82 FR 24174 - Self-Regulatory Organizations; The Depository Trust Company; Fixed Income Clearing Corporation; National Securities Clearing Corporation; Notice of No Objection to Advance Notices To Enhance the Credit Risk Rating Matrix and Make Other Changes
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 100 (May 25, 2017)
Federal Register Volume 82, Issue 100 (May 25, 2017)
| Page Range | 24174-24177 | |
| FR Document | 2017-10689 |
[Federal Register Volume 82, Number 100 (Thursday, May 25, 2017)] [Notices] [Pages 24174-24177] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-10689] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80731; File Nos. SR-DTC-2017-801; SR-FICC-2017-804; SR- NSCC-2017-801] Self-Regulatory Organizations; The Depository Trust Company; Fixed Income Clearing Corporation; National Securities Clearing Corporation; Notice of No Objection to Advance Notices To Enhance the Credit Risk Rating Matrix and Make Other Changes May 19, 2017. On March 22, 2017, The Depository Trust Company (``DTC''), Fixed Income Clearing Corporation (``FICC''), and National Securities Clearing Corporation (``NSCC,'' each a ``Clearing Agency,'' and collectively, ``Clearing Agencies'') filed with the Securities and Exchange Commission (``Commission''), respectively advance notices SR- DTC-2017-801, SR-FICC-2017-804, and SR-NSCC-2017-801 (collectively, the ``Advance Notices'') pursuant to section 806(e)(1) of the Payment, Clearing, and Settlement Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934 (``Exchange Act'').\3\ The Advance Notices were published for comment in the Federal Register on April 7, 2017.\4\ The Commission received no comments to the Advance Notices. This publication serves as notice that the Commission does not object to the changes set forth in the Advance Notices. --------------------------------------------------------------------------- \1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight Council designated the Clearing Agencies systemically important financial market utilities on July 18, 2012. Financial Stability Oversight Council 2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, the Clearing Agencies are required to comply with the Clearing Supervision Act and file advance notices with the Commission. 12 U.S.C. 5465(e). \2\ 17 CFR 240.19b-4(n)(1)(i). \3\ 15 U.S.C. 78s(b)(1). \4\ Securities Exchange Act Release Nos. 80395 (April 7, 2017), 82 FR 17921 (April 13, 2017) (SR-NSCC-2017-801); 80396 (April 7, 2017), 82 FR 17906 (April 13, 2017) (SR-FICC-2017-804); and 80394 (April 7, 2017), 82 FR 17901 (April 13, 2017) (SR-DTC-2017-801) (``Notices''). The Clearing Agencies also filed proposed rule changes with the Commission pursuant to section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder, seeking approval of changes to their Rules necessary to implement the proposal. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively. The proposed rule changes were published for comment in the Federal Register on April 11, 2017. Securities Exchange Act Release Nos. 30383 (April 5, 2017), 82 FR 17468 (April 11, 2017) (SR-FICC-2017-006); 80382 (April 5, 2017), 82 FR 17483 (April 11, 2017) (SR-DTC-2017-002); and 80381 (April 5, 2017), 82 FR 17475 (April 11, 2017) (SR-NSCC-2017-002). The Commission did not receive any comments on the proposed rule changes. --------------------------------------------------------------------------- I. Description of the Advance Notices The Advance Notices consist of proposed modifications to the Rules, By-Laws and Organizational Certificate of DTC (``DTC Rules''), the Rulebook of GSD (``GSD Rules''), the Clearing Rules of MBSD (``MBSD Rules''), and the Rules & Procedures of NSCC (``NSCC Rules'') (collectively, the ``Rules'').\5\ The Advance Notices are proposals by the Clearing Agencies to amend the Rules to: (i) Enhance their shared credit risk rating matrix (``Credit Risk Rating Matrix'' or ``CRRM''), which was developed by the Clearing Agencies to evaluate the credit risks posed by certain Clearing Agency members to the Clearing Agencies (and by implication to all of the Clearing Agency members), as a result of providing services to such members; and (ii) make other amendments to the Rules, both related and unrelated to the CRRM, to provide more transparency and description regarding the Clearing Agencies' current ongoing membership monitoring process, as described below. --------------------------------------------------------------------------- \5\ Available at http://www.dtcc.com/en/legal/rules-and-procedures. FICC is comprised of two divisions: The Government Securities Division (``GSD'') and the Mortgage-Backed Securities Division (``MBSD''). Each division serves as a central counterparty, becoming the buyer and seller to each of their respective members' securities transactions and guarantying settlement of those transactions, even if a member defaults. GSD provides, among other things, clearance and settlement for trades in U.S. Government debt issues. MBSD provides, among other things, clearance and settlement for trades in mortgage-backed securities. GSD and MBSD maintain separate sets of rules, margin models, and clearing funds. --------------------------------------------------------------------------- Currently, the CRRM rates the credit risk presented by members of the Clearing Agencies that are U.S. broker-dealers and U.S. banks. The CRRM assigns a credit rating based on certain quantitative factors (``Credit Rating''), which vary based upon whether the member is a broker-dealer or bank.\6\ The current CRRM also uses a relative scoring approach (i.e., rating participants on a curve) and relies on peer grouping of members to calculate the Credit Rating of a member. Ultimately, the ratings generated are based on a 7-point rating system, with ``1'' being the strongest Credit Rating and ``7'' being the weakest Credit Rating. Although the current CRRM does not directly consider qualitative factors, the Clearing Agencies' credit risk staff may manually downgrade a particular member's Credit Rating based on various qualitative factors.\7\ Members that receive a Credit Rating of 5, 6, or 7 are placed on the Clearing Agencies' ``Watch List,'' as these members present a greater risk of default.