SEC Division of Trading and Markets no-action letter: National Financial Services LLC, Re: Cash in a Customer Reserve Account under Rule 15c3-3(e)(5)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
DIVISION OF
TRADING AND MARKETS
Michael Lyons
ChiefFinancial Officer
National Financial Services LLC
200 Seaport Boulevard
Boston, MA 02210
Re: Cash in a Customer Reserve Account under Rule 15c3-3(e)(5) Dear Mr. Lyons:
In your letter dated March 7, 2018,1 on behalf ofNational Financial Services LLC ("NFS"), you request assurances that the staff ofthe Division ofTrading and Markets ("Division") of the Securities and Exchange Commission ("Commission") will not recommend enforcement action to the Commission pursuant to Rule l 5c3-3 under the Securities Exchange Act of 1934 ("Exchange Act"/ ifNFS, when calculating the 15% bank equity capital limitation under paragraph (e)(5) ofthe rule, excludes intra-day cash balances arising from maturing qualified securities and unwinding reverse repurchase transactions in qualified securities ("Permitted Investments") in its special reserve bank account for the exclusive benefit of customers ("Reserve Account") at The Bank ofNew York Mellon ("BNY"). You are not seeking this relief with respect to any other Reserve Account maintained now or in the future by NFS.
I. Background
Based on the representations in your letter, I understand the following to be pertinent to your request for relief Rule 15c3-3 requires a broker-dealer that holds customer securities and cash (a «carrying broker-dealer") to maintain cash or qualified securities on deposit in a Reserve Account at a bank in an amount computed in accordance with a fommla in Exhibit A to the rule. 3 The rule defines the term "qualified security" to mean a security issued by the United States or a security in respect of which the principal and interest arc guaranteed by the United States \Ve have attached a copy ofy·our 1etter. Each defined tcrrn in our response has the san1e rncanlng as defined in the letter~ unless \Ve note otherwise. 17 c:FR. 2,40. !

Mr. Michael Lyons
("qualified securities").4 In determining whether a carrying broker-dealer maintains the minimum required amount on deposit in its Reserve Account(s), the firm must exclude: (i) cash deposited with an affiliated bank; and (ii) cash deposited with a non-affiliated bank to the extent that the amount ofthe deposit exceeds 15% ofthe bank's equity capital as reported by the bank in its most recent Call Report (the "15% limitation").5 The 15% limitation applies to cash deposits only (i.e., it does not apply to the value of qualified securities deposited in a Reserve Account). The Commission adopted the 15% limitation in 2013 with the objective of avoiding the situation where a carrying broker-dealer's Reserve Account cash deposit constitutes a substantial portion ofthe bank's total deposits.6 More particularly, the 15% limitation is designed to address the potential impairment ofthe bank's ability to quickly return the cash in the Reserve Account to the broker-dealer. 7 NFS operates as a carrying broker-dealer registered with the Commission. As a carrying broker-dealer, NFS is subject to Rule 15c3-3 and, accordingly, it maintains a Reserve Account at a bank. The majority ofthe required deposit amount in NFS's Reserve Account arises from free credit balances held in retail customer accounts. NFS meets its Reserve Account requirement by depositing qualified securities into the Reserve Account. The bank holding the Reserve Account currently provides U.S. government securities clearance services that facilitates NFS's use of qualified securities to meet its Reserve Account deposit requirement. A large proportion ofthe qualified securities in NFS's Reserve Account are obtained through overnight and term reverse repurchase transactions cleared and settled in the account. The use ofovernight (as opposed to term) reverse repurchase transactions is designed to maintain liquidity in the Reserve Account to address the potential risk that NFS could experience an unexpectedly large number of contemporaneous customer withdrawals offree credit balances. NFS's use of overnight reverse repurchase transactions to address the risk of this type of liquidity stress event is designed to comport with regulatory guidance. 8 The daily settlement ofPem1itted Investments in NFS's Reserve Account results in an intra-day cash deposit into the Reserve Account of approximately $20 billion.9 On a daily basis, this intra-day cash balance is primarily attributable to the close-out and re-establishment of overnight reverse repurchase transactions. NFS believes this daily intra-day cash balance in the Reserve Account appropriately addresses the liquidity risk arising from the total amount offree credit balances it holds for customers. Based on the amount of equity capital maintained by the bank that currently holds NFS's Reserve Account, the intra-day cash deposit docs not implicate the 15% limitation. Howevec this bank is exiting the business of providing (J. S. government l 7 CFR 240.
l 5c3-3(a)(6). 17 CFR 240. 15c3-3(c)(5). ,See }~inancia! Re:ij)Onsibili~v J\ule5i•j("Jr Exchange ;\ct ReJeasc No. 70072 (July 2013)~ 78 FR 51824, 51834 (Aug. 21, 2013) fJ FlT\iR/t R._eguiarc,ry l'Jotice 15-33 Risk or o.rc:r t!n1c on

