82 FR 19771 - Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Amend the Mortgage-Backed Securities Division Rules Concerning Use of Clearing Fund for Losses, Liabilities or Temporary Needs for Funds Incident to the Clearance and Settlement Business and Make Other Related Changes
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 81 (April 28, 2017)
Federal Register Volume 82, Issue 81 (April 28, 2017)
| Page Range | 19771-19775 | |
| FR Document | 2017-08578 |
[Federal Register Volume 82, Number 81 (Friday, April 28, 2017)] [Notices] [Pages 19771-19775] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-08578] [[Page 19771]] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80517; File No. SR-FICC-2017-010] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Amend the Mortgage-Backed Securities Division Rules Concerning Use of Clearing Fund for Losses, Liabilities or Temporary Needs for Funds Incident to the Clearance and Settlement Business and Make Other Related Changes April 24, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on April 11, 2017, Fixed Income Clearing Corporation (``FICC'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II and III below, which Items have been prepared by the clearing agency. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change consists of modifications to the Mortgage- Backed Securities Division (``MBSD'') Clearing Rules (``MBSD Rules'') \3\ of FICC. Specifically, FICC proposes to amend Section 5 of MBSD Rule 4 to (i) delete language that would potentially limit FICC's access to MBSD Clearing Fund cash and collateral to address losses, liabilities, or temporary needs for funds incident to its clearance and settlement business and (ii) make additional changes to correct grammar errors, delete superfluous words and otherwise align the text of Section 5 of MBSD Rule 4 to the text of Section 5 of Rule 4 of FICC's Government Securities Division (``GSD'') Rulebook (``GSD Rules'').\4\ --------------------------------------------------------------------------- \3\ Capitalized terms used herein and not otherwise defined shall have the meaning assigned to such terms in the MBSD Rules, available at www.dtcc.com/legal/rules-and-procedures.aspx. \4\ See Rule 4 in the GSD Rules, available at www.dtcc.com/legal/rules-and-procedures.aspx. Capitalized terms used herein specifically with respect to GSD and not otherwise defined shall have the meaning assigned to such terms in the GSD Rules. --------------------------------------------------------------------------- II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the clearing agency included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The clearing agency has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. (A) Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The proposed rule change would (i) delete language that would potentially limit FICC's access to MBSD Clearing Fund cash and collateral to address losses, liabilities or temporary needs for funds incident to its clearance and settlement business and (ii) make additional changes to correct grammar errors, delete superfluous words, and otherwise align the text of Section 5 of MBSD Rule 4 to the text of Section 5 of GSD Rule 4. Section 5 of MBSD Rule 4 (the ``Rule'' or the ``MBSD Rule'' as used herein) describes the purposes for which FICC may use MBSD Clearing Fund deposits. The Rule is based on the parallel Section 5 of GSD Rule 4. The Rule describes the use of Clearing Fund deposits both to satisfy ``losses or liabilities of the Corporation'' and as collateral.\5\ The first category is further divided between losses or liabilities ``arising from the failure of a Defaulting Member'' \6\ and those ``otherwise incident to the clearance and settlement business of the Corporation with respect to losses or liabilities to meet unexpected or unusual requirements for funds that represent a small percentage of the Clearing Fund.'' \7\ The second category refers to Clearing Fund deposits serving as collateral (i) to meet FICC's temporary financing needs, (ii) to ensure Members' satisfaction of settlement obligations, and (iii) ``to meet unexpected or unusual requirements for funds that represent a small percentage of the Clearing Fund.'' \8\ --------------------------------------------------------------------------- \5\ MBSD Rule 4, Section 5. \6\ This category of losses or liabilities also includes those relating to failures relating to Cross-Guaranty Agreements, discussion of which is omitted herein for simplicity. Id. \7\ Id. (Emphasis added.) \8\ Id. (Emphasis added.) --------------------------------------------------------------------------- Section 5 of GSD Rule 4 reflects the same two-part construction but does not contain the limiting language relating to ``unexpected or unusual requirements for funds.'' \9\ This limiting language was approved and became effective in 2012 when FICC introduced central counterparty and guaranteed settlement services for MBSD, at which time the entirety of the MBSD Rules were updated and replaced.\10\ Neither FICC's proposal nor the Commission's approval order describes the purpose of the limiting language.\11\ --------------------------------------------------------------------------- \9\ GSD Rule 4, Section 5. \10\ See Securities Exchange Act Release No. 66550 (March 9, 2012), 77 FR 15155 (March 14, 2012) (SR-FICC-2008-01) (the ``FICC CCP Approval Order'') at 15155. \11\ See Securities Exchange Act Release No. 65899 (Dec. 6, 2011), 76 FR 77287 (Dec. 12, 2011) (SR-FICC-2008-01) (proposed rule change) and FICC CCP Approval Order, id. --------------------------------------------------------------------------- The language appears to have been drawn from the Commission's publication in 1980 of standards for the Commission's Division of Market Regulation (the ``Division'') to employ in connection with the registration of clearing agencies.\12\ In the 1980 Standards Release, the Division stated, in relevant part, that a clearing agency ``should have a clearing fund which . . . is limited in the purposes for which it may be used.'' \13\ The Division further stated that ``the rules of the clearing agency should limit the purposes for which the clearing fund may be used to protecting participants and the clearing agency (i) from the defaults of participants and (ii) from clearing agency losses (not including day-to-day operating expenses) such as losses of securities not covered by insurance or other resources of the clearing agency.'' \14\ The Division observed that some commenters opposed the limitation contained in clause (ii) on grounds that it could limit a clearing agency's access to its clearing fund in the event of a temporary need to cover an operating funds shortfall while a fee increase was being implemented or a temporary need to cover a delay in payment by a participant due to circumstances beyond the participant's control.\15\ The Division noted that the commenter expressed concern that the clearing agency not be forced into insolvency in such circumstances.\16\ The Division stated that it ``appreciate[ed] a clearing agency's possible need for temporary applications of a clearing fund in limited amounts to meet unexpected or [[Page 19772]] unusual requirements for funds,'' but noted that ``regular or substantial use of a clearing fund for such purposes, however, would be inappropriate.'' \17\ --------------------------------------------------------------------------- \12\ See Securities Exchange Act Release No. 16900 (June 17, 1980), 45 FR 41920 (June 23, 1980) (the ``1980 Standards Release''). \13\ Id. at 41929. \14\ Id. (Emphasis added.) \15\ See id. \16\ See id. \17\ Id. --------------------------------------------------------------------------- At the time that the Commission published the 1980 Standards Release, clearing agencies operated in a very different manner from how FICC operates today. Clearing agencies were not, for example, subject to requirements with respect to maintaining any particular amount of operating capital.\18\ Against this background, it is understandable that the Division could have deemed the temporary access by a clearing agency to a limited amount of its clearing fund to cover operating expense shortfalls to be acceptable. --------------------------------------------------------------------------- \18\ The 1980 Standards Release does not include specific financial requirements for clearing agencies. The Division stated that clearing agencies should provide financial statements to their participants on a periodic basis and that clearing agencies should plan for contingencies including (in relevant part) loss of funds, with respect to which the Division advised that clearing agencies should maintain adequate insurance. See id. at 41926-27 and 41929. --------------------------------------------------------------------------- FICC is now subject to substantially enhanced requirements. On September 28, 2016, the Commission adopted amendments to Rule 17Ad-22 under the Act, including the addition of new section 17Ad-22(e), which specifies enhanced standards for covered clearing agencies.\19\ The new and enhanced standards specified in Rule 17Ad-22(e) require, among other things, that FICC ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . maintain a sound risk management framework for comprehensively managing legal, credit, liquidity, operational, general business, investment, custody, and other risks that arise in or are borne by'' FICC, including ``plans for the recovery . . . of [FICC] necessitated by credit losses, liquidity shortfalls, losses from general business risk, or any other losses.'' \20\ Rule 17Ad-22(e) also requires FICC to maintain policies and procedures reasonably designed to ``[i]dentify, monitor, and manage [its] general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that [it] can continue operations and services as a going concern if those losses materialize.'' \21\ The above requirement includes the requirement that FICC maintain ``a viable plan . . . for raising additional equity should its equity fall below the amount required [to satisfy its operating capital requirement].'' \22\ --------------------------------------------------------------------------- \19\ See Securities Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (the ``Covered Clearing Agency Standards Release''). FICC is a ``covered clearing agency'' as defined in Rule 17Ad-22(a)(5) and must comply with the new section (e) of Rule 17Ad-22 by April 11, 2017. \20\ 17 CFR 240.17Ad-22(e)(3). \21\ 17 CFR 240.17Ad-22(e)(15). The capital requirement set forth in Rule 17Ad-22(e)(15) is equal to, at a minimum, six months of FICC's current operating expenses. 17 CFR 240.17Ad-22(e)(15)(ii). \22\ 17 CFR 240.17Ad-22(e)(15)(iii). --------------------------------------------------------------------------- FICC proposes to delete the language in Section 5 of MBSD Rule 4 that limits certain uses by FICC of the MBSD Clearing Fund to ``unexpected or unusual'' requirements for funds that represent a ``small percentage'' of the MBSD Clearing Fund because (i) the first instance of the limiting language could impair FICC's access to the MBSD Clearing Fund as one tool (among many) that FICC could employ in order to manage non-default risks, so that it can withstand or recover from such risks and continue operations and services as a going concern while implementing its viable plan for raising additional capital, and (ii) the effect of the second instance of the limiting language is confusing and unclear. Although, as noted above, FICC's original objective in including the limiting language when it revised the MBSD Rules is not clear, the comments described in the 1980 Standards Release suggests two examples for which such language could have been intended: (i) Limiting FICC's use of the MBSD Clearing Fund should an MBSD member experience an operational problem that caused a temporary delay in payment and (ii) limiting FICC's use of the MBSD Clearing Fund should FICC suffer an operating funds shortfall to the point that FICC's viability as a going concern became temporarily impaired.\23\ --------------------------------------------------------------------------- \23\ See 1980 Standards Release, supra note 12, at 41929. --------------------------------------------------------------------------- The first example, however, is inconsistent with FICC's broad and unlimited access to the MBSD Clearing Fund to satisfy ``losses or liabilities . . . arising from the failure of a Defaulting Member . . .'' and to use Clearing Fund deposits as collateral ``to meet its temporary financing needs'' with respect to securities settlement.\24\ Additionally, FICC believes that both examples would represent a misreading of the objective of this discussion in the 1980 Standards Release, in which the Division stated that a clearing agency's rules should provide that it may access its clearing fund to cover clearing agency losses, in addition to losses caused by a participant default, in an unrestricted manner ``but not including day-to-day operating expenses.'' \25\ In other words, it appears that the Division believed, at the time when the 1980 Standards Release was published, that a clearing agency should be permitted to access its clearing fund on a temporary basis to cover even short-term day-to-day operating losses if such use was necessary to avoid ``going out of business'' and such use was neither ``regular'' nor ``substantial.'' \26\ FICC notes that it would be extraordinarily unlikely for it to access the MBSD Clearing Fund for such a purpose at the present time, because, as noted above, FICC is now subject to a requirement that it hold, at a minimum, capital equal to six months of operating expenses.\27\ To summarize, the limiting language as currently included in the Rule would not be effective to limit FICC's use of the MBSD Clearing Fund to address a temporary operational issue that caused a delay in payment by a participant, nor does FICC believe such limitation would have been intended. While the language would be effective to limit to small amounts FICC's access to MBSD Clearing Fund deposits to cover temporary shortfalls in funds needed to meet day-to-day operating expenses, the utility of such a restriction has been eliminated by the new capital requirements to which FICC is subject. --------------------------------------------------------------------------- \24\ MBSD Rule 4, Section 5. \25\ See 1980 Standards Release, supra note 12, at 41929. \26\ Id. \27\ On April 6, 2017, FICC submitted a proposed rule change to adopt a Clearing Agency Policy on Capital Requirements and a Clearing Agency Capital Replenishment Plan in connection with its compliance with Rule 17Ad-22(e)(15). See SR-FICC-2017-007 (the ``FICC Capital Plan PRC''), which was filed with the Commission but has not yet been published in the Federal Register. A copy of the proposed rule change is available at http://www.dtcc.com/legal/sec-rule-filings.aspx. --------------------------------------------------------------------------- FICC is concerned, however, that the limiting language could be interpreted to prevent FICC from accessing MBSD Clearing Fund deposits as a tool to address an unexpected short-term need for funds that would allow FICC to continue operations and services as a going concern while it implements other tools available to it, because such use may be deemed to be either ``satisfaction of losses or liabilities of FICC,'' even if the use of deposits is temporary, or the use of deposits as collateral is to meet ``temporary financing needs'' (see discussion below), both of which are impacted by the limiting language in the Rule. There are many tools that are available to FICC to address such a need for funds, which tools are described in the FICC Capital Plan PRC. The tools directly available to FICC include increasing fees or decreasing expenses, and FICC's parent company, The [[Page 19773]] Depository Trust & Clearing Corporation (``DTCC''),\28\ may also implement tools available to it to raise capital that may be contributed to FICC.\29\ While the FICC Capital Plan PRC does not contemplate recourse to either the GSD Clearing Fund or the MBSD Clearing Fund as a formal tool for capital replenishment, FICC believes that it would be imprudent to limit FICC's ability to employ this tool, particularly on a temporary basis, and it is clear that this was not the Division's objective when it discussed the underlying concerns in the 1980 Standards Release. Finally, FICC notes that FICC's access to GSD Clearing Fund deposits is not so limited. While FICC believes that its use of either the MBSD Clearing Fund or the GSD Clearing Fund for such purposes would be extraordinarily unlikely, the distinction between the two rules creates an appearance of inequity between MBSD Members and GSD Netting Members. --------------------------------------------------------------------------- \28\ DTCC operates on a shared services model with respect to FICC and its other subsidiaries. Most corporate functions are established and managed on an enterprise-wide basis pursuant to intercompany agreements. \29\ See FICC Capital Plan PRC, supra note 27, at 8. --------------------------------------------------------------------------- FICC also proposes to delete the second instance of the limiting language and otherwise amend the ``collateral'' portion of Section 5 of MBSD Rule 4, for the reasons described above, to the extent that the second instance of the limiting language that appears in the Rule would limit FICC's ability to pledge MBSD Clearing Fund deposits that are in the form of securities in order to meet temporary financing needs for purposes otherwise permitted by the Rule as FICC proposes to amend it. Section 5 of MBSD Rule 4 states that the MBSD Clearing Fund also may be used to provide FICC a source of collateral both [sic] to meet its temporary financing needs (through an appropriate financing method determined by the Corporation in its sole discretion) for any financing that is obtained by the Corporation to hold securities pending settlement, to ensure the satisfaction of Members' settlement obligations and to meet unexpected or unusual requirements for funds that represent a small percentage of the Clearing Fund.\30\ --------------------------------------------------------------------------- \30\ MBSD Rule 4, Section 5. This section of the Rule identifies that the MBSD Clearing Fund is a source of collateral for FICC to meet ``temporary financing needs'' (i.e., where FICC may pledge the assets as collateral to a lender to FICC) and to ensure that Members perform to FICC (i.e., where Members have pledged collateral to FICC as surety against their own default). This understanding of the construction of the Rule is clear from comparison to Section 5 of GSD Rule 4, which also uses the word ``both,'' but where only the temporary financing example and the member surety example follow.