\8\ --------------------------------------------------------------------------- \6\ For U.S. broker-dealers, the Clearing Agencies consider size (i.e., total excess net capital), capital, leverage, liquidity, and profitability. For U.S. banks, the Clearing Agencies consider size, capital, asset quality, earnings, and liquidity. \7\ Quantitative factors currently considered by the Clearing Agencies include: (a) Available news reports and/or regulatory observations relating to the member; (b) member's liquidity arrangements; and (c) material changes to the member's organizational structure. \8\ Members on the Watch List are subject to enhanced surveillance by the Clearing Agencies and additional margin charges. --------------------------------------------------------------------------- To improve the coverage and the effectiveness of the current CRRM, the Clearing Agencies are proposing three enhancements, as discussed below. In addition to the enhancements, the Clearing Agencies also propose to make other changes to their Rules to more fully describe the Clearing Agencies' current ongoing membership monitoring process, both related and unrelated to the CRRM, also discussed below.\9\ --------------------------------------------------------------------------- \9\ Although each of the Clearing Agencies uses the CRRM uniformly, the description of the respective Clearing Agencies' Rules regarding the CRRM are different. To address this issue, the Clearing Agencies propose to adopt similar Rules at each Clearing Agency. --------------------------------------------------------------------------- A. Proposed CRRM Enhancements Currently, the CRRM is comprised of two Credit Rating models--one for U.S. broker-dealers and one for U.S. banks. The first proposed enhancement would expand the CRRM by adding a third model that would enable the CRRM to generate Credit Ratings for members that are foreign banks or foreign trust companies that have audited financial data that is publicly available. The Credit Rating for these particular members would be based on both quantitative and qualitative factors, as indicated in the second enhancement, below. According to the Clearing Agencies, the expected benefit of this expansion and enhancement of the CRRM would be that the Clearing Agencies could better evaluate the default risk of their foreign bank or foreign trust company members. The second proposed enhancement would supplement the Clearing Agencies' ability to manually downgrade members by incorporating [[Page 24175]] new qualitative factors into the two existing CRRM models, as well as in the new foreign bank and trust company model.\10\ Instead of relying primarily on quantitative data, as do the current CRRM models, the proposed enhancement would modify the CRRM models to blend qualitative factors with quantitative factors to produce a Credit Rating for each applicable member in relation to the member's credit risk. For U.S. banks, foreign banks, and foreign trust companies, the enhanced CRRM would use 70/30 weights between quantitative and qualitative factors to generate Credit Ratings. For U.S. broker-dealers, the weights between quantitative and qualitative factors would be 60/40. According to the Clearing Agencies, these weights were chosen by the Clearing Agencies based on the industry best practice, as well as research and sensitivity analysis conducted by the Clearing Agencies.\11\ The Clearing Agencies would review and adjust both the weights and the quantitative and qualitative factors as needed, based on recalibration of the CRRM. According to the Clearing Agencies, this proposed enhancement is expected to reduce the need and the frequency for them to manually override a member's Credit Rating. --------------------------------------------------------------------------- \10\ Quantitative and qualitative factors used for each of the three models differ. The quantitative factors for foreign banks and foreign trust companies would include size, capital, leverage, liquidity, profitability, and growth. Qualitative factors would include market position and sustainability, information reporting and compliance, management quality, capital management, and business/product diversity. The added qualitative factors for U.S. broker-dealers would include market position and sustainability, management quality, capital management, liquidity management, geographic diversification, business/product diversity, and access to alternative sources of funding. The added qualitative factors for U.S. banks would include the current business environment, regulatory compliance and litigation risk, management quality, liquidity management, and parental demands/needs. \11\ Notices at 82 FR 17923, 17908, 17903. --------------------------------------------------------------------------- The third enhancement would replace the current CRRM's relative scoring approach (which considers other members' Credit Ratings) with a statistical approach that would estimate the absolute probability of default of each member by ranking members based on their individual probability of default. According to the Clearing Agencies, under the current relative scoring approach, a member's Credit Rating can be affected by changes in its peer group, even if the member's financial condition is unchanged. They believe this issue would be addressed by the proposed statistical approach because it would eliminate any potential distortion of the rating from the member's peer group that can occur under the relative scoring approach, and therefore a member's Credit Rating would better reflect the absolute measure of the member's default risk. B. Proposed Other Changes Related to the CRRM The Advance Notices also contain a number of other changes to the Clearing Agencies' Rules with respect to the CRRM. Generally, these CRRM-related changes are intended to make the Rules more clear, consistent, and current for members that rely on them. The proposed CRRM-related changes would include:Adding both the CRRM and the Watch List to the definitions sections of the Clearing Agencies' Rules; Providing more description regarding the Clearing Agencies' continuing ability to downgrade a member's Credit Rating if the Clearing Agencies believe the factors used as part of the CRRM may not identify all risks that a member may present to the Clearing Agencies, and providing more description that any such downgrade could result in the member being placed on the Watch List and/or being subject to enhanced surveillance; Providing more description regarding the Clearing Agencies' ability to place non-CRRM members on the Watch List and/or subject them to enhanced surveillance, if necessary under certain specified conditions, such as news reports and/or regulatory observations that raise reasonable concerns relating to the member and material changes to the member's organizational structure; Providing more description regarding, with respect to members on the Watch List, that the Clearing Agencies