
[Federal Register Volume 78, Number 125 (Friday, June 28, 2013)]
[Notices]
[Pages 39027-39036]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-15509]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69838; File No. 600-23]


Order Granting the Fixed Income Clearing Corporation's Amended 
Application for Permanent Registration as a Clearing Agency

June 24, 2013.

I. Introduction

    On April 5, 2013, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') an 
amended application on Form CA-1 \1\ seeking permanent registration as 
a clearing agency under Sections 17A and 19(a) of the Securities 
Exchange Act of 1934 (``Act'') \2\ and Rule 17Ab2-1 thereunder.\3\ 
Notice of the amended application was published in the Federal Register 
on April 17, 2013.\4\ The Commission received no comments on the 
notice. This Order grants FICC

[[Page 39028]]

permanent registration as a clearing agency.
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    \1\ See Letter from Donaldine Temple, Senior Associate Counsel 
and Corporate Secretary, FICC, to Joseph P. Kamnik, Assistant 
Director, Division of Trading and Markets, Securities and Exchange 
Commission (April 4, 2013). The amendment filed by FICC updates all 
of the information required by Form CA-1, and incorporates by 
reference all information submitted in connection with FICC's prior 
application and amendments thereto, to the extent not otherwise 
superseded by proposed rule changes filed pursuant to Section 19(b) 
of the Act or by FICC's amended Form CA-1.
    \2\ 15 U.S.C. 78q-1; 15 U.S.C. 78s(a).
    \3\ 17 CFR 240.17Ab2-1.
    \4\ See Securities Exchange Act Release No. 69362 (April 11, 
2013), 78 FR 22923-01 (April 17, 2013) (File No. 600-23).
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II. Background

    On December 13, 1986, the Mortgage-Backed Securities Clearing 
Corporation (``MBSCC'') filed with the Commission a Form CA-1 \5\ 
seeking registration as a clearing agency. The Commission granted MBSCC 
a temporary registration on February 2, 1987 \6\ and extended this 
temporary registration on several occasions thereafter.\7\ On October 
16, 1987, the Government Securities Clearing Corporation (``GSCC'') 
filed with the Commission a Form CA-1 \8\ seeking registration as a 
clearing agency. The Commission granted GSCC a temporary registration 
on May 24, 1988 \9\ and extended this temporary registration on several 
occasions thereafter.\10\ On January 1, 2003, GSCC acquired MBSCC and 
named the resulting entity FICC,\11\ which has operated under a 
temporary registration since that time.
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    \5\ See Securities Exchange Act Release No. 23929 (December 23, 
1986), 52 FR 373-01 (January 5, 1987) (File No. 600-22).
    \6\ See Securities Exchange Act Release No. 24046 (February 2, 
1987), 52 FR 4218-01 (February 10, 1987) (File No. 600-22).
    \7\ See Securities Exchange Act Release No. 25957 (August 2, 
1988), 53 FR 29537-01 (August 2, 1988) (File No. 600-19); Securities 
Exchange Act Release No. 27079 (July 31, 1989), 54 FR 32412-01 
(August 7, 1989) (File No. 600-22); Securities Exchange Act Release 
No. 28492 (September 28, 1990), 55 FR 41148-03 (October 9, 1990) 
(File No. 600-19); Securities Exchange Act Release No. 29751 
(September 27, 1991), 56 FR 50602-01 (October 7, 1991) (File Nos. 
600-19 and 600-22); Securities Exchange Act Release No. 31750 
(January 21, 1993), 58 FR 6424-02 (January 28, 1993) (File Nos. 600-
19 and 600-22) (noting that, ``[d]ue to an inadvertent 
administrative error by MBSCC,'' MBSCC failed to request an 
extension of its temporary registration prior to the expiration of 
its last extension on September 30, 1992); Securities Exchange Act 
Release No. 33348 (December 15, 1993), 58 FR 68183-01 (December 23, 
1993) (File Nos. 600-19 and 600-22); Securities Exchange Act Release 
No. 35132 (December 21, 1994), 59 FR 67743-01 (December 30, 1994) 
(File Nos. 600-19 and 600-22); Securities Exchange Act Release No. 
37372 (June 26, 1996), 61 FR 35281-02 (July 5, 1996) (File No. 600-
22); Securities Exchange Act Release No. 38784 (June 27, 1997), 62 
FR 36587-01 (July 8, 1997) (File No. 600-22); Securities Exchange 
Act Release No. 39776 (March 20, 1998), 63 FR 14740-02 (March 26, 
1998) (File No. 600-22); Securities Exchange Act Release No. 42568 
(March 23, 2000), 65 FR 16980-01 (March 30, 2000) (File No. 600-22); 
Securities Exchange Act Release No. 44089 (March 21, 2001), 66 FR 
16961-02 (March 28, 2001) (File No. 600-22); Securities Exchange Act 
Release No. 44831 (September 21, 2001), 66 FR 49728-01 (September 
28, 2001) (File No. 600-22); Securities Exchange Act Release No. 
45607 (March 20, 2002), 67 FR 14755-01 (March 27, 2002) (File No. 
600-22); Securities Exchange Act Release No. 46136 (June 27, 2002), 
67 FR 44655-01 (July 3, 2002) (File No. 600-22).
    \8\ See Securities Exchange Act Release No. 25129 (November 16, 
1987), 52 FR 44659-01 (November 20, 1987) (File No. 600-23).
    \9\ See Securities Exchange Act Release No. 25740 (May 24, 
1988), 53 FR 19839-01 (May 31, 1988) (File No. 600-23).
    \10\ See Securities Exchange Act Release No. 29236 (May 24, 
1991), 56 FR 24852 (May 31, 1991) (File No. 600-23); Securities 
Exchange Act Release No. 32385 (June 3, 1993), 58 FR 32405 (June 9, 
1993) (File No. 600-23); Securities Exchange Act Release No. 35787 
(May 31, 1995), 60 FR 30324 (June 8, 1995) (File No. 600-23); 
Securities Exchange Act Release No. 36508 (November 27, 1995), 60 FR 
61719 (December 1, 1995) (File No. 600-23); Securities Exchange Act 
Release No. 37983 (November 25, 1996), 61 FR 64183 (December 3, 
1996) (File No. 600-23); Securities Exchange Act Release No. 38698 
(May 30, 1997), 62 FR 30911 (June 5, 1997) (File No. 600-23); 
Securities Exchange Act Release No. 39696 (February 24, 1998), 63 FR 
10253 (March 2, 1998) (File No. 600-23); Securities Exchange Act 
Release No. 41104 (February 24, 1999), 64 FR 10510 (March 4, 1999) 
(File No. 600-23); Securities Exchange Act Release No. 41805 (August 
27, 1999), 64 FR 48682 (September 7, 1999) (File No. 600-23); 
Securities Exchange Act Release No. 42335 (January 12, 2000), 65 FR 
3509 (January 21, 2000) (File No. 600-23); Securities Exchange Act 
Release No. 43089 (July 28, 2000), 65 FR 48032 (August 4, 2000) 
(File No. 600-23); Securities Exchange Act Release No. 43900 
(January 29, 2001), 66 FR 8988 (February 5, 2001) (File No. 600-23); 
Securities Exchange Act Release No. 44553 (July 13, 2001), 66 FR 
37714 (July 19, 2001) (File No. 600-23); Securities Exchange Act 
Release No. 45164 (December 18, 2001), 66 FR 66957 (December 27, 
2001) (File No. 600-23); and Securities Exchange Act Release No. 
46135 (June 27, 2002), 67 FR 44655 (July 3, 2002) (File No. 600-23).
    \11\ See Securities Exchange Act Release No. 47015 (December 17, 
2002), 67 FR 78531 (December 24, 2002) (SR-GSCC-2002-07 and SR-
MBSCC-2002-01).
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    The temporary registrations granted to MBSCC and GSCC exempted them 
from certain requirements imposed by Section 17A of the Act.\12\ 
Specifically, both MBSCC and GSCC were exempted from compliance with 
the Act's fair representation requirement,\13\ and GSCC was further 
exempted from the Act's participation requirements.\14\ The Commission 
has since determined that MBSCC and GSCC met the statutory requirements 
from which they were exempted and consequently lifted the 
exemptions.\15\ As a result, FICC is currently subject to all 
requirements of the Act applicable to registered clearing agencies, 
including the requirement to submit rule change proposals to the 
Commission for approval \16\ and to make its records available for 
periodic, special, or other examinations by Commission staff.\17\
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    \12\ Pursuant to Rule 17Ab2-1(c)(1), the Commission may grant 
registration to a clearing agency while exempting it from one or 
more of the requirements of paragraphs (A) through (I) of section 
17A(b)(3) of the Act. See 17 CFR 240.17Ab2-1(c)(1).
    \13\ See Securities Exchange Act Release No. 24046 (February 2, 
1987), 52 FR 4218-01 (February 10, 1987) (File No. 600-22); 
Securities Exchange Act Release No. 25740 (May 24, 1988), 53 FR 
19839-01 (May 31, 1988) (File No. 600-23).
    \14\ See Securities Exchange Act Release No. 25740 (May 24, 
1988), 53 FR 19839-01 (May 31, 1988) (File No. 600-23).
    \15\ See Securities Exchange Act Release No. 26729 (April 14, 
1989), 54 FR 16438-G-01 (April 24, 1989) (SR-MBSS-89-2) (lifting 
MBSCC's exemption from the Act's fair representation requirements); 
Securities Exchange Act Release No. 36508 (November 27, 1995), 60 FR 
61719-02 (December 1, 1995) (File No. 600-23) (lifting GSCC's 
exemption from the Act's participation requirements); Securities 
Exchange Act Release No. 39372 (November 28, 1997), 62 FR 64415 
(December 5, 1997) (SR-GSCC-97-01) (lifting GSCC's exemption from 
the Act's fair representation requirements).
    \16\ See 15 U.S.C. 78s(b)(1).
    \17\ See 15 U.S.C. 78q(b); see also Section 807 of Title VIII of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010) (mandating that 
supervisory agencies examine financial market utilities at least 
once each year) and n.26, infra (noting that FICC has been 
designated a financial market utility).
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    The Commission extended FICC's temporary registration on several 
occasions,\18\ most recently on June 20, 2011.\19\ At that time, the 
Commission explained that it would consider whether to grant FICC 
permanent registration after the Commission acted upon FICC's proposal 
to introduce central counterparty and guaranteed settlement services to 
FICC's Mortgage-Backed Securities Division (``FICC/MBSD''). The 
Commission approved FICC's request to provide central counterparty 
services at FICC/MBSD on March 9, 2012.\20\ FICC's temporary 
registration expires on June 30, 2013.\21\
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    \18\ See Securities Exchange Act Release No. 48116 (July 1, 
2003), 68 FR 41031 (July 9, 2003) (File No. 600-23); Securities 
Exchange Act Release No. 49940 (June 29, 2004), 69 FR 40695 (July 5, 
2004) (File No. 600-23); Securities Exchange Act Release No. 51911 
(June 23, 2005), 70 FR 37878 (June 30, 2005) (File No. 600-23); 
Securities Exchange Act Release No. 54056 (June 28, 2006), 71 FR 
38193 (July 5, 2006) (File No. 600-23); Securities Exchange Act 
Release No. 55920 (June 18, 2007), 72 FR 35270 (June 27, 2007) (File 
No. 600-23); and Securities Exchange Act Release No. 57949 (June 11, 
2008), 73 FR 34808 (June 18, 2008) (File No. 600-23).
    \19\ See Securities Exchange Act Release No. 64707 (June 20, 
2011), 76 FR 37165 (June 24, 2011) (File No. 600-23).
    \20\ See Securities Exchange Act Release No. 66550 (March 9, 
2012), 77 FR 15155 (March 14, 2012) (File No. 600-23).
    \21\ See Securities Exchange Act Release No. 64707 (June 20, 
2011), 76 FR 37165 (June 24, 2011) (File No. 600-23).
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III. Overview of FICC

