------------------------------------------------------------------
Upon receipt of a Notice of Intent to Close Out for either a
Discretionary or Mandatory Close-Out Execution, PSSC would ``as soon as
technologically practicable'' cease to attempt to use operating cash or
securities that become available in the failing participant's account
to settle any outstanding Settlement Failure specified in the Notice of
Intent to Close Out. Any non-failing participant effecting a
Discretionary or Mandatory Close-Out will provide notice to PSSC and
the failing participant immediately following, and in no event more
than two hours after, the relevant Close-Out Execution. If the non-
failing participant does not complete the Mandatory Close-Out Execution
by the Daily Settlement Cut-Off Time on the second business day after
the Notice of Intent to Close Out is provided or if for any reason
effecting such execution is not permitted (as may be the case if both
participants in a CP Pair are defaulting participants), PSSC will fix a
cash settlement value for the quantity of the securities not bought-in
or sold-out through a Close-Out Execution. The value fixed by PSSC will
be final and not subject to review.\102\
---------------------------------------------------------------------------
\102\ Application, Exhibit J at 28-29; see also PSSC Rules, at
Rule 6.5.
---------------------------------------------------------------------------
Any non-failing participant effecting a Discretionary or Mandatory
Close-Out would be required to provide notice to PSSC and the failing
participant immediately following, and in no event more than two hours
after, the relevant Close-Out Execution (``Close-Out Execution
Notice'').\103\ Upon receiving a Close-Out Execution Notice \104\ from
a non-failing participant and/or fixing a cash settlement value
pursuant to PSSC
[[Page 32157]]
Rules, PSSC would create a Close-Out Liability Obligation due for
settlement on the next business day. The Close-Out Liability Obligation
would obligate the failing participant to pay the amount of the
difference, if any, in favor of the non-failing participant between the
value of the Settlement Failure and the value, as applicable, of the
Close-Out Execution or cash settlement value fixed by PSSC that is
deemed to be the value obtained in a Mandatory Close-Out
Execution.\105\
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\103\ PSSC Rules, at Rule 6.4.2.
\104\ The term ``Close-Out Execution Notice'' is defined to mean
a notice, which is provided by a participant effecting a Close-Out
Execution, to PSSC that must comply with the requirements set forth
in Rule 6. PSSC Rules, at Rule 1.
\105\ PSSC Rules, at Rule 6.6.
---------------------------------------------------------------------------
In the event that a Participant incurs a Settlement Failure
regarding a Close-Out Liability Obligation, the participant would be
considered a ``Defaulting Participant'' under PSSC Rules,\106\ and PSSC
would immediately use the margin assets of such participant to settle
all Close-Out Liability Obligations of the participant. PSSC would
apply the margin assets on a pro rata basis across all Close-Out
Liability Obligations of the Defaulting Participant in respect of all
CP Pairs across any and all applicable non-Defaulting Participant
counterparties to settle or partially settle open Close-Out Liability
Obligations.\107\
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\106\ ``Defaulting Participant'' means a Participant that incurs
a Settlement Failure of a Close-Out Liability Obligation as
described in Rule 6, or a Participant that fails to satisfy a margin
call as described in Rule 5C. PSSC Rules, at Rule 1.
\107\ PSSC Rules, at Rule 6.7.
---------------------------------------------------------------------------
For any Close-out Liability Obligation not fully settled after PSSC
has applied available assets, each participant in such CP Pair would
have the discretion to pursue recovery of the amount of the final value
against the failing participant as between themselves and any such
process would not be governed by PSSC Rules.\108\ Accordingly, in the
event of a counterparty default, non-defaulting participants may need
to pursue a private action to seek restitution from their defaulting
participant counterparty.
---------------------------------------------------------------------------
\108\ PSSC Rules, at Rule 6.7; see also Application, Exhibit J,
at 29.
---------------------------------------------------------------------------
(f) Netting
Although PSSC would not operate as a central counterparty, PSSC
proposes as part of its settlement system to provide two types of
netting arrangements: (i) bilateral netting in CP Pairs and (ii)
enhanced netting across CP Pairs.\109\ With the exception of
transactions accepted for gross settlement, all transactions accepted
by PSS for clearance and settlement would be settled bilaterally on a
net basis per CP Pair.\110\ Specifically, through the process of
bilateral netting, transactions accepted to PSS would create settlement
obligations that are netted for each participant such that, for each
security in which the participant has activity, the participant will
have one obligation to deliver securities or cash for each CP Pair for
which there is an obligation.\111\
---------------------------------------------------------------------------
\109\ See PSSC Rules, at Rule 4A.
\110\ PSSC Rules, at Rule 4.1A; see also Application, Exhibit J,
at 15.
\111\ PSSC Rules, at Rule 4.1A.
---------------------------------------------------------------------------
Participants would be permitted to request that PSSC further net
settlement obligations among CP Pairs through a process of ``enhanced
netting'' provided that: (i) each participant included in the enhanced
netting is part of a CP Pair with each other participant included in
the enhanced netting and (ii) the enhanced netting does not result in
an increased settlement or margin obligation to any participant.\112\
Where enhanced netting is applied, the resulting settlement obligation
of each participant would be in the amount and to the participant(s)
determined by the enhanced netting process. PSSC has provided several
examples as to how the enhanced netting process would work under
specific scenarios.\113\
---------------------------------------------------------------------------
\112\ PSSC Rules, at Rule 4.2A.
\113\ See Application, Exhibit J, at 16-18.
---------------------------------------------------------------------------
PSSC also would permit gross settlement for any CP Pair. Pursuant
to written instructions from each participant in the CP Pair provided
to PSSC prior to the acceptance of a specified transaction for
clearance and settlement, PSSC would create gross settlement
obligations for the participants, which would be due on settlement
date.\114\
---------------------------------------------------------------------------
\114\ PSSC Rules, at Rule 4.3A.
---------------------------------------------------------------------------
(g) Risk Management
As noted above, PSSC would not serve as a central counterparty to
PSSC participants and would not extend any form of intraday or
overnight credit.\115\ As a result, the Application states that PSSC
participants would have credit exposure to only those participant
counterparties that they approve in advance and would have no
counterparty credit exposure to PSSC.\116\
---------------------------------------------------------------------------
\115\ Application, Exhibit J, at 3.
\116\ Id.
---------------------------------------------------------------------------
Upon commencing participation in PSSC, each participant would be
required to deposit and maintain an ``initial margin deposit,'' as
determined by the Compliance and Risk Management Committee and in
connection with an applicant's admission as a participant.\117\ Factors
used by the committee to determine the initial margin deposit would
include credit worthiness, anticipated or actual settlement
obligations, trading strategy and operational capabilities.\118\
Participants would also be required to maintain a ``minimum required
margin deposit'' of $10,000, which may be increased based on the
factors used to determine the initial margin deposit.\119\ PSSC would
not accept new transactions for settlement unless and until the minimum
required margin deposit is met.\120\
---------------------------------------------------------------------------
\117\ PSSC Rules, at Rule 5.1.1B.
\118\ Id.
\119\ PSSC Rules, at Rule 5.1.2B.
\120\ Id.
---------------------------------------------------------------------------
Pursuant to PSSC Rules, the ``required margin amount'' (``RMA'') is
defined as the greater of the initial margin deposit, the minimum
required margin deposit and the ``computed margin requirement''
(``CMR'').\121\ Participants would be required to maintain sufficient
margin assets to collateralize their RMA.\122\ The CMR is defined as
the aggregate amount required for a participant to collateralize
unsettled settlement obligations with each of its CP Pairs.\123\ Each
participant's CMR would be calculated by determining a ``preliminary
computed margin requirement'' (``PCMR''); \124\ and adding to the PCMR
any fails charges, excessive fails penalties, or both. PSSC would
calculate each participant's CMR at the end of each business day.\125\
The PCMR would be calculated by using the following measures: (i) a
dynamic spot price; \126\ (ii) liquidity exposure requirement; \127\
(ii) low-priced
[[Page 32158]]
securities requirement; \128\ (iii) market capitalization requirement;
\129\ and (iv) percentage of outstanding shares requirement.\130\
---------------------------------------------------------------------------
\121\ PSSC Rules, at Rule 5.3B.
\122\ See PSSC Rules, at Rule 5.3B.
\123\ PSSC Rules, at Rule 5.4B. A participant's unsettled
settlement obligation due on settlement date may be net or gross.
See PSSC Rules, at Rule 4A. The CMR would also include fails charges
and excessive fails penalties. PSSC Rules, at Rule 5.4B; see also
Application, Exhibit J, at 18-19.
\124\ See PSSC Rules, at Rule 5.4.1B.
\125\ See PSSC Rules, at Rules 5.5B and 5C.
\126\ The dynamic spot price is to equal a three standard
deviation move of two-day prices for a relevant security. This would
be calculated using the implied volatility of the 30-day at-the-
money options for the security. If options prices were unavailable
for the security, PSSC would use the actual volatility of the
security over the past twenty trading days to calculate the standard
deviation of price moves. As described more fully in Rule 5B, the
PCMR calculated using a ``dynamic spot price,'' may use different
prices to determine the dynamic spot price in an enhanced netting
arrangement. See PSSC Rules, at Rule 5.4.1.1B and Rule 5.4.1.2B.
\127\ See PSSC Rules, at Rule 5.4.1.3B. An unsettled settlement
obligation would be subject to liquidity exposure requirement of
five percent if the participant's total unsettled settlement
obligation in a security to all of its CP Pairs exceeds the average
trading volume in that security over the past thirty trading days.
If the unsettled settlement obligation exceeds the average trading
volume in a security over the past 30 trading days, by a multiple
(e.g., two, three or more times the relevant volume), then the
liquidity exposure requirement would increase in corresponding
increments. See id.
\128\ See PSSC Rules, at Rule 5.4.1.4B. The low-priced security
requirement would be determined as follows: a participant with an
unsettled settlement obligation to receive a security that has a
closing price equal to or less than $1.00 would be required to post
margin equal to 100 percent of the value of the unsettled settlement
obligation. A participant with an obligation to deliver a security
that has a closing price equal to or less than $2.50 would be
required to post margin equal to 250 percent of the value of the
unsettled settlement obligation. See id.
\129\ See PSSC Rules, at Rule 5.4.1.5B. The market
capitalization requirement would be determined as follows: a
participant with an unsettled settlement obligation in a security
with a market capitalization equal to or less than $250,000,000
would be required to post margin equal to 100 percent of the value
of the unsettled settlement obligation.
\130\ See PSSC Rules, at Rule 5.4.1.6B. The percentage of
outstanding share requirement would be determined as follows: a
participant with a total unsettled settlement obligation to all of
its CP Pairs to receive shares in a security that exceeds five
percent of the total shares outstanding for that security would be
required to post margin equal to 100 percent of the value of the
unsettled settlement obligation. A participant that has a total
unsettled settlement obligation to its CP Pairs to deliver shares in
a security that exceeds five percent of the total shares outstanding
for that security would be required to post margin equal to 250
percent of the unsettled settlement obligation. Id.
---------------------------------------------------------------------------
PSSC would also apply a ``credit risk rating'' to each
participant.\131\ The credit risk rating would be based on PSSC's
credit risk rating matrix, which would evaluate the credit risk posed
by participants to each other.\132\ PSSC Rules also describe the
procedures related to the determination and use of the credit risk
rating, including the process by which the Board approves such rating,
participant appeal rights, access to potential CP Pair credit risk
ratings, requests for increased credit risk rating, annual PAC review
of rating factors, and Board review of participants' credit risk
rating. A participant's credit risk rating might be adjusted upward
(indicating a poorer creditworthiness) depending upon specified market
conditions based on the VIX volatility index and determinations made by
the Compliance and Risk Management Committee.\133\
---------------------------------------------------------------------------
\131\ See PSSC Rules, at Rule 2.4.2B. The credit risk rating
would be determined by applying to the participant or settlement
bank the following factors: (i) the availability of actively traded
5-year credit default swaps applicable to the participant; (ii)
credit ratings from any publicly available credit rating service;
(iii) capital, assets, earning and liquidity; and (iv) the
participant's creditworthiness and operational capabilities.
\132\ Id. PSSC would assign to each participant a credit risk
rating based on certain quantitative, and when available, publicly
accessible, credit factors. The credit risk ratings assigned would
use a five-point credit rating system, with Tier 1 being the
strongest and Tier 7 being the weakest.
\133\ See PSSC Rules, at Rule 2.4.2B.
---------------------------------------------------------------------------
In the event a participant were to fail to deliver either operating
cash or eligible securities on settlement date, the participant would
be charged an additional 20 percent of the portion of its CMR that is
attributable to the failed settlement obligation.\134\ Fails charges
would be collateralized for as long as the fail persists. In the event
that the total market value of a participant's fails were to exceed
specified percentages of that participant's total unsettled settlement
obligation to all of its CP Pairs, the participant would also be
subject to an excessive fails charge. Participants would additionally
be subject to penalties for excessive fails, escalating those charges
based on a formula using the percentage of total market value of the
participant's fails as compared to the total unsettled settlement
obligations, generating a requirement to post margin assets equal to
50% to 100% of the market value of the total pending settlement
obligation.\135\ In cases where the total market value exceeds 50
percent of the total unsettled settlement obligations, the participant
would be subject to PSSC Rules governing cessation of services and
terminations, which might cause PSCC to cease to act on such
participant's behalf.\136\
---------------------------------------------------------------------------
\134\ Application, Exhibit J, at 22-23; see also PSSC Rules, at
Rule 5.4B.
\135\ See Application, Exhibit J, at 23; see also PSSC Rules, at
Rule 5.4.3B.
\136\ Id.
---------------------------------------------------------------------------
In addition to the end-of-the-day CMR calculation, PSSC would
recalculate the applicable CMR on a continuous basis throughout the
course of the next business day, generating an intraday CMR. The
difference between an intraday CMR and the last calculated CMR is
referred to as the Intraday Additional CMR. If at any time during the
business day, a participant's intraday CMR were to exceed the last
calculated CMR requirement by 25 percent and the amount of the Intraday
Additional CMR exceeds $10,000, then the participant would be required
to post margin assets equal in value to the Intraday Additional CMR. An
intraday CMR that results in this obligation to post such margin equal
to the Intraday Additional CMR would be substituted as the CMR for the
participant. If the resulting CMR for any participant were to be
greater than the initial margin deposit and minimum RMA deposit, then
the RMA for such participant would be equal to such CMR.\137\
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\137\ See PSSC Rules, at Rule 5.5B.
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At least once per day, PSSC would conduct backtesting of its margin
methodology using predetermined parameters and assumptions.\138\ At
least once per month, or more frequently during periods of high
volatility, PSSC would also conduct a sensitivity analysis of its
margin methodology and review of its parameters and assumptions for
backtesting.\139\ At least annually, PSSC would perform a model
validation of its margin methodology.\140\
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\138\ See PSSC Rules, at Rule 5.6B. For purposes of its margin
methodology rules under Rule 5, the term ``backtest'' means an ex-
post comparison of actual outcomes with expected outcomes derived
from PSSC's use of the margin model.
\139\ See PSSC Rules, at Rule 5.7B.
\140\ See PSSC Rules, at Rule 5.8B.
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Between trade date and settlement date, PSSC would calculate and
collect margin collateral from its participants in the form of
cash.\141\ Each participant would be required to maintain sufficient
margin assets to collateralize its RMA, as specified under PSSC Rules.
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\141\ See PSSC Rules, at Rule 5A (discussing collateral), Rule
5B (discussing margin methodology), and Rule 5C (discussing margin
procedures); see also Application, Exhibit J, at 18-25.
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PSSC would determine and communicate to each participant the RMA at
least once daily by a cut-off time of 10:00 p.m., or in certain
circumstances, not later than 11:59 p.m. on trade date.\142\ Each
participant would be required to satisfy its RMA by 10:00 a.m. on the
following business day, in an amount equal to or greater than the RMA,
less any amount of margin assets already credited to the respective
participant's Margin Cash Account.\143\ PSSC would determine and
communicate to each participant the Intraday Additional CMR charges as
soon as practicable.\144\ Participants would be required to satisfy any
Intraday Additional CMR within two hours of communication by PSSC.\145\
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\142\ PSSC Rules, at Rule 5.2C.
\143\ PSSC Rules, at Rule 5.4C(a).
\144\ PSSC Rules, at Rule 5.3C.
\145\ PSSC Rules, at Rule 5.4C(b).
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Failure to satisfy any margin requirement by the prescribed times
would constitute a missed margin call, prompting PSSC to notify each of
the CP Pairs of the participant's failure. A participant failing to
make any required deposit, including any margin deposit, would
establish adequate cause to permit PSSC at its discretion to cease to
act for the participant.\146\
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\146\ PSSC Rules, at Rule 5.5C; see also PSSC Rules, at Rule 7
(regarding cessation of services).
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Under PSSC Rules, participants would be permitted to withdraw
margin assets exceeding the RMA upon request. However, PSSC Rules state
that PSSC would have the right to reject any withdrawal request based
on: (i) the market price or changes in the market
[[Page 32159]]
price of securities comprising the participant's settlement
obligations; (ii) the size of participant's settlement obligations;
(iii) the operational capability or financial position of the
participant; or (iv) a determination that such actions is otherwise in
the interest of the protection of PSSC, its participants, the markets,
or the general public.\147\
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\147\ See PSSC Rules, at Rule 5.6C.
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(h) Technology
In its Application, PSSC describes the technology and procedures it
would use to ensure security of its systems, including those related to
(i) security of its systems; (ii) safeguarding funds and securities
within its control; (iii) backup systems for its automated clearing
facilities; and (iv) compliance with Regulation SCI.\148\ As described
more fully in the PSSC Application, PSSC's infrastructure as it relates
to its automated clearing functions would be hosted and maintained
entirely on a cloud platform.\149\ With respect to any PSSC systems
hosted on the cloud, separation mechanisms would be in place to prevent
automatic entry to PSSC's infrastructure in the event of a systems
``intrusion'' at the cloud services provider.\150\
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\148\ See Application, Exhibits K, L, M.1, and M.4,
respectively.
\149\ Application, Exhibit M. PSSC will contract with a cloud
service provider as a vendor to support core clearing agency
services performed by PSSC, including trade capture, pre-settlement
processing, margin, settlement, and custody of security entitlements
to securities and cash.
\150\ Application, Exhibit L.
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The PSSC Application states that PSSC intends to negotiate and
execute a service agreement with its cloud services provider such that
the contractual terms and conditions would enable PSSC to satisfy the
requirements of Regulation SCI for the PSS.\151\ Such terms would
include PSSC ensuring that the backup systems provided by the cloud
service provider are designed to prevent interruptions in the
performance of any function from a technical or other malfunction
(including with respect to input or output links to the system and
precautions with respect to malfunctions in any areas external to the
system).\152\ For example, PSSC states, it would attempt to negotiate
terms and conditions requiring that the cloud services rely on separate
availability zones only within the U.S. These availability zones would
not rely on the same infrastructure components, such as for water and
electric power. PSSC states it believes that such terms would be
consistent with the requirements in Regulation SCI regarding geographic
diversity.\153\
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\151\ Application, Exhibit M.4, at 6. PSSC also states that the
use of cloud services by registered clearing agencies is a
``relatively'' new and evolving practice, and as such it, intends to
rely on the Commission's Division of Trading and Markets FAQ
concerning Regulation SCI. PSSC Rules define PSS as the systems used
by PSSC to provide clearance and settlement services to
participants. See PSSC Rules, at Rule 1.
\152\ Application, Exhibit M.4, at 6.
\153\ Id.
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More generally, PSSC would also seek to negotiate contractual terms
and conditions that would obligate the cloud services provider to,
among other things, establish, maintain, and enforce written policies
and procedures reasonably designed to ensure that each cloud service
provided to PSSC has a level of capacity, integrity, and resiliency,
availability, and security that is sufficient to allow normal
operations at all times.\154\ In addition, PSSC would seek to establish
a right in contractual agreements with the cloud service provider to
request relevant documents and perform regulatory inspections or audits
of applicable cloud systems and associated physical locations.\155\
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\154\ Application, Exhibit M.1 at 7.
\155\ Id.
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(i) Ramp-Up Period
In the Application, PSSC has proposed steps to ``ramp-up its
readiness for commencing operations'' (the ``Ramp-Up Period'').\156\ As
part of the Ramp-Up Period, PSSC represents that it would not commence
operations sooner than ten months from the date of any approval by the
Commission of the Application. Once PSSC commenced operations, for a
period of not less than 12 months, PSSC would limit the number of
participants to ten and not permit enhanced netting across CP
Pairs.\157\
---------------------------------------------------------------------------
\156\ See Application, Exhibit J, at 36-39.
\157\ See id. at 36-37.
---------------------------------------------------------------------------
PSSC further describes specific steps it will take during the Ramp-
Up Period including: (i) implementing ``necessary service provider
relationships to help support its operations'' such as becoming a DTC
participant and establishing at least one settling bank relationship;
(ii) entering contractual and operational arrangements with its initial
participants to include testing of its systems; (iii) developing and
implementing any necessary policies and procedures to support
operations; (iv) publishing its rulebook on its website; and (v) adding
human resources (whether through employee, contractor or vendor
relationships) to put in place appropriate knowledge, skills and
abilities to support commencing operations. PSSC explains that, during
the Ramp-Up Period, as a registered clearing agency, PSSC would be
subject to the Commission's recordkeeping requirements, examinations,
and obligations as to self-regulatory organization proposed rule
changes.\158\ In addition, PSSC states that it will ``remain in regular
[contact] and coordination'' with Commission staff regarding the status
of the Ramp-Up Period,\159\ consistent with the Commission's
supervisory program for registered clearing agencies.
---------------------------------------------------------------------------
\158\ See id. at 37-38.
\159\ See id. at 38.
---------------------------------------------------------------------------
4. Analysis
As described in the Application, material elements of the clearing
agency that affect how PSSC would provide its core services for
clearance and settlement remain undeveloped, including the
establishment of key relationships that will define the way its
technology systems and linkages with other clearing agencies function,
the policies and procedures that PSSC uses to manage and operate those
systems and linkages, and undertakings relating to certain deferred
material expenses for capital commitments, human resources, and
contractual arrangements, as discussed further in Part IV.
To address this, the Application included a Ramp-Up Period,
composed of two phases, during which PSSC intends to undertake multiple
actions to address these items and further develop its services. To
that end, PSSC requested temporary registration pursuant to Rule 17Ab2-
1(c). Accordingly, the Commission is not, at this time, making a
determination as to whether PSSC's Application satisfies the
requirements of Section 17A(b)(3)(A) of the Exchange Act.
As discussed further below in Part IV, pursuant to Rule 17Ab2-1(c),
the Commission is granting PSSC's request for temporary registration
with an exemption from Section 17A(b)(3)(A) of the Exchange Act for a
period of 18 months to provide PSSC time to complete the actions
described in the Ramp-Up Period.\160\
---------------------------------------------------------------------------
\160\ See 17 CFR 240.17ab2-1(c)(2) (requiring the Commission
within nine months of the effective date of the temporary
registration of a clearing agency to either make all the
determinations required by Section 17A with respect to the
registered clearing agency or institute proceedings to determine
whether registration should be denied at the expiration of the
temporary registration period).
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[[Page 32160]]
B. Participation Standards
1. Statutory Standard and Analysis: Section 17A(b)(3)(B)
Section 17A(b)(3)(B) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
the rules of the clearing agency provide that any (i) registered broker
or dealer, (ii) other registered clearing agency, (iii) registered
investment company, (iv) bank, (v) insurance company, or (vi) other
person or class of persons as the Commission, by rule, may from time to
time designate as appropriate to the development of a national system
or the prompt and accurate clearance and settlement of securities
transactions may become a participant in such clearing agency.\161\
---------------------------------------------------------------------------
\161\ Section 17A(b)(3)(B) of the Exchange Act also states that
the rules of the clearing agency are subject to the provisions of
Section 17A(b)(4) of the Exchange Act.