will (i) collect additional deposits to the clearing fund; and (ii) retain deposits in excess of the required deposits; Providing more description regarding the Clearing Agencies' ability to continue to monitor and review all members on an ongoing and periodic basis, and that such monitoring may include conducting reviews of news and market developments relating to these members, as well as financial reports and other public information of these members; Providing more description regarding both members placed on the Watch List and members subject to enhanced surveillance for other reasons being subject to more thorough monitoring of their financial condition and/or operational capability, and being required to provide more frequent financial disclosures; Providing more description regarding thresholds for any margin ``add-on charges'' \12\ not applying to Watch List members, but applying to non-Watch List members; and --------------------------------------------------------------------------- \12\ Add-on charges are margin requirements that are in addition to the Clearing Agencies' primary value-at-risk margin requirement, such as an intraday charge to account for market volatility and a charge for having a concentrated position in a security. See, e.g., NSCC Procedure XV, section 1.(B), available at http://www.dtcc.com/en/legal/rules-and-procedures. --------------------------------------------------------------------------- Conforming changes to other sections of the Clearing Agencies' Rules to use consistent terminology and to provide updated cross references. C. Proposed Other Changes Unrelated to the CRRM The Clearing Agencies also propose changes that would provide more description regarding the Clearing Agencies' explicit authority to review additional reporting from members regarding their financial or operational condition. Such reporting could include information regarding the businesses and operations of the member and its risk management practices with respect to the Clearing Agencies' services utilized by the member for another person (``Indirect Member''). According to the Clearing Agencies, such a review could result in the member being placed on the Watch List, and/or becoming subject to enhanced surveillance. The Clearing Agencies believe such authority would enable them to better determine whether the member and Indirect Member has sufficient financial resources and monitor compliance with the Clearing Agencies' financial requirements on an ongoing basis. II. Discussion of Commission Findings Although the Clearing Supervision Act does not specify a standard of review for an advance notice, its stated purpose is instructive: To mitigate systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for systemically important financial market utilities and strengthening the liquidity of systemically important financial market utilities.\13\ Section 805(a)(2) of the Clearing Supervision Act authorizes the Commission to prescribe risk management standards for the payment, clearing, and settlement activities of designated clearing entities and financial institutions engaged in designated activities for which it is the Supervisory Agency or the appropriate financial regulator.\14\ Section 805(b) of the Clearing Supervision Act \15\ states that the objectives and principles for the risk management standards prescribed under section 805(a) shall be to: --------------------------------------------------------------------------- \13\ 12 U.S.C. 5461(b). \14\ 12 U.S.C. 5464(a)(2). \15\ 12 U.S.C. 5464(b). Promote robust risk management; Promote safety and soundness; Reduce systemic risks; and Support the stability of the broader financial system. [[Page 24176]] The Commission has adopted risk management standards under section 805(a)(2) of the Clearing Supervision Act \16\ and section 17A of the Exchange Act (``Rule 17Ad-22'').\17\ Rule 17Ad-22 requires registered clearing agencies to establish, implement, maintain, and enforce written policies and procedures that are reasonably designed to meet certain minimum requirements for their operations and risk management practices on an ongoing basis.\18\ Therefore, it is appropriate for the Commission to review proposed changes in advance notices against the objectives and principles of these risk management standards as described in section 805(b) of the Clearing Supervision Act and against Rule 17Ad-22.\19\ --------------------------------------------------------------------------- \16\ 12 U.S.C. 5464(a)(2). \17\ See 17 CFR 240.17Ad-22. \18\ Id. \19\ 12 U.S.C. 5464(b). --------------------------------------------------------------------------- A. Consistency With Section 805(b) of the Clearing Supervision Act As discussed below, the Commission believes that the changes proposed in the Advance Notices are consistent with section 805(b) of the Clearing Supervision Act because they: (i) Are designed to reduce systemic risk; (ii) are designed to support the stability of the financial system; (iii) are designed to promote robust risk management; and (iv) are consistent with promoting safety and soundness. When considering the CRRM enhancements in their entirety, the Commission believes that the proposal could help reduce the systemic risk presented by the Clearing Agencies, which in turn could help support the stability of the broader financial system. The Commission agrees that the proposed enhancements could enable the Clearing Agencies to (i) more effectively evaluate the credit risk presented by a distinct class of members by expanding the CRRM to foreign banks and foreign trust companies; (ii) more effectively incorporate qualitative data into the Credit Rating; and (iii) more accurately measure the absolute probability of default by rated members. Taken together, these enhancements could in turn improve the Clearing Agencies ability to determine and evaluate the credit risk presented by the various types of Clearing Agency members and ensure that, as applied to all rated members, the CRRM could be a more developed and nuanced tool for evaluating the credit risk any member presents to the Clearing Agencies. The Commission further believes that, by enhancing the Clearing Agencies' ability to make distinctions across their various types of members through the CRRM, the proposed enhancements also could improve the Clearing Agencies' ability to use their risk-management tools in a more targeted way to reduce the risk and impact of a counterparty default, which in turn also could help mitigate the risks and effects on the broader financial system that could be associated with the default of a member. Accordingly, the Commission believes that the CRRM proposal could help reduce systemic risks and support the stability of the financial system, consistent with section 805(b) of the Clearing Supervision Act.