\31\ It is reasonable to believe that the second instance of the limiting language in the MBSD Rule was simply intended to make clear that, to the extent FICC was permitted to use the MBSD Clearing Fund to address a particular loss or liability ``otherwise incident to the clearance and settlement business,'' FICC was also permitted to use MBSD Clearing Fund deposits as collateral to address ``temporary financing needs'' for the same purpose. If so, the same rationale for deleting the limiting language that is described above would apply. --------------------------------------------------------------------------- \31\ GSD Rule 4, Section 5. --------------------------------------------------------------------------- Finally, with respect to both instances of the limiting language in the Rule, FICC is concerned that scenarios that previously may have been fairly described as generating ``unexpected or unusual requirements for funds'' may no longer be fairly described as ``unexpected'' or ``unusual'' given the expectations described in the Covered Clearing Agency Standards Release that covered clearing agencies contemplate and plan for such scenarios.\32\ --------------------------------------------------------------------------- \32\ See Covered Clearing Agency Standards Release, supra note 19, at 70810 and 70836. --------------------------------------------------------------------------- Consequently, FICC proposes to delete the limiting language in both places where it appears in MBSD Rule 4, Section 5, because the original purpose of the language is unclear, and potential applications of the limiting language may not have been intended or would not be, as a prudential matter, appropriate today. FICC also believes that, because of the uncertain intent of the language and the inherent ambiguity of terms such as ``unexpected or unusual,'' FICC's use of MBSD Clearing Fund deposits to address needs that are ``otherwise incident to [its] clearance and settlement business'' could be subject to legal challenges. FICC believes that the limiting language could impair FICC's compliance with Rule 17Ad-22(e)(3)(ii), pursuant to which FICC is preparing a recovery plan that provides for FICC's management of a broad range of risks such that it can continue to provide critical clearance and settlement operations and services even if such risks materialize.\33\ FICC also believes that, because of its unclear purpose and the ambiguity of its terms, the limiting language could also impair FICC's compliance with Rule 17Ad-22(e)(1), pursuant to which FICC is required to ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [p]rovide for a well-founded, clear, transparent and enforceable legal basis for each of its activities in all relevant jurisdictions.'' \34\ --------------------------------------------------------------------------- \33\ The Commission issued a temporary exemption from compliance with the recovery and wind-down plan requirements of Rule 17Ad- 22(e)(3) and (e)(15) until December 31, 2017. Securities Exchange Act Release No. 80378 (April 5, 2017) (File No. S7-03-14). \34\ 17 CFR 240.17Ad-22(e)(1). --------------------------------------------------------------------------- FICC also proposes to amend Section 5 of MBSD Rule 4 to make additional changes that would align the Rule to Section 5 of GSD Rule 4 (where applicable), remove superfluous words and correct grammar errors and sentence construction ambiguities in the paragraph of the Rule that FICC proposes to amend in order to delete the limiting language discussed above. The first instance of the limiting language modifies the phrase ``otherwise incident to the clearance and settlement business'' with the phrase ``with respect to losses and liabilities to meet unexpected or unusual requirements for funds . . . .'' FICC proposes that, upon deleting this phrase, ``otherwise incident to the clearance and settlement business of the Corporation'' would be followed immediately by ``including losses and liabilities arising other than from such failure of such Member,'' which would align the amended MBSD Rule to Section 5 of GSD Rule 4 but would not otherwise change the extent of FICC's authority if the limiting language was deleted. FICC also proposes to replace the word ``provide'' with the word ``providing'' because ``providing'' would be grammatically correct where the sentence construction is that the use of MBSD Clearing Fund deposits ``shall be limited to . . . satisfaction of losses or liabilities . . . and to [providing] the Corporation with a source of collateral.'' Next, FICC proposes to add to the clause referring to temporary financing needs the modifier ``including, without limitation,'' and delete the parenthetical modifier ``(through an appropriate financing method determined by the Corporation in its sole discretion) for'' that currently precedes the reference to ``financing that is obtained by the Corporation to hold securities pending settlement.'' This change would delete a superfluous parenthetical clause and align the amended MBSD Rule to Section 5 of GSD Rule 4. Finally, FICC proposes to delete a comma and add the word ``and'' before the phrase ``to ensure the satisfaction of Members' settlement obligations,'' because these changes would be grammatically [[Page 19774]] necessary upon deletion of the second instance of the limiting language. FICC also believes it is reasonable and appropriate to align the language of Section 5 of MBSD Rule 4 to Section 5 of GSD Rule 4, because it would avoid any question whether Section 5 of MBSD Rule 4 should be interpreted differently from Section 5 of GSD Rule 4. FICC does not believe that these sections should be interpreted differently, except as necessary with respect to differences that are specific to the services and defined terminology of each division. 2. Statutory Basis FICC believes that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder that are applicable to FICC. In particular, FICC believes that the proposed rule change is consistent with Section 17A(b)(3)(F) \35\ of the Act and Rule 17Ad-22(e) under the Act,\36\ for the reasons described below. --------------------------------------------------------------------------- \35\ 15 U.S.C. 78q-1(b)(3)(F). \36\ 17 CFR 240.17Ad-22(e). --------------------------------------------------------------------------- Section 17A(b)(3)(F) of the Act requires, in part, that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions.\37\ The proposed rule change would enhance FICC's prompt and accurate clearance and settlement of securities transactions because it would enhance FICC's ability to ensure that it can continue its operations and services as a going concern in the unlikely event that it would be necessary or appropriate for FICC to access MBSD Clearing Fund deposits to address losses, liabilities or temporary financing needs incident to its clearance and settlement business. Additionally, the more technical aspects of the proposed rule change would promote the prompt and accurate clearance and settlement of securities transactions by removing potentially ambiguous language, correcting grammar errors, and deleting superfluous text in Section 5 of MBSD Rule 4, which changes would enhance the clarity of the Rule. The proposed rule change would also promote the prompt and accurate clearance and settlement of securities transactions by aligning Section 5 of MBSD Rule 4 to Section 5 of GSD Rule 4, which would reduce the risk of legal challenges to FICC's use of MBSD Clearing Fund deposits based upon the argument that differences between the two rules indicate that Section 5 of MBSD Rule 4 should be interpreted differently from Section 5 of GSD Rule 4. --------------------------------------------------------------------------- \37\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- FICC also believes that the proposed rule change is consistent Rule 17Ad-22(e)(1) and (3). Rule 17Ad-22(e)(1) requires FICC to ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [p]rovide for a well-founded, clear, transparent and enforceable legal basis for each of its activities in all relevant jurisdictions.'' \38\ As described above, FICC believes that the proposed rule change to eliminate the limiting language described above would reduce the risk of legal challenges to FICC's ability to access MBSD Clearing Fund deposits under scenarios in which FICC believes that such limitation was not intended or in which such limitation would not be appropriate, as a prudential matter, in light of the enhanced standards to which FICC is now subject. The more technical aspects of the proposed rule change would also reduce the risk of legal challenges to FICC's actions that could be based upon grammar errors or differences between Section 5 of MBSD Rule 4 and Section 5 of GSD Rule 4. Rule 17Ad-22(e)(3) requires FICC to ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . maintain a sound risk management framework for comprehensively managing legal, credit, liquidity, operational, general business, investment, custody, and other risks that arise in or are borne by'' FICC, including ``plans for the recovery . . . of [FICC] necessitated by credit losses, liquidity shortfalls, losses from general business risk, or any other losses.'' \39\ The proposed rule change would enhance FICC's compliance with Rule 17Ad-22(e)(3) by enhancing and clarifying FICC's ability to access MBSD Clearing Fund deposits as one tool that it may employ in order to address losses, liabilities or temporary needs for funds incident to its clearance and settlement business. In particular, FICC believes that enhancing and clarifying FICC's ability to access MBSD Clearing Fund deposits in this manner and making the related more technical changes to Section 5 of MBSD Rule 4 would enhance FICC's comprehensive management of legal and operational risks, consistent with Rule 17Ad- 22(e)(3)(i).