---------------------------------------------------------------------------
PSSC Rules identify the following persons as those that may be
approved for membership provided that they satisfy the applicable
qualifications for participation: a broker-dealer registered under the
Exchange Act; a bank or trust company organized under the laws of the
United States or any state and is a member of the Federal Reserve
System; a clearing agency registered under the Exchange Act; an
Insurance Company or Insurance Entity; \162\ and an investment company
registered under Section 8 of the Investment Company Act.\163\ In
Exhibit O, PSSC further explains that the proposed qualifications for
participation are based substantially on the corresponding, approved
requirements of the other registered clearing agencies that serve the
equities markets.\164\ PSSC states that this approach promotes
consistency and coordination of access standards and would allow
eligible market participants to gain access to multiple clearing
agencies that provide services to the same markets based on the same or
similar criteria.\165\
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\162\ PSSC Rules, at Rules 1.I.2 and 1.I.3.
\163\ PSSC Rules, at Rule 2.3A.
\164\ Application, Exhibit O.
\165\ If the Commission adopted rules under Section
17A(b)(3)(B)(vi) of the Exchange Act regarding other persons or
classes of persons designated as appropriate to the development of
the national system for clearance and settlement or the prompt and
accurate clearance and settlement of securities transactions, each
registered clearing agency, including PSSC, would need to submit a
proposed rule change to incorporate such person or class of person
into its rules for participation.
---------------------------------------------------------------------------
Because PSSC Rules specify that each type of person described in
Section 17A(b)(3)(B) of the Exchange Act may become a member of PSSC,
the Commission has determined that the Application satisfies the
requirements of Section 17A(b)(3)(B) of the Exchange Act.
2. Statutory Standard and Analysis: Section 17A(b)(4)(B)
Section 17A(b)(4)(B) of the Exchange Act states that a registered
clearing agency may deny participation to, or condition the
participation of, any person if such person does not meet such
standards of financial responsibility, operational capability,
experience, and competence as are prescribed by the rules of the
clearing agency.\166\ Section 17A(b)(4)(B) also provides that, a
registered clearing agency may examine and verify the qualifications of
an applicant to be a participant in accordance with procedures
established by the rules of the clearing agency.\167\
---------------------------------------------------------------------------
\166\ 15 U.S.C. 78q-1(b)(4)(B).
\167\ Id.
---------------------------------------------------------------------------
With respect to the criteria for participation under Section
17A(b)(4)(B) of the Exchange Act, the Application describes how PSSC's
participant structure affects its framework of managing risk.\168\
Specifically, PSSC has established requirements for applicants'
financial resources, operational capacity, creditworthiness, and
business experience. With respect to financial resources, the financial
responsibility standards for participants vary depending upon the
nature of the applicant's business.\169\ In addition, PSSC's financial
standards require, among other things, that an applicant for
participation has sufficient resources to meet all of its anticipated
obligations to PSSC and other participants; is in compliance with its
regulatory capital requirements; and is not subject to voluntary or
involuntary insolvency proceedings.\170\ PSSC's operational criteria
require prospective applicants to have adequate personnel, books and
records, systems and procedures to fulfil its anticipated commitments
to and operational requirements of PSSC promptly and accurately as well
as to conform to any conditions imposed by PSSC that it reasonably
deems necessary for its protection, and an established business history
of a minimum of six months, or personnel with sufficient operational
background and experience to ensure the ability of the applicant to
conduct such business.\171\ PSSC Rules also require applicants to have
an appropriate risk management framework that is commensurate with its
risk profile, net capital and business strategy; sufficient to preserve
the integrity of PSSC's systems and services; and reasonably designed
to protect other participants from risks associated with the use of
PSSC's systems and services.\172\
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\168\ PSSC Rules, at Rule 2.5A.
\169\ PSSC Rules, at Rule 2.6A. The rule states that, for
example, a broker-dealer applicant shall have at least five hundred
thousand dollars ($500,000) in excess net capital over the greater
of the minimum capital requirement imposed pursuant to Rule 15c3-1
under the Exchange Act; such higher minimum capital requirement
imposed by its designated examining authority; or one million
dollars if the applicant clears for other broker dealers. In the
case of a bank, maintain a minimum amount of equity capital in the
amount of fifty million dollars ($50,000,000) or a guarantee of such
amount by a parent bank holding company with its own consolidated
capital of this amount.
\170\ PSSC Rules, at Rule 2.5.1A.(c).
\171\ PSSC Rules, at Rules 2.5.1A.(d), 2.7A, and 2.8A.
\172\ PSSC Rules, at Rule 2.5.1A.(e).
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PSSC may also deny admission to any applicant or cease to act for
any participant if, among other things, the applicant is subject to any
Statutory Disqualification or similar order issued by a federal or
state banking authority or other examining authority or regulator; the
applicant or its management is responsible for making a misstatement
(or omission) of material fact in connection with an application to be
a participant or is responsible for fraudulent acts or a violation of
federal or state law; or the applicant or its management has been
convicted within the past 10 years of the filing of the application (or
any time after the filing of the application) of a criminal offense
involving such things as the purchase or sale of a security, or
bribery, burglary or conspiracy to commit these offenses.\173\
---------------------------------------------------------------------------
\173\ PSSC Rules, at Rule 2.5.2A.
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PSSC participants will be monitored and reviewed for compliance
with its qualifications and standards on an ongoing basis.\174\ In this
regard, PSSC requires its participants to provide it with annual
audited financial reports, and, periodically, certain regulatory
reports (e.g., the FOCUS reports broker-dealers must file with the
Financial Industry Regulatory Authority), among others.\175\ PSSC has
the authority to conduct due diligence reviews of the financial
responsibility and operational capability of any participant,\176\ and
participants must notify PSSC of any material changes to its
organization, operations, or financial condition.\177\ Participants
must also furnish to PSSC adequate assurances of their financial
responsibility and operational capability.\178\ In addition, PSSC has
the authority to take action with respect to participants that fail to
maintain PSSC's participation requirements, including
[[Page 32161]]
disciplinary sanctions such as fines, censure, or limitations on access
to PSSC's services (ceasing to act for the participant).\179\
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\174\ PSSC Rules, at Rules 2.1B and 2.4B.
\175\ PSSC Rules, at Rule 2.2.1B.
\176\ PSSC Rules, at Rule 2.4B.
\177\ PSSC Rules, at Rule 2.2.2B.
\178\ PSSC Rules, at Rule 2.2C.
\179\ PSSC Rules, at Rules 7 and 9.
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Because PSSC Rules would establish participation requirements that
include financial and operational competency standards for participants
that clearly denote ongoing compliance obligations and set forth
consequences for failing to meet those obligations, the Application
demonstrates that PSSC Rules are sufficient to protect PSSC from the
risks that can be associated with participants who would not otherwise
meet such competency standards.
For the reasons discussed above, the Commission determines that the
rules of PSSC regarding participation in the clearing agency are
consistent with the standards set forth in Section 17A(b)(4)(B) of the
Exchange Act.
C. Fair Representation
1. Statutory Standard: Section 17A(b)(3)(C)
Section 17A(b)(3)(C) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
the rules of the clearing agency assure a fair representation of its
shareholders (or members) and participants in the selection of its
directors and administration of its affairs.\180\
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\180\ Section 17A(b)(3)(C) of the Exchange Act also states that
the Commission may determine that the representation of participants
is fair if they are afforded a reasonable opportunity to acquire
voting stock of the clearing agency, directly or indirectly, in
reasonable proportion to their use of such clearing agency.
---------------------------------------------------------------------------
2. Summary of Application and Analysis
As described in Part III.A.2, PSSC's Board would be composed of ten
directors: three member directors selected by Paxos Holdings; five
public directors, initially specified in PSSC's bylaws and thereafter
elected annually by the PSSC's Board from among nominees selected by
the Board's Governance, Nominating, and Policy Committee; and two
participant directors to be nominated by participant representatives
serving on the Board's PAC.\181\ PSSC's Board would not initially
include the participant directors; under PSSC's bylaws, within 180
calendar days of PSSC commencing operations and having at least two
participants (or a different time that is agreed to by PSSC and its
PAC), the participant directors, as selected by the PAC, would be added
to the Board.\182\
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\181\ See Application, Exhibit E.3; see also supra Part III.A.2.
\182\ See Application, Exhibit E.3; see also supra Part III.A.2.
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Under Section 17A(b)(3)(C) of the Exchange Act, the Commission
considers whether the Application provides fair representation both to
shareholders and to participants in the selection of directors and the
administration of affairs. In doing so, the Commission undertakes an
analysis of the documents in the Application that govern or otherwise
affect the selection of directors by the clearing agency and the
administration of its affairs. Such documents include, for example, the
constitution, articles of incorporation, bylaws, rules, and written
policies or procedures. Such analysis considers both qualitative and
quantitative factors, including the number of board positions reserved
for management or to represent participants, as well as the existence
of provisions in governing documents that may impede participation in
the selection of directors or the administration of affairs. The
Commission also considers the overall organization of the clearing
agency, the nature of the products it clears, and the structure of the
market it serves, including the nature of existing clearing and
settlement arrangements in the market served, the existence of other
clearing agencies that would compete to offer services, and the size of
the market served by the applicant, to evaluate whether the
representation proposed by the applicant is consistent with the
requirements of the Exchange Act.\183\
---------------------------------------------------------------------------
\183\ Accordingly, the level of participant representation
needed to ensure fair representation consistent with the Exchange
Act may vary depending on the facts and circumstances, including the
market or markets to which the application is directed.
---------------------------------------------------------------------------
After performing this analysis, the Commission has determined that
the Application provides fair representation for the reasons set forth
below.
With respect to the fair representation of the shareholders in the
selection of its directors and administration of its affairs, Paxos
Holdings will hold 100% of the membership interests in PSSC and will be
represented on the PSSC Board by three member directors. Paxos Holdings
will also participate in the selection of PSSC directors. Specifically,
Paxos Holdings will be responsible for selecting the three member
directors, and the member directors who are selected by Paxos Holdings
will also participate in the selection of the five public directors.
Regarding selection of public directors, each public director will be
elected from among one or more persons nominated by the Governance,
Nominating and Policy Committee, which must be composed, at a minimum,
of at least one member director, one participant director, and one
public director. In addition, no nominee may be nominated by the
committee without approval of at least one member director then-
serving. Therefore, Paxos Holdings will participate in the selection of
eight of the ten directors on the Board. More generally, the Board will
be responsible for the operations of the clearing agency and will have
oversight of the executives who are managing PSSC, which also allows
the shareholder to obtain fair representation in the administration of
PSSC's affairs. Taken as a whole, these provisions assure a fair
representation of the shareholders of PSSC in the selection of its
directors and administration of its affairs.
With respect to fair representation of the participants of PSSC in
the selection of its directors and administration of its affairs, 20
percent of the Board will be participant directors. Each participant
director in PSSC will be nominated and selected by the participant
representatives to the PAC, and each participant will be entitled to
representation on the PAC by one representative. Participant directors
will also participate in the selection of the five public directors. At
least one participant director will be required to serve on the
Governance, Nominating and Policy Committee. Therefore, participants
will participate in the selection of seven of the ten directors on the
Board (i.e., the two participant and five public directors).
Additionally, a Board quorum for conducting business will require at
least one participant director and one member director, as well as a
majority of the directors then serving on the Board. As a result, at no
time would the member directors have majority voting power to control
the Board as a voting block. Such ability to influence the selection of
directors is an important component of participant representation in
the selection of directors and the accompanying ability for
participants to participate in the Board-level administration of the
affairs of the clearing agency. For these reasons, the governance of
PSSC ensures the fair representation of participants in the selection
of directors and administration of the affairs of the clearing agency.
In addition, for the reasons discussed III.A.2 above, the
Application demonstrates that the PSSC Application is consistent with
the requirements related to director independence and board governance
provided for in Rule
[[Page 32162]]
17Ad-25 under the Exchange Act.\184\ The Application also states that
PSSC will establish, implement, maintain and enforce written policies
and procedures reasonably designed to require the board of directors to
solicit, consider and document its consideration of the views of PSSC
participants and other relevant stakeholders of PSSC regarding material
developments in its risk management and operations on a recurring basis
as required by Rule 17Ad-25(j) under the Exchange Act.\185\ Such rules,
policies and procedures under Rule 17Ad-25 also facilitate participant
involvement in the administration of the clearing agency's affairs.