Mr. Michael Lyons securities clearance services. NFS has identified BNY as a bank that provides comparable U.S. government securities clearance services. Consequently, NFS is planning to move its Reserve Account to BNY. BNY is a New York state-chartered bank and a member ofthe Federal Reserve System, and is subject to regulation, supervision, and examination by the Federal Reserve, the Federal Deposit Insurance Corporation, and the New York State Department ofFinancial Services. 10 It is the largest banking subsidiary ofits parent corporation, The Bank ofNew York Mellon Corporation ("BNY Mellon"). BNY Mellon - as one of the eight U.S. banking institutions that have been designated systemically important - is subject to heightened capital and liquidity requirements and a resolution process that explicitly requires planning to ensure the continuity of critical services even in the event of a default. The long-term senior debt of BNY Mellon and BNY is rated in one ofthe three highest rating categories by at least four credit rating agencies that are registered with the Commission as Nationally Recognized Statistical Rating Organizations. 11 As ofDecember 31, 2016, BNY Mellon and BNY were "well capitalized" based on the capital ratios and rules applicable to them. 12 BNY Mellon, through its subsidiaries such as BNY, provides global and U.S. government securities clearance services and settles securities transactions in over l 00 markets. 13 In this regard, BNY Mellon services approximately $1.5 trillion, or approximately 86%, of the $1.8 trillion tri-party repurchase agreement market in the U.S. 14 IfNFS moves its Reserve Account to BNY, it intends to continue to meet its Rule 15c3-3 deposit requirement using qualified securities. Further, it will continue to obtain a large proportion ofthese securities by entering into overnight reverse repurchase transactions. Moreover, it will continue to manage its liquidity risk by entering into Permitted Investments that -- when unwound each day will result in an intra-day cash deposit in its Reserve Account of approximately $20 billion. NFS anticipates that BNY's clearance process for settling Permitted Investments in its Reserve Account will be similar to the process used by its current bank. In particular, the approximately $20 billion in Pennitted Investments will be unwound each morning. This will result in an intra-day cash deposit in the Reserve Account of approximately $20 billion. Throughout the morning and early afternoon, NFS will close out and re-establish Permitted Investments. This will reduce the approximately $20 billion cash balance in the account arising from the unwinding ofPermitted Investments and replace those positions 'Nith qualified securities which satisfy the 15% limitation. As a result, the intra-day cash balance in the Reserve i1.ccount will typically be eliminated by 3:30 p.m. each business day. BNY 2016 Annual Report. p.85, avui!ab!e ar: https:/iwww.l.mymellon.cmn/
global-assets/pdtlinvc::;tor￾rclations/annuat-rcpmt-2016.pdf. BNY 2016 Annual Report, p.49. 131\ry 2016 ;\nnua! I~~eport:' p. 77. Bi"·f' 20 I 6 1\nnuai R..cport~ p.23.

Mr. Michael Lyons
Based on the amount of equity capital reported by BNY in its most recent Call Report, a $20 billion intra-day cash deposit into a Reserve Account held at BNY would exceed the 15% limitation in Rule 15c3-3. Consequently, NFS is seeking relieffrom the 15% limitation, but solely with respect to intra-day cash balances arising from unwinding Permitted Investments in a Reserve Account held at BNY. NFS believes the reliefwould be appropriate because: (i) the cash balance is intra-day and primarily relates to the close-out and re-establishment ofovernight reverse repurchase transactions; (ii) the intra-day cash balance is a tool designed to manage liquidity risk; (iii) BNY is well-capitalized; and (iv) BNY is subject to stringent regulatory and prudential requirements. NFS also notes that BNY provides a broad suite ofU.S. government securities settlement services that will greatly facilitate NFS's use ofqualified securities to meet its Reserve Account deposit requirement. Finally, NFS has established a Reserve Account at one or more other banks and procedures so that in the unlikely event that the intra-day cash balance in the Reserve Account at BNY is not eliminated by 3 :30 p.m. New York time, NFS will transfer a sufficient amount ofthe remaining cash balance to a Reserve Account at another bank by 6:00 p.m. New York time on that same business day in order to reduce the cash balance in the Reserve Account at BNY to an amount that complies with the 15% limitation in Rule 15c3-3.
II. Response
Based on the facts and representations set forth in your letter, and without necessarily agreeing with your conclusions and analysis, the Division will not recommend enforcement action to the Commission pursuant to Rule 15c3-3 ifNFS excludes the intra-day cash balances arising from unwinding Permitted Investments in its Reserve Account at BNY in calculating the 15% limitation, provided that:

1. The intra-day cash balances arising from unwinding Permitted Investments are reinvested
   in Permitted Investments by 3:30 p.m. New York time the same day the cash balances anse;
2. In the unlikely event that cash balances remain in the Reserve Account at BNY after 3:30
   p.m. New York time on the same day they arise, NFS will transfer a sufficient amount of the cash balances no later than 6:00 p.m. New York time out ofthe Reserve Account at BNY and to a Reserve Account at one or more other banks to comply with the 15% limitation in Rule l 5c3-3 with respect to the Reserve Account maintained by BNY;
3. NFS establishes, maintains, and enforces written policies and procedures that are
   reasonably designed to comply v;ith conditions #1 and #2 above; and
4. NFS maintains accurate books and records, including a daily itemized record of cash
   balances in the Reserve Account at BNY and anv other bank. 1.hat evidence comolianc,~ ., .' ! v,:ith the conditions in this letter and that \Vill be provided to the staff ofthe Commission or NFS's Designated Examining A.uthority (''DEA") upon request.

Mr. Michael Lyons
In your letter, NFS undertakes to notify the Commission and its DEA immediately if the cash balances in the Reserve Account at BNY after 6:00 p.m. New York time exceed 15% of the equity capital ofBNY. This staffposition is based on the facts you have presented and the representations you have made in your letter. Moreover, this staffposition is strictly limited to the application of Rule 15c3-3 to the intra-day cash balances arising from the unwinding ofPermitted Investments in the Reserve Account that NFS maintains at BNY. Any different facts and circumstances from those set forth in this letter may require a different response. This response, furthermore, expresses the Division's position regarding enforcement action only and does not purport to express any legal conclusions on the question presented The staff expresses no view with respect to any other questions that the activities discussed above may raise, including the applicability of any other federal or state laws, or rules of a self-regulatory organization. This position is subject to modification or revocation as necessary or appropriate for the public interest or the protection of investors. If you have any questions regarding this letter, please contact Sheila Dombal Swartz, Senior Special Counsel at (202) 551-5545, Randall W. Roy, Deputy Associate Director at (202) 551-5522, or me at (202) 551-5525. Sincerely, Michael A. Macchiaroli Associate Director

Z2K
March 7,2018
BYE-MAIL
Michad A. Macchiaroli
Associate Director
Division ofTrading and Markets
U.S. Securities and Exchange Commission
100 F S treeL NE
Washington, DC 20549
Re: Cash in a Customer Reserve Account under Rule 15c3-3(~)(5} Dear Mr. Macchiaroli:
On behalfofNational Financial Services LLC ("NFS" or ''Firm"), 1 ! am writing to request assurances that the staffofthe Division ofTrading and Markets ("'Division") ofthe Securities and Exchange Commission ("Commission") wiH not recommend enforcement action to the Commission pursuant to Rule 15c3-3 under the Securities Exchange Act of 1934 ("Exchange Act")2 ifNFS, when calculating the 15% bank equity capital limitation under paragraph (e)(5) ofthe rule, excludes intra-day cash balances arising from maturing qualified securities and unwinding reverse repurchase transactions in qualified securities ("Permitted Investments") in its special reserve ban,lc account for the exclusive benefit of customers ("Reserve Accounf') at The Bank ofNelv York Mellon ("BNY"). We are not seeking this relief '>Vith respect to any other Reserve Account maintained now or 1n the future by 1,ffS. Background The Firm's request relates to the interpretation of Rule 15c3-3( e) with respect to cash deposits in the Firm's Reserve Account in light of necessary changes to the clearance and ~eulement of its government securities business. Rule 15c3-3 requires a broker-dealer that holds customer se.:udties and cash (a "can-ying broker-dealer") to maintain cash or qualified securities on deposit in a Reserve Account at a bank in an amount computed in accor<lance v-11th a formula in :Ex~hibit i-\ lo tl1e 3 'T11e rule defines the tern1 ~'qualified security~' to n1ean a security~ issu.ecl l\JFS, a Fidelity lnvestrnents c:01npany, is an SEC-registered clearing and can)1 ing broker-dealer and Financial Regulatory m,,,-., ... , c-Ffr~R.i'') mernbcr. 1.s such~ 1'-lFS acts as the custodian for cash and securities f(}r (1) custo1ners of affiliated retail introducing broker-dealer Brokerage Services LLC (FI!S); (il) cuslon1crs ofunaffiliattd broker-deaiers and lnvesuncnt and !ts dlrect -fnstltntional cns.tcnners. f 7 C~F'R. 240. l /. 7 (~FR_ 240.

