
[Federal Register Volume 82, Number 144 (Friday, July 28, 2017)]
[Notices]
[Pages 35241-35244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-15907]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81194; File Nos. SR-DTC-2017-004; SR-NSCC-2017-005; SR-
FICC-2017-008]


Self-Regulatory Organizations; The Depository Trust Company; 
National Securities Clearing Corporation; Fixed Income Clearing 
Corporation; Notice of Filing Amendment No. 2, Notice of Filing 
Amendment No. 3, and Order Instituting Proceedings To Determine Whether 
To Approve or Disapprove Proposed Rule Changes, as Previously Modified 
by Amendment No. 1, To Adopt the Clearing Agency Liquidity Risk 
Management Framework

July 24, 2017.

I. Introduction

    On April 6, 2017, The Depository Trust Company (``DTC''), National 
Securities Clearing Corporation (``NSCC''), and Fixed Income Clearing 
Corporation (``FICC,'' each a ``Clearing Agency,'' and collectively, 
the ``Clearing Agencies''), filed with the Securities and Exchange 
Commission (``Commission'') proposed rule changes SR-DTC-2017-004, SR-
NSCC-2017-005, and SR-FICC-2017-008, respectively, pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder.\2\ On April 13, 2017, the Clearing Agencies each 
filed Amendment No. 1 to their respective proposed rule changes. 
Amendment No. 1 made technical corrections to each Exhibit 5 of the 
proposed rule change filings. The proposed rule changes, as modified in 
each instance by Amendment No. 1, were published for comment in the 
Federal Register on April 25, 2017.\3\ On June 7, 2017, the Commission 
designated a longer period for Commission Action on the proposed rule 
changes, as amended in each instance by Amendment No. 1.\4\ As of

[[Page 35242]]

July 20, 2017, the Commission did not receive any comment letters on 
the proposed rule changes, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 80489 (April 19, 2017), 
82 FR 19120 (April 25, 2017) (SR-DTC-2017-004, SR-NSCC-2017-005, SR-
FICC-2017-008) (``Notice'').
    \4\ Securities Exchange Act Release No. 80877 (June 7, 2017), 82 
FR 27094 (June 13, 2017) (SR-DTC-2017-004, SR-NSCC-2017-005, SR-
FICC-2017-008).
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    On July 20, 2017, the Clearing Agencies each filed Amendment No. 2 
to their respective proposed rule changes, as previously modified by 
Amendment No. 1. On July 21, 2017, the Clearing Agencies each filed 
Amendment No. 3 to their respective proposed rule changes to supersede 
and replace Amendment No. 2 in its entirety, due to a technical defect 
of Amendment No. 2. Pursuant to Section 19(b)(1) of the Exchange Act 
\5\ and Rule 19b-4 thereunder,\6\ notice is hereby given that the 
Commission is publishing this notice to solicit comments on the 
proposed rule changes, as modified by Amendment No. 3, from interested 
persons (hereinafter, ``Proposed Rule Changes.''). Additionally, this 
order institutes proceedings under Section 19(b)(2)(B) of the Act \7\ 
to determine whether to approve or disapprove the Proposed Rule 
Changes.
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    \5\ 15 U.S.C. 78s(b)(1).
    \6\ 17 CFR 240.19b-4.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Changes

    The Clearing Agencies propose to adopt the Clearing Agency 
Liquidity Risk Management Framework (``Framework'') of the Clearing 
Agencies, which would set forth the Clearing Agencies' (A) liquidity 
resources, and (B) liquidity risk management practices, to include 
measurement and monitoring of their respective liquidity risks.\8\ More 
specifically, the Framework would describe FICC and NSCC's liquidity 
risk management strategy and objectives, which are to maintain 
sufficient liquid resources in order to meet the potential amount of 
funding required to settle outstanding transactions of a defaulting 
Member, or affiliated family (``Affiliated Family'') of Members, in a 
timely manner.\9\ For DTC, the Framework would describe how DTC's 
liquidity management strategy and controls are designed to maintain 
sufficient available liquid resources to complete system-wide 
settlement on each business day with a high degree of confidence 
notwithstanding the failure to settle of a Participant or Affiliated 
Family of Participants.\10\ The Framework would also state that DTC 
operates on a fully collateralized basis.\11\
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    \8\ Notice, 82 at 19120-19121.
    \9\ FICC and NSCC refer to their participants as ``Members,'' 
while DTC refers to its participants as ``Participants.'' These 
terms are defined in the rules of each of the Clearing Agencies. 
Supra note 4. Notice, 82 at 19121.
    \10\ Notice, 82 at 19121.
    \11\ Id.
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    In addition, the Framework would outline the regulatory 
requirements that would be applicable to each Clearing Agency with 
respect to liquidity risk management.\12\ The Framework would be owned 
and managed by the Liquidity Product Risk Unit (``LPRU'') of DTCC.\13\ 
Although the Clearing Agencies would consider the Framework to be a 
rule of each Clearing Agency, the Proposed Rule Changes do not require 
any changes to the Rules, By-laws and Organization Certificate of DTC 
(``DTC Rules''), the Rulebook of GSD (``GSD Rules''), the Clearing 
Rules of MBSD (``MBSD Rules''), or the Rules & Procedures of NSCC 
(``NSCC Rules''), as the Framework would be a standalone document.\14\
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    \12\ Id.
    \13\ The parent company of the Clearing Agencies is The 
Depository Trust & Clearing Corporation (``DTCC''). DTCC operates on 
a shared services model with respect to the Clearing Agencies. Most 
corporate functions are established and managed on an enterprise-
wide basis pursuant to intercompany agreements under which it is 
generally DTCC that provides a relevant service to a Clearing 
Agency. Id.
    \14\ Available at http://www.dtcc.com/en/legal/rules-and-procedures. FICC is comprised of two divisions: The Government 
Securities Division (``GSD'') and the Mortgage-Backed Securities 
Division (``MBSD''). Notice, 82 at 19120.
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    The Clearing Agencies each filed Amendment No. 3 to the proposed 
rule changes, as previously modified, in order to clarify the three 
types of scenarios used in daily liquidity sufficiency testing to 
measure each Clearing Agency's available liquidity resources, as 
described below.