Taken as a whole, the provisions of the Application described above
assure a fair representation of PSSC participants in the selection of
its directors and administration of its affairs.
---------------------------------------------------------------------------
\184\ 17 CFR 240.17ad-25; see also, e.g., Application, Exhibit
C.1 at 10 (describing application of Rule 17Ad-25 requirements for
conflicts of interest to PSSC directors), 11-12 (describing
application of requirements for independent directors to PSSC
directors and the nominating committee).
\185\ 17 CFR 240.17ad-25(j); see also Application, Exhibit C.1.
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For the reasons discussed directly above, the Commission determines
that the rules of PSSC assure fair representation in the selection of
its directors and administration of its affairs consistent with Section
17A(b)(3)(C) of the Exchange Act.
D. Fees
1. Statutory Standard: Section 17A(b)(3)(D) and (E)
Section 17A(b)(3)(D) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
the rules of the clearing agency provide for the equitable allocation
of reasonable dues, fees, and other charges among its
participants.\186\ Section 17A(b)(3)(E) of the Exchange Act states that
a clearing agency shall not be registered unless the rules of the
clearing agency do not impose any schedule of prices, or fix rates or
other fees, for services rendered by its participants.\187\
---------------------------------------------------------------------------
\186\ 15 U.S.C. 78q-1(b)(3)(D).
\187\ 15 U.S.C. 78q-1(b)(3)(E).
---------------------------------------------------------------------------
2. Summary of Application and Analysis
PSSC's Schedule of Fees sets forth the fees that PSSC will charge
its participants. Participants will elect in writing to be charged on a
price per trade or price per share model.\188\ A participant may change
its selection by providing PSSC reasonable notice in writing. In
addition, for the first three months of participation, PSSC will charge
each participant a minimum monthly settlement fee of $5,000. It will
also charge a $2.50 daily fee for failures to settle and charges for
failure to provide specified data to comply with ongoing participation
requirements.
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\188\ See Application, Exhibit E.13.
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As described in the Application, both the initial minimum monthly
settlement fee and the per trade or per share fees apply to all PSSC
participants on an equal basis.\189\ Further, PSSC's per trade or per
share fees are entirely based on each participant's usage, and as such,
provides participants with a choice as to the fee model that best suits
their particular business considerations. Moreover, if PSSC fees, dues,
and other charges are determined unreasonable for any reason by PSSC
participants or potential PSSC participants, such participants may
choose to use DTC's settlement services instead. In the Commission's
view, PSSC's approach provides for equitable allocation of reasonable
dues, fees, and other charges amongst its participants. Accordingly,
the Commission determines that the Application is consistent with
Section 17A(b)(3)(D) of the Exchange Act.
---------------------------------------------------------------------------
\189\ Id.
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In addition, the Application states that PSSC does not currently
fix prices, rates, or fees for services rendered by its
participants.\190\ The Commission sees no evidence in the Application
that PSSC does otherwise, and the Commission therefore determines that
the Application is consistent with the requirements of Section
17A(b)(3)(E) of the Exchange Act.
---------------------------------------------------------------------------
\190\ Application, Exhibit Q.
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E. Rules Designed To Promote Prompt and Accurate Clearance and
Settlement and the Safeguarding of Securities and Funds
1. Statutory Standard: Section 17A(b)(3)(F)
Section 17A(b)(3)(F) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
the rules of the clearing agency are designed to promote the prompt and
accurate clearance and settlement of securities transactions and, to
the extent applicable, derivative agreements, contracts, and
transactions, to assure the safeguarding of securities and funds which
are in the custody or control of the clearing agency or for which it is
responsible, to foster cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions, to
remove impediments to and perfect the mechanism of a national system
for the prompt and accurate clearance and settlement of securities
transactions, and, in general, to protect investors and the public
interest. It also states that a clearing agency shall not be registered
unless the Commission determines that the rules are not designed to
permit unfair discrimination in the admission of participants or among
participants in the use of the clearing agency, or to regulate by
virtue of any authority conferred by the Exchange Act matters not
related to the purposes of this section or the administration of the
clearing agency.\191\
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\191\ With respect to the provisions in Section 17A(b)(3)(F) of
the Exchange Act requiring that the rules of the clearing agency are
not designed to permit unfair discrimination in the admission of
participants or among participants in the use of the clearing agency
and not regulate by virtue of any authority conferred by the
Exchange Act matters not related to the purposes of the Exchange Act
or the administration of the clearing agency, those topics have been
addressed in Parts III.B and III.G, concerning the statutory
requirements for, respectively, participant standards of the
clearing agency and addressing the clearing agency's burden on
competition. With respect to the provisions requiring that the rules
foster cooperation and coordination with persons engaged in the
clearance and settlement of securities transactions and to remove
impediments to and perfect the mechanism of a national system for
the prompt and accurate clearance and settlement of securities
transactions, those topics have been addressed in Part III.G,
concerning the statutory requirements addressing the clearing
agency's burden on competition.
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2. Summary of Application and Analysis
The Commission has adopted multiple rules that are related to
Section 17A(b)(3)(F), in that they establish requirements related to
financial risk management, default management and loss allocation, and
recovery and orderly wind-down. Specifically, these Commission rules
implicate the safeguarding of securities and funds and promoting the
prompt and accurate clearance and settlement of securities
transactions.\192\ Part III.A.3 of this order describes how PSSC
proposes to conduct trade submission and settlement, how it would
address settlement fails, and how it would perform netting and risk
management as part of its service offerings. In the context of these
services, the Commission below considers how PSSC Rules safeguard
securities and funds to effectuate settlement as part of its CSD and
settlement system.\193\ The Commission also discusses the comments
received as to PSSC's
[[Page 32163]]
corporate actions and netting processes, as well as its recovery and
wind-down plans.
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\192\ See 17 CFR 240.17ad-22(e)(11) (setting forth requirements
for CSDs).
\193\ For example, PSSC is subject to certain requirements
specific to CSDs, such as those set forth in Rule 17Ad-22(e)(11).
See 17 CFR 240.17ad-22(e)(11).
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(a) Safeguarding of Securities and Funds
Part III.A.3 describes the operations that PSSC would employ, and
the PSSC Rules that would govern, settlement through PSSC as a CSD and
settlement system. As a registered clearing agency and securities
intermediary as defined in Article 8 of the Uniform Commercial Code,
PSSC would have control over electronic systems used to record security
entitlements that it will create on its books and records for the
benefit of its participants. These security entitlements concern either
certain securities or U.S. dollar cash. Securities in which PSSC grants
participants security entitlements will be required under PSSC Rules to
be securities that PSSC accepts as eligible for PSSC's services and to
which DTC provides book-entry services. U.S. dollar cash in which PSSC
grants participants security entitlements will be required under PSSC
Rules to be cash that is held at a bank or trust company that is
organized under the laws of the United States or any state, that is
supervised by Federal or state regulators, and that has been approved
as a Settling Bank by PSSC.
Participants will agree to be bound by the PSSC Rules through the
participant agreement between PSSC and each participant that each
participant will be required to execute prior to accessing PSSC's
services.\194\ Under the participant agreement, a participant will
agree to abide by PSSC's organizational documents, bylaws, rules and
relevant policies, procedures, notices, circulars, interpretations, or
other directives and/or decisions adopted by PSSC and to establish such
arrangements for conducting business with PSSC as PSSC requires.
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\194\ See Application, Exhibit P (providing the PSSC participant
agreement).
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With respect to the safeguarding of securities, as provided in PSSC
Rule 3, PSSC will be required to be a DTC participant and, as provided
in PSSC Rule 2.7A, each participant will also be required to be a DTC
participant.\195\ Eligible securities deposited with DTC for book-entry
transfer services are registered in the name of DTC's nominee, Cede &
Co. (``Cede''), which is a New York partnership. When the certificates
are registered in the name of Cede, DTC acquires legal title to the
securities and, when DTC credits interests in these securities to the
securities accounts of its participants, the DTC participants, in turn,
acquire a beneficial interest in the securities. PSSC will be one such
DTC participant. DTC requires participants to reconcile their activity
and positions with DTC upon receipt of applicable activity statements
at the end of each day and to immediately report any discrepancies.
Participants are also required to reconcile their DTC positions on a
daily and month-end basis.\196\ In addition, the systems that DTC uses
to create security entitlements for its participants are subject to the
requirements applicable to it as a registered clearing agency under the
Exchange Act, including those requirements set forth in the
Commission's rules for clearing agencies and Regulation SCI.\197\ As a
DTC participant itself, PSSC will benefit from safeguarding, capacity,
resilience, and integrity required of DTC pursuant to those Commission
rules in connection with the security entitlements that DTC credits to
PSSC's DTC account. PSSC Participants in turn will benefit from these
requirements that apply to DTC and will also apply to PSSC, since PSSC
will create security entitlements for its participants based on
security entitlements that are credited by DTC to PSSC's DTC account
and because PSSC participants will be required to also be DTC
participants.
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\195\ See DTC Rules, <a href="https://www.dtcc.com/-/media/Files/Downloads/legal/rules/dtc_rules.pdf">https://www.dtcc.com/-/media/Files/Downloads/legal/rules/dtc_rules.pdf</a>.
\196\ See id.
\197\ See supra note 20 (providing citations to those rules).
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PSSC Rule 4.4.1 provides that upon receipt of eligible securities
from a participant into PSSC's DTC account, PSSC will create a security
entitlement on its books and records that is credited to the
participant account of the relevant participant and that is a
representation of the eligible security that is credited by DTC to
PSSC's DTC account. PSSC will facilitate withdrawal of eligible
securities from the participant account of a participant based on
instructions from the participant by removing the security entitlement
to the eligible security that is credited to the participant in its
participant account on PSSC's books and records and initiating relevant
instructions through DTC to remove the eligible security from PSSC's
DTC account and to deliver it to a designated DTC account of the
participant. To ensure that corporate actions regarding eligible
securities are processed by DTC rather than PSSC, each participant will
agree, pursuant to PSSC Rule 3A, to provide a standing instruction to
PSSC to transfer any eligible security credited to its participant
account to the DTC account of that participant before any record date
for a corporate action regarding the eligible security.
One commenter, DTCC, stated that PSSC may still encounter corporate
actions processing challenges using this approach, explaining that not
all corporate actions events are known ex-ante or known with sufficient
notice to be handled ex-ante (even as a matter of current normal market
practice).\198\ DTCC stated that PSSC may be allocated an entitlement
(e.g., dividend payment, interest payment, securities payment) instead
of the appropriate PSSC participant, should that participant not know
ex-ante whether to transfer a given security out of the PSSC
environment and back into its own DTC account, and this could require
reconciliation and potential claims by the impacted participant. In the
PSSC Response Letter, PSSC stated that it looks forward to direct
engagement with DTCC on corporate actions processing in connection with
its application to become a DTC participant, and PSSC states that it
can address any specific examples through revisions as necessary to its
operations-level procedures.\199\
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\198\ DTCC Letter at 2.
\199\ PSSC Letter at 3.
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With respect to the safeguarding of funds, as provided in PSSC
Rules 2.7A and 2.1B, each participant will be required to establish and
maintain one or more accounts at a settling bank to facilitate its
participation in PSSC. As described in PSSC Rule 4.5, PSSC will also
maintain at each settling bank two separate types of omnibus custody
accounts for U.S. dollar cash for the benefit of participants. Under
PSSC Rules 2.3A(b) and 13.1, a settling bank will be a bank or trust
company, including a trust company having limited power, which is
organized under the laws of the United States or any state and is a
member of the Federal Reserve System or that is supervised and examined
by state or Federal authorities having supervision over banks. A
settling bank will also be subject to the eligibility, approval and
monitoring processes that are described in PSSC Rule 13, including
review and approval by PSSC's Compliance and Risk Management Committee
of the Board and assignment of a Credit Risk Rating and ongoing
monitoring of the settling bank.
Participants will deposit U.S. dollar cash to the Operating Cash
Account and the Margin Cash Account through a wire transfer or other
funds transfer process acceptable to PSSC.\200\ Upon receipt of cash
from a participant into the Operating Cash Account or Margin Cash
[[Page 32164]]
Account, as applicable, PSSC will create a security entitlement on its
books and records credited to the participant account of the relevant
participant that is a representation of the cash in the operating cash
account or margin cash account, as applicable. In accordance with
instructions to PSSC from a participant, PSSC will facilitate the
withdrawal of operating cash or margin cash, as applicable, from the
participant's account by removing the security entitlement to cash
credited to the participant's account on the books and records of PSSC
and initiating a wire transfer or other funds transfer process
acceptable to PSSC from the applicable omnibus account to a designated
account of the participant.
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\200\ PSSC Rules, at Rules 4.5.2 and 4.5.3.
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(b) Prompt and Accurate Clearance and Settlement
As described in detail in Part III.A.3, PSSC Rules address the
failure of a participant to deliver cash or securities, the
circumstances of a participant default, and PSSC's settlement
prioritization. Although PSSC will not operate as a central
counterparty, PSSC Rules establish a margin collection system that
collateralizes transactions submitted for settlement.
One commenter stated that, if its understanding was correct, it is
unclear how trades submitted for settlement on trade date (T) would be
handled should there be no express instruction for gross
settlement.\201\ The commenter further noted that the Application
states netting is expected to occur throughout the day with the
creation of an end-of-day bilateral net Settlement Obligation for the
participants in the CP Pair for settlement beginning 12 a.m. on each
Settlement Day.\202\ The commenter stated there did not seem to be
information in the Application addressing final settlement of trades
that are submitted for end-of-day T settlement and that clarification
is likely necessary regarding how trades would be processed and the
point at which these trades are considered settled with finality.\203\
In its response letter, PSSC stated that the result of the interplay
between PSSC Rules 4.11, 4.1.A, and 4.3.A and the daily settlement cut-
off time is that same-day settling trades accepted before the cut-off
time would be incorporated in a participant's bilateral net settlement
obligation with its counterparty pair in that particular security.\204\
Furthermore, PSSC stated that it plans to clarify the cut-off time in
its procedures and communications with its participants as part of the
Ramp-Up Period.\205\
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\201\ DTCC Letter at 3.
\202\ Id.; see also Application, Exhibit J, at 3.
\203\ DTCC Letter at 3.
\204\ PSSC Response Letter at 4.
\205\ Id.
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Additionally, the same commenter also posed questions regarding
PSSC's approach to enhanced netting.\206\ Specifically, the commenter
stated that, without a central counterparty to novate netted
obligations, the proposed approach to netting would seem to create a
potential need to conduct DVP settlement for more than two linked
obligations. In its understanding, the commenter believes that, under
Commission rules,\207\ to achieve DVP for settlement obligations that
are calculated through multilateral netting, final settlement of each
obligation would be conditioned upon the final settlement of the other
obligations (i.e., all linked obligations settle or none do). Based on
its understanding of the Application, the commenter states that it is
unclear whether such conditioning mechanism is employed (or employed
fully), noting that it appears PSSC envisions the ability to partially
settle obligations within a netting group for a period of time, should
a participant in the group fail to make sufficient cash or securities
available by the 3:10 p.m. daily cut off, and these outstanding
obligations would then be prioritized in later settlement cycles. The
commenter states that, if its understanding is correct, this approach
introduces ambiguity in two respects: (1) whether final settlement may
proceed as usual for linked obligations within a group that are not
affected by the group member(s) who failed to sufficiently prefund
while the affected linked obligations are awaiting settlement; and (2)
to the extent the affected linked obligations are being processed on
later settlement days, it would be unclear how PSSC can demonstrate
that it achieves same-day settlement of payment obligations in the
relevant currency. The commenter concludes that further clarification
is likely necessary regarding how final settlement occurs on a
multilateral basis, particularly as the Application generally reference
``bilateral'' DVP settlement by CP Pair. In its response, PSSC cites
PSSC Rule 4.2A and Section II.H.(ii) of Exhibit J in the Application
that provides a description of enhanced netting and detailed examples
of its intended function.\208\ PSSC states that these materials explain
that enhanced netting would further net bilateral settlement
obligations by and among CP Pairs where such netting would not result
in any increased settlement obligation or margin obligation to any of
the relevant participants. PSSC also acknowledged that its enhanced
netting functionality would not be fully implemented until after
completion of the Ramp-Up Period, and, more generally, that it plans to
clarify cut-off times in procedures and communications with its
participants.\209\
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\206\ DTCC Letter at 3.
\207\ Id. at 2 (citing 17 CFR 240.17ad-22(e)(7), (8), and (12)).
\208\ PSSC Response Letter at 5.
\209\ Id. at 4.
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The Application also includes PSSC's policies and procedures to
manage operational risk. For example, as described in Part III.A.3.h),
PSSC has included in its Application policies and procedures that would
be consistent with its requirements under Regulation SCI, such as
performing periodic assessments of PSSC systems that directly support
functionality relating to clearance and settlement, and for processes
and programs that, if breached, would be reasonably likely to pose a
security threat to such systems. In addition to the required annual SCI
Review, PSSC will perform systems health monitoring and vulnerability
monitoring and scans on its SCI systems. PSSC also will perform
periodic systems capacity testing on the PSS. Because the PSS must be
available under extreme market conditions, PSSC will test capacity
under extreme assumptions that simulate a load far greater than the
estimated maximum capacity need.\210\ PSSC also maintains a Business
Continuity and Disaster Recovery Plan that will be tested and assessed
at least annually.\211\
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\210\ See Application, Exhibit M.4 (summarizing its policies for
compliance with Regulation SCI).
\211\ See Application, Exhibit M.5 (summarizing the Business
Continuity and Disaster Recovery Plan).
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One commenter stated that PSSC may have conflated the concepts of
``recovery,'' as defined in Commission rules for clearing
agencies,\212\ and concepts related to business continuity and disaster
recovery (``BC/DR'').\213\ The commenter states that PSSC's filing
seems to address recovery only from the
[[Page 32165]]
BC/DR perspective and orderly wind-down planning only with respect to
the procedures it would take to wind down its operations but not also
the financial resources it would hold to fund such a wind down, and
further clarification is likely necessary around PSSC's recovery and
orderly wind-down planning. In response, PSSC stated that it agrees
with the commenter's observation that covered clearing agencies have
certain different requirements that address financial risk scenarios
and operational risk scenarios; PSSC then stated it is difficult to
respond to the conflation comment without a more detailed explanation
of the basis for the comment, citing that the commenter did not give
any specific example of conflation that may exist in the
Application.\214\
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\212\ See, e.g., 17 CFR 240.17ad-26(b) (providing a definition
of ``recovery'' to mean ``the actions of a covered clearing agency,
consistent with its rules, procedures, and other ex ante contractual
arrangements, to address any uncovered loss, liquidity shortfall, or
capital inadequacy, whether arising from participant default or
other causes (such as business, operational, or other structural
weaknesses), including actions to replenish any depleted prefunded
financial resources and liquidity arrangements, as necessary to
maintain the covered clearing agency's viability as a going concern
and to continue its provision of core services'').
\213\ DTCC Letter at 3-4.
\214\ PSSC Response Letter at 6.
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(c) Analysis
As described immediately above and earlier in Section III.A.3.d),
PSSC Rules state PSSC would conduct DVP settlement on a bilateral basis
of settlement obligations between CP Pairs.\215\ Settlement would occur
through the movement of cash and eligible securities on the Paxos
Ledger, and each participant would be required to have the securities
or cash in its account no later than the relevant cut-off time.\216\
PSSC Rules also provide for the priority of settling outstanding
settlement obligations.\217\
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\215\ PSSC Rules, at Rule 4A.
\216\ PSSC Rules, at Rule 4.9.
\217\ PSSC Rules, at Rule 6.1.2.
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However, as previously discussed in Part III.A.4, material elements
of the clearing agency that affect how PSSC would provide its core
services for clearance and settlement remain undeveloped. In developing
and implementing these core services, PSSC may also need to develop
additional rules and policies and procedures to ensure that its
participants will be able to make use of the services and systems
described in its Application. In the PSSC Response Letter, for example,
PSSC states that it appreciates comments received regarding its
corporate actions processing, and intends to engage with DTCC so that
example cases can be addressed in its operations-level procedures
during the DTC participant onboard process.\218\ PSSC also states, for
example, that it plans during the Ramp-Up Period to clarify cut-off
times in its procedures and in communications with participants.\219\
Accordingly, the Commission is not, at this time, making a
determination as to whether PSSC's Application satisfies the
requirements of Section 17A(b)(3)(F) of the Exchange Act.
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\218\ PSSC Response Letter at 3.
\219\ Id. at 4.
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As discussed further below in Part IV, pursuant to Rule 17Ab2-1(c),
the Commission is granting PSSC's request for temporary registration
with an exemption from Section 17A(b)(3)(F) of the Exchange Act for a
period of 18 months to provide PSSC time to complete the actions
described in the Ramp-Up Period.
F. Participant Discipline
1. Statutory Standard and Analysis: Section 17A(b)(3)(G)
Section 17A(b)(3)(G) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
the rules of the clearing agency provide that (subject to any rule or
order of the Commission pursuant to Sections 17(d) or 19(g)(2) of the
Exchange Act) its participants shall be appropriately disciplined for
violation of any provision of the rules of the clearing agency by
expulsion, suspension, limitation of activities, functions, and
operations, fine, censure, or any other fitting sanction.
With respect to discipline and sanctions, PSSC Rules provide that
PSSC may discipline a participant for a violation of the rules or any
of the participant's agreements with PSSC, or for errors or delays, by
imposing sanctions including termination,\220\ ceasing to act
(including through a summary action of suspension),\221\ fines (as set
forth in PSSC's Fee Schedule), censure, and any other fitting
sanction.\222\ In addition, in response to a violation of the rules or
any of the participant's agreements with PSSC, PSSC may require cash or
other deposit by the participant as is necessary or appropriate to
protect PSSC and the other participants.\223\
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\220\ PSSC Rules, at Rules 7.6 and 9.1.
\221\ PSSC Rules, at Rules 7, 9.1, and 9.4. PSSC may cease to
act for a participant at any time with respect to particular
transactions or services or with respect to all transactions and
services generally. PSSC Rules, at Rule 7.2.
\222\ PSSC Rules, at Rule 9.1.
\223\ PSSC Rules, at Rule 9.2.
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To monitor for potential violations, PSSC Rules include various
requirements regarding the ongoing monitoring of participants, in which
participants must comply with the detailed ongoing informational,
financial, and operational requirements.\224\ A participant's failure
to furnish information and/or comply with the requirements of the rule
may subject the participant to a restriction on access to PSSC's
services, disciplinary proceedings, or PSSC ceasing to act for the
participant.\225\ PSSC has also delegated to its PAC the responsibility
to provide advice and recommendations to management and the Board on
matters including participant standards and disciplinary practices
regarding participants.\226\
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\224\ PSSC Rules, at Rules 2.1-2.4.
\225\ PSSC Rules, at Rule 2.4C.
\226\ Application, Exhibit E.10, at 4.
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As described above, PSSC includes procedures for enforcing its
rules and disciplining participants that are consistent with the
requirements of the Exchange Act. PSSC Rules provide it with the
authority to discipline participants for rule violations and to impose
each of the sanctions enumerated in the Exchange Act. Accordingly, the
Commission determines that PSSC Rules provide that its participants
shall be appropriately disciplined for violation of any provision of
the PSSC Rules consistent with the requirements of Section 17A(b)(3)(G)
of the Exchange Act.
2. Statutory Standard and Analysis: Section 17A(b)(3)(H)
Section 17A(b)(3)(H) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
the rules of the clearing agency, in general, provide a fair procedure
with respect to the disciplining of participants, the denial of
participation to any persons seeking participation therein, and the
prohibition or limitation by the clearing agency of any person with
respect to access to services offered by the clearing agency.\227\
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\227\ Section 17A(b)(3)(H) of the Exchange Act also states that
the rules of the clearing agency must be in accordance with the
provisions of Section 17A(b)(5) of the Exchange Act.
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When a participant application is submitted to PSSC, the PSSC
Compliance and Risk Management Committee (``CRM Committee'') will
review and approve or disapprove the application.\228\ If the CRM
Committee is considering denying an application, the CRM Committee will
provide the applicant with a written statement describing the reasons
why the CRM Committee is considering denying the application and will
notify the applicant of its right to request a hearing to determine
whether the application should be denied.\229\ Even though a hearing
can be requested in most circumstances, PSSC Rules clarify that PSSC
can deny an application if there are any factors or circumstances about
[[Page 32166]]
the applicant that may impact the financial or operational ability of
the applicant, including the ability to meet settlement obligations to
other participants and to meet margin requirements to PSSC or any other
adverse factors specified in Rule 2.5.2A.\230\
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\228\ PSSC Rules, at Rule 2.9.
\229\ PSSC Rules, at Rule 2.10.1A.
\230\ PSSC Rules, at Rule 2.10.2A and Rule 2.5.2A. The reasons
for denial in Rule 2.5.2A include: (a) the applicant is subject to
any Statutory Disqualification as per Section 3(a)(39) of the
Exchange Act, or an order of similar effect issued by a federal or
state banking authority, or other examining authority or regulator;
(b) the applicant is responsible for (i) making a misstatement of a
material fact or omitting a material fact to PSSC in connection with
its application to become a Participant or (ii) fraudulent acts or a
violation of federal or state law; (c) the applicant or its
controlling management has been convicted within the last ten years
preceding the filing of the application, or at any time thereafter,
of: (i) any criminal offense involving the purchase, sale or
delivery of any security, or bribery, burglary or conspiracy to
commit any offense referred to in this subparagraph (c); (ii) the
larceny, theft, robbery, embezzlement, extortion, fraudulent
conversion, fraudulent concealment, forgery or misappropriation of
funds, securities or other property; (iii) any violation of Sections
1341, 1342 or 1343 of Title 18 of the U.S. Code; or (iv) any other
criminal offense involving breach of fiduciary obligation, or
arising out of the conduct of business as a broker, dealer,
investment company, adviser or underwriter, bank, trust company,
fiduciary, insurance company or other financial institution; (d) the
applicant or its controlling management has been permanently or
temporarily enjoined or prohibited by order, judgment or decree of
any court or other governmental authority of competent jurisdiction
from acting as a broker, dealer, investment company, advisor or
underwriter, bank, trust company, fiduciary, insurance company or
other financial institution, or from engaging or in continuing any
conduct or practice in connection with any such activity, or in
connection with the purchase, sale or delivery of any security, and
the enforcement of such injunction or prohibition has not been
stayed; or (e) the applicant has been expelled or suspended from or
had its participation terminated by an SRO, or has been barred or
suspended from being associated with any member of such an SRO.
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Once an entity is a participant, PSSC Rules require PSSC to send a
notice to participants when PSSC proposes to impose any sanction under
the PSSC Rules. PSSC will send the participant a notice (``Penalty
Notice'') containing a written statement describing the reason for the
proposed sanction and notifying the participant that the participant
has five business days to respond or PSSC will impose the
sanction.\231\ PSSC Rules explain that the right to contest a decision
before it is imposed will not apply to cases in which PSSC summarily
suspends or terminates the accounts of a participant pursuant to
Section 17A(b)(5)(C) of the Exchange Act.\232\
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\231\ PSSC Rules, at Rules 9.3 and 10.1. PSSC Rule 10.1
specifies the request for a hearing will apply to instances where
PSSC: (a) proposes to deny the Applicant's application to become a
participant pursuant to Rule 2A; (b) summarily ceases to act for or
terminates the participant pursuant to Rule 7; (c) ceases to act for
or terminate the participant pursuant to Rule 7 other than by
summary action; (d) proposes to impose a disciplinary sanction
pursuant to Rule 9 (other than to cease to act or terminate as
described in (b) and (c) above); (e) determines that the issuer's
Eligible Security will cease to be an Eligible Security; or (f) sets
a Credit Risk Rating for the participant as described in Rule 5B.
PSSC Rules, at Rule 10.1.
\232\ PSSC Rules, at Rule 9.4. As set forth in the Application,
Section 17A(b)(5)(C) of the Exchange Act permits PSSC summarily to
suspend and close the Participant Accounts of a participant that (a)
has been and is expelled or suspended from any SRO; (b) is in
default of any delivery of funds or securities to PSSC; or (c) is in
such financial or operating difficulty that PSSC determines and so
notifies the appropriate regulatory agency for such participant that
such suspension and closing of Participant Accounts are necessary
for the protection of PSSC, its participants, creditors or
investors.
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Once notice has been received, a participant or applicant
(``Interested Person'') may request a hearing by filing a written
request, within the applicable time period, that details the action or
proposed action by PSSC with respect to which the hearing is requested
and the name of the Interested Person and its representative who may be
contacted with respect to the hearing.\233\ An applicant requesting a
hearing due to denial, must submit the written request to PSSC within
thirty calendar days of the receipt of the denial notice, and a
participant must submit the written request to PSSC within five
business days of PSSC's decision to take any of the following actions:
cease to act for or terminate the participant pursuant to its rules,
propose to impose a disciplinary sanction, determine that the issuer's
Eligible Security will cease to be an Eligible Security, or set a
credit risk rating for the participant.\234\
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\233\ PSSC Rules, at Rules 10.1 and 10.2.1.
\234\ PSSC Rules, at Rule 10.2.2.
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Within seven business days after the filing of the written request,
or three business days in the case of summary action taken against a
participant, the Interested Person will submit to PSSC a written
statement detailing: (a) the action or proposed action with respect to
which the hearing is requested; (b) the basis for objection to such
action; (c) whether the Interested Person intends to attend the
hearing; and (d) whether the Interested Person chooses to be
represented by counsel at the hearing. If the written statement
contests PSSC's determination that the Interested Person has violated a
PSSC Rule, the statement must specifically admit or deny each violation
and detail the reasons why the rule alleged to have been violated is
being contested. Any alleged violation not specifically denied will
constitute an admission to that violation. PSSC may reject the
statement if it fails to set forth a prima facie basis for contesting
the violation. The failure of an Interested Person to submit the
written statement within the time period specified above will
constitute a waiver by the Interested Person of its right to a hearing.
Once a hearing is scheduled, PSSC will notify the Interested Person in
writing of the date, place, and hour of the hearing at least five
business days prior to the hearing.\235\ If the violation an Interested
Person disputes is a fine, PSSC will automatically conduct a review of
the disputed fine after the Interested Person files a written request
and a written statement. PSSC may examine the written statement
submitted and/or arrange a meeting with the Interested Person to
discuss the disputed fine. If PSSC decides to waive the fine, it will
notify the Board of the decision. The Board, or an authorized Committee
of the Board, may in its reasonable discretion, determine to reinstate
any fine waived by PSSC. PSSC will notify the Interested Person of the
result of this review process and the Interested Person, if it disputes
the outcome, will be entitled to a hearing.\236\
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\235\ PSSC Rules, at Rule 10.2.3.
\236\ PSSC Rules, at Rule 10.3.
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Hearings requested for a violation of PSSC Rules in which PSSC is
imposing a fine equal to or less than $2,500 (``Minor Rule Violation'')
will be held before a panel, composed of three officers of PSSC. One of
the members of the panel will act as chairman and conduct the hearing.
At the hearing, an officer of PSSC will present the case against the
Interested Person. The Interested Person will have an opportunity to be
heard and may be represented by counsel. A record will be kept of the
hearing. No later than ten business days after the conclusion of the
hearing, the panel will provide the Interested Person with a decision.
An Interested Person may request a further hearing for any adverse
decision by filing a written request within five business days of
receipt of the adverse decision. PSSC will notify the Interested Person
of the date, time and place of the hearing at least five business days
prior to the hearing. The failure of the Interested Person to submit
the written request within the required time period will be deemed an
election to waive the right to any further hearing.\237\
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\237\ PSSC Rules, at Rule 10.4.1.
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Any hearing requested in connection with a matter that is not a
Minor Rule Violation or an appeal of a Minor Rule Decision will be held
before a panel selected from the Board or their designees, with the
Chairman of the Board selecting the panel members and
[[Page 32167]]
panel chairman. The panel will not include any person representing the
Interested Person or any person who was responsible for imposing the
sanction. At the hearing, the Interested Person will be afforded an
opportunity to be heard and may be represented by counsel. A record
will be kept of any hearing held. The panel will advise the Interested
Person of its decision in writing within ten business days of the
conclusion of the hearing. The decision of the panel will be
communicated in a notice detailing the reasons upon which the decision
is based to the Interested Person (``Notice of Decision''). A copy of
the Notice of Decision will also be given to the Chairman of the Board.
Decisions of the panel are final, but the Board may in its reasonable
discretion modify any sanction or reverse any decision that is adverse
to the Interested Person.\238\
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\238\ PSSC Rules, at Rule 10.4.2.
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Any action or proposed action of PSSC in which an Interested Person
has the right to request a hearing will be deemed final: (a) when the
Interested Person stipulates to the taking of the action by PSSC, at
which time PSSC will provide the Interested Person with a notice of
decision; (b) upon the expiration of the applicable time period
provided in the PSSC Rules for the filing of a written request or a
written statement, at which time any such proposed action will become
effective and PSSC will provide the Interested Person with a notice of
decision; or (c) if a hearing has been held, upon PSSC furnishing the
Interested Person with a Notice of Decision.\239\
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\239\ PSSC Rules, at Rule 10.5.
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As described above, PSSC has in its rules established procedures to
ensure that any participant assessed with a rule violation receives
notice of the alleged violation, and is afforded an opportunity to
contest the allegations, including by requesting a hearing at which the
participant may be represented by counsel. PSSC's procedures address
the disciplining of participants, denial of participation, and
prohibitions or limitations imposed by the clearing agency with respect
to access to services offered by the clearing agency. The Commission
therefore determines that PSSC Rules provide a fair procedure
consistent with Section 17A(b)(3)(H) of the Exchange Act.
G. Burden on Competition
1. Statutory Standard: Section 17A(b)(3)(I)
Section 17A(b)(3)(I) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
the rules of the clearing agency do not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\240\ In addition, Section 17A(a)(2) of the
Exchange Act directs the Commission, having due regard for the
maintenance of fair competition among brokers, dealers, clearing
agencies, and transfer agents, to use its authority under the Exchange
Act to facilitate the establishment of a national system for the prompt
and accurate clearance and settlement of transactions in securities
(``National System'') and to facilitate the establishment of linked or
coordinated facilities for the clearance and settlement of transactions
in securities.\241\
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\240\ 15 U.S.C. 78q-1(b)(3)(I).
\241\ 15 U.S.C. 78q-1(a)(2).
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2. Summary of Application and Analysis
As described throughout this order, PSSC proposes to operate a
registered clearing agency from within another registered clearing
agency and to offer a novel settlement system within that structure. In
assessing whether the rules of a clearing agency impose or do not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act under Section
17A(b)(3)(I) of the Exchange Act, the Commission considers the impact
of the Applicant's rules on competition among brokers, dealers,
clearing agencies, and transfer agents, and on competition between the
Applicant and these entities.\242\ Where there is a burden on
competition, the Commission must determine if that burden is necessary
or appropriate consistent with the determination required by Section
17A(b)(3)(I) of the Exchange Act.\243\ In so doing, the Commission
assesses the benefits that arise from the applicant acting as a
registered clearing agency in the National System and the necessity or
appropriateness of any burdens on competition that the applicant may
impose on the National System.\244\
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\242\ See, e.g., GSCC Order, 53 FR at 19845.
\243\ See Bradford Nat'l Clearing Corp. v. SEC., 590 F.2d 1085
(D.C. Cir. 1978) (explaining that Congress intended to give the
Commission ``exceptionally broad powers'' to determine the precise
structure of the National System and placed ``slightly more emphasis
on rapid development and national availability'' with respect to the
National System than the national market system).
