
[Federal Register Volume 80, Number 12 (Tuesday, January 20, 2015)]
[Notices]
[Pages 2758-2760]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-00704]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74046; File No. SR-FICC-2014-06]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Amend the Rules of the 
Government Securities Division and the Mortgage-Backed Securities 
Division on Insolvency and Ceasing To Act

January 13, 2015.

I. Introduction

    On November 25, 2014, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-FICC-2014-06 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The proposed change was published for 
comment in the Federal Register on December 12, 2014.\3\ The Commission 
received one comment supporting the proposed rule change.\4\ For the 
reasons discussed below, the Commission is approving the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 73787 (December 8, 
2014), 79 FR 73927 (December 12, 2014) (SR-FICC-2014-06).
    \4\ Letter from ``Anonymous,'' Office of the Secretary, U.S. 
Securities and Exchange Commission (Jan. 1, 2015).
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II. Description

    The rule change, as proposed, amends the rulebooks of FICC's 
Government Securities Division (``GSD'') and FICC's Mortgage-Backed 
Securities Division (``MBSD'') to simplify those rules relating to the 
insolvency of a member and ceasing to act, in order to simplify certain 
aspects of FICC's process in a cease to act situation and provide 
greater legal certainty for FICC and its members, particularly in an 
intra-day cease to act situation.

A. Background

    In connection with lessons learned from a recent close-out 
simulation exercise conducted by FICC's parent company, The Depository 
Trust & Clearing Corporation, in which FICC participated, and a related 
review of the GSD and MBSD rules, specific challenges were identified 
relating to the administration of certain aspects of GSD and MBSD 
insolvency and ceasing to act rule provisions, particularly in an 
intra-day cease to act situation.

B. ``Time of Insolvency'' and ``Cut-Off Time''

    GSD and MBSD include in their current insolvency rules \5\ and 
cease to act rules \6\ the concept of a ``Time of Insolvency,'' which 
is defined to mean the time at which FICC determines to its reasonable 
satisfaction that a member is ``insolvent'' within the meaning of GSD 
Rule 22 or MBSD Rule 16, respectively.
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    \5\ FICC, Government Securities Division Rulebook (``GSD 
Rulebook''), Rule 22; Fixed Income Clearing Corporation, Mortgage-
Backed Securities Division Rulebook (``MBSD Rulebook''), Rule 16.
    \6\ GSD Rulebook, Rule 22A; MBSD Rulebook, Rule 17.
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    This ``Time of Insolvency'' concept is distinguished from the time 
at which FICC ceases to act for a member. The GSD and MBSD rules 
currently use ``Time of Insolvency'' as a line of demarcation when 
determining FICC's obligations with respect to pending transactions 
involving the insolvent member. Specifically, transactions with the 
insolvent member that are not compared or deemed compared in accordance 
with the GSD or MBSD rules, respectively, prior to the ``Time of 
Insolvency'' are not eligible to be part of the close-out process, 
unless otherwise determined by FICC's Board of Directors in order to 
promote orderly settlement.
    For a non-insolvency cease to act situation, the GSD rules and the 
MBSD rules on ceasing to act \7\ currently include the concept of a 
``Cut-Off Time,'' which is defined to mean a time specified in advance 
by FICC in a notice to its members at which it will cease to act for a 
member. Like the ``Time of Insolvency'' concept, ``Cut-Off Time'' is 
currently used in the GSD rules and the MBSD rules when determining 
FICC's obligations with respect to pending transactions involving the 
defaulted member.
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    \7\ GSD Rulebook, Rule 22A; MBSD Rulebook, Rule 17.
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    Identifying an exact time at which a member has become 
``insolvent'' for purposes of establishing a ``Time of Insolvency'' may 
pose potential challenges for FICC in circumstances where the member is 
deemed ``insolvent'' based upon the determination or action of a third 
party, such as the member's regulator, supervisory authority or a court 
of competent jurisdiction. In an intra-day cease to act situation where 
transaction data is being submitted to FICC in real-time, such 
potential challenges may create a lack of legal certainty for FICC and 
its members regarding FICC's obligations with respect to pending 
transactions involving the insolvent member. The rule change removes 
the ``Time of Insolvency'' concept from the GSD rules and the MBSD 
rules and instead simply relies on the single time FICC ceases to act 
for an insolvent member for purposes of determining its obligations 
with respect to pending transactions involving such insolvent member.
    In order to also simplify its process in non-insolvency cease to 
act situations, the rule change removes the separate ``Cut-Off Time'' 
concept from the GSD rules and the MBSD rules, and instead relies on 
the single time FICC ceases to act for a defaulted member for purposes 
of determining its obligations with respect to pending transactions 
involving such defaulted member.\8\
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    \8\ In addition to simplifying FICC's rules relating to the 
insolvency of a member and ceasing to act, the rule change more 
closely aligns the GSD rules and the MBSD rules with the rules of 
FICC's affiliate, National Securities Clearing Corporation 
(``NSCC''). Under its Rule 18 (Procedures for When the Corporation 
Declines or Ceases to Act), NSCC relies on the time it declines or 
ceases to act for a member when determining which transactions 
involving such member will be excluded from its operations, rather 
than on a separate ``Time of Insolvency'' or ``Cut-Off Time,'' as 
applicable.
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C. Transactions Deemed Compared Based Solely on Non-Defaulting Member 
Data