\20\ --------------------------------------------------------------------------- \20\ 12 U.S.C. 5464(b). --------------------------------------------------------------------------- The Commission also believes that the CRRM proposal is designed to promote robust risk management and is consistent with promoting safety and soundness. The Commission agrees that the proposed enhancements to the CRRM could improve the Clearing Agencies' ability to identify and measure the credit risk presented by their various members, which in turn could allow the Clearing Agencies to more effectively target their risk management tools to manage the credit, market, and liquidity risk arising from those members with the highest risk of default. Accordingly, the Commission believes that the CRRM proposal is designed to help promote robust risk management, and is consistent with promoting safety and soundness, consistent with section 805(b) of the Clearing Supervision Act.\21\ --------------------------------------------------------------------------- \21\ 12 U.S.C. 5464(b). --------------------------------------------------------------------------- B. Consistency With Rules 17Ad-22(e)(1), (e)(3), and (e)(18) The Commission believes that the changes proposed in the Advance Notices are consistent with Rules 17Ad-22(e)(1), (e)(3)(i), and (e)(18) under the Exchange Act.\22\ --------------------------------------------------------------------------- \22\ 17 CFR 240.17Ad-22(e)(1); (e)(2); and (e)(3). --------------------------------------------------------------------------- The Commission believes that the changes proposed in the Advanced Notice are consistent with Rule 17Ad-22(e)(1) under the Exchange Act, which requires, in part, that the Clearing Agencies ``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 aspect of its activities.'' \23\ As described above, the Clearing Agencies propose a number of other changes to their Rules that are designed to update them and to make them more consistent and provide greater description for members that rely on them. As such, the Commission believes that these proposed changes could make the Clearing Agencies' Rules more clear and transparent for members that rely on them, consistent with Rule 17Ad- 22(e)(1). --------------------------------------------------------------------------- \23\ 17 CFR 240.17Ad-22(e)(1). --------------------------------------------------------------------------- The Commission also believes that the changes proposed in the Advance Notices are consistent with Rule 17Ad-22(e)(3)(i) under the Exchange Act, which requires, in part, that the Clearing Agencies ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [m]aintain a sound risk management framework for comprehensively managing . . . risks that arise in or are born by [the Clearing Agencies], which includes . . . systems designed to identify, measure, monitor and manage the range of risks that arise in or are borne by [the Clearing Agencies].'' \24\ As discussed above, the CRRM is a risk measurement tool used by the Clearing Agencies to help assess the credit risk presented by their various members. The proposed enhancements to the CRRM could help the Clearing Agencies better identify and measure such risks, which in turn could help facilitate the Clearing Agencies' management of credit, market, and liquidity risk that arises from being a central counterparty (in the case of NSCC and FICC) and central securities depository (in the case of DTC). Accordingly, the Commission believes that the proposed enhancements are designed to help effectively manage the Clearing Agencies' risk exposures, including their credit exposure to participants, arising from their payment, clearing, and settlement processes, consistent with Rule 17Ad-22(e)(3)(i). --------------------------------------------------------------------------- \24\ 17 CFR 240.17Ad-22(e)(3)(i). --------------------------------------------------------------------------- Finally, the Commission believes that the proposal is consistent with Rule 17Ad-22(e)(18) under the Exchange Act, which requires, in part, that the Clearing Agencies ``establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [e]stablish objective, risk-based, and publicly disclosed criteria for participation, which . . . require participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation in the clearing agency, and monitor compliance with such participation requirements on an ongoing basis.'' \25\ As described above, the proposal would provide more description regarding the Clearing Agencies' authority to review additional reporting from members regarding their financial or operational condition and [[Page 24177]] the financial information of any Indirect Member. Because such authority could enable the Clearing Agencies to better determine whether the member has sufficient financial resources and monitor compliance with the Clearing Agencies' financial requirements on an ongoing basis, the Commission believes this requirement is consistent with Rule 17Ad-22(e)(18). --------------------------------------------------------------------------- \25\ 17 CFR 240.17Ad-22(e)(18). --------------------------------------------------------------------------- III. Conclusion It is therefore noticed, pursuant to section 806(e)(1)(I) of the Clearing Supervision Act,\26\ that the Commission does not object to these advance notice proposals (SR-DTC-2017-801, SR-FICC-2017-804, and SR-NSCC-2017-801) and that the Clearing Agencies are authorized to implement the proposals as of the date of this notice or the date of an order by the Commission approving a proposed rule change that reflects rule changes that are consistent with the relevant advance notice proposal (SR-FICC-2017-006, SR-DTC-2017-002, SR-NSCC-2017-002), whichever is later. --------------------------------------------------------------------------- \26\ 12 U.S.C. 5465(e)(1)(I). By the Commission. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-10689 Filed 5-24-17; 8:45 am] BILLING CODE 8011-01-P
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proceedings to determine whether to Commission received no comments to participants on a curve) and relies on
disapprove, the proposed rule change the Advance Notices. This publication peer grouping of members to calculate
(File No. SR–NYSE–2017–11). serves as notice that the Commission the Credit Rating of a member.