    FICC, a wholly owned subsidiary of the Depository Trust & Clearing 
Corporation (``DTCC''), is the sole clearing agency in the United 
States acting as a central counterparty and provider of significant 
clearance and settlement services for cash-settled U.S. Treasury and 
agency securities and the non-private label mortgage-backed securities 
markets.\22\ FICC is comprised

[[Page 39029]]

of two divisions, the Government Securities Division (``FICC/GSD'') and 
FICC/MBSD (collectively, the ``Divisions''), each of which has its own 
membership and rules.\23\ The rules are similar in most aspects and 
differ primarily where the clearance and settlement of specific 
products requires distinctions.\24\ In 2011, the FICC/GSD and FICC/MBSD 
cleared transactions valued at $1.1 quadrillion on a gross basis and 
$64.8 trillion on a gross basis, respectively.\25\ On July 18, 2012, 
the Financial Stability Oversight Council (``FSOC'') designated FICC 
systemically important under Title VIII of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act'').\26\
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    \22\ See Financial Stability Oversight Council, 2012 Annual 
Report, Appendix A, p.167, available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. In the 
absence of FICC, trades in the U.S. government securities market and 
the mortgage-backed securities market would have to settle 
bilaterally. See id. at 171.
    \23\ FICC/GSD currently has 113 members, 104 of which are full-
service members. FICC/MBSD currently has 143 members.
    \24\ See Securities Exchange Act Release No. 66550 (March, 9, 
2012), 77 FR 15155-01, 15162 (March 14, 2012) (SR-FICC-2008-01) 
(noting that FICC/MBSD's rules were ``revised to harmonize them with 
similar provisions in the current [FICC/]GSD rules, and in some 
cases updated to reflect the MBSD market'').
    \25\ See Financial Stability Oversight Council, 2012 Annual 
Report, Appendix A, p.168, available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
    \26\ See Financial Stability Oversight Council, 2012 Annual 
Report, at p.110 and Appendix A, p.167, available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
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    As the sole central counterparty in the United States for cash-
settled U.S. government and agency securities, FICC/GSD provides 
clearing, netting, settlement, risk management, and a guarantee of 
trade completion for the following securities: (i) U.S. Treasury bills, 
notes, bonds, Treasury inflation-protected securities (TIPS), and 
Separate Trading of Registered Interest and Principal Securities 
(STRIPS), and (ii) Federal agency notes, bonds and zero-coupon 
securities that are book-entry, Fedwire eligible, and non-mortgage 
backed. FICC/GSD accepts buy-sell transactions, repurchase and reverse 
repurchase agreement transactions, and Treasury auction purchases in 
several types of U.S. Government securities.
    As the sole central counterparty in the United States for the non-
private label mortgage-backed securities market, FICC/MBSD provides 
clearing, netting, settlement, risk management, pool notification, and 
a guarantee of trade completion for pass-through mortgage-backed 
securities issued by the Government National Mortgage Association 
(``Ginnie Mae''), the Federal Home Loan Mortgage Corporation (``Freddie 
Mac''), and the Federal National Mortgage Association (``Fannie Mae'').