A. Liquidity Resources

    The Framework would address how each of the Clearing Agencies meets 
its requirement to hold qualifying liquid resources, as defined by Rule 
17Ad-22(a)(14) under the Act,\15\ sufficient to meet its minimum 
liquidity resource requirement in each relevant currency for which it 
has payment obligations owed to its Members or Participants, as 
applicable.\16\ The Framework also would identify each of the 
qualifying liquid resources available to each Clearing Agency. Such 
qualifying liquid resources include, for example, (1) deposits to the 
Clearing Agencies' respective Clearing Funds, or, for DTC, its 
Participants Fund, made by Members or Participants pursuant to the 
respective rules; \17\ (2) for DTC and NSCC, an annual committed credit 
facility; \18\ (3) for NSCC, its Members' Supplemental Liquidity 
Deposits; \19\ and (4) for GSD and MBSD, a rule-based Capped 
Contingency Liquidity Facility (``CCLF'') program.\20\ The Framework 
also would state that the Clearing Agencies may have access to other 
available liquidity resources that may not meet the definition of 
qualifying liquid resources.\21\
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    \15\ 17 CFR 240.17Ad-22(a)(14).
    \16\ Notice, 82 at 19121.
    \17\ DTC Rule 4 (Participants Fund and Participants Investment), 
GSD Rule 4 (Clearing Fund and Loss Allocation), MBSD Rule 4 
(Clearing Fund and Loss Allocation), NSCC Rule 4 (Clearing Fund). 
Supra note 8. Notice, 82 at 19121.
    \18\ See Securities Exchange Act Release No. 77750 (April 29, 
2016), 81 FR 27181 (May 5, 2016) (SR-DTC-2016-801, SR-NSCC-2016-
801). Notice, 82 at 19121.
    \19\ NSCC Rule 4A (Supplemental Liquidity Deposits). Supra note 
8. Notice, 82 at 19121.
    \20\ MBSD Rule 17, Section 2a (Procedures for When the 
Corporation Ceases to Act). Supra note 8. GSD has filed a proposed 
rule change and related advance notice to adopt a CCLF program. See 
Securities Exchange Act Release No. 80234 (March 14, 2017), 82 FR 
14401 (March 20, 2017) (SR-FICC-2017-002). The Notice of No 
Objection to Advance Notice Filing to Implement the Capped 
Contingency Liquidity Facility in the Government Securities Division 
Rulebook was issued. Securities Exchange Act Release No. 81054 (June 
29, 2017), 82 FR 13876 (March 15, 2017) (SR-FICC-2017-802). Upon 
Commission approval of this proposed rule change, GSD's CCLF program 
will become a qualifying liquid resource of GSD. Notice, 82 at 
19121.
    \21\ Notice, 82 at 19121.
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B. Liquidity Measurement and Monitoring

    The Framework would describe the manner in which FICC and NSCC 
measure and monitor the sufficiency of their respective qualifying 
liquid resources to meet the cash settlement obligations of their 
respective largest Affiliated Family, through daily liquidity studies, 
across a range of stress scenarios.\22\ The Framework would state that 
FICC and NSCC would perform daily liquidity sufficiency testing using 
three types of scenarios: (1) Normal market scenarios, as a baseline 
reference point to assess other stress assumptions; \23\ (2) scenarios 
designed to meet the requirements set forth in Rule 17Ad-22(e)(7)(i); 
\24\ and (3) scenarios designed to meet the requirements set forth in 
Rule 17Ad-22(e)(7)(vi).\25\ The Framework would describe the manner in 
which scenarios reflecting these three sets of conditions are developed 
and selected for testing.\26\ The Framework would also describe how the 
summary results of certain scenario analyses are escalated to Clearing 
Agency management on at least a monthly basis, and how these results 
are used to evaluate the adequacy of the liquidity resources of FICC or 
NSCC.\27\
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    \22\ Id.
    \23\ Id.
    \24\ 17 CFR 240.17Ad-22(e)(7)(i).
    \25\ 17 CFR 240.17Ad-22(e)(7)(vi).
    \26\ Notice, 82 at 19121.
    \27\ Id.

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[[Page 35243]]

    With respect to DTC's measurement of the sufficiency of its 
liquidity resources, the Framework would set forth that DTC's risk 
management tools, including the Collateral Monitor and Net Debit 
Cap,\28\ limit DTC's liquidity exposure and, thus, DTC's liquidity 
requirement in default scenarios.\29\ The Framework would describe how 
these risk management tools enable DTC to regularly test the 
sufficiency of its liquid resources on an intraday and end-of-day basis 
and adjust to stressed circumstances during a settlement day to protect 
DTC and its Participants against liquidity exposure under normal and 
stressed market conditions.\30\
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    \28\ ``Collateral Monitor'' and ``Net Debit Cap'' