
[Federal Register Volume 80, Number 44 (Friday, March 6, 2015)]
[Notices]
[Pages 12213-12215]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-05190]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74411; File No. SR-FICC-2014-09]


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 Regarding the Default of Fixed Income Clearing Corporation

March 2, 2015.

I. Introduction

    On November 12, 2014, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-FICC-2014-09 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The proposed rule change was published 
for comment in the Federal Register on December 2, 2014.\3\ On January 
9, 2015, pursuant to Section 19(b)(2)(A)(ii) of the Act,\4\ FICC 
consented to an extension of the time for Commission action on the 
proposed rule change to March 2, 2015. The Commission received no 
comment letters in response to the proposed rule change. 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\ See Securities Exchange Act Release No. 73682 (November 25, 
2014), 79 FR 71481 (December 2, 2014) (File No. SR-FICC-2014-09).
    \4\ 15 U.S.C. 78s(b)(2)(A)(ii).
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II. Description

    FICC filed the proposed rule change to amend the clearing rules of 
the Government Securities Division (``GSD'') and of the Mortgage-Backed 
Securities Division (``MBSD'') concerning a default by FICC.\5\ The 
FICC Default Rules were added to GSD's and MBSD's rules in 2010 and 
2012, respectively, to make explicit the close-out netting of 
obligations between FICC and its clearing members in the event that 
FICC becomes insolvent or defaults on its obligations to its clearing 
members.\6\ FICC represented that the FICC Default Rules provide 
clarity to clearing member firms in their application of balance sheet 
netting to their positions with FICC under U.S. GAAP.\7\ FICC further 
represented that the FICC Default Rules allow clearing members to 
comply with Basel Accord Standards relating to netting, and thereby 
enable clearing members to calculate their capital requirements on the 
basis of their net credit exposure.\8\
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    \5\ In 2010, the Commission approved a proposed rule change 
filed by FICC to add Rule 22B to the GSD rules (``GSD Default 
Rule''). See Securities Exchange Act Release No. 63038 (October 5, 
2010), 75 FR 62899 (October 13, 2010) (File No. SR-FICC-2010-04). In 
2012, the Commission approved a proposed rule change filed by FICC 
to add Rule 17A to the MBSD rules (``MBSD Default Rule'', and 
together with the GSD Default Rule, ``FICC Default Rules''). See 
Securities Exchange Act Release No. 66550 (March 9, 2012), 77 FR 
15155 (March 14, 2012) (File No. SR-FICC-2008-01).
    \6\ See Securities Exchange Act Release No. 63038 (October 5, 
2010), 75 FR 62899 (October 13, 2010) (File No. SR-FICC-2010-04) and 
Securities Exchange Act Release No. 66550 (March 9, 2012), 77 FR 
15155 (March 14, 2012) (File No. SR-FICC-2008-01).
    \7\ See Id.
    \8\ See Id.
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    The existing FICC Default Rules cover three general types of 
default: Voluntary proceedings defaults; involuntary proceedings 
defaults; and non-insolvency related defaults. Under the existing FICC 
Default Rules, FICC states that it is considered in default with 
respect to voluntary proceedings defaults (i) immediately upon the 
dissolution of FICC, (ii) the voluntary institution of proceedings by 
FICC seeking a judgment of insolvency or bankruptcy or other similar 
relief, or (iii) the voluntary presentation by FICC of a petition for 
its winding up or liquidation.
    Under the existing FICC Default Rules, FICC is considered in 
default

[[Page 12214]]

with respect to involuntary proceedings defaults on the 91st calendar 
day after the judgment of insolvency or bankruptcy or the entry of an 
order for relief (or similar order) for FICC's winding up or 
liquidation, or the appointment of an administrator, provisional 
liquidator, conservator, receiver, trustee, custodian or other similar 
official for all or substantially all of FICC's assets, where such 
judgment, order or appointment, as applicable, remains unstayed 
throughout the 90 calendar day grace period. FICC is considered in 
default with respect to non-insolvency related defaults on the 91st 
calendar day after it receives notice from a member of its failure to 
make an undisputed payment or delivery to such member that is required 
under the GSD Rules or the MBSD Rules, respectively, where such failure 
remains unremedied throughout the 90 calendar day grace period.
    The existing FICC Default Rules exclude the following from the 
scope of what is considered a non-insolvency related default: (i) The 
failure on the part of FICC to satisfy obligations to members in wind-
down, members in default, or members for whom FICC has ceased to act 
pursuant to either GSD Rule 22A or MBSD Rule 17, as applicable; (ii) 
the satisfaction of any payment or delivery obligation by FICC through 
alternate means as provided in GSD or MBSD rules, as applicable; (iii) 
the failure of the other division of FICC to satisfy a payment or 
delivery obligation to a clearing member; and (iv) the failure to 
satisfy any payment or delivery obligation required to be made to a 
clearing member that is solely the result of an operational, 
technological, or administrative error or impediment, provided that 
FICC possesses sufficient funds or assets to satisfy the obligation.
    Additionally, according to FICC, the grace period can be extended 
beyond 90 calendar days under the existing FICC Default Rules in a non-
insolvency related default situation where a payment or delivery 
deadline has been suspended under GSD Rule 42 or MBSD Rule 33, as 
applicable, in which case the 90 calendar day grace period would 
commence on the date FICC receives notice from a clearing member of its 
failure to make an undisputed payment or delivery on the later due date 
determined pursuant to the suspension.
    Pursuant to this rule change, as approved, FICC is now amending its 
FICC Default Rules in order to more closely align such rules with those 
of its peer central counterparties and to facilitate the participation 
of market participants, including registered investment companies, in 
FICC's services by providing members with further legal certainty 
regarding their rights with respect to a default by FICC. First, FICC 
is amending its FICC Default Rules to add the voluntary making by FICC 
of a general assignment for the benefit of creditors as an additional 
type of voluntary proceeding. Second, FICC is eliminating the 90 
calendar day grace period for involuntary proceeding defaults. 
According to FICC, this change will result in FICC being considered in 
default immediately upon the judgment of insolvency or bankruptcy or 
the entry of an order for relief (or similar order) for FICC's winding-
up or liquidation, or the appointment of a receiver, trustee or other 
similar official for FICC or substantially all of FICC's assets, 
provided that such receiver, trustee or other similar official is 
appointed pursuant to the federal securities laws, particularly Section 
19(i) of the Act, or Title II of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act.
    Third, FICC is reducing the grace period from 90 to 7 calendar days 
for non-insolvency related defaults. According to FICC, this change 
will result in it being in a non-insolvency related default on the 8th 
calendar day after it receives notice from a member of its failure to 
make an undisputed payment or delivery to such member that is required 
under the rules of GSD or MBSD, as applicable, provided that such 
failure has not been remedied during the 7 calendar days, and does not 
fall within the category of exclusions that are enumerated in clause 
(b)(i), sub-clauses (A), (B) and (C) of the GSD Default Rule or the 
MBSD Default Rule, as applicable.
    Fourth, FICC is removing the provisions that provide for a 
potential extension of the grace period in a non-insolvency default 
situation where the deadline for a payment or delivery obligation of 
FICC has been suspended by FICC under either GSD Rule 42 or MBSD Rule 
33, as applicable. As a result, the grace period will commence on the 
date FICC receives notice from a member of its failure to make an 
undisputed payment or delivery on the later due date determined 
pursuant to the suspension.
    Fifth, FICC is removing the provisions that exclude from the scope 
of what can be considered a non-insolvency related default the failure 
to satisfy any payment or delivery obligation required to be made to a 
clearing member that is the result of an operational, technological, or 
administrative error or impediment.
    Sixth, is adding language to the FICC Default Rules to clarify that 
no other provision within the rules of GSD or MBSD, respectively, 
including FICC's authority under GSD Rule 42 and MBSD Rule 33, as 
applicable, can override the definition of what constitutes a default 
by FICC.

III. Discussion

    Section 19(b)(2)(C) of the Act \9\ directs the Commission to 
approve a self-regulatory organization's proposed rule change if the 
Commission finds that the 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 \10\ 
requires, among other things, that the rules of a clearing agency are 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions.
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    \9\ 15 U.S.C. 78s(b)(2)(C).
    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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    After careful review, the Commission finds that FICC's rule change 
to amend the FICC Default Rules is consistent with Section 17A(b)(3)(F) 
of the Act \11\ because the changes as proposed in FICC's filing should 
provide further legal certainty to FICC's clearing members regarding 
their close-out netting rights with respect to a default by FICC. In 
addition, FICC's rule changes should assist in addressing certain 
regulatory concerns of new market participants, including registered 
investment companies, which FICC believes will facilitate their 
participation in FICC's central counterparty services and thus 
facilitate the prompt and accurate clearance and settlement of 
securities transactions submitted by such market participants.
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    \11\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission concludes that the 
proposal is consistent with the requirements of the Act, particularly 
the requirements of Section 17A of the Act,\12\ and the rules and 
regulations thereunder.
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    \12\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-FICC-2014-09) be 
and hereby is approved.\14\
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).


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    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-05190 Filed 3-5-15; 8:45 am]
 BILLING CODE 8011-01-P