\40\ FICC also believes that enhancing and clarifying FICC's ability to access MBSD Clearing Fund deposits to address such risks would enhance FICC's ability to establish and maintain appropriate recovery and orderly wind-down plans, as required by Rule 17Ad-22(e)(3)(ii),\41\ by enhancing and clarifying one tool that FICC may employ in order to address such risks. --------------------------------------------------------------------------- \38\ 17 CFR 240.17Ad-22(e)(1). \39\ 17 CFR 240.17Ad-22(e)(3). \40\ 17 CFR 240.17Ad-22(e)(3)(i). See also Covered Clearing Agency Standards Release, supra note 19, at 70810 (discussing guidelines that a covered clearing agency should consider with respect to its comprehensive risk management framework). \41\ 17 CFR 240.17Ad-22(e)(3)(ii). --------------------------------------------------------------------------- (B) Clearing Agency's Statement on Burden on Competition FICC believes that the proposed rule change to delete the limiting language in Section 5 of MBSD Rule 4 could have an impact upon competition. Specifically, as a result of the proposed rule change FICC's ability to access MBSD Clearing Fund deposits with respect to certain non-default losses would be expanded and clarified. Although FICC believes it is extraordinarily unlikely that FICC would find it necessary or appropriate to employ this tool in lieu of other tools that are available to FICC, if FICC were to access MBSD Clearing Fund deposits for this purpose, and such use became a loss or liability that was allocated to MBSD Members pursuant to Section 5 and Section 7 of MBSD Rule 4, such allocation could have a different financial impact upon MBSD Members than would be imposed by use of another tool that FICC could employ to address the underlying loss, liability, or temporary needs for funds incident to its clearance and settlement business. Accordingly, FICC believes that the proposed rule change to delete the limiting language in Section 5 of MBSD Rule 4 could burden competition. However, FICC does not believe that this aspect of the proposed rule changes would impose a significant burden on competition, both because it is extraordinarily unlikely that FICC would employ this tool and because FICC's access to MBSD Clearing Fund deposits for these purposes would, if employed, likely replace (possibly temporarily) alternative tools such as fee increases or capital-raising tools available to DTCC that would also have a financial impact on MBSD Members. FICC believes that the above described potential burden on competition would be necessary and appropriate in furtherance of the Act, specifically Section 17A(b)(3)(F) of the Act,\42\ because, as described above, the proposed rule change would enhance FICC's prompt and accurate clearance and settlement of securities transactions by enhancing FICC's ability to ensure that it can continue its operations and services as a going concern, in the [[Page 19775]] unlikely event that it would be necessary or appropriate for FICC to access MBSD Clearing Fund deposits to address losses, liabilities or temporary financing needs incident to its clearance and settlement business. FICC also believes that the proposed rule change to delete the limiting language in Section 5 of MBSD Rule 4 is necessary and appropriate in furtherance of the Act because it would (i) reduce the risk of legal challenges to FICC's ability to access MBSD Clearing Fund deposits under scenarios in which FICC believes that such limitation was not intended or in which, FICC believes, such limitation would not be appropriate, thereby supporting FICC's compliance with Rule 17Ad- 22(e)(1),\43\ (ii) enhance FICC's comprehensive management of legal and operational risks, thereby supporting FICC's compliance with Rule 17Ad- 22(e)(3)(i),\44\ and (iii) enhance FICC's ability to establish and maintain appropriate recovery and orderly wind-down plans, thereby supporting FICC's compliance with Rule 17Ad-22(e)(3)(ii).\45\ --------------------------------------------------------------------------- \42\ 15 U.S.C. 78q-1(b)(3)(F). \43\ 17 CFR 240.17Ad-22(e)(1). \44\ 17 CFR 240.17Ad-22(e)(3)(i). \45\ 17 CFR 240.17Ad-22(e)(3)(ii). --------------------------------------------------------------------------- FICC does not believe the additional changes to correct grammar errors, delete superfluous words and otherwise align the text of Section 5 of MBSD Rule 4 to the text of Section 5 of GSD Rule 4 would have any impact upon competition, because these proposed rule changes would enhance the clarity and grammatical accuracy of the Rule and therefore would not have an impact on MBSD members or impose any other potential burden on competition. (C) Clearing Agency's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others FICC has not received or solicited any written comments relating to this proposal. FICC will notify the Commission of any written comments received by FICC. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-FICC-2017-010 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-FICC-2017-010. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of FICC and on DTCC's Web site (http://dtcc.com/legal/sec-rule-filings.aspx). All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-FICC-2017-010 and should be submitted on or before May 19, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\46\ --------------------------------------------------------------------------- \46\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-08578 Filed 4-27-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 81 / Friday, April 28, 2017 / Notices 19771
SECURITIES AND EXCHANGE II. Clearing Agency’s Statement of the contain the limiting language relating to
COMMISSION Purpose of, and Statutory Basis for, the ‘‘unexpected or unusual requirements
Proposed Rule Change for funds.’’ 9 This limiting language was
[Release No. 34–80517; File No. SR–FICC– In its filing with the Commission, the approved and became effective in 2012
2017–010] clearing agency included statements when FICC introduced central
concerning the purpose of and basis for counterparty and guaranteed settlement
Self-Regulatory Organizations; Fixed the proposed rule change and discussed services for MBSD, at which time the
Income Clearing Corporation; Notice of any comments it received on the entirety of the MBSD Rules were
Filing of Proposed Rule Change To proposed rule change. The text of these updated and replaced.10 Neither FICC’s
statements may be examined at the proposal nor the Commission’s approval
Amend the Mortgage-Backed
places specified in Item IV below. The order describes the purpose of the
Securities Division Rules Concerning
clearing agency has prepared limiting language.11
Use of Clearing Fund for Losses, The language appears to have been
Liabilities or Temporary Needs for summaries, set forth in sections A, B,
and C below, of the most significant drawn from the Commission’s
Funds Incident to the Clearance and publication in 1980 of standards for the
Settlement Business and Make Other aspects of such statements.
Commission’s Division of Market
Related Changes (A) Clearing Agency’s Statement of the Regulation (the ‘‘Division’’) to employ
Purpose of, and Statutory Basis for, the in connection with the registration of
April 24, 2017. Proposed Rule Change clearing agencies.12 In the 1980
Pursuant to Section 19(b)(1) of the 1. Purpose Standards Release, the Division stated,
Securities Exchange Act of 1934 in relevant part, that a clearing agency
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 The proposed rule change would (i) ‘‘should have a clearing fund which
notice is hereby given that on April 11, delete language that would potentially . . . is limited in the purposes for
2017, Fixed Income Clearing limit FICC’s access to MBSD Clearing which it may be used.’’ 13 The Division
Fund cash and collateral to address further stated that ‘‘the rules of the
Corporation (‘‘FICC’’) filed with the
losses, liabilities or temporary needs for clearing agency should limit the
Securities and Exchange Commission
funds incident to its clearance and purposes for which the clearing fund
(‘‘Commission’’) the proposed rule settlement business and (ii) make
change as described in Items I, II and III may be used to protecting participants
additional changes to correct grammar and the clearing agency (i) from the
below, which Items have been prepared errors, delete superfluous words, and defaults of participants and (ii) from
by the clearing agency. The Commission otherwise align the text of Section 5 of clearing agency losses (not including
is publishing this notice to solicit MBSD Rule 4 to the text of Section 5 of day-to-day operating expenses) such as
comments on the proposed rule change GSD Rule 4. losses of securities not covered by
from interested persons. Section 5 of MBSD Rule 4 (the ‘‘Rule’’ insurance or other resources of the
or the ‘‘MBSD Rule’’ as used herein) clearing agency.’’ 14 The Division
I. Clearing Agency’s Statement of the describes the purposes for which FICC
Terms of Substance of the Proposed observed that some commenters
may use MBSD Clearing Fund deposits. opposed the limitation contained in
Rule Change The Rule is based on the parallel clause (ii) on grounds that it could limit
The proposed rule change consists of Section 5 of GSD Rule 4. The Rule a clearing agency’s access to its clearing
modifications to the Mortgage-Backed describes the use of Clearing Fund fund in the event of a temporary need
deposits both to satisfy ‘‘losses or to cover an operating funds shortfall
Securities Division (‘‘MBSD’’) Clearing
liabilities of the Corporation’’ and as while a fee increase was being
Rules (‘‘MBSD Rules’’) 3 of FICC.