For the Commission, by the Division of does not object to the changes set forth Ultimately, the ratings generated are
Trading and Markets, pursuant to delegated in the Advance Notices. based on a 7-point rating system, with
authority.6 ‘‘1’’ being the strongest Credit Rating
I. Description of the Advance Notices
Eduardo A. Aleman, and ‘‘7’’ being the weakest Credit
Assistant Secretary. The Advance Notices consist of Rating. Although the current CRRM
[FR Doc. 2017–10691 Filed 5–24–17; 8:45 am]
proposed modifications to the Rules, does not directly consider qualitative
By-Laws and Organizational Certificate factors, the Clearing Agencies’ credit
BILLING CODE 8011–01–P
of DTC (‘‘DTC Rules’’), the Rulebook of risk staff may manually downgrade a
GSD (‘‘GSD Rules’’), the Clearing Rules particular member’s Credit Rating based
SECURITIES AND EXCHANGE of MBSD (‘‘MBSD Rules’’), and the on various qualitative factors.7 Members
COMMISSION Rules & Procedures of NSCC (‘‘NSCC that receive a Credit Rating of 5, 6, or
Rules’’) (collectively, the ‘‘Rules’’).5 The 7 are placed on the Clearing Agencies’
[Release No. 34–80731; File Nos. SR–DTC– Advance Notices are proposals by the ‘‘Watch List,’’ as these members present
2017–801; SR–FICC–2017–804; SR–NSCC–
Clearing Agencies to amend the Rules a greater risk of default.8
2017–801]
to: (i) Enhance their shared credit risk To improve the coverage and the
Self-Regulatory Organizations; The rating matrix (‘‘Credit Risk Rating effectiveness of the current CRRM, the
Depository Trust Company; Fixed Matrix’’ or ‘‘CRRM’’), which was Clearing Agencies are proposing three
Income Clearing Corporation; National developed by the Clearing Agencies to enhancements, as discussed below. In
Securities Clearing Corporation; evaluate the credit risks posed by addition to the enhancements, the
Notice of No Objection to Advance certain Clearing Agency members to the Clearing Agencies also propose to make
Notices To Enhance the Credit Risk Clearing Agencies (and by implication other changes to their Rules to more
Rating Matrix and Make Other Changes to all of the Clearing Agency members), fully describe the Clearing Agencies’
as a result of providing services to such current ongoing membership monitoring
May 19, 2017. members; and (ii) make other process, both related and unrelated to
On March 22, 2017, The Depository amendments to the Rules, both related the CRRM, also discussed below.9
Trust Company (‘‘DTC’’), Fixed Income and unrelated to the CRRM, to provide
Clearing Corporation (‘‘FICC’’), and more transparency and description A. Proposed CRRM Enhancements
National Securities Clearing Corporation regarding the Clearing Agencies’ current Currently, the CRRM is comprised of
(‘‘NSCC,’’ each a ‘‘Clearing Agency,’’ ongoing membership monitoring two Credit Rating models—one for U.S.
and collectively, ‘‘Clearing Agencies’’) process, as described below. broker-dealers and one for U.S. banks.
filed with the Securities and Exchange Currently, the CRRM rates the credit The first proposed enhancement would
Commission (‘‘Commission’’), risk presented by members of the expand the CRRM by adding a third
respectively advance notices SR–DTC– Clearing Agencies that are U.S. broker- model that would enable the CRRM to
2017–801, SR–FICC–2017–804, and SR– dealers and U.S. banks. The CRRM generate Credit Ratings for members that
NSCC–2017–801 (collectively, the assigns a credit rating based on certain are foreign banks or foreign trust
‘‘Advance Notices’’) pursuant to section quantitative factors (‘‘Credit Rating’’), companies that have audited financial
806(e)(1) of the Payment, Clearing, and which vary based upon whether the data that is publicly available. The
Settlement Supervision Act of 2010 member is a broker-dealer or bank.6 The Credit Rating for these particular
(‘‘Clearing Supervision Act’’) 1 and Rule current CRRM also uses a relative members would be based on both
19b–4(n)(1)(i) 2 under the Securities scoring approach (i.e., rating quantitative and qualitative factors, as
Exchange Act of 1934 (‘‘Exchange indicated in the second enhancement,
Act’’).3 The Advance Notices were changes were published for comment in the Federal below. According to the Clearing
published for comment in the Federal Register on April 11, 2017. Securities Exchange Act Agencies, the expected benefit of this
Register on April 7, 2017.4 The Release Nos. 30383 (April 5, 2017), 82 FR 17468
(April 11, 2017) (SR–FICC–2017–006); 80382 (April expansion and enhancement of the
5, 2017), 82 FR 17483 (April 11, 2017) (SR–DTC– CRRM would be that the Clearing
6 17 CFR 200.30–3(a)(31).
1 12
2017–002); and 80381 (April 5, 2017), 82 FR 17475 Agencies could better evaluate the
U.S.C. 5465(e)(1). The Financial Stability (April 11, 2017) (SR–NSCC–2017–002). The
Oversight Council designated the Clearing Agencies
default risk of their foreign bank or
Commission did not receive any comments on the
systemically important financial market utilities on proposed rule changes. foreign trust company members.
July 18, 2012. Financial Stability Oversight Council 5 Available at http://www.dtcc.com/en/legal/ The second proposed enhancement
2012 Annual Report, Appendix A, http:// rules-and-procedures. FICC is comprised of two would supplement the Clearing
www.treasury.gov/initiatives/fsoc/Documents/ divisions: The Government Securities Division
2012%20Annual%20Report.pdf. Therefore, the
Agencies’ ability to manually
(‘‘GSD’’) and the Mortgage-Backed Securities
Clearing Agencies are required to comply with the Division (‘‘MBSD’’). Each division serves as a
downgrade members by incorporating
Clearing Supervision Act and file advance notices central counterparty, becoming the buyer and seller
with the Commission. 12 U.S.C. 5465(e). to each of their respective members’ securities 7 Quantitative factors currently considered by the
2 17 CFR 240.19b–4(n)(1)(i). Clearing Agencies include: (a) Available news
transactions and guarantying settlement of those
3 15 U.S.C. 78s(b)(1). transactions, even if a member defaults. GSD reports and/or regulatory observations relating to
4 Securities Exchange Act Release Nos. 80395 provides, among other things, clearance and the member; (b) member’s liquidity arrangements;
(April 7, 2017), 82 FR 17921 (April 13, 2017) (SR– settlement for trades in U.S. Government debt and (c) material changes to the member’s
NSCC–2017–801); 80396 (April 7, 2017), 82 FR issues. MBSD provides, among other things, organizational structure.
clearance and settlement for trades in mortgage- 8 Members on the Watch List are subject to
17906 (April 13, 2017) (SR–FICC–2017–804); and
80394 (April 7, 2017), 82 FR 17901 (April 13, 2017) backed securities. GSD and MBSD maintain enhanced surveillance by the Clearing Agencies and
(SR–DTC–2017–801) (‘‘Notices’’). The Clearing separate sets of rules, margin models, and clearing additional margin charges.
Agencies also filed proposed rule changes with the funds. 9 Although each of the Clearing Agencies uses the
Commission pursuant to section 19(b)(1) of the 6 For U.S. broker-dealers, the Clearing Agencies CRRM uniformly, the description of the respective
Exchange Act and Rule 19b–4 thereunder, seeking consider size (i.e., total excess net capital), capital, Clearing Agencies’ Rules regarding the CRRM are
approval of changes to their Rules necessary to leverage, liquidity, and profitability. For U.S. banks, different. To address this issue, the Clearing
implement the proposal. 15 U.S.C. 78s(b)(1) and 17 the Clearing Agencies consider size, capital, asset Agencies propose to adopt similar Rules at each
CFR 240.19b–4, respectively. The proposed rule quality, earnings, and liquidity. Clearing Agency.
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The Commission has adopted risk ability to make distinctions across their Commission believes that these
management standards under section various types of members through the proposed changes could make the
805(a)(2) of the Clearing Supervision CRRM, the proposed enhancements also Clearing Agencies’ Rules more clear and
Act 16 and section 17A of the Exchange could improve the Clearing Agencies’ transparent for members that rely on
Act (‘‘Rule 17Ad–22’’).17 Rule 17Ad–22 ability to use their risk-management them, consistent with Rule 17Ad–
requires registered clearing agencies to tools in a more targeted way to reduce 22(e)(1).
establish, implement, maintain, and the risk and impact of a counterparty The Commission also believes that the
enforce written policies and procedures default, which in turn also could help changes proposed in the Advance
that are reasonably designed to meet mitigate the risks and effects on the Notices are consistent with Rule 17Ad–
certain minimum requirements for their broader financial system that could be 22(e)(3)(i) under the Exchange Act,
operations and risk management associated with the default of a member. which requires, in part, that the Clearing
practices on an ongoing basis.18 Accordingly, the Commission believes Agencies ‘‘establish, implement,
Therefore, it is appropriate for the that the CRRM proposal could help maintain and enforce written policies
Commission to review proposed reduce systemic risks and support the and procedures reasonably designed to
changes in advance notices against the stability of the financial system, . . . [m]aintain a sound risk
objectives and principles of these risk consistent with section 805(b) of the management framework for
management standards as described in Clearing Supervision Act.20 comprehensively managing . . . risks
section 805(b) of the Clearing The Commission also believes that the that arise in or are born by [the Clearing
Supervision Act and against Rule 17Ad– CRRM proposal is designed to promote Agencies], which includes . . . systems
22.19 robust risk management and is designed to identify, measure, monitor
consistent with promoting safety and and manage the range of risks that arise
A. Consistency With Section 805(b) of soundness. The Commission agrees that in or are borne by [the Clearing
the Clearing Supervision Act the proposed enhancements to the Agencies].’’ 24 As discussed above, the
As discussed below, the Commission CRRM could improve the Clearing CRRM is a risk measurement tool used
believes that the changes proposed in Agencies’ ability to identify and by the Clearing Agencies to help assess
the Advance Notices are consistent with measure the credit risk presented by the credit risk presented by their various
section 805(b) of the Clearing their various members, which in turn members. The proposed enhancements
Supervision Act because they: (i) Are could allow the Clearing Agencies to to the CRRM could help the Clearing
designed to reduce systemic risk; (ii) are more effectively target their risk Agencies better identify and measure
designed to support the stability of the management tools to manage the credit, such risks, which in turn could help
financial system; (iii) are designed to market, and liquidity risk arising from facilitate the Clearing Agencies’
promote robust risk management; and those members with the highest risk of management of credit, market, and
(iv) are consistent with promoting safety default. Accordingly, the Commission liquidity risk that arises from being a
and soundness. believes that the CRRM proposal is central counterparty (in the case of
When considering the CRRM designed to help promote robust risk NSCC and FICC) and central securities
enhancements in their entirety, the management, and is consistent with depository (in the case of DTC).
Commission believes that the proposal promoting safety and soundness, Accordingly, the Commission believes
could help reduce the systemic risk consistent with section 805(b) of the that the proposed enhancements are
presented by the Clearing Agencies, Clearing Supervision Act.21 designed to help effectively manage the
which in turn could help support the Clearing Agencies’ risk exposures,
stability of the broader financial system. B. Consistency With Rules 17Ad– including their credit exposure to
The Commission agrees that the 22(e)(1), (e)(3), and (e)(18) participants, arising from their payment,
proposed enhancements could enable The Commission believes that the clearing, and settlement processes,
the Clearing Agencies to (i) more changes proposed in the Advance consistent with Rule 17Ad–22(e)(3)(i).
effectively evaluate the credit risk Notices are consistent with Rules 17Ad– Finally, the Commission believes that
presented by a distinct class of members 22(e)(1), (e)(3)(i), and (e)(18) under the the proposal is consistent with Rule
by expanding the CRRM to foreign Exchange Act.22 17Ad–22(e)(18) under the Exchange Act,
banks and foreign trust companies; (ii) The Commission believes that the which requires, in part, that the Clearing
more effectively incorporate qualitative changes proposed in the Advanced Agencies ‘‘establish, implement,
data into the Credit Rating; and (iii) Notice are consistent with Rule 17Ad– maintain and enforce written policies
more accurately measure the absolute 22(e)(1) under the Exchange Act, which and procedures reasonably designed to
probability of default by rated members. requires, in part, that the Clearing . . . [e]stablish objective, risk-based,
Taken together, these enhancements Agencies ‘‘establish, implement, and publicly disclosed criteria for
could in turn improve the Clearing maintain and enforce written policies participation, which . . . require
Agencies ability to determine and and procedures reasonably designed to participants to have sufficient financial
evaluate the credit risk presented by the . . . [p]rovide for a well-founded, clear, resources and robust operational
various types of Clearing Agency transparent and enforceable legal basis capacity to meet obligations arising from
members and ensure that, as applied to for each aspect of its activities.’’ 23 As participation in the clearing agency, and
all rated members, the CRRM could be described above, the Clearing Agencies monitor compliance with such
a more developed and nuanced tool for propose a number of other changes to participation requirements on an
evaluating the credit risk any member their Rules that are designed to update ongoing basis.’’ 25 As described above,
presents to the Clearing Agencies. them and to make them more consistent the proposal would provide more
The Commission further believes that, and provide greater description for description regarding the Clearing
by enhancing the Clearing Agencies’ members that rely on them. As such, the Agencies’ authority to review additional
reporting from members regarding their
16 12 U.S.C. 5464(a)(2). 20 12 U.S.C. 5464(b). financial or operational condition and
17 See 17 CFR 240.17Ad–22. 21 12 U.S.C. 5464(b).
18 Id. 22 17 CFR 240.17Ad–22(e)(1); (e)(2); and (e)(3). 24 17 CFR 240.17Ad–22(e)(3)(i).
19 12 U.S.C. 5464(b). 23 17 CFR 240.17Ad–22(e)(1). 25 17 CFR 240.17Ad–22(e)(18).
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![Federal Register / Vol. 82, No. 100 / Thursday, May 25, 2017 / Notices 24177
the financial information of any Indirect The Proposed Rule Changes were assigns a credit rating based on certain
Member. Because such authority could published for comment in the Federal quantitative factors (‘‘Credit Rating’’),
enable the Clearing Agencies to better Register on April 11, 2017.3 The which vary based upon whether the
determine whether the member has Commission received no comments to member is a broker-dealer or bank.5 The
sufficient financial resources and the Proposed Rule Changes. This order current CRRM also uses a relative
monitor compliance with the Clearing approves the Proposed Rule Changes. scoring approach (i.e., rating
Agencies’ financial requirements on an participants on a curve) and relies on
ongoing basis, the Commission believes I. Description of the Proposed Rule
peer grouping of members to calculate
this requirement is consistent with Rule Changes
the Credit Rating of a member.
17Ad–22(e)(18). The Proposed Rule Changes consist of Ultimately, the ratings generated are
proposed modifications to the Rules, based on a 7-point rating system, with
III. Conclusion
By-Laws and Organizational Certificate ‘‘1’’ being the strongest Credit Rating
It is therefore noticed, pursuant to of DTC (‘‘DTC Rules’’), the Rulebook of and ‘‘7’’ being the weakest Credit
section 806(e)(1)(I) of the Clearing GSD (‘‘GSD Rules’’), the Clearing Rules Rating. Although the current CRRM
Supervision Act,26 that the Commission of MBSD (‘‘MBSD Rules’’), and the does not directly consider qualitative
does not object to these advance notice Rules & Procedures of NSCC (‘‘NSCC factors, the Clearing Agencies’ credit
proposals (SR–DTC–2017–801, SR– Rules’’) (collectively, the ‘‘Rules’’).4 The risk staff may manually downgrade a
FICC–2017–804, and SR–NSCC–2017– Proposed Rule Changes are proposals by particular member’s Credit Rating based
801) and that the Clearing Agencies are the Clearing Agencies to amend the on various qualitative factors.6 Members
authorized to implement the proposals Rules to: (i) Enhance their shared credit that receive a Credit Rating of 5, 6, or
as of the date of this notice or the date risk rating matrix (‘‘Credit Risk Rating 7 are placed on the Clearing Agencies’
of an order by the Commission Matrix’’ or ‘‘CRRM’’), which was ‘‘Watch List,’’ as these members present
approving a proposed rule change that developed by the Clearing Agencies to a greater risk of default.7
reflects rule changes that are consistent evaluate the credit risks posed by To improve the coverage and the
with the relevant advance notice certain Clearing Agency members to the effectiveness of the current CRRM, the
proposal (SR–FICC–2017–006, SR– Clearing Agencies (and by implication Clearing Agencies are proposing three
DTC–2017–002, SR–NSCC–2017–002), to all of the Clearing Agency members), enhancements, as discussed below. In
whichever is later. as a result of providing services to such addition to the enhancements, the
By the Commission. members; and (ii) make other Clearing Agencies also propose to make
Eduardo A. Aleman, amendments to the Rules, both related other changes to their Rules to more
Assistant Secretary. and unrelated to the CRRM, to provide fully describe the Clearing Agencies’
[FR Doc. 2017–10689 Filed 5–24–17; 8:45 am] more transparency and description current ongoing membership monitoring
BILLING CODE 8011–01–P
regarding the Clearing Agencies’ current process, both related and unrelated to
ongoing membership monitoring the CRRM, also discussed below.8
process, as described below.
A. Proposed CRRM Enhancements
SECURITIES AND EXCHANGE Currently, the CRRM rates the credit
COMMISSION risk presented by members of the Currently, the CRRM is comprised of
Clearing Agencies that are U.S. broker- two Credit Rating models—one for U.S.
[Release No. 34–80734; File Nos. SR–DTC– dealers and U.S. banks. The CRRM broker-dealers and one for U.S. banks.
2017–002; SR–FICC–2017–006; SR–NSCC– The first proposed enhancement would
2017–002]
pursuant to Section 806(e)(1) of the Payment, expand the CRRM by adding a third
Clearing, and Settlement Supervision Act of 2010 model that would enable the CRRM to
Self-Regulatory Organizations; The and Rule 19b–4(n)(1) under the Act. 15 U.S.C.
Depository Trust Company; Fixed 5465(e)(1) and 17 CFR 240.19b–4(n)(1). The
generate Credit Ratings for members that
Income Clearing Corporation; National advance notices were published for comment in the are foreign banks or foreign trust
Securities Clearing Corporation; Order Federal Register on April 7, 2017. See Securities companies that have audited financial
Exchange Act Release Nos. 80395 (April 7, 2017), data that is publicly available. The
Approving Proposed Rule Changes To 82 FR 17921 (April 13, 2017) (SR–NSCC–2017–
Enhance the Credit Risk Rating Matrix 801); 80396 (April 7, 2017), 82 FR 17906 (April 13,
Credit Rating for these particular
and Make Other Changes 2017) (SR–FICC–2017–804); and 80394 (April 7, members would be based on both
2017), 82 FR 17901 (April 13, 2017) (SR–DTC– quantitative and qualitative factors, as
May 19, 2017. 2017–801). The Commission did not receive any indicated in the second enhancement,
On March 22, 2017, The Depository comments on the advance notices.
3 Securities Exchange Act Release Nos. 30383
below. According to the Clearing
Trust Company (‘‘DTC’’), Fixed Income (April 5, 2017), 82 FR 17468 (April 11, 2017) (SR–
Clearing Corporation (‘‘FICC’’), and FICC–2017–006); 80382 (April 5, 2017), 82 FR
5 For U.S. broker-dealers, the Clearing Agencies
National Securities Clearing Corporation 17483 (April 11, 2017) (SR–DTC–2017–002); and consider size (i.e., total excess net capital), capital,
80381 (April 5, 2017), 82 FR 17475 (April 11, 2017) leverage, liquidity, and profitability. For U.S. banks,
(‘‘NSCC,’’ each a ‘‘Clearing Agency,’’ the Clearing Agencies consider size, capital, asset
(SR–NSCC–2017–002) (‘‘Notices’’).
and collectively, ‘‘Clearing Agencies’’) 4 Available at http://www.dtcc.com/en/legal/ quality, earnings, and liquidity.
filed with the Securities and Exchange rules-and-procedures. FICC is comprised of two
6 Quantitative factors currently considered by the
Commission (‘‘Commission’’) proposed divisions: The Government Securities Division Clearing Agencies include: (a) Available news
rule changes SR–DTC–2017–002, SR– (‘‘GSD’’) and the Mortgage-Backed Securities reports and/or regulatory observations relating to
Division (‘‘MBSD’’). Each division serves as a the member; (b) member’s liquidity arrangements;
FICC–2017–006, and SR–NSCC–2017– and (c) material changes to the member’s
central counterparty, becoming the buyer and seller
002 (collectively, the ‘‘Proposed Rule to each of their respective members’ securities organizational structure.
Changes’’) pursuant to Section 19(b)(1) transactions and guarantying settlement of those 7 Members on the Watch List are subject to
of the Securities Exchange Act of 1934 transactions, even if a member defaults. GSD enhanced surveillance by the Clearing Agencies and
provides, among other things, clearance and additional margin charges.
(‘‘Act’’),1 and Rule 19b–4 thereunder.2
settlement for trades in U.S. Government debt 8 Although each of the Clearing Agencies uses the
issues. MBSD provides, among other things, CRRM uniformly, the description of the respective
26 12 U.S.C. 5465(e)(1)(I). clearance and settlement for trades in mortgage- Clearing Agencies’ Rules regarding the CRRM are
1 15 U.S.C. 78s(b)(1). backed securities. GSD and MBSD maintain different. To address this issue, the Clearing
2 17 CFR 240.19b–4. The Clearing Agencies also separate sets of rules, margin models, and clearing Agencies propose to adopt similar Rules at each
filed the Proposed Rule Changes as advance notices funds. Clearing Agency.
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Document Created: 2018-11-08 08:53:17
Document Modified: 2018-11-08 08:53:17
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 82 FR 24174 |
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