Michael A. Macchiaroli
March 7, 2018
NFS currently has a deposit obligation in its Reserve Account of approximately $45.9 billion, ofwhich the daily settlement ofPermitted Investments in NFS's Reserve Account results in an i~tra-day cash dep;sit into the Reserve Account of approximately $20 billion.9 On a daily basis, this intra-day cash balance is prjmarily attributable to the close-out and re-establishment of overnight reverse repurchase transactions. NFS believes this daily intra-day cash balance in the Reserve Account appropriately addresses the liquidity risk arising from tbe total amount offree credit balances it holds for customers. Based on the amount of equity capital maintained by the bank that currently holds NFS's Reserve Account, the intra-day cash deposit does not implicate t,he 15% limitation. However, this bank is exiting the business ofproviding U.S. government securities clearance services. NFS has identified BNY as a bank that provides comparable U.S. government securities clearance services. Consequently, NFS is planning to move its Reserve Account to BNY. BNY is a New York state-chartered bank and a member ofthe Federal Reserve System, and is subject to regulation, supervision, and examination by the Federal Reserve, the Federal Deposit Insurance Corporation, and the New York State Department of Financial Services. 10 It is the largest banking subsidiary of its parent corporation, The Bank ofNew York Meilon Corporation ("BNY Mellon"). BNY Mellon as one ofthe eight U.S. banking institutions that have been designated systemically imp01iant -·· is subject to heightened capital and liquidity requirements and a resolution process that explicitly requires planning to ensure the continuity of critical services even in the event of a default. The long-term senior debt ofBNY 1v1eHon and BNY is rated in one ofthe three highest rating categories by at least four credit rating agencies that are registered with the Commission as Nationally Recognized Statistical Rating Organizations. i I As ofDecember 31, 2016, BNY Mellon and BNY were "well capitalized'' based on the capital ratios and rules applicable to them. 12 BNY Mellon, through its subsidiaries such as BNY, provides globai and U.S. government securities dearnnce sen1ices and settles . . . . , '}') • n 1 -• • l nN·,r · A Jf · secunties transact10ns mover l l I marKets. '·' m lh1s regarc,, o t i.1e, on sePnces approximately $1.5 trillion, or approximately 86%, ofthe $1.8 triHion tri-party repurchase

• · o •·'n1 ;;'I 1h"._, • r S 14 a:::,re..,...en..n .. r kP~t ;,n -· l., ....
  IfNFS moves its Reserve Account to BNY, it intends to continue 10 meet its Rule l5c3-3 deposit requirement using qualified securities. Further, it 'Nill continue to obtain a large proportion ofthese securities by entering into overnight reverse repurchase transactions. ? Data as of December 3L2017. This amount may increase, or &:crease, over 1imc depending on porlfolio activity and customer deposits. 11}-.JY 2016 ,Annual R,eport~ p.85~ uv<:ilabfr:-" al:
  relat'ions/annuaI-report-2016.pdf. p.49.
  Bl-J\l 2016 A.nnua1 p.77.

Michaei A. Macchiaroli
March 7, 2018
BNY and to a Reserve A.ccount at one or more other banks to comply with the 15% limitation in Rule 15c3-3 with respect to tbe Reserve Account maintained by BNY;
3. NFS establishes, maintains, and enforces written policies and procedures that are
reasonably designed to comply with conditions#l and #2 above; and
4. NFS maintains accurate books and records, including a daily itemized record of cash
balances jn the Reserve Account at BNY and any other bank, that evidence compliance with the conditions in this letter and that will be provided to the staffofthe Commission or NFS's Designated Examining Authority ("DEA") upon request. NFS also will undertake to notify the Commission and its DEA immediately ifthe cash balances in the Reserve Account at BNY after 6:00 p.m. Nevi York time exceed 15% ofthe equity capital ofBNY. We appreciate your consideration ofthis request. Please contact me at (201) 915-7437 if you have any questions. Sincerely, __----~-P5~~ I Michad Lyons Chief Financial Officer