\244\ In assessing benefits and burdens, the Commission can
consider a variety of factors, such as the efficiency and costs of
the current National System, emerging operational innovations,
emerging technologies, new business models and entrants, and
investor protections. For example, Commission staff have previously
observed that, to the extent consolidation and heightened regulation
of current clearing agencies may serve as barriers to entry in the
market for clearance and settlement--further raising the potential
for a clearing agency to be the sole provider of a given service--
new technologies, such as distributed ledger technology, may present
opportunities to mitigate the risk of resulting single points of
failure. See, e.g., Staff Report on the Regulation of Clearing
Agencies, at 23-24 (Oct. 2020). Distributed ledger technology may
have the potential to reduce certain risks in clearance and
settlement, and it also can introduce new questions regarding
scalability, information security, interoperability, governance, and
the application of Commission rules for clearing agencies. See,
e.g., The Depositary Trust Company, SEC Staff No-Action Letter (Dec.
11, 2025), <a href="https://www.sec.gov/files/tm/no-action/dtc-nal-121125.pdf">https://www.sec.gov/files/tm/no-action/dtc-nal-121125.pdf</a>; Paxos Trust Company, LLC, SEC Staff No-Action Letter
(Oct. 28, 2019), <a href="https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf">https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf</a>; DTCC, Project ION
Case Study (May 2020), https://www.dtcc.com/~/media/Files/Downloads/
settlementasset-services/user-documentation/Project-ION-Paper-
2020.pdf.
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The Application states that the technology and data processing
techniques represented by its settlement system have the potential to
provide unique advancements in the clearance and settlement of
securities transactions, including facilitation of more efficient
settlement, immediacy of access to settlement proceeds, greater data
accuracy and transparency, advanced security and increased levels of
availability and operational efficiency.\245\ Specifically, PSSC
identifies benefits such as (i) participants' ability to process
settlements on a variety of timeframes (e.g., T, T+1, or longer), (ii)
PSSC providing DVP settlement finality by exchanging cryptographically
secure digital representations of eligible securities and cash, which
are memorialized in immutable records written to the Paxos Ledger, and
after final settlement, settlement proceeds and need not wait until end
of day batch processes have been completed; (iii) lower operating
costs, which will deliver significant cost efficiencies to
participants; (iv) participants having credit exposures to only those
other participant counterparties they have approved in advance and
having no exposure to PSSC itself; and (v) participants' margin
requirements would be highly transparent and, because of PSSC's
bilateral settlement model, reduced from current industry levels,
thereby freeing up capital for its participants.\246\
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\245\ See Application, Exhibit J.
\246\ Application, Exhibit J, at 3. In this order, the
Commission does not intend to predict the degree to which the
benefits described by PSSC in its Application may materialize.
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The Commission received two comment letters on the Application, one
of which expressed general support for its impact on innovation, the
[[Page 32168]]
prospective benefits of PSSC's services to the market, and its impact
on competition.\247\ The commenter stated that approval of the
Application would represent an important step forward in modernizing
U.S. capital markets and enable flexibility in clearing cycles through
the advent of sophisticated real-time netting and settlement
capabilities, which would present an alternative to clearing through
the registered clearing agency subsidiaries of DTCC.\248\ This
competition, the commenter stated, can help lower costs, accelerate the
transition toward real-time settlement, and ultimately reduce expenses
for retail investors. Additionally, the commenter stated that the
presence of a ``technologically advanced'' clearing agency could
incentivize ``legacy'' providers to modernize and improve services, and
that timely competition and technological advancement are essential to
protecting market integrity and investor interests.
---------------------------------------------------------------------------
\247\ Robinhood Letter at 1.
\248\ Id.
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The Commission agrees with the commenter generally that PSSC
presents an alternative to other clearing agencies through which market
participants clear and settle their transactions, and that competition
and technological advancement may facilitate improved efficiencies and
lower costs in the National System, which is an essential component to
protect market integrity and investor interests. The benefits derived
from PSSC operating in the National System, however, need to be
balanced against any burdens on competition imposed by PSSC Rules,
including the ability to access PSSC's services, the denial or
conditioning of participation in the clearing agency, the allocation of
fees, dues and charges among its participants, and the impact of PSSC's
operations on other non-PSSC member market participants in the National
System, including brokers, dealers, and other clearing agencies.
The Application states that all qualifications for participation
identified in its Application pertaining to participant eligibility,
initial and ongoing participant standards, and assurances of financial
responsibility and operational capability are based substantially on
the Commission approved rules of other registered clearing
agencies.\249\ PSSC states that this would promote consistency and
coordination of access standards within the National System and allow
eligible market participants to gain access on substantially similar
terms to multiple clearing agencies that provide services within the
market for U.S. equities.\250\ PSSC believes that its approach reduces
compliance burdens that would arise that would arise if different
standards applied within the same market.\251\
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\249\ Application, Exhibit O.
\250\ Id.
\251\ Id.
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As discussed in Part III.B, PSSC Rules establish standards for
initial and ongoing participation as a PSSC participant. PSSC Rules
permit all of the participant categories required by Section
17A(b)(3)(B) of the Exchange Act to be PSSC participants.\252\ As
contemplated by Section 17A(b)(4)(B), PSSC Rules also state that PSSC
may deny participation, or condition participation on: (i) legal and
regulatory standing; (ii) financial responsibility standards; (iii)
general operational capabilities; (iv) adequacy of personnel; (v) risk
management framework; (vi) business history evidencing experience and
competence. Furthermore, each PSSC participant must comply with ongoing
informational, financial and operating requirements set forth in PSSC
Rules.\253\
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\252\ PSSC Rules, at Rule 2.A.
\253\ See PSSC Rules, at Rules 2, 2.A, 2.B, and 2.C; see also
supra Part III.B (describing PSSC's initial and ongoing
participation standards and compliance with Section 17A(b)(3)(B) of
the Exchange Act).
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PSSC Rules may impact competition among market participants by
providing access to its clearing services primarily to those market
participants that already have accounts at DTC because PSSC Rule 2.7A
states that an applicant for participation in PSSC will be qualified if
it is a DTC participant that maintains a DTC Account that is eligible
for book-entry services.\254\ For that reason, market participants that
are not already themselves DTC participants may be discouraged from
participation in PSSC due to the potential costs associated with
establishing and maintaining an account at DTC; alternatively, access
to PSSC services may incentivize market participants that do not
currently maintain a DTC account to establish participation at both
clearing agencies. In either case, such a burden on competition can be
consistent with, the Exchange Act, including Exchange Act Sections
17A(b)(3)(B), 17A(b)(4)(B), and 17A(b)(3)(F) thereof.\255\ Establishing
initial and ongoing participant standards, particularly those related
to financial and operational competency, help ensure that PSSC Rules
are designed to sufficiently protect PSSC and its participants from
risks associated with failure to meet those competencies. Such
participation requirements also enable PSSC to manage, mitigate, and
where possible, reduce the risk it faces in its capacity as a clearing
agency.
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\254\ Cf. Robinhood Letter at 1 (stating that PSSC's
capabilities present an alternative to clearing through DTCC and
that this competition can help lower costs).
\255\ 15 U.S.C. 78q-1(b)(3)(B), (b)(4)(B), (b)(3)(F).
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As discussed above, one of PSSC's initial participation standards
requires that an applicant for PSSC participant status also be a DTC
participant that maintains a DTC account eligible for book-entry
services.\256\ According to the Application, the purpose of this dual
membership is to facilitate movement of eligible securities to and from
PSSC's own DTC account.\257\ Since the DTC participation requirements
also will apply to all market participants seeking to become a
participant of PSSC, PSSC Rules may impact competition among market
participants to the extent they provide participants in PSSC, DTC, or
other clearing agencies a choice among different clearing services.
Such choice presents opportunities for innovation in the provision of
clearing agency services to market participants.\258\
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\256\ PSSC Rules, at Rule 2.7A.
\257\ Id.
\258\ See supra note 244 (describing recent steps both PSSC and
DTC have taken regarding their use of innovative clearing agency
services).
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While access to these services is necessarily limited to those
market participants that are also PSSC and DTC participants, this
potential burden on competition would be alleviated to the extent the
benefits accruing from the addition of PSSC to the National System
extend to the market generally. For example, market participants can
still use PSSC services indirectly as a customer of a PSSC participant,
and as such may benefit from efficiencies and cost savings that may
arise from use of PSSC. Market participants also may benefit generally
from any efficiencies or reduced operational, risk management, and
regulatory costs that arise from such attempts at innovation when using
the services of DTC indirectly as well.
With regard to the impact of PSSC's fees, dues, and other charges,
as discussed in Section III.D above, on competition, the Application
provides its ``Schedule of Fees'' that include settlement fees, failure
to settle charges, and certain fines for failure to provide reports and
information.\259\ PSSC also states that it believes that the fees
contained in its service provider contracts are reasonably designed to
allow PSSC to satisfy the requirements of Exchange Act Section
17A(b)(3)(D) that its rules must provide for the equitable allocation
of reasonable dues,
[[Page 32169]]
fees, and other charges, which in part requires management of the costs
incurred by the clearing agency in service relationships to ensure that
the fees charged to participants are reasonable.\260\ Additionally,
PSSC indicates that it does not fix any prices, rates or fees for
services rendered by its Participants.\261\ Given that PSSC's dues,
fees, and other charges are assessed on a quantitative or activity-
based methodology, and that the Application states that PSSC does not
currently fix any prices, rates, or fees for services provided by its
participants to their customers, PSSC Rules do not impose a burden on
its participants that is not necessary or appropriate.\262\
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\259\ See Application, Exhibit E.13.
\260\ Application, Exhibit C.1, at 6.
\261\ See Application, Exhibit Q.
\262\ The Application also states that, as of the time of
filing, there are no prohibitions or limitations on access to
services offered by PSSC participants. See Application, Exhibit R.
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Finally, the Commission must assess whether PSSC imposes a
competitive burden on other clearing agencies. While PSSC has
established its own membership standards and operational and risk
management rules, the Application explains how various aspects of
PSSC's operations also rely on DTC to perform certain services and
functions that would otherwise need to be performed by PSSC. As
discussed more fully in Section III.A, B, and F, PSSC relies on, among
other things, DTC's participant eligibility determinations, securities
eligibility standards and determinations, certain depository functions,
corporate action processing, and risk management.\263\ For example,
PSSC Rules provide that (i) only DTC participants are eligible for
admission as a PSSC participant; (ii) only securities eligible for
deposit at DTC are eligible for clearance and settlement services at
PSSC; and (iii) all corporate actions must be processed using DTC
services and systems.\264\ Therefore while the cost of DTC's services,
operations, and regulatory compliance is borne by all DTC participants,
those DTC participants that are also PSSC participants benefit the most
directly from the potential lower cost of settlement at PSSC.\265\ The
benefit of these lower costs to PSSC participants, however, may be
offset by the cost of having to be a participant in two clearing
agencies (i.e., DTC and PSSC) and, as such, bear the cost of complying
with rules of both clearing agencies.
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\263\ In addition, the DTCC Letter also describes PSSC as
``leverag[ing] participation in DTC to enable [PSSC's] clearance and
settlement operations. See DTCC Letter at 2.
\264\ As explained more fully in Sections III.A and E above,
PSSC does not provide corporate action processing. As a result,
securities held in PSSC account at DTC on behalf of PSSC
participants that are subject to a corporate action will have to be
moved out of PSSC's account at DTC and into the PSSC participant's
account at DTC for processing. Upon completion of the corporate
action processing, the PSSC participant would need to instruct DTC
to move such securities back to PSSC's account at DTC for the
benefit of the PSSC participant. See also DTCC Letter at 2
(providing its views regarding PSSC's proposed approach to corporate
actions based in DTC's experience with corporate actions
processing).
\265\ PSSC's approach to settlement may enable PSSC participants
to submit to PSSC transactions that carry relatively lower market,
credit, or liquidity risk, while continuing to submit to NSSC and/or
DTC transactions with comparatively higher market, credit, or
liquidity risk.