collateral.5 The first category is further implemented or a temporary need to
Specifically, FICC proposes to amend
divided between losses or liabilities cover a delay in payment by a
Section 5 of MBSD Rule 4 to (i) delete ‘‘arising from the failure of a Defaulting
language that would potentially limit participant due to circumstances
Member’’ 6 and those ‘‘otherwise beyond the participant’s control.15 The
FICC’s access to MBSD Clearing Fund incident to the clearance and settlement
cash and collateral to address losses, Division noted that the commenter
business of the Corporation with respect expressed concern that the clearing
liabilities, or temporary needs for funds to losses or liabilities to meet agency not be forced into insolvency in
incident to its clearance and settlement unexpected or unusual requirements for such circumstances.16 The Division
business and (ii) make additional funds that represent a small percentage stated that it ‘‘appreciate[ed] a clearing
changes to correct grammar errors, of the Clearing Fund.’’ 7 The second agency’s possible need for temporary
delete superfluous words and otherwise category refers to Clearing Fund applications of a clearing fund in
align the text of Section 5 of MBSD Rule deposits serving as collateral (i) to meet limited amounts to meet unexpected or
4 to the text of Section 5 of Rule 4 of FICC’s temporary financing needs, (ii) to
FICC’s Government Securities Division ensure Members’ satisfaction of 9 GSD Rule 4, Section 5.
(‘‘GSD’’) Rulebook (‘‘GSD Rules’’).4 settlement obligations, and (iii) ‘‘to meet 10 See Securities Exchange Act Release No. 66550
unexpected or unusual requirements for (March 9, 2012), 77 FR 15155 (March 14, 2012) (SR–
1 15 funds that represent a small percentage FICC–2008–01) (the ‘‘FICC CCP Approval Order’’) at
U.S.C. 78s(b)(1).
15155.
2 17 CFR 240.19b–4. of the Clearing Fund.’’ 8 11 See Securities Exchange Act Release No. 65899
Section 5 of GSD Rule 4 reflects the
asabaliauskas on DSK3SPTVN1PROD with NOTICES
3 Capitalized terms used herein and not otherwise
(Dec. 6, 2011), 76 FR 77287 (Dec. 12, 2011) (SR–
defined shall have the meaning assigned to such same two-part construction but does not FICC–2008–01) (proposed rule change) and FICC
terms in the MBSD Rules, available at CCP Approval Order, id.
www.dtcc.com/legal/rules-and-procedures.aspx. 5 MBSD Rule 4, Section 5. 12 See Securities Exchange Act Release No. 16900
4 See Rule 4 in the GSD Rules, available at 6 This category of losses or liabilities also (June 17, 1980), 45 FR 41920 (June 23, 1980) (the
www.dtcc.com/legal/rules-and-procedures.aspx. includes those relating to failures relating to Cross- ‘‘1980 Standards Release’’).
13 Id. at 41929.
Capitalized terms used herein specifically with Guaranty Agreements, discussion of which is
respect to GSD and not otherwise defined shall omitted herein for simplicity. Id. 14 Id. (Emphasis added.)
have the meaning assigned to such terms in the 7 Id. (Emphasis added.) 15 See id.
GSD Rules. 8 Id. (Emphasis added.) 16 See id.
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![19772 Federal Register / Vol. 82, No. 81 / Friday, April 28, 2017 / Notices
unusual requirements for funds,’’ but materialize.’’ 21 The above requirement day-to-day operating expenses.’’ 25 In
noted that ‘‘regular or substantial use of includes the requirement that FICC other words, it appears that the Division
a clearing fund for such purposes, maintain ‘‘a viable plan . . . for raising believed, at the time when the 1980
however, would be inappropriate.’’ 17 additional equity should its equity fall Standards Release was published, that a
At the time that the Commission below the amount required [to satisfy its clearing agency should be permitted to
operating capital requirement].’’ 22 access its clearing fund on a temporary
published the 1980 Standards Release,
FICC proposes to delete the language basis to cover even short-term day-to-
clearing agencies operated in a very in Section 5 of MBSD Rule 4 that limits day operating losses if such use was
different manner from how FICC certain uses by FICC of the MBSD necessary to avoid ‘‘going out of
operates today. Clearing agencies were Clearing Fund to ‘‘unexpected or business’’ and such use was neither
not, for example, subject to unusual’’ requirements for funds that ‘‘regular’’ nor ‘‘substantial.’’ 26 FICC
requirements with respect to represent a ‘‘small percentage’’ of the notes that it would be extraordinarily
maintaining any particular amount of MBSD Clearing Fund because (i) the unlikely for it to access the MBSD
operating capital.18 Against this first instance of the limiting language Clearing Fund for such a purpose at the
background, it is understandable that could impair FICC’s access to the MBSD present time, because, as noted above,
the Division could have deemed the Clearing Fund as one tool (among many) FICC is now subject to a requirement
temporary access by a clearing agency to that FICC could employ in order to that it hold, at a minimum, capital equal
a limited amount of its clearing fund to manage non-default risks, so that it can to six months of operating expenses.27
cover operating expense shortfalls to be withstand or recover from such risks To summarize, the limiting language as
acceptable. and continue operations and services as currently included in the Rule would
FICC is now subject to substantially a going concern while implementing its not be effective to limit FICC’s use of the
enhanced requirements. On September viable plan for raising additional MBSD Clearing Fund to address a
28, 2016, the Commission adopted capital, and (ii) the effect of the second temporary operational issue that caused
amendments to Rule 17Ad–22 under the instance of the limiting language is a delay in payment by a participant, nor
Act, including the addition of new confusing and unclear. does FICC believe such limitation
section 17Ad–22(e), which specifies Although, as noted above, FICC’s would have been intended. While the
original objective in including the language would be effective to limit to
enhanced standards for covered clearing
limiting language when it revised the small amounts FICC’s access to MBSD
agencies.19 The new and enhanced
MBSD Rules is not clear, the comments Clearing Fund deposits to cover
standards specified in Rule 17Ad–22(e)
described in the 1980 Standards Release temporary shortfalls in funds needed to
require, among other things, that FICC
suggests two examples for which such meet day-to-day operating expenses, the
‘‘establish, implement, maintain and language could have been intended: (i) utility of such a restriction has been
enforce written policies and procedures Limiting FICC’s use of the MBSD eliminated by the new capital
reasonably designed to . . . maintain a Clearing Fund should an MBSD member requirements to which FICC is subject.
sound risk management framework for experience an operational problem that FICC is concerned, however, that the
comprehensively managing legal, credit, caused a temporary delay in payment limiting language could be interpreted
liquidity, operational, general business, and (ii) limiting FICC’s use of the MBSD to prevent FICC from accessing MBSD
investment, custody, and other risks Clearing Fund should FICC suffer an Clearing Fund deposits as a tool to
that arise in or are borne by’’ FICC, operating funds shortfall to the point address an unexpected short-term need
including ‘‘plans for the recovery . . . of that FICC’s viability as a going concern for funds that would allow FICC to
[FICC] necessitated by credit losses, became temporarily impaired.23 continue operations and services as a
liquidity shortfalls, losses from general The first example, however, is going concern while it implements other
business risk, or any other losses.’’ 20 inconsistent with FICC’s broad and tools available to it, because such use
Rule 17Ad–22(e) also requires FICC to unlimited access to the MBSD Clearing may be deemed to be either ‘‘satisfaction
maintain policies and procedures Fund to satisfy ‘‘losses or liabilities . . . of losses or liabilities of FICC,’’ even if
reasonably designed to ‘‘[i]dentify, arising from the failure of a Defaulting the use of deposits is temporary, or the
monitor, and manage [its] general Member . . .’’ and to use Clearing Fund use of deposits as collateral is to meet
business risk and hold sufficient liquid deposits as collateral ‘‘to meet its ‘‘temporary financing needs’’ (see
net assets funded by equity to cover temporary financing needs’’ with discussion below), both of which are
potential general business losses so that respect to securities settlement.24 impacted by the limiting language in the
[it] can continue operations and services Additionally, FICC believes that both Rule. There are many tools that are
as a going concern if those losses examples would represent a misreading available to FICC to address such a need
of the objective of this discussion in the for funds, which tools are described in
17 Id.
1980 Standards Release, in which the the FICC Capital Plan PRC. The tools
18 The 1980 Standards Release does not include
Division stated that a clearing agency’s directly available to FICC include
specific financial requirements for clearing increasing fees or decreasing expenses,
agencies. The Division stated that clearing agencies
rules should provide that it may access
should provide financial statements to their its clearing fund to cover clearing and FICC’s parent company, The
participants on a periodic basis and that clearing agency losses, in addition to losses
agencies should plan for contingencies including caused by a participant default, in an 25 See 1980 Standards Release, supra note 12, at
(in relevant part) loss of funds, with respect to 41929.
which the Division advised that clearing agencies
unrestricted manner ‘‘but not including 26 Id.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
should maintain adequate insurance. See id. at 27 On April 6, 2017, FICC submitted a proposed
21 17 CFR 240.17Ad–22(e)(15). The capital
41926–27 and 41929. rule change to adopt a Clearing Agency Policy on
19 See Securities Exchange Act Release No. 78961 requirement set forth in Rule 17Ad–22(e)(15) is Capital Requirements and a Clearing Agency
(September 28, 2016), 81 FR 70786 (October 13, equal to, at a minimum, six months of FICC’s Capital Replenishment Plan in connection with its
2016) (S7–03–14) (the ‘‘Covered Clearing Agency current operating expenses. 17 CFR 240.17Ad– compliance with Rule 17Ad–22(e)(15). See SR–
Standards Release’’). FICC is a ‘‘covered clearing 22(e)(15)(ii). FICC–2017–007 (the ‘‘FICC Capital Plan PRC’’),
22 17 CFR 240.17Ad–22(e)(15)(iii).
agency’’ as defined in Rule 17Ad–22(a)(5) and must which was filed with the Commission but has not
comply with the new section (e) of Rule 17Ad–22 23 See 1980 Standards Release, supra note 12, at
yet been published in the Federal Register. A copy
by April 11, 2017. 41929. of the proposed rule change is available at http://
20 17 CFR 240.17Ad–22(e)(3). 24 MBSD Rule 4, Section 5. www.dtcc.com/legal/sec-rule-filings.aspx.
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Depository Trust & Clearing Corporation understanding of the construction of the purpose and the ambiguity of its terms,
(‘‘DTCC’’),28 may also implement tools Rule is clear from comparison to Section the limiting language could also impair
available to it to raise capital that may 5 of GSD Rule 4, which also uses the FICC’s compliance with Rule 17Ad–
be contributed to FICC.29 While the word ‘‘both,’’ but where only the 22(e)(1), pursuant to which FICC is
FICC Capital Plan PRC does not temporary financing example and the required to ‘‘establish, implement,
contemplate recourse to either the GSD member surety example follow.31 It is maintain and enforce written policies
Clearing Fund or the MBSD Clearing reasonable to believe that the second and procedures reasonably designed to
Fund as a formal tool for capital instance of the limiting language in the . . . [p]rovide for a well-founded, clear,
replenishment, FICC believes that it MBSD Rule was simply intended to transparent and enforceable legal basis
would be imprudent to limit FICC’s make clear that, to the extent FICC was for each of its activities in all relevant
ability to employ this tool, particularly permitted to use the MBSD Clearing jurisdictions.’’ 34
on a temporary basis, and it is clear that Fund to address a particular loss or FICC also proposes to amend Section
this was not the Division’s objective liability ‘‘otherwise incident to the 5 of MBSD Rule 4 to make additional
when it discussed the underlying clearance and settlement business,’’ changes that would align the Rule to
concerns in the 1980 Standards Release. FICC was also permitted to use MBSD Section 5 of GSD Rule 4 (where
Finally, FICC notes that FICC’s access to Clearing Fund deposits as collateral to applicable), remove superfluous words
GSD Clearing Fund deposits is not so address ‘‘temporary financing needs’’ and correct grammar errors and
limited. While FICC believes that its use for the same purpose. If so, the same sentence construction ambiguities in the
of either the MBSD Clearing Fund or the rationale for deleting the limiting paragraph of the Rule that FICC
GSD Clearing Fund for such purposes language that is described above would proposes to amend in order to delete the
would be extraordinarily unlikely, the apply. limiting language discussed above. The
distinction between the two rules Finally, with respect to both instances first instance of the limiting language
creates an appearance of inequity of the limiting language in the Rule, modifies the phrase ‘‘otherwise incident
between MBSD Members and GSD FICC is concerned that scenarios that to the clearance and settlement
Netting Members. previously may have been fairly business’’ with the phrase ‘‘with respect
FICC also proposes to delete the described as generating ‘‘unexpected or to losses and liabilities to meet
second instance of the limiting language unusual requirements for funds’’ may unexpected or unusual requirements for
and otherwise amend the ‘‘collateral’’ no longer be fairly described as funds . . . .’’ FICC proposes that, upon
portion of Section 5 of MBSD Rule 4, for ‘‘unexpected’’ or ‘‘unusual’’ given the deleting this phrase, ‘‘otherwise
the reasons described above, to the expectations described in the Covered incident to the clearance and settlement
extent that the second instance of the Clearing Agency Standards Release that business of the Corporation’’ would be
limiting language that appears in the covered clearing agencies contemplate followed immediately by ‘‘including
Rule would limit FICC’s ability to and plan for such scenarios.32 losses and liabilities arising other than
pledge MBSD Clearing Fund deposits Consequently, FICC proposes to from such failure of such Member,’’
that are in the form of securities in order delete the limiting language in both which would align the amended MBSD
to meet temporary financing needs for places where it appears in MBSD Rule Rule to Section 5 of GSD Rule 4 but
purposes otherwise permitted by the 4, Section 5, because the original would not otherwise change the extent
Rule as FICC proposes to amend it. purpose of the language is unclear, and of FICC’s authority if the limiting
Section 5 of MBSD Rule 4 states that the potential applications of the limiting language was deleted. FICC also
MBSD Clearing Fund also may be used language may not have been intended or proposes to replace the word ‘‘provide’’
to provide FICC would not be, as a prudential matter, with the word ‘‘providing’’ because
appropriate today. FICC also believes ‘‘providing’’ would be grammatically
a source of collateral both [sic] to meet its correct where the sentence construction
that, because of the uncertain intent of
temporary financing needs (through an
the language and the inherent ambiguity is that the use of MBSD Clearing Fund
appropriate financing method determined by
the Corporation in its sole discretion) for any of terms such as ‘‘unexpected or deposits ‘‘shall be limited to . . .
financing that is obtained by the Corporation unusual,’’ FICC’s use of MBSD Clearing satisfaction of losses or liabilities . . .
to hold securities pending settlement, to Fund deposits to address needs that are and to [providing] the Corporation with
ensure the satisfaction of Members’ ‘‘otherwise incident to [its] clearance a source of collateral.’’ Next, FICC
settlement obligations and to meet and settlement business’’ could be proposes to add to the clause referring
unexpected or unusual requirements for subject to legal challenges. FICC to temporary financing needs the
funds that represent a small percentage of the modifier ‘‘including, without
believes that the limiting language could
Clearing Fund.30 limitation,’’ and delete the parenthetical
impair FICC’s compliance with Rule
This section of the Rule identifies that 17Ad–22(e)(3)(ii), pursuant to which modifier ‘‘(through an appropriate
the MBSD Clearing Fund is a source of FICC is preparing a recovery plan that financing method determined by the
collateral for FICC to meet ‘‘temporary provides for FICC’s management of a Corporation in its sole discretion) for’’
financing needs’’ (i.e., where FICC may broad range of risks such that it can that currently precedes the reference to
pledge the assets as collateral to a lender continue to provide critical clearance ‘‘financing that is obtained by the
to FICC) and to ensure that Members and settlement operations and services Corporation to hold securities pending
perform to FICC (i.e., where Members even if such risks materialize.33 FICC settlement.’’ This change would delete a
have pledged collateral to FICC as also believes that, because of its unclear superfluous parenthetical clause and
asabaliauskas on DSK3SPTVN1PROD with NOTICES
surety against their own default). This align the amended MBSD Rule to
31 GSD Rule 4, Section 5. Section 5 of GSD Rule 4. Finally, FICC
28 DTCC operates on a shared services model with 32 See Covered Clearing Agency Standards proposes to delete a comma and add the
respect to FICC and its other subsidiaries. Most Release, supra note 19, at 70810 and 70836. word ‘‘and’’ before the phrase ‘‘to
corporate functions are established and managed on 33 The Commission issued a temporary exemption
ensure the satisfaction of Members’
an enterprise-wide basis pursuant to intercompany from compliance with the recovery and wind-down
agreements. settlement obligations,’’ because these
plan requirements of Rule 17Ad–22(e)(3) and (e)(15)
29 See FICC Capital Plan PRC, supra note 27, at
until December 31, 2017. Securities Exchange Act changes would be grammatically
8. Release No. 80378 (April 5, 2017) (File No. S7–03–
30 MBSD Rule 4, Section 5. 14). 34 17 CFR 240.17Ad–22(e)(1).
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necessary upon deletion of the second should be interpreted differently from to access MBSD Clearing Fund deposits
instance of the limiting language. FICC Section 5 of GSD Rule 4. to address such risks would enhance
also believes it is reasonable and FICC also believes that the proposed FICC’s ability to establish and maintain
appropriate to align the language of rule change is consistent Rule 17Ad– appropriate recovery and orderly wind-
Section 5 of MBSD Rule 4 to Section 5 22(e)(1) and (3). Rule 17Ad–22(e)(1) down plans, as required by Rule 17Ad–
of GSD Rule 4, because it would avoid requires FICC to ‘‘establish, implement, 22(e)(3)(ii),41 by enhancing and
any question whether Section 5 of maintain and enforce written policies clarifying one tool that FICC may
MBSD Rule 4 should be interpreted and procedures reasonably designed to employ in order to address such risks.
differently from Section 5 of GSD Rule . . . [p]rovide for a well-founded, clear,
transparent and enforceable legal basis (B) Clearing Agency’s Statement on
4. FICC does not believe that these Burden on Competition
sections should be interpreted for each of its activities in all relevant
differently, except as necessary with jurisdictions.’’ 38 As described above, FICC believes that the proposed rule
respect to differences that are specific to FICC believes that the proposed rule change to delete the limiting language in
the services and defined terminology of change to eliminate the limiting Section 5 of MBSD Rule 4 could have
each division. language described above would reduce an impact upon competition.
the risk of legal challenges to FICC’s Specifically, as a result of the proposed
2. Statutory Basis ability to access MBSD Clearing Fund rule change FICC’s ability to access
FICC believes that the proposed rule deposits under scenarios in which FICC MBSD Clearing Fund deposits with
change is consistent with the believes that such limitation was not respect to certain non-default losses
intended or in which such limitation would be expanded and clarified.
requirements of the Act and the rules
would not be appropriate, as a Although FICC believes it is
and regulations thereunder that are
prudential matter, in light of the extraordinarily unlikely that FICC
applicable to FICC. In particular, FICC
enhanced standards to which FICC is would find it necessary or appropriate
believes that the proposed rule change
now subject. The more technical aspects to employ this tool in lieu of other tools
is consistent with Section
of the proposed rule change would also that are available to FICC, if FICC were
17A(b)(3)(F) 35 of the Act and Rule
reduce the risk of legal challenges to to access MBSD Clearing Fund deposits
17Ad–22(e) under the Act,36 for the
FICC’s actions that could be based upon for this purpose, and such use became
reasons described below.
grammar errors or differences between a loss or liability that was allocated to
Section 17A(b)(3)(F) of the Act Section 5 of MBSD Rule 4 and Section MBSD Members pursuant to Section 5
requires, in part, that the rules of a 5 of GSD Rule 4. Rule 17Ad–22(e)(3) and Section 7 of MBSD Rule 4, such
clearing agency be designed to promote requires FICC to ‘‘establish, implement, allocation could have a different
the prompt and accurate clearance and maintain and enforce written policies financial impact upon MBSD Members
settlement of securities transactions.37 and procedures reasonably designed to than would be imposed by use of
The proposed rule change would . . . maintain a sound risk management another tool that FICC could employ to
enhance FICC’s prompt and accurate framework for comprehensively address the underlying loss, liability, or
clearance and settlement of securities managing legal, credit, liquidity, temporary needs for funds incident to
transactions because it would enhance operational, general business, its clearance and settlement business.
FICC’s ability to ensure that it can investment, custody, and other risks Accordingly, FICC believes that the
continue its operations and services as that arise in or are borne by’’ FICC, proposed rule change to delete the
a going concern in the unlikely event including ‘‘plans for the recovery . . . of limiting language in Section 5 of MBSD
that it would be necessary or [FICC] necessitated by credit losses, Rule 4 could burden competition.
appropriate for FICC to access MBSD liquidity shortfalls, losses from general However, FICC does not believe that
Clearing Fund deposits to address business risk, or any other losses.’’ 39 this aspect of the proposed rule changes
losses, liabilities or temporary financing The proposed rule change would would impose a significant burden on
needs incident to its clearance and enhance FICC’s compliance with Rule competition, both because it is
settlement business. Additionally, the 17Ad–22(e)(3) by enhancing and extraordinarily unlikely that FICC
more technical aspects of the proposed clarifying FICC’s ability to access MBSD would employ this tool and because
rule change would promote the prompt Clearing Fund deposits as one tool that FICC’s access to MBSD Clearing Fund
and accurate clearance and settlement of it may employ in order to address deposits for these purposes would, if
securities transactions by removing losses, liabilities or temporary needs for employed, likely replace (possibly
potentially ambiguous language, funds incident to its clearance and temporarily) alternative tools such as fee
correcting grammar errors, and deleting settlement business. In particular, FICC increases or capital-raising tools
superfluous text in Section 5 of MBSD believes that enhancing and clarifying available to DTCC that would also have
Rule 4, which changes would enhance FICC’s ability to access MBSD Clearing a financial impact on MBSD Members.
the clarity of the Rule. The proposed Fund deposits in this manner and FICC believes that the above
rule change would also promote the making the related more technical described potential burden on
prompt and accurate clearance and changes to Section 5 of MBSD Rule 4 competition would be necessary and
settlement of securities transactions by would enhance FICC’s comprehensive appropriate in furtherance of the Act,
aligning Section 5 of MBSD Rule 4 to management of legal and operational specifically Section 17A(b)(3)(F) of the
Section 5 of GSD Rule 4, which would risks, consistent with Rule 17Ad– Act,42 because, as described above, the
asabaliauskas on DSK3SPTVN1PROD with NOTICES
reduce the risk of legal challenges to 22(e)(3)(i).40 FICC also believes that proposed rule change would enhance
FICC’s use of MBSD Clearing Fund enhancing and clarifying FICC’s ability FICC’s prompt and accurate clearance
deposits based upon the argument that and settlement of securities transactions
differences between the two rules 38 17 CFR 240.17Ad–22(e)(1). by enhancing FICC’s ability to ensure
39 17 CFR 240.17Ad–22(e)(3).
indicate that Section 5 of MBSD Rule 4 that it can continue its operations and
40 17 CFR 240.17Ad–22(e)(3)(i). See also Covered
services as a going concern, in the
Clearing Agency Standards Release, supra note 19,
35 15 U.S.C. 78q–1(b)(3)(F). at 70810 (discussing guidelines that a covered
36 17 CFR 240.17Ad–22(e). 41 17 CFR 240.17Ad–22(e)(3)(ii).
clearing agency should consider with respect to its
37 15 U.S.C. 78q–1(b)(3)(F). comprehensive risk management framework). 42 15 U.S.C. 78q–1(b)(3)(F).
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![Federal Register / Vol. 82, No. 81 / Friday, April 28, 2017 / Notices 19775
unlikely event that it would be (B) institute proceedings to determine For the Commission, by the Division of
necessary or appropriate for FICC to whether the proposed rule change Trading and Markets, pursuant to delegated
access MBSD Clearing Fund deposits to should be disapproved. authority.46
address losses, liabilities or temporary Eduardo A. Aleman,
IV. Solicitation of Comments Assistant Secretary.
financing needs incident to its clearance
and settlement business. FICC also Interested persons are invited to [FR Doc. 2017–08578 Filed 4–27–17; 8:45 am]
believes that the proposed rule change submit written data, views and BILLING CODE 8011–01–P
to delete the limiting language in arguments concerning the foregoing,
Section 5 of MBSD Rule 4 is necessary including whether the proposed rule
and appropriate in furtherance of the change is consistent with the Act. SECURITIES AND EXCHANGE
Act because it would (i) reduce the risk Comments may be submitted by any of COMMISSION
of legal challenges to FICC’s ability to the following methods:
[Release No. 34–80516; File No. SR–
access MBSD Clearing Fund deposits Electronic Comments NYSEArca–2017–43]
under scenarios in which FICC believes
• Use the Commission’s Internet Self-Regulatory Organizations; NYSE
that such limitation was not intended or
comment form (http://www.sec.gov/ Arca, Inc.; Notice of Filing and
in which, FICC believes, such limitation
rules/sro.shtml); or Immediate Effectiveness of Proposed
would not be appropriate, thereby • Send an email to rule-comments@
supporting FICC’s compliance with Rule Rule Change Amending the NYSE Arca
sec.gov. Please include File Number SR–
17Ad–22(e)(1),43 (ii) enhance FICC’s Equities Schedule of Fees and
FICC–2017–010 on the subject line.
comprehensive management of legal Charges for Exchange Services
and operational risks, thereby Paper Comments
April 24, 2017.
supporting FICC’s compliance with Rule • Send paper comments in triplicate Pursuant to Section 19(b)(1) 1 of the
17Ad–22(e)(3)(i),44 and (iii) enhance to Secretary, Securities and Exchange Securities Exchange Act of 1934 (the
FICC’s ability to establish and maintain Commission, 100 F Street NE., ‘‘Act’’) 2 and Rule 19b–4 thereunder,3
appropriate recovery and orderly wind- Washington, DC 20549–1090. notice is hereby given that, on April 20,
down plans, thereby supporting FICC’s All submissions should refer to File 2017, NYSE Arca, Inc. (the ‘‘Exchange’’
compliance with Rule 17Ad– Number SR–FICC–2017–010. This file or ‘‘NYSE Arca’’) filed with the
22(e)(3)(ii).45 number should be included on the Securities and Exchange Commission
FICC does not believe the additional subject line if email is used. To help the (the ‘‘Commission’’) the proposed rule
changes to correct grammar errors, Commission process and review your change as described in Items I, II, and
delete superfluous words and otherwise comments more efficiently, please use III below, which Items have been
align the text of Section 5 of MBSD Rule only one method. The Commission will prepared by the self-regulatory
4 to the text of Section 5 of GSD Rule post all comments on the Commission’s organization. The Commission is
4 would have any impact upon Internet Web site (http://www.sec.gov/ publishing this notice to solicit
competition, because these proposed rules/sro.shtml). Copies of the comments on the proposed rule change
rule changes would enhance the clarity submission, all subsequent from interested persons.
and grammatical accuracy of the Rule amendments, all written statements
and therefore would not have an impact I. Self-Regulatory Organization’s
with respect to the proposed rule
on MBSD members or impose any other Statement of the Terms of the Substance
change that are filed with the
potential burden on competition. of the Proposed Rule Change
Commission, and all written
(C) Clearing Agency’s Statement on communications relating to the The Exchange proposes to amend the
Comments on the Proposed Rule proposed rule change between the NYSE Arca Equities Schedule of Fees
Change Received From Members, Commission and any person, other than and Charges for Exchange Services
Participants, or Others those that may be withheld from the (‘‘Fee Schedule’’) to add a new pricing
public in accordance with the tier, the Large Order Tier, and to change
FICC has not received or solicited any pricing in Tier 3. The Exchange
provisions of 5 U.S.C. 552, will be
written comments relating to this proposes to implement the fee changes
available for Web site viewing and
proposal. FICC will notify the effective April 20, 2017.4 The proposed
printing in the Commission’s Public
Commission of any written comments rule change is available on the
Reference Room, 100 F Street NE.,
received by FICC. Exchange’s Web site at www.nyse.com,
Washington, DC 20549 on official
III. Date of Effectiveness of the business days between the hours of at the principal office of the Exchange,
Proposed Rule Change and Timing for 10:00 a.m. and 3:00 p.m. Copies of the and at the Commission’s Public
Commission Action filing also will be available for Reference Room.
Within 45 days of the date of inspection and copying at the principal II. Self-Regulatory Organization’s
publication of this notice in the Federal office of FICC and on DTCC’s Web site Statement of the Purpose of, and
Register or within such longer period (http://dtcc.com/legal/sec-rule- Statutory Basis for, the Proposed Rule
up to 90 days (i) as the Commission may filings.aspx). All comments received Change
designate if it finds such longer period will be posted without change; the
In its filing with the Commission, the
to be appropriate and publishes its Commission does not edit personal
self-regulatory organization included
identifying information from
asabaliauskas on DSK3SPTVN1PROD with NOTICES
reasons for so finding or (ii) as to which
the self-regulatory organization submissions. You should submit only 1 15 U.S.C. 78s(b)(1).
consents, the Commission will: information that you wish to make 2 15 U.S.C. 78a.
(A) By order approve or disapprove available publicly. All submissions 3 17 CFR 240.19b–4.
such proposed rule change, or should refer to File Number SR–FICC– 4 The Exchange originally filed to amend the Fee
2017–010 and should be submitted on Schedule on March 31, 2017 (SR–NYSEArca–2017–
34) and withdrew such filing on April 10, 2017. On
43 17 CFR 240.17Ad–22(e)(1). or before May 19, 2017. April 10, 2017, the Exchange re-filed to amend the
44 17 CFR 240.17Ad–22(e)(3)(i). Fee Schedule (SR–NYSEArca–2017–39) and
45 17 CFR 240.17Ad–22(e)(3)(ii). 46 17 CFR 200.30–3(a)(12). withdrew such filing on April 20, 2017.
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Document Created: 2017-04-28 03:02:25
Document Modified: 2017-04-28 03:02:25
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
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