    Currently, the provisions of the GSD's rules and the MBSD's rules 
on ceasing to act,\9\ and the related prongs of the ``Compared Trade'' 
definition in Rule 1 of the each of GSD's rules and MBSD's rules 
provide that, in the context of FICC ceasing to act for a member, a 
transaction involving such member that would not otherwise be compared 
or deemed compared under the GSD rules or the MBSD rules, respectively, 
may, in certain circumstances, be deemed a compared trade based solely 
on data submitted by a non-defaulting member. The determination of 
whether such a

[[Page 2759]]

transaction should be deemed a compared trade is currently based on a 
multi-pronged facts-and-circumstances-based test, including 
determinations as to whether the transaction was executed prior to FICC 
ceasing to act for the defaulted member, whether the transaction was 
entered into in good faith and not primarily in order to take advantage 
of the defaulted member's financial condition and whether the 
transaction is an ``Off-the-Market Transaction'' as defined in Rule 1 
of each of GSD's rules and MBSD's rules.
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    \9\ GSD Rulebook, Rule 22A; MBSD Rulebook, Rule 17.
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    Administering such a multi-pronged facts-and-circumstances-based 
test for individual transactions in a cease to act situation, 
particularly an intra-day cease to act situation where transaction data 
is being submitted to FICC in real-time, may pose potential challenges 
to FICC and create a lack of legal certainty for FICC and its members 
regarding FICC's obligations with respect to individual pending 
transactions involving the insolvent or otherwise defaulted member. In 
order to simplify FICC's process in a cease to act situation and 
provide FICC and its members with greater ex ante legal certainty 
regarding the rules applicable to pending transactions involving an 
insolvent or otherwise defaulted member, the rule change removes the 
multi-pronged facts and circumstances-based test and the related 
provisions of each of GSD's rules and MBSD's rules, and instead simply 
relies on the compared trade definitions under each of GSD's and MBSD's 
rules, subject to the discretion of FICC's Board of Directors to 
determine otherwise in order to promote orderly settlement with respect 
to transactions the data on which have been submitted only by non-
defaulting members.

D. GSD Rule Changes

    The rule change, as approved, amends the GSD rules as follows:
    In Rule 1--``Definitions,'' the following definitions have been 
revised:
    The term ``Compared Trade'' is revised to remove the prong of the 
definition which provides that, in the context of FICC ceasing to act 
for a member under GSD Rule 22A, a transaction involving such member 
that would not otherwise be a Compared Trade under the GSD rules may, 
in certain circumstances, be deemed a Compared Trade based solely on 
data submitted by a non-defaulting member.
    The term ``Off-the-Market Transaction'' is revised to conform the 
text and the numbering of the definition with the text and numbering of 
the parallel ``Off-the-Market Transaction'' definition in the MBSD 
rules.
    In Rule 3A--``Sponsoring Members and Sponsored Members,'' Sections 
15(a) and 16(a) of Rule 3A are revised to remove references to Rule 22, 
current Section 3 (Notification of Insolvency) and related conforming 
changes to the text of such sections are made. Section 15(b) of Rule 3A 
is revised to remove the reference to the ``Time of Insolvency'' 
concept and to align the text regarding the actions taken by FICC in 
connection with the insolvency of a Sponsored Member with the parallel 
text included in Section 16 of Rule 3A relating to the actions taken by 
FICC in connection with the insolvency of a Sponsoring Member. 
Consistent with the numbering of Section 15 of Rule 3A, Section 16(a) 
of Rule 3A is revised to make the second paragraph a new subsection 
(b). New Section 16(b) is also revised to align the text regarding the 
actions taken by FICC in connection with the insolvency of a Sponsoring 
Member with the parallel text included in Section 15(b) relating to the 
actions taken by FICC in connection with the insolvency of a Sponsored 
Member.
    In Rule 22--``Insolvency of a Member,'' current Section 3, which 
provides for FICC to notice its membership and the Commission regarding 
the insolvency of a GSD member, is removed in order to clarify that GSD 
members and the Commission will only receive one notice from FICC at 
the time it ceases to act for a GSD member in accordance with the 
provisions of Section 1 of Rule 22A (Procedures for When the 
Corporation Ceases to Act), whether FICC ceases to act for the member 
for insolvency or non-insolvency related reasons. Section 4 of Rule 22 
(Ceasing to Act for the Member) is renumbered as new Section 3 and 
revised to remove the reference to the ``Time of Insolvency'' concept.
    In Rule 22A--``Procedures for When the Corporation Ceases to Act,'' 
Section 1 (Notification) is revised to clarify that FICC will notice 
the Commission and GSD members of every decision to cease to act for a 
member. Section 1 is further revised to remove the requirement that 
FICC establish a separate ``Time of Insolvency,'' in the event it 
ceases to act because of a member's insolvency, or ``Cut-Off Time,'' in 
the event it ceases to act for a member for non-insolvency related 
reasons.
    Sections 2, 2(a) and 2(b) of Rule 22A are revised remove the ``Time 
of Insolvency'' and ``Cut-Off Time'' concepts, and instead rely on the 
time FICC ceases to act for a member for purposes of determining its 
obligations with respect to pending transactions involving such member. 
Section 2(a) is further revised to use the defined term ``Compared 
Trade'' for purposes of clarifying which transactions are eligible to 
be part of the close-out process as of the time FICC ceases to act for 
a member, subject to the discretion of FICC's Board of Directors to 
determine otherwise in order to promote orderly settlement.
    Section 2(c) of Rule 22A, which provides that, in the context of 
FICC ceasing to act for a member, a transaction involving such member 
that would not otherwise be compared or deemed compared under the GSD 
rules may, in certain circumstances, be deemed compared based solely on 
data submitted by a non-defaulting member, based on a multi-pronged 
facts and circumstances-based test, is removed. FICC will instead rely 
on the ``Compared Trade'' definition in GSD Rule 1 when determining its 
obligations with respect to pending transactions involving an insolvent 
or otherwise defaulted member, subject to the discretion of FICC's 
Board of Directors to determine otherwise in order to promote orderly 
settlement with respect to transactions the data on which have been 
submitted only by non-defaulting members.

E. MBSD Rule Changes

    The rule change, as approved, amends the MBSD rules as follows:
    In Rule 1--``Definitions,'' the following definitions have been 
revised:
    The term ``Compared Trade'' is revised to remove the prong of the 
definition which provides that, in the context of FICC ceasing to act 
for a member under MBSD Rule 17, a transaction involving such member 
that would not otherwise be compared or deemed compared under the MBSD 
rules may, in certain circumstances, be deemed a Compared Trade based 
solely on data submitted by a non-defaulting member. The ``Compared 
Trade'' definition is further clarified to reference the specific MBSD 
rules \10\ pursuant to which a transaction would be compared or deemed 
compared by MBSD.
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    \10\ MBSD Rulebook, Rule 5 and Rule 7.
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    In Rule 16--``Insolvency of a Member,'' current Section 3 of Rule 
16, which provides for FICC to notice its membership and the Commission 
regarding the insolvency of a member, is removed in order to clarify 
that MBSD members and the Commission will only receive one notice from 
FICC at the time FICC ceases to act for a MBSD member in accordance 
with the provisions of Section 1 of Rule 17 (Procedures for When the 
Corporation Ceases to Act), whether FICC ceases to act for a MBSD

[[Page 2760]]

member for insolvency or non-insolvency related reasons. Section 4 of 
Rule 16 (Ceasing to Act for the Member) is renumbered as new Section 3 
and revised to remove the reference to the ``Time of Insolvency'' 
concept.
    In Rule 17--``Procedures for When the Corporation Ceases to Act,'' 
Section 1 (Notification) is revised to clarify that FICC will notice 
the Commission as well as MBSD's members of every decision to cease to 
act for a MBSD member. Section 1 of Rule 17 is further revised to 
remove the requirement that FICC establish a separate ``Time of 
Insolvency,'' in the event it ceases to act because of a member's 
insolvency, or ``Cut-Off Time,'' in the event it ceases to act for a 
member for non-insolvency related reasons.
    Sections 2, 2(a), 2(d) and 2(e) of Rule 17 are revised to remove 
the ``Time of Insolvency'' and ``Cut-Off Time'' concepts, and instead 
rely on the time FICC ceases to act for a member for purposes of 
determining its obligations with respect to pending transactions 
involving such member.
    Section 2(g) of Rule 17, which provides that, in the context of 
FICC ceasing to act for a MBSD member, a transaction involving such 
member that would not otherwise be compared or deemed compared under 
the MBSD rules may, in certain circumstances, be deemed compared based 
solely on data submitted by a non-defaulting member, based on a multi-
pronged facts and circumstances-based test, is removed. FICC will 
instead rely on the compared trade definitions in the MBSD rules when 
determining its obligations with respect to pending transactions 
involving an insolvent or otherwise defaulted member, subject to the 
discretion of FICC's Board of Directors to determine otherwise in order 
to promote orderly settlement with respect to transactions the data on 
which have been submitted only by non-defaulting members.

III. Discussion

    Section 19(b)(2)(C) of the Act \11\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. Section 17A(b)(3)(F) of the Act \12\ 
requires, among other things, that the rules of a clearing agency be 
designed to achieve several goals, including promoting the prompt and 
accurate clearance and settlement of securities transactions and, to 
the extent applicable, derivative agreements, contracts, and 
transactions.
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    \11\ 15 U.S.C. 78s(b)(2)(C).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission concludes that the proposed rule change is 
consistent with Section 17A(b)(3)(F) \13\ of the Securities and 
Exchange Act of 1934, as amended, and the rules and regulations 
promulgated thereunder because it will promote the prompt and accurate 
clearance and settlement of securities transactions and remove 
impediments to and perfect the mechanism of a national system for the 
prompt and accurate clearance and settlement of securities 
transactions. In particular, the rule change simplifies FICC's process 
in a cease to act situation and provide greater legal certainty for 
FICC and its members as to FICC's obligations with respect to pending 
transactions involving an insolvent or otherwise defaulted member, 
particularly in an intra-day cease to act situation.
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
particularly those set forth in Section 17A,\14\ and the rules and 
regulations thereunder.
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    \14\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-FICC-2014-06) be, and hereby 
is, approved.\16\
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. See 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-00704 Filed 1-16-15; 8:45 am]
BILLING CODE 8011-01-P