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Clearing agencies, including DTC, retain the ability to adapt
services in response to the use of PSSC's clearing agency so long as
any related changes are consistent with the Exchange Act.\266\ For
example, pursuant to Section 19(b)(4) and Rule 19b-4 under the Exchange
Act, a clearing agency whose participants are also clearing agencies
could consider proposed rule changes related to their standards and
qualifications for participation or to the risk monitoring or
management tools to better address the risks and other effects of
having clearing agencies as their participants.\267\ Registered
clearing agencies are also obligated by the Exchange Act and Commission
rules to facilitate linked and coordinated systems for clearance and
settlement, and to manage the risks that may result from such
linkages.\268\ In the case of PSSC and DTC specifically, DTC and PSSC
may use the DTC participant application process to address concerns
associated with any PSSC Rules, policies, or procedures that could
impact the obligations of DTC, PSSC, or both to comply with their
obligations as registered clearing agencies under the Exchange Act or
Commission rules. DTC has established a variety of participant
membership categories, including for clearing agencies as participants,
and as such has rules, policies, and procedures to address specialized
circumstances associated with clearing agency participants, and these
rules, policies, and procedures would necessarily assist PSSC in its
review of PSSC's participant application.\269\
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\266\ The Commission's announcement of the standards to be used
by the Division of Market Regulation (now the Division of Trading
and Markets) in connection with the registration of clearing
agencies discussed the Division's belief that a clearing agency's
registration should qualify it for participation in (or interface
with) other registered clearing agencies. The Division recognized,
however, that the contra clearing agency has as interest in assuring
itself that the participant clearing agency will be able to meet its
obligations. For this reason, the Division determined that clearing
agencies may require reasonable assurances of another clearing
agency's ability to meet its obligations or the obligations of its
participants, provided any such requirement is designed and
administered in a manner that facilitates the establishment of the
National System and that it does not unfairly discriminate among
clearing agencies or in appropriately burden competition among them.
Standards Release, supra note 26, at 419. Each clearing agency would
appear to be well situated to propose safeguards necessary an
appropriate to minimize its exposure to the particular risks
presented by another clearing agency in an interface arrangement.
Release No. 34-76514 (Nov. 24, 2015), 80 FR 75401, 75420 (Dec. 1,
2015).
\267\ Rule 19b-4 and Form 19b-4, Section 4, requires any
proposed rule changes filed by an SRO to include to include a
statement on the burden on competition. Specifically the filing must
(i) state whether a proposed rule change will have an impact on
competition and if so, whether it will relieve any burden on or
otherwise promote, competition and (ii) specify the particular
categories of persons and kinds of business on which any burden will
be imposed and the ways in which the proposed rule change will
affect them. See 17 CFR 240.19b-4.
\268\ See 17 CFR 240.17ad-22(e)(20).
\269\ E.g., DTCC Letter at 2 (describing aspects of the process
for reviewing and onboarding new DTC participants).
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As set forth in Section 17A(a)(1) of the Exchange Act, new data
processing and communications techniques create the opportunity for
more efficient, effective, and safe procedures for clearance and
settlement, and linking of clearance and settlement facilities and the
development of uniform standards and procedures will reduce unnecessary
costs and increase the protection of investors.\270\ Accordingly, the
Commission has long supported innovations in technology and operations,
and in particular, those that promote risk mitigation, efficiencies and
cost reductions in the National System and that further the objectives
of Section 17A of the Exchange Act.\271\ Competition often helps to
produce such results, and the requirements of the Exchange Act and
Commission rules thereunder help facilitate this competition and
innovation consistent with the purposes of the Exchange Act, such as
facilitating a linked and coordinated National System and the prompt
and accurate clearance and settlement of securities transactions.
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\270\ 15 U.S.C 78q-1(a)(1).
\271\ See, e.g., Release No. 34-78961 (Sept. 28, 2016), 81 FR
70786, 70867 (Oct. 13, 2016) (explaining that the Commission is
scoping the elements of Rules 17Ad-22(d) and (e) to preserve the
potential for the continuing development of the National System and
maintaining innovation in the operation of registered clearing
agencies).
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As noted above, the Application and PSSC Rules pertaining to
participant eligibility, initial and ongoing participant requirements,
and dues, fees, and other charges meet the standards set forth in
Section 17A(b)(3) of the Exchange Act, and as such, to the extent they
impose a burden on competition, impose one that is
[[Page 32170]]
necessary or appropriate in furtherance of the purposes of Section 17A
of the Exchange Act. To the extent PSSC's intention to use the services
of another clearing agency imposes any burden on competition, such
burden could be managed or mitigated by such other clearing agency,
such as when considering applications for participation or considering
proposed changes to its rules pursuant to the Section 19(b) rule filing
process. Because of the potential for new business models and new
technologies to promote efficiencies or innovations that contribute to
the ongoing development of the National System that can benefit market
participants, investors, and the public, the potential burden on
competition with respect to other clearing agencies can be necessary
and appropriate when such business models and technologies also are
consistent with the rules and requirements applied to registered
clearing agencies in the Exchange Act and Commission rules thereunder.
Accordingly, for the reasons discussed above, and based on the facts
and circumstances presented by this Application, the Commission
determines, pursuant to Section 17A(b)(3)(I) of the Exchange Act, that
the Application, and PSSC's registration as a clearing agency, do not
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of Section 17A of the Exchange Act.\272\
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\272\ 15 U.S.C. 78q-1(b)(3)(I).
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IV. Request for Temporary Registration
PSSC has requested, pursuant to Rule 17Ab2-1(c), that the
Commission grant PSSC temporary registration as a clearing agency,
which would enable PSSC to undertake the actions described as part of
the Ramp-Up Period and in the PSSC Response Letter.\273\ For the
reasons discussed below, pursuant to Section 17A(b) of the Exchange Act
and Rule 17Ab2-1(c) thereunder, the Commission is granting PSSC's
request for temporary registration as a clearing agency and finds that
an exemption from the requirements of Sections 17A(b)(3)(A) and (F) is
consistent with the public interest, the protection of investors and
the purposes of Section 17A, including the prompt and accurate
clearance and settlement of securities transactions and the
safeguarding of securities and funds.\274\
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\273\ See supra notes 33, 218-219, and accompanying text. In
addition, as discussed further in Part III.E.2.c), PSSC also will
need to demonstrate that its corporate actions processing and
netting service fully address the comments received.
\274\ See 15 U.S.C. 78q-1(b)(1).
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As discussed throughout this order, the Application includes novel
elements. Among others, these include its planned approach to operate
as a registered clearing agency as a participant of another clearing
agency (i.e., DTC), its use of new technologies to facilitate
securities and cash ``digitization'' on the Paxos Ledger through a
cloud services provider, a settlement system oriented around CP Pairs,
and the use of both margin collection and an optional netting
functionality outside of the typical central counterparty structure.
The Commission is mindful that PSSC's Application is one among a number
of efforts exploring the ways in which the tokenization of securities
may advance the development and adoption of new technologies that can
reduce costs and improve efficiency while continuing to promote
investor protection.\275\ If successful, such efforts may unlock new
efficiencies consistent with the Congressional findings in Section 17A
of the Exchange Act, which state that new data processing and
communications techniques create the opportunity for more efficient,
effective, and safe procedures for clearance and settlement. PSSC has
explained in its description of the Ramp-Up Period the material
elements of the work that remains before it can begin operations.
Including the detailed description of the Ramp-Up Period alongside the
information and documents required to be provided as part of Form CA-1
provides sufficient evidence that PSSC would attempt to ``faithfully
execute[ ]'' those steps to initiate operations of its clearing
agency.\276\ Consistent with the Congressional findings that begin
Section 17A of the Exchange Act, the Commission has, since the
enactment of the Securities Act Amendments of 1975, supported the
further development of a national system for clearance and settlement
that promotes innovation and the development of new technologies,
operational systems, and business models that increase efficiency and
reduce costs consistent with the purposes of the Exchange Act,
including investor protection.\277\
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\275\ See supra note 244 (describing other efforts, including a
tokenization pilot by DTC).
\276\ See supra notes 31-32 and accompanying text (quoting Bd.
of Trade of City of Chicago v. SEC.).
\277\ See, e.g., GSCC Order, 53 FR at 19843.
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Nevertheless, in promoting innovation, the Commission also must
continue to ensure that any innovative developments within the National
System continue to promote the prompt and accurate clearance and
settlement of securities transactions and the establishment of linked
and coordinated facilities in the National System, while at the same
time, maintaining due regard for the public interest, the protection of
investors, the safeguarding of securities and funds, and the
maintenance of fair competition among brokers, dealers, and clearing
agencies. As described in Part III.A.3.i), PSSC has committed to
completing the specific actions described in the Ramp-Up Period, during
which the Commission can assess PSSC's progress in completing the
development of its core services for clearance and settlement,
including any relationships, systems, operations, and policies and
procedures necessary to ensure it is able and likely to comply with the
requirements set forth in Sections 17A(b)(3)(A) and (F) of the Exchange
Act.\278\ During the Ramp-Up Period, PSSC has included limitations on
its activity to ensure that the development of its service supports the
public interest and the protection of investors: specifically, PSSC
states that it would not commence operations sooner than ten months
from the date of any approval of its Application while it completes
certain actions, and then, for a period of not less than 12 months, it
would limit the number of participants to ten and not permit enhanced
netting.
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\278\ See, e.g., PSSC Response Letter at 2, 4 (explaining that
PSSC would engage with DTCC regarding its DTC application, address
any examples identified by DTCC for its corporate actions processing
in its operations-level procedures, and clarify the cut-off times in
its procedures and in communications with PSSC participants during
the Ramp-Up Period).
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In addition, while it undertakes to complete these steps as a
registered clearing agency, PSSC must continue to satisfy its
obligations under Rule 17Ab2-1 and Form CA-1, including submission of
any amendments to its Form CA-1 application as it completes the actions
described in the Ramp-Up Period. For example, consistent with the
requirements of Rule 17Ab2-1(e), and the instructions on Form CA-1,
PSSC is required to amend its Application following any material
changes to the descriptions in its Application, including but not
limited to any modifications to the descriptions of the Ramp-Up Period.
As a registered clearing agency and self-regulatory organization,
PSSC also will be obligated during the Ramp-Up Period to file changes
to its rules, policies, and procedures pursuant to Section 19(b) and
Rule 19b-4 under the Exchange Act.\279\ In so doing, its efforts
[[Page 32171]]
under the Ramp-Up Period will be the subject of public comment and
specific processes to ensure that the final development of its clearing
agency is consistent with the Exchange Act. PSSC also would be subject
to recordkeeping requirements, Commission supervision as a registered
clearing agency, and examinations under the Exchange Act. Therefore,
the Commission is granting PSSC's request for temporary registration
with an exemption from the requirements of Sections 17A(b)(3)(A) and
(F) for a period of 18 months.\280\
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\279\ See id.; see also 15 U.S.C. 78s.
\280\ The requirements of Sections 17A(b)(3)(A) and (F) are
discussed above in Part III.A and Part III.E. respectively.
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V. Conclusion
For the reasons discussed above, pursuant to Section 17A(b) of the
Exchange Act and Rule 17Ab2-1(c) thereunder, the Commission is
exempting PSCC from the requirements of Sections 17A(b)(3)(A) and (F)
and has determined that PSSC's Application otherwise satisfies the
requirements of Section 17A of the Exchange Act and the rules and
regulations thereunder. Accordingly, the Commission is granting PSSC's
request for temporary registration for a period of 18 months.\281\
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\281\ 15 U.S.C. 78q-1(b)(2).
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It is therefore ordered, pursuant to Sections 17A and 19(a) of the
Exchange Act and Rule 17Ab2-1(c) thereunder, that the application for
temporary registration as a clearing agency filed by Paxos Securities
Settlement Company, LLC (File No. 600-39) be, and hereby is, approved,
and that PSSC is granted exemptions from the requirements in Sections
17A(b)(3)(A) and (F) of the Exchange Act for the reasons described in
this order and subject to the terms and other qualifications set forth
in the Application, to be effective for not more than 18 months from
the date of this order.
By the Commission.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-10808 Filed 5-28-26; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on May 29, 2026.
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