IV. Discussion

A. Statutory Requirements

    Section 17A of the Act directs the Commission--having due regard 
for the public interest, the protection of investors, the safeguarding 
of securities and funds, and the maintenance of fair competition--to 
use its authority to facilitate the establishment of a national system 
for the prompt and accurate clearance and settlement of securities 
transactions.\27\ The registration and continued oversight of clearing 
agencies represent key elements in promoting these statutory 
objectives. Accordingly, Section 17A of the Act requires a clearing 
agency, as defined in Section 3(a)(23) of the Act, to register with the 
Commission.\28\ Before granting registration to a clearing agency, 
Section 17A(b)(3) of the Act requires that the Commission make a number 
of determinations with respect to the clearing agency's organization, 
capacity, and rules.\29\ Section 17A(b)(3)(A) of the Act requires a 
clearing agency, among other things, to be ``so organized and [have] 
the capacity to be able to facilitate the prompt and accurate clearance 
and settlement of securities transactions and derivative agreements, 
contracts, and transactions for which it is responsible, to safeguard 
securities and funds in its custody or control or for which it is 
responsible, [and] to comply with the provisions of [the Act] and the 
rules and regulations thereunder.'' \30\ An approval of clearing agency 
registration does not mean that no further modifications of the 
applicant's rules, systems, procedures, or practices are needed.\31\
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    \27\ 15 U.S.C. 78q-1.
    \28\ The term ``clearing agency'' is defined, in pertinent part, 
as ``any person who acts as an intermediary in making payments or 
deliveries or both in connection with transactions in securities or 
who provides facilities for comparison of data respecting the terms 
of settlement of securities transactions, to reduce the number of 
settlements of securities transactions, or for the allocation of 
securities settlement responsibilities.'' 15 U.S.C. 78c(a)(23)(A).
    \29\ 15 U.S.C. 78q-1(b)(3). See also Section 19 of the Act, 15 
U.S.C. 78s, and Rule 19b-4 thereunder, 17 CFR 240.19b-4, setting 
forth procedural requirements for registration and continuing 
Commission oversight of clearing agencies, and Section 17(a) of the 
Act, 15 U.S.C. 78q, setting forth certain recordkeeping and record 
retention requirements for clearing agencies.
    \30\ 15 U.S.C. 78q-1(b)(3)(A). The Commission has recently 
adopted standards for registered clearing agencies that establish 
minimum requirements regarding how registered clearing agencies must 
maintain effective risk management procedures and controls, as well 
as meet the statutory requirements under the Act on an ongoing 
basis. See Securities Exchange Act Release No. 68080 (October 22, 
2012), 77 FR 66220 (November 2, 2012) (File No. S7-08-11) 
(``Clearing Agency Standards''). As the Commission noted in the 
Clearing Agency Standards Release, the standards were modeled on 
standards developed by the International Organization of Securities 
Commissions (``IOSCO'') and the Committee on Payment and Settlement 
Systems (``CPSS'') in the Recommendations for Securities Settlement 
Systems (2001) (``RSSS'') and Recommendations for Central 
Counterparties (2004) (``RCCP'') (collectively, ``CPSS-IOSCO 
Recommendations''). See id. at 66222-23. Independent assessors from 
the International Monetary Fund (``IMF'') evaluated FICC/GSD against 
the standards outlined in the CPSS-IOSCO Recommendations and 
determined that FICC/GSD observed or broadly observed the CPSS-IOSCO 
Recommendations. Since that time, FICC/MBSD updated its rules 
generally to mirror the rules of FICC/GSD. See Securities Exchange 
Act Release No. 66550 (March, 9, 2012), 77 FR 15155-01, 15162 (March 
14, 2012) (SR-FICC-2008-01) (noting that FICC/MBSD's rules were 
``revised to harmonize them with similar provisions in the current 
GSD rules, and in some cases updated to reflect the [FICC/MBSD] 
market''). Furthermore, FICC has performed a self-assessment of the 
clearing agency's rules, policies, and procedures against the 
Clearing Agency Standards. While the Commission believes that FICC's 
practices are largely consistent with the Clearing Agency Standards, 
it will evaluate FICC's continued compliance with the Act, the 
Clearing Agency Standards, and other applicable rules under the Act 
on an ongoing basis.
    \31\ See Securities Exchange Act Release No. 20221 (September 
23, 1983), 48 FR 45167-02, 45171 (October 3, 1983) (File No. 600-1 
et al.) (order approving full registration of nine clearing 
agencies). In approving these registrations, the Commission noted 
that it ``does not intend this [order approving applications for 
registration] to suggest that no further modifications of the 
subject clearing agencies' rules, systems, procedures, and practices 
are needed now or in the future. Indeed, the findings made in this 
Order are intended to supplement the Commission's . . . continuing 
authority under the Act to regulate evolving clearing systems. The 
Commission will continue to use its oversight, inspection, and 
enforcement authority as necessary and appropriate to further the 
purposes of the Act, and, as necessary, will use its rulemaking 
authority . . . to ensure continued development of the National 
System [for the clearance and settlement of securities 
transactions].'' Id.
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    In 1980, the Commission published a statement of the views and 
positions that the Division of Trading and Markets \32\ (``Standards 
Release'') \33\ would apply in evaluating applications for clearing 
agency registration. The Standards Release provides information 
concerning the Division's interpretation of the requirements for 
clearing agency registration set forth in subparagraphs (A) through (I) 
of Section 17A(b)(3),\34\ illustrates specific objectives that a 
clearing agency's rules, procedures, and systems should achieve to be 
granted registration, and discusses the Division's views on the 
national system for clearance and settlement.\35\
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    \32\ In 1980, the Division of Trading and Markets was named the 
Division of Market Regulation.
    \33\ See Securities Exchange Act Release No. 16900 (June 17, 
1980), 45 FR 41920 (June 23, 1980).
    \34\ 15 U.S.C. 78q-1(b)(3)(A) through (I).
    \35\ The Commission notes that the standards reflected in the 
Standards Release were developed in the context registering ten 
clearing agencies engaged primarily in clearing domestic corporate 
debt and equity securities and, to a lesser extent, municipal 
securities. The Commission recognizes that some of these standards 
may not be appropriate for clearing agencies that provide services 
for other investment products, such as mortgage-backed securities. 
Accordingly, the Commission intends to apply the standards flexibly 
and on a case-by-case basis.

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[[Page 39030]]

B. Membership Standards

1. Statutory Requirements
    Section 17A(b)(3)(B) of the Act enumerates the following categories 
of persons that a clearing agency's rules must make eligible for 
membership: Registered brokers or dealers, registered clearing 
agencies, registered investment companies, banks, and insurance 
companies. While the Act requires that these entities must be eligible 
for membership, clearing agencies are permitted to establish additional 
admission criteria.\36\
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    \36\ 15 U.S.C. 78q-1(b)(3)(B). The Act uses the term 
``participant,'' rather than ``member,'' but as FICC's rules refer 
to its users as members rather than participants, this Order will 
use the term ``member'' for the sake of clarity. See also 15 U.S.C. 
78c(3)(a)(24) (``The term `participant' when used with respect to a 
clearing agency means any person who uses a clearing agency to clear 
or settle securities transactions or to transfer, pledge, lend, or 
hypothecate securities.'').
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    Section 17A(b)(4)(B) of the Act contemplates that a registered 
clearing agency will have financial responsibility, operational 
capability, experience, and competency standards that are used to 
accept, deny, or condition participation of any member or any category 
of members enumerated in Section 17A(b)(3)(B), but it also provides 
that these criteria may not be used to unfairly discriminate among 
applicants.\37\ The rules of the clearing agency must not be designed 
to permit unfair discrimination in the admission of members or among 
members in the use of the clearing agency, nor impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act.\38\
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    \37\ 15 U.S.C. 78q-1(b)(4)(B) and (b)(3)(F).
    \38\ 15 U.S.C. 78q-1(b)(3)(F) and (I).
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2. FICC Compliance With Membership Requirements
    FICC/GSD has established each of the membership categories required 
by Section 17A, and also offers membership to certain other types of 
entities.\39\ FICC/GSD divides its members into four types depending 
upon the level of services offered: (i) Comparison-only members; (ii) 
netting members; (iii) sponsored members and their sponsors; and (iv) 
funds-only settling bank members. FICC/MBSD has also established each 
of the membership categories required by Section 17A, and also offers 
membership to certain other types of entities.\40\ FICC/MBSD offers two 
principal categories of membership: one for clearing members, and one 
for cash-settling bank members.\41\
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    \39\ See GSD Rulebook, Rule 2(b).
    \40\ See MBSD Rulebook, Rule 2A.
    \41\ See MBSD Rulebook, Rule 2(b).
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    FICC has established requirements for applicants' financial 
resources, operational capacity, creditworthiness, and business 
experience. The financial requirements vary depending upon the nature 
of the applicant's business, the types of clearing services the 
applicant uses, and the accounting principles the applicant follows in 
preparing its audited financial statements.\42\ FICC's financial 
standards require, among other things, that applicants have sufficient 
resources to make any required clearing fund contributions, to pay cash 
settlement amounts, to meet any applicable regulatory capital 
requirements, and to satisfy all obligations to FICC.\43\ FICC ensures 
members' creditworthiness by retaining the authority to deny membership 
to entities that, among other things, are subject to statutory 
disqualification under Section 3(a)(39) of the Act,\44\ have violated 
the anti-fraud provisions of federal securities laws, or have been 
convicted of a criminal offense.\45\ FICC's operational criteria 
require applicants to have adequate personnel, physical facilities, 
books and records, accounting systems, and internal procedures to 
process transactions promptly and accurately, to communicate with FICC, 
and to conform to any conditions imposed by FICC.\46\ FICC's business 
experience criteria require certain applicants to have a profitable 
business history of at least six months, or personnel with sufficient 
operational background and experience to ensure the firm's ability to 
conduct business.\47\
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    \42\ For example, a FICC/GSD member that is a broker-dealer 
member registered under Section 15 of the Act whose financial 
statements are prepared in accordance with U.S. GAAP must have at 
least $25 million in net worth and at least $10 million in excess 
net capital. See GSD Rulebook, Rule 2A, Section 4(b)(ii)(A)(1) and 
(2). Similarly, a FICC/MBSD member that is a broker-dealer 
registered under Section 15 of the Act whose financial statements 
are prepared in accordance with U.S. GAAP must have at least $25 
million in net worth and at least $10 million in excess net capital. 
See MBSD Rulebook, Rule 2A, Section 2(e)(ii)(A)(1) and (2).
    \43\ See GSD Rulebook, Rule 2A, Sections 3 and 4; MBSD Rulebook, 
Rule 2A, Section 2.
    \44\ 15 U.S.C. 78c(a)(39).
    \45\ See GSD Rulebook, Rule 2A, Sections 3 and 4(a); MBSD 
Rulebook, Rule 2A, Section 2.
    \46\ See GSD Rulebook, Rule 2A, Section 3; MBSD Rulebook, Rule 
2A, Section 2.
    \47\ See GSD Rulebook, Rule 2A, Section 4(c); MBSD Rulebook, 
Rule 2A, Section 2(f).
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    FICC routinely monitors its members to ensure they adhere to FICC's 
membership requirements on an ongoing basis. In this regard, FICC 
requires members to provide it with interim and annual financial 
statements and, periodically, certain regulatory reports (e.g., the 
FOCUS reports broker-dealers must file with the Financial Industry 
Regulatory Authority).\48\ FICC can require members to undergo periodic 
operational testing, and members must promptly notify FICC if they 
cease to satisfy any of FICC's membership requirements.\49\ FICC also 
assigns its bank and broker-dealer members a rating based on their 
financial stability, and this rating can affect both the level of 
financial scrutiny these members receive and the members' clearing fund 
requirement.\50\
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    \48\ See GSD Rulebook, Rule 3, Section 2; MBSD Rulebook, Rule 3, 
Section 2.
    \49\ See GSD Rulebook, Rule 3, Sections 6 and 7; MBSD Rulebook, 
Rule 3, Sections 5 and 6.
    \50\ See GSD Rulebook, Rule 3; MBSD Rulebook, Rule 3.
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    FICC has the authority to take action with respect to members that 
fail to maintain FICC's membership standards. A member that no longer 
satisfies FICC's membership requirements is subject to enhanced 
monitoring, increased clearing fund requirements, limitations on its 
access to FICC's services, and possible loss of membership 
privileges.\51\
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    \51\ See GSD Rulebook Rule 3; MBSD Rulebook, Rule 3.
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3. Commission Findings on FICC's Compliance With Membership Standards
    At the time of GSCC's initial temporary registration, the 
Commission granted GSCC exemptions from compliance with the 
participation standards of Section 17A(b)(3)(B) and 17A(b)(4)(B) 
because the Commission determined that GSCC rules did not provide for 
all the statutory categories of membership required under the Act or 
the financial standards for membership as contemplated by the Act.\52\ 
Since the Commission's original order granting temporary registration, 
the Commission has approved a number of rule filings that amended 
GSCC's membership categories and membership requirements.\53\ The 
Division

[[Page 39031]]

thoroughly reviewed FICC's membership eligibility criteria and 
membership requirements when GSCC and MBSCC merged and determined that 
FICC's participation standards were consistent with the requirements 
under the Act.\54\ FICC/MBSD updated its membership standards in 2012 
to generally mirror the FICC/GSD standards.\55\
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    \52\ See Securities Exchange Act Release No. 25740 (May 24, 
1988), 53 FR 19839-01 (May 31, 1988) (File No. 600-23) (granting 
GSCC a temporary registration and exempting it from the Act's fair 
representation and participation requirements).
    \53\ See Securities Exchange Act Release Nos. 32722 (August 5, 
1993), 58 FR 42993 (August 12, 1993) (SR-GSCC-93-01) (order 
approving establishment of new categories of netting system 
membership of Category 2 dealers and inter-dealer brokers, issuers 
of government securities, insurance companies, registered clearing 
agencies, and registered investment companies) and 34935 (November 
3, 1994), 59 FR 56100 (November 10, 1994) (SR-GSCC-94-04) (order 
approving establishing new categories of netting system membership 
for futures commission merchants).
    \54\ See Securities Exchange Act Release No. 47015 (December 17, 
2002), 67 FR 78531 (December 24, 2002) (SR-GSCC-2002-07 and SR-
MBSCC-2002-01).
    \55\ See Securities Exchange Act Release No. 66550 (March 9, 
2012), 77 FR 15155 (March 14, 2012) (File No. 600-23).
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    FICC's current rules provide for membership for those entities 
enumerated in the statute and provide for robust financial and 
operational competency standards. By clearly denoting ongoing 
compliance obligations and setting forth the consequences for failing 
to meet those obligations, FICC's rules are designed to sufficiently 
protect the clearing agency from risk associated with not meeting those 
competency standards. In addition, FICC's rules are not designed to 
permit unfair discrimination in the admission of members or among 
members in the use of the clearing agency, nor do they impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act. Therefore, the Commission reaffirms its 2002 
and 2012 findings and finds that FICC's membership standards are in 
compliance with the Act.

C. Fair Representation

1. Statutory Requirements
    Section 17A(b)(3)(C) of the Act requires that the rules of a 
clearing agency assure fair representation of the clearing agency's 
members in the selection of the clearing agency's directors and in the 
administration of the clearing agency's affairs.\56\ The Standards 
Release interprets this section to require that a clearing agency's 
rules: (i) Provide members with a meaningful opportunity to be 
represented in the selection of the clearing agency's directors and the 
administration of its affairs; and (ii) provide members with sufficient 
information concerning the clearing agency's affairs to ensure 
meaningful participation.\57\ In particular, clearing agencies should 
furnish members with audited annual financial statements, an annual 
report on internal accounting controls prepared by an independent 
public accountant, and notice of any proposed rule changes.\58\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78q-1(b)(3)(C).
    \57\ See Securities Exchange Act Release No. 16900 (June 17, 
1980), 45 FR 41920, 41293-94 (June 23, 1980).
    \58\ Id.
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2. FICC's Compliance With the Fair Representation Requirement
    With respect to the selection of directors and the administration 
of the affairs of FICC, individuals elected to the DTCC Board of 
Directors are also elected to and constitute the Board of Directors of 
FICC (collectively, ``Board''). The Board consists of between fifteen 
and twenty-five directors, as determined by the Board periodically.\59\ 
A majority of the Board must be composed of member representatives.\60\ 
DTCC currently maintains eight Board Committees, with at least one 
director serving on each Committee.\61\ Collectively, these eight 
committees advise DTCC's Board on matters including, but not limited 
to, clearing agency operations, membership, credit, and risk. Finally, 
members that make full use of FICC's services are required to purchase 
DTCC common shares in proportion to their relative use of FICC's 
services.\62\ Holders of DTCC common shares elect all but two of the 
Directors of DTCC.\63\
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    \59\ Currently, the Board is composed of nineteen directors. 
Twelve directors represent clearing agency members, three directors 
are independent representatives of non-members, two directors 
represent DTCC management, and two directors are designated by 
DTCC's preferred shareholders. For more information, see http://www.dtcc.com/about/governance/board.php.
    \60\ See The Board of Directors of the Depository Trust and 
Clearing Corporation Mission Statement and Charter, available at 
http://www.dtcc.com/legal/compliance/governance/DTCC_BOD_Mission_ 
and_Charter.pdf.
    \61\ The eight Board Committees are: Governance, Executive, 
Audit, Business and Products, Operations and Technology, 
Compensation and Human Resources, Risk, and Finance and Capital.
    \62\ DTCC common stock is reallocated at least once every three 
years based on members' usage of services of the DTCC clearing 
agencies. See DTCC Common Stock Reallocation, DTCC Important Notice, 
May 11, 2012, available at http://www.dtcc.com/downloads/legal/imp_notices/2012/ficc/gov/GOV050.12.pdf; see also The Depository Trust & 
Clearing Corporation Third Amended and Restated Shareholders 
Agreement, art. 2, Section 2.01(a). Members of one DTCC entity that 
use the services of other DTCC entities are entitled to purchase 
additional shares based on their use of those services.
    \63\ The other two directors are appointed by DTCC's preferred 
shareholders, NYSE-Euronext and the Financial Industry Regulatory 
Authority (``FINRA''), each of which hold 10,000 DTCC preferred 
shares.
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    FICC's rules require FICC/GSD and FICC/MBSD to provide members with 
copies of audited annual financial statements and an annual report on 
internal accounting controls.\64\ FICC rules also require FICC to 
provide prompt notice of any proposals to change, revise, add or repeal 
any rule, along with the text or a brief description of the proposed 
rule and its purpose and effect.\65\ Members also have the right to 
submit to FICC comments on the proposal, and FICC will file such 
comments with the Commission and retain them with FICC's records.
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    \64\ See GSD Rulebook, Rule 35; MBSD Rulebook, Rule 26. Although 
FICC/GSD's rule does not include a provision requiring it to provide 
members with an annual internal accounting controls report, both 
FICC/MBSD and FICC/GSD make the report available to members on 
DTCC's Web site within the requisite 60-day period after FICC 
receives the report. See Letter from Nikki Poulos, Managing Director 
and General Counsel, DTCC, to Joseph Kamnik, Assistant Director, 
Division of Trading and Markets, Securities and Exchange Commission 
(May 30, 2013), available at http://www.sec.gov/rules/other/2013/dtcc-supplemental-letter-053013.pdf. See also www.dtcc.com/legal/internal/FICC_2012.pdf.
    \65\ See MBSD Rulebook, Rule 27; GSD Rulebook, Rule 36.
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3. Commission Findings Regarding FICC's Compliance With the Fair 
Representation Requirements
    In approving the merger of GSCC and MBSCC in 2002, the Commission 
determined that FICC satisfied the fair representation requirements of 
Section 17A of the Act by (i) continuing to give the members the right 
to purchase shares of DTCC common stock on a basis that reflects their 
usage of FICC's services; \66\ (ii) continuing to allow members of FICC 
to take part in the selection of individuals to the Board; and (iii) 
using the committee structure to ensure that FICC members will have a 
voice in the operations and affairs of the divisions.\67\ Accordingly, 
the Commission reaffirms its conclusion that FICC's rules provide 
members with a meaningful opportunity to select Board directors and to 
participate in the administration of the affairs of the clearing 
agency. The Commission also finds that FICC provides members with the 
information necessary to make informed decisions regarding these 
matters.
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    \66\ Since 2005, members of DTC, NSCC, and FICC that make full 
use of the services of one or more of these clearing agencies have 
been required to purchase DTCC common shares based on their use of 
those clearing agencies in which they are members. For more 
information, see Securities Exchange Act Release No. 52922 (December 
7, 2005), 70 FR 74070 (December 14, 2005) (SR-DTC-2005-16, SR-FICC-
2005-19, and SR-NSCC-2005-14).
    \67\ See Securities Exchange Act Release No. 47015 (December 17, 
2002), 67 FR 78531 (December 24, 2002) (SR-GSCC-2002-09 and SR-
MBSCC-2002-01).

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[[Page 39032]]

D. Capacity To Enforce Rules and To Discipline Members in Accordance 
With Fair Procedures

1. Statutory Requirements
    Section 17A(b)(3)(A) of the Act provides that a clearing agency 
must be organized and have the capacity to enforce compliance by its 
members with the rules of the clearing agency.\68\ Section 17A(b)(3)(G) 
requires that the rules of a clearing agency provide that its members 
shall be appropriately disciplined for violations of any provision of 
those rules by expulsion, suspension, a limitation of activities, 
functions, and operations, fine, censure, or any other fitting 
sanction.\69\ Section 17A(b)(3)(H) requires that the rules of the 
clearing agency provide a fair procedure with respect to the 
disciplining of members, the denial of a request for membership, and 
the prohibition or limitation by the clearing agency of any person with 
respect to the services offered by the clearing agency.\70\
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    \68\ 15 U.S.C. 78q-1(b)(3)(A).
    \69\ 15 U.S.C. 78q-1(b)(3)(G).
    \70\ 15 U.S.C. 78q-1(b)(3)(H).
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2. FICC's Capacity To Enforce Rules and To Discipline Members in 
Accordance With Fair Procedures
    FICC rules require members to notify FICC if they fail to maintain 
the relevant standards and qualifications for admission to membership, 
including minimum capital standards, operations testing and related 
reporting requirements.\71\ If a member (i) fails to maintain such 
relevant standards and qualifications, including but not limited to 
minimum capital standards, operations testing, or reporting 
requirements imposed pursuant to FICC rules, (ii) violates any rule of 
or agreement with FICC; (iii) fails to satisfy in a timely manner any 
obligations to FICC; or (iv) experiences a reportable event (e.g., 
changes in control of a member or events having a substantial effect on 
a member's business or financial condition), FICC may undertake 
appropriate action to determine the member's continued eligibility for 
membership. Furthermore, at any time FICC deems it necessary or 
advisable in order to protect FICC, its members, creditors, or 
investors, to safeguard securities and funds in FICC's custody or 
control, or to promote the prompt and accurate clearance and settlement 
of securities transactions, FICC may undertake appropriate action to 
determine the member's eligibility for membership.\72\
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    \71\ See GSD Rulebook, Rule 3, Section 7; MBSD Rulebook, Rule 3, 
Section 6.
    \72\ See GSD Rulebook, Rule 3, Section 7; MBSD Rulebook, Rule 3, 
Section 6.
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    FICC rules also set forth the clearing agency's right to discipline 
members for violations of any rules or member agreements, and for any 
error, delay, or other conduct that either constitutes an abuse or 
misuse of FICC's procedures or is detrimental to the clearing 
agency.\73\ In addition, FICC rules describe certain member actions 
that may cause FICC to restrict a member's access to services, 
including but not limited to failing to make certain payments, 
deliveries, or deposits pursuant to FICC rules, and provide the process 
by which FICC may wind down a member's activities in the clearing 
agency.\74\ FICC may discipline a member by, as appropriate, 
terminating membership, ceasing to act on behalf of the member,\75\ 
limiting a member's access to FICC's services, fining or censuring a 
member, or imposing any other fitting sanctions.\76\ FICC must notify 
members of the type of disciplinary sanction being imposed, the reasons 
for the sanction, the effective date of the sanction, and the right to 
a hearing.\77\
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    \73\ See GSD Rulebook, Rule 48; MBSD Rulebook, Rule 38.
    \74\ See GSD Rulebook, Rule 21; MBSD Rulebook, Rule 14.
    \75\ See GSD Rulebook, Rules 22 and 22A; MBSD Rulebook, Rules 16 
and 17.
    \76\ See GSD Rulebook, Rule 48; MBSD Rulebook, Rule 38.
    \77\ See GSD Rulebook, Rule 48; MBSD Rulebook, Rule 38.
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    The rules of FICC/GSD and FICC/MBSD specify the due process 
protections to which members are entitled. These rules permit members 
accused of violations to request a hearing and require FICC to 
establish a panel to conduct such hearings.\78\ The hearing panel is 
required to advise the requesting member of its decision and the 
grounds upon which its decision is based. Disciplinary sanctions may be 
imposed only in accordance with FICC rules. While decisions of the 
panel are generally final, the Board retains the discretion to modify 
any sanction or reverse any decision of the panel that is adverse to a 
member.\79\
---------------------------------------------------------------------------

    \78\ See GSD Rulebook, Rule 37; MBSD Rulebook, Rule 28.
    \79\ See GSD Rulebook, Rule 37; MBSD Rulebook, Rule 28.
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3. Commission Findings Regarding FICC's Capacity To Enforce Rules and 
To Discipline Members in Accordance With Fair Procedures
    In approving GSCC's and MBSCC's initial request for registration, 
the Commission reviewed the clearing agencies' ability to enforce their 
rules and reviewed the processes by which the clearing agencies imposed 
fines, expulsions, suspensions, limitation of or restrictions on 
activities, functions and operations, or other sanctions. In so doing, 
the Commission was satisfied that GSCC and MBSCC rules met statutory 
requirements to have the capacity to enforce their rules and fairly 
discipline their members.\80\
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    \80\ See Securities Exchange Act Release Nos. 24046 (February 2, 
1987), 52 FR 4218-01 (February 10, 1987) (File No. 600-22) and 25740 
(May 24, 1988), 53 FR 19839 (May 31, 1988) (File No. 600-23).
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    The Commission continues to find that FICC has procedures for 
enforcing rules and disciplining members that are consistent with the 
requirements of the Act. Specifically, the Commission finds that FICC's 
rules provide it with appropriate authority to discipline members for 
rules violations and to impose each of the sanctions enumerated in the 
Act. Moreover, the Commission finds that FICC has established 
procedures to ensure members accused of rules violations receive notice 
of the alleged violations, and are afforded an opportunity to contest 
the allegations, including by requesting a hearing at which the accused 
member may be represented by counsel. In the Commission's view, these 
procedural safeguards are consistent with the protections envisioned by 
the Act. The Commission therefore concludes that FICC's capacity to 
enforce its rules and discipline its members comports with Section 
17A(b)(3)(A), (G) and (H).

E. Safeguarding Securities and Funds

1. Statutory Requirements
    Sections 17A(b)(3)(A) and (F) of the Act \81\ require that a 
clearing agency be organized and that its rules be designed both to 
promote the prompt and accurate clearance and settlement of securities 
transactions for which it is responsible and to safeguard securities 
and funds in its custody or control, or for which it is responsible. 
The clearing agency is permitted to use clearing fund resources in 
limited amounts on a temporary basis to meet unexpected and unusual 
requirements for funds.\82\
---------------------------------------------------------------------------

    \81\ 15 U.S.C. 78q-1(b)(3)(A) and (F).
    \82\ See Securities Exchange Act Release No. 16900 (June 17, 
1980), 45 FR 41920, 41929 (June 23, 1980).
---------------------------------------------------------------------------

    The Standards Release also enumerated certain requirements that 
should be met to comply with the Act, including that a clearing agency 
should: (i) Be organized in a manner that effectively establishes 
operational and audit controls while fostering director independence; 
(ii) have an audit

[[Page 39033]]

committee of its board of directors composed of non-management 
directors that would select, or participate in the selection of, the 
clearing agency's independent public accountant and that would review 
the nature and scope of the work to be performed by the independent 
public accountant and the results thereof with the independent public 
accountant; (iii) have an adequately and competently staffed internal 
audit department that reviews, monitors, and evaluates the clearing 
agency's system of internal accounting control; (iv) furnish annually 
to members audited financial statements and furnish quarterly to 
members on request unaudited financial statements; (v) furnish annually 
to members an opinion report prepared by its independent public 
accountant based on a study and evaluation of the clearing agency's 
system of internal accounting control for the period since the last 
such report; and (vi) have detailed plans to assure (1) the physical 
safeguarding of securities and funds, (2) the integrity of the 
automatic data processing system and (3) the recovery, under a variety 
of contingencies, from loss or destruction of securities, funds, or 
data.\83\ The Commission provides a more detailed discussion of these 
requirements and FICC's compliance with each directly below.
---------------------------------------------------------------------------

    \83\ See Securities Exchange Act Release No. 16900 (June 17, 
1980), 45 FR 41920, 41925-29 (June 23, 1980).
---------------------------------------------------------------------------

2. FICC's Safeguarding Securities and Funds
a. Clearing Fund
i. General
    FICC maintains separate clearing funds for FICC/GSD and FICC/
MBSD.\84\ These clearing funds serve not only to provide readily 
accessible liquidity to facilitate timely settlement, but also to 
reduce costs that may be incurred in the event a member becomes 
insolvent or fails to fulfill its contractual obligations to FICC. FICC 
calculates certain portions of each member's required clearing fund 
deposit twice daily \85\ based upon the member's unsettled and pending 
transactions. In calculating members' clearing fund obligations, FICC 
employs a risk-based margining methodology that measures each 
Division's credit exposure to its members. Members are required to 
deposit cash and eligible securities into to the appropriate clearing 
fund to cover these exposures.\86\
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    \84\ Although FICC has implemented a similar clearing fund 
methodology for both Divisions, some variations exist to account for 
the different products each Division clears. For example, to address 
its clearing of repurchase agreements via a general collateral fund 
(``GCF''), FICC/GSD's clearing fund calculation includes a GCF 
Premium Charge and a GCF Repo Event Premium. Moreover, FICC/GSD's 
clearing fund methodology includes adjustments to account for its 
cross-margining agreements with the Chicago Mercantile Exchange and 
New York Portfolio Clearing, LLC. FICC/MBSD's clearing fund formula 
differs in that it includes a margin requirement differential and a 
deterministic risk component that are absent from FICC/GSD's 
formula. Unlike FICC/GSD, FICC/MBSD collects clearing fund deposits 
once per day, and thus the margin requirement differential addresses 
the risk that a member may not satisfy the next day's margin 
requirements. The deterministic risk component captures the mark-to-
market gains or losses of a member's portfolio, as well as any net 
cash items and adjustments.
    \85\ Only certain components of the clearing fund, such as the 
Value at Risk component, are calculated twice each day. Others, such 
as the coverage component, are calculated only once daily.
    \86\ Members' required clearing fund deposits must be made and 
maintained in cash, U.S. Treasury securities, securities issued by 
certain federal agencies, and mortgage-backed securities issued by 
federal agencies or entities sponsored by the federal government. 
FICC requires that at least 10% of a member's required deposit be 
maintained in cash, up to a required maximum of $5 million.
---------------------------------------------------------------------------

    FICC calculates clearing fund requirements for cash-settled 
transactions at both FICC/GSD and FICC/MBSD assuming a three-day 
liquidation period in normal market conditions. The clearing fund 
requirement is calculated to provide FICC/GSD and FICC/MBSD with 
adequate clearing fund resources to withstand a default of the largest 
member 99 percent of the time in normal market conditions. FICC uses 
routine back and stress testing to monitor the sufficiency of clearing 
fund levels vis-[agrave]-vis the risk represented by the 99th 
percentile of expected possible losses from member portfolios and to 
monitor tail risk exposure that falls beyond the 99th percentile. 
FICC's stress tests include events from the last 10 years, as well as 
special stress events outside that period and hypothetical scenarios. 
FICC back-tests its clearing fund model on a monthly basis and has 
outside experts validate the model periodically.
    FICC's methodology for calculating members' clearing fund 
requirements includes two principal components: (i) A Value at Risk 
(``VaR'') charge, which is calculated using a historical simulation 
with full revaluation; and (ii) a risk-related charge, known as a 
``coverage charge.'' \87\ The VaR component of the clearing fund 
addresses the risk presented by a member's unsettled positions. The 
coverage component seeks to address the VaR model's potential 
deficiencies through daily back-testing, and further serves to ensure 
that members' collateral deposits are sufficient to satisfy their 
obligations 99 percent of the time in normal market conditions. FICC 
also has the authority under its rules to levy a ``special charge'' on 
individual members to account for market conditions, changes to a 
member's financial and operational capabilities, and other forms of 
risk, including credit, reputational and legal risk.\88\
---------------------------------------------------------------------------

    \87\ See GSD Rulebook, Rule 4; MBSD Rulebook, Rule 4.
    \88\ See GSD Rulebook, Rule 4; MBSD Rulebook, Rule 4.
---------------------------------------------------------------------------

ii. Investment of Clearing Fund Deposits
    All securities and cash associated with FICC's settlement processes 
and clearing fund are held in FICC's accounts at its two clearing 
banks, the Bank of New York Mellon and JPMorgan Chase Bank. FICC 
generally invests its cash in securities issued or guaranteed as to 
principal and interest by the United States or agencies and 
instrumentalities of the United States or in repurchase agreements 
related to securities issued or guaranteed as to principal and interest 
by the United States or agencies and instrumentalities of the United 
States. FICC's investment policy also permits investments in 
certificates of deposit or deposits in FDIC-insured banks, but limited 
to the level of FDIC insurance protection, and with a time to maturity 
of not greater than one year. FICC's investment policy also permits it 
to earn money market rates in interest bearing accounts with 
creditworthy banks and other financial institutions deemed acceptable 
by FICC consistent with its investment policy.
    The risk of loss of invested funds is minimized in a number of 
ways. Investments are placed with well-capitalized financial 
institutions acting as principal rather than as agent, and maturity is 
limited to the next business day. FICC vets its counterparties for 
creditworthiness. FICC ensures that its reverse repo investments are 
fully secured by requiring collateral to have a market value greater 
than or equal to 102% of the cash invested. A written confirmation of 
each security underlying the repo is also required to be provided by 
the custodian bank. In addition to these risk-minimizing measures, 
counterparty credit limits are established for each investment type.
iii. Loss Allocation
    The rules of FICC/GSD and FICC/MBSD set out a loss allocation 
procedure, which is invoked if a defaulting member's clearing fund 
deposit is insufficient to cover losses incurred in the liquidation of 
the member's positions. If a member becomes insolvent, FICC would first 
use

[[Page 39034]]

that member's clearing fund to cover a loss incurred on the liquidation 
of the member's positions, along with any funds available from 
applicable collateral sharing arrangements between FICC and other 
clearing corporations.\89\ If those resources are insufficient to cover 
the liquidation of all of the defaulting member's positions, FICC's 
loss allocation procedure would be used. Any such loss allocation would 
first be made against the retained earnings of FICC attributable to the 
Division of which the defaulter was a member, in the amount of up to 
25% of the retained earnings or such higher amount as may be approved 
by the Board.
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    \89\ FICC has entered into a multilateral netting contract and 
limited cross-guaranty agreement with the Depository Trust Company 
(DTC), National Securities Clearing Corporation (NSCC), and the 
Options Clearing Corporation, under which these clearing agencies 
have agreed to make payment to each other for any remaining 
unsatisfied obligations of a common defaulting member to the extent 
they have excess resources of the defaulting member. FICC/GSD has 
also established cross-margining arrangements with the Chicago 
Mercantile Exchange (``CME'') and New York Portfolio Clearing, LLC 
(``NYPC'') pursuant to which a FICC/GSD member that is also a 
clearing member of CME or NYPC may elect to have its clearing fund 
requirement in respect of eligible positions at FICC/GSD and its 
margin requirements in respect of eligible positions in its 
proprietary account at CME and NYPC calculated by taking into 
consideration the net risk of such eligible positions at both 
clearing organizations. Copies of FICC/GSD's cross-guaranty and 
cross-margining agreements are appended as Exhibit G to FICC's 
Amended Application for Registration, and are available on the 
Commission's Web site at the following address: http://www.sec.gov/rules/sro/ficc.shtml.
---------------------------------------------------------------------------

iv. Use of Clearing Fund Deposits
    The rules of FICC/GSD and FICC/MBSD place limits on their ability 
to use clearing fund deposits and assets. Specifically, the Divisions 
may use the clearing fund only to satisfy FICC's losses or liabilities 
arising from the failure of a member to satisfy an obligation to FICC, 
the failure of a member that is party to one of FICC's cross-guaranty 
or cross-margin agreements to satisfy an obligation to a counterparty 
that is also party to those agreements, or from unexpected or unusual 
requirements for funds incident to FICC's clearance and settlement 
business, provided these requirements represent a small percentage of 
the clearing fund.\90\ FICC may also use the clearing fund as a source 
of collateral both to meet temporary financing needs in connection with 
its own settlement obligations and those of its members, and to meet 
unusual or unexpected funding needs, provided that these needs also 
represent a small percentage of the clearing fund.\91\
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    \90\ See GSD Rulebook, Rule 4, Section 5; MBSD Rulebook, Rule 4, 
Section 5.
    \91\ See GSD Rulebook, Rule 4, Section 5; MBSD Rulebook, Rule 4, 
Section 5.
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b. Operational Capacity
    DTCC maintains perpetually active in-region and out-of-region data 
centers, each of which has sufficient capacity to process the entire 
production workload so that any data center can function as the sole 
site if one or more data centers experience an outage. Capacity plans 
are reviewed annually by DTCC's Infrastructure Department and the 
Board, and FICC performs a stress test annually to determine daily 
capacity. DTCC's Operations and Technology Committee oversees the 
operational and technology capabilities that support FICC's businesses, 
as well as management's operation and development of technology 
infrastructure capabilities, technology resources, processes, and 
controls necessary to fulfill service delivery requirements.\92\ The 
Operations and Technology Committee also monitors key operational and 
technology metrics associated with the delivery of services, reviews 
financial performance related to technology and operations, and 
receives reports on various operational and technological programs.\93\ 
The Operations and Technology Committee meets at least four times per 
year and reports to the Board regularly.\94\ The Committee is required 
to perform an annual self-assessment of its performance and provide the 
results to the DTCC Board for review.\95\
---------------------------------------------------------------------------

    \92\ See Exhibit C to FICC's Amended Form CA-1, filed on April 
5, 2013, available at http://www.sec.gov/rules/other/2013/ficc-clearing-agency-app-exhibit-a-thru-d.pdf.
    \93\ See Exhibit C to FICC's Amended Form CA-1, filed on April 
5, 2013, available at http://www.sec.gov/rules/other/2013/ficc-clearing-agency-app-exhibit-a-thru-d.pdf.
    \94\ See DTCC Operations and Technology Committee Charter of 
June 2012. This Charter appears as Exhibit A to FICC's Amended Form 
CA-1, filed on April 5, 2013, available at http://www.sec.gov/rules/other/2013/ficc-clearing-agency-app-exhibit-a-thru-d.pdf.
    \95\ See DTCC Operations and Technology Committee Charter of 
June 2012. This Charter appears as Exhibit A to FICC's Amended Form 
CA-1, filed on April 5, 2013, available at http://www.sec.gov/rules/other/2013/ficc-clearing-agency-app-exhibit-a-thru-d.pdf.
---------------------------------------------------------------------------

c. Audit Committee and Internal Audit Department
    DTCC's Audit Committee and internal audit department oversee audit 
matters for all DTCC entities, including FICC. The Audit Committee's 
primary responsibilities include supervising the preparation of 
financial reports, establishing and maintaining adequate internal 
controls, arranging and supervising internal and external audits, and 
overseeing the management of legal, compliance, and regulatory risk. 
The Audit Committee is composed of not less than four members, none of 
whom are employed by DTCC, and at least one of whom is not affiliated 
with a member of DTCC. The Audit Committee meets at least four times 
per year and reports to the Board regularly on its activities, 
including an annual self-assessment of its performance. DTCC's internal 
audit department reports directly to DTCC's Audit Committee \96\ and 
provides independent validation of FICC's risk and control environment, 
evaluates and remediates risk, and reviews the adequacy of FICC's 
internal controls, procedures, and records. DTCC commissions an 
independent review of its internal audit department at least once every 
five years and uses an internal quality assurance program to test its 
processes on a sample basis every year.\97\ FICC also engages 
independent accountants to perform an annual study and evaluation of 
the internal controls relating to its operations.
---------------------------------------------------------------------------

    \96\ See DTCC Audit Committee Charter of June 2012. The charter 
provides that the head of DTCC's internal audit department, the 
General Auditor, has the opportunity at least four times each year 
to meet with the Audit Committee in an executive session. The 
charter appears as Exhibit A to FICC's Amended Form CA-1, filed on 
April 5, 2013, available at http://www.sec.gov/rules/other/2013/ficc-clearing-agency-app-exhibit-a-thru-d.pdf.
    \97\ See Mitigating Risk at DTCC: The Role of Internal Audit, 
DTCC Corporate Newsletter (May 2011), available at http://www.dtcc.com/news/newsletters/dtcc/2011/may/mitigating_risk.php.
---------------------------------------------------------------------------

d. Financial Report and Internal Accounting Control Report
    FICC provides to members annual audited financial statements 
prepared in accordance with U.S. Generally Accepted Accounting 
Principles to members within sixty days after the close of the fiscal 
year.\98\ FICC also provides to members unaudited financial statements 
within thirty days following the close of FICC's fiscal quarter for 
each of the first three quarters of each calendar year and for FICC's 
fourth quarter of each calendar year, within sixty days following the 
close of FICC's fiscal year.\99\ The

[[Page 39035]]

financial statements include, among other things, the total balances of 
the clearing funds of FICC/GSD and FICC/MBSD, the balances of both 
clearing funds' cash and securities components, the types and amounts 
of investments made with the cash balance, the amount charged to the 
clearing fund during the year in excess of a member's contribution, if 
any, and any other charge to clearing fund during the year not directly 
related to a specific member's contribution.
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    \98\ GSD Rulebook, Rule 35; MBSD Rulebook, Rule 26. See also 
Letter from Nikki M. Poulos, Managing Director and General Counsel, 
FICC, to Joseph Kamnik, Assistant Director, Division of Trading and 
Markets, Securities and Exchange Commission (May 30, 2013), 
available at http://www.sec.gov/rules/other/2013/dtcc-supplemental-letter-053013.pdf.
    \99\ GSD Rulebook, Rule 35; MBSD Rulebook, Rule 26. See also 
Letter from Nikki M. Poulos, Managing Director and General Counsel, 
FICC, to Joseph Kamnik, Assistant Director, Division of Trading and 
Markets, Securities and Exchange Commission (May 30, 2013), 
available at http://www.sec.gov/rules/other/2013/dtcc-supplemental-letter-053013.pdf. The financial statements are available on DTCC's 
Web site at: http://www.dtcc.com/legal/financials/2012.
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    FICC retains an independent public accountant to evaluate FICC's 
system of internal accounting control with respect to the safeguarding 
of members' assets, the clearance and settlement of securities 
transactions, and the reliability of FICC's records. The evaluation is 
conducted in accordance with standards established by the American 
Institute of Certified Public Accountants and is made available to all 
members within a reasonable time upon receipt from FICC's independent 
accountant.\100\
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    \100\ See MBSD Rulebook, Rule 26. See also Letter from Nikki M. 
Poulos, Managing Director and General Counsel, FICC, to Joseph 
Kamnik, Assistant Director, Division of Trading and Markets, 
Securities and Exchange Commission (May 30, 2013), available at 
http://www.sec.gov/rules/other/2013/dtcc-supplemental-letter-053013.pdf.
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e. Securities, Funds, and Data Controls
    DTCC has multiple data center locations, including in-region and 
out-of-region sites. In-region sites use synchronous data replication 
between them, maintaining multiple exact copies of all production data 
in separate locations. Production processing is spread across the in-
region data centers. The out-of-region site contains additional 
asynchronously replicated copies of in-region production data.
    All data centers have emergency monitoring and backup systems, 
backup generators, and redundant telecommunications from multiple 
carriers. All sites have sufficient capacity to process FICC's entire 
workload independently. To guarantee continuous operation from multiple 
sites, DTCC decentralized its information technology and key business 
operations staff among in-region and out-of-region sites.
    DTCC's SMART (Securely Managed and Reliable Technology) Network 
provides connectivity between DTCC and its customers and trading 
platforms.\101\ All critical clearance and settlement transactions use 
SMART. Each element of SMART is engineered with multiple independent 
levels of redundancy, and is capable of handling DTCC's entire 
clearance and settlement workload independently.
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    \101\ SMART is an end-to-end, privately managed communications 
system encompassing a geographically dispersed complex of processing 
centers, communications networks and control facilities. See 
generally Securities Exchange Act Release No. 52655 (October 24, 
2005), 70 FR 62154 (October 28, 2005) (SR-FICC-2005-15) (relating to 
the imposition of fees for FICC members who fail to migrate their 
communications systems to the SMART system); see also The Complete 
Guide to SMART, March 2004, available at http://www.dtcc.com/products/documentation/technology/technology.php.
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3. Commission Findings Regarding FICC's Compliance With the 
Safeguarding Securities and Funds Requirements
    As discussed above, FICC maintains a clearing fund based on a 
formula applicable to all users with a requirement that the lesser of 
$5,000,000 or 10 percent of the total required amount, with a minimum 
of $100,000, must be made and maintained in cash.\102\ The clearing 
fund is used solely to protect members and the clearing agency from 
member defaults and from clearing agency losses that do not result from 
day-to-day expenses, and cash contributions to the clearing fund may 
generally be invested only in securities issued or guaranteed as to 
principal and interest by the United States or agencies and 
instrumentalities of the United States, or in repurchase agreements 
related to securities issued or guaranteed as to principal and interest 
by the United States or agencies and instrumentalities of the United 
States.\103\
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    \102\ See GSD Rulebook Rule 4, Section 2(b); MBSD Rulebook Rule 
4, Section 2(d).
    \103\ See GSD Rulebook Rule 4, Section 5; MBSD Rulebook Rule 4, 
Section 5.
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    DTCC has dedicated capacity planning staff and ensures that FICC 
has sufficient capacity to meet operational needs and adequate controls 
over the review of capacity plans and operational and technological 
capabilities of FICC. DTCC maintains an Audit Committee composed of 
non-management directors and an internal audit department that reports 
periodically to it. FICC provides financial reports and internal 
control reports to members on a timely basis, and DTCC has adequate 
controls around the prevention of a loss of securities, funds, or data 
and proper recovery mechanism in the event of a loss of securities, 
funds, or data. The Commission finds that FICC is adequately organized 
and that its rules are designed both to promote the prompt and accurate 
clearance and settlement of securities transactions for which it is 
responsible and to safeguard securities and funds in its custody or 
control or for which it is responsible, as required by the Act.

F. Obligations to Members: Standard of Care

1. Statutory Requirements
    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\104\
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    \104\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Division has interpreted section 17A(b)(3)(F) to require a 
clearing agency to maintain a uniform standard of care in its 
obligations to members, and specifically that a clearing agency is 
responsible for delivering securities in its custody to, or as directed 
by, the members for whom such securities are held.\105\
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    \105\ See Securities Exchange Act Release No. 16900 (June 17, 
1980), 45 FR 41920, 41930 (June 23, 1980).
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2. FICC's Standard of Care
    FICC's standard of care states in pertinent part, that ``[FICC] 
will not be liable for any action taken, or any delay or failure to 
take any action, hereunder or otherwise to fulfill [FICC's] obligation 
to its members, other than for losses caused directly by [FICC's] gross 
negligence, willful misconduct, or violation of Federal securities laws 
for which there is a private right of action,'' and that FICC will not 
be held liable for third party actions or omissions unless FICC was 
grossly negligent, engaged in willful misconduct, or in violation of 
Federal securities laws for which there is a private right of action 
against the third party.\106\
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    \106\ See GSD Rulebook, Rule 39; MBSD Rulebook, Rule 30.
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3. Commission Findings on FICC's Standard of Care
    The Commission has previously approved a standard of care for 
FICC's predecessors, MBSCC and GSCC, that limits their liability to 
direct losses caused by their gross negligence, willful misconduct, or 
violation of Federal securities laws for which there is a private right 
of action.\107\ The Commission determined that such a standard was 
warranted given that neither MBSCC nor GSCC has custody

[[Page 39036]]

of their members' funds or securities.\108\ As both FICC/GSD and FICC/
MBSD continue to perform only non-custodial functions, the Commission 
reaffirms its prior determination that their standards of care are 
consistent with the Act.
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    \107\ Securities Exchange Act Release No. 48201 (July 21, 2003), 
68 FR 44128-01 (July 25, 2003) (SR-GSCC-2002-10); Securities 
Exchange Act Release No. 49373 (March 8, 2004), 69 FR 11921-01 
(March 12, 2004) (SR-MBSCC-2003-09).
    \108\ Securities Exchange Act Release No. 48201 (July 21, 2003), 
68 FR 44128-01 (July 25, 2003) (SR-GSCC-2002-10); Securities 
Exchange Act Release No. 49373 (March 8, 2004), 69 FR 11921-01 
(March 12, 2004) (SR-MBSCC-2003-09).
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G. Dues, Fees and Charges

    Sections 17A(b)(3)(D) and (E) of the Act require a clearing 
agency's rules to provide for the equitable allocation of reasonable 
dues, fees, and other charges among its members, and prohibit the rules 
of a clearing agency from imposing any schedule of prices, or fixing 
rates or other fees, for services rendered by its members.
    The fees charged by FICC are generally usage-based and apply 
equally to all members using the relevant service. FICC does not impose 
any schedule of prices or fix rates or other fees for services rendered 
by its customers. Accordingly, the Commission is satisfied that the 
method by which FICC provides for the equitable allocation of 
reasonable dues, fees, and other charges among its members and its 
prohibitions regarding the fixing of prices of its members meet the 
Act's requirements.

H. Examination Findings; Other Considerations

    FICC is currently subject to examination \109\ by Commission staff, 
and may be required by Commission staff to make records available for 
examination by Commission staff,\110\ including, but not limited to, in 
connection with FICC's activities pertaining to risk management, 
membership, and the safeguarding of securities and funds.\111\ FICC 
also is subject to the requirement to file all proposed rule changes 
with the Commission for review,\112\ including proposed changes that 
could materially affect the nature or level of risks presented by 
FICC.\113\ Based upon such supervisory contacts, the Commission is not 
aware of any reason to believe the approval of FICC's application for 
permanent registration as a clearing agency would not be consistent 
with the public interest.
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    \109\ 15 U.S.C. 78q(b); see also Section 807 of Title VIII of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010) (mandating that 
supervisory agencies examine financial market utilities at least 
once each year) and n.26, supra (noting that FICC has been 
designated a financial market utility).
    \110\ 15 U.S.C. 78q(a).
    \111\ See supra n.30 for some of the standards by which 
Commission staff measures FICC's activities.
    \112\ 15 U.S.C. 78s(b)(1).
    \113\ Section 806(e)(1) of Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, Public Law 111-203, 124 
Stat. 1376 (2010).
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V. Conclusion

    The Commission concludes that FICC's rules, policies and 
procedures, as set forth in its application for permanent registration 
as a clearing agency, meet the requirements for such registration, 
including those standards set forth under Section 17A of the Act.
    It is therefore ordered that the application for permanent 
registration as a clearing agency filed by FICC (File No. 600-23) 
pursuant to Sections 17A(b) and 19(a)(1) of the Act be, and hereby is, 
approved.

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15509 Filed 6-27-13; 8:45 am]
BILLING CODE 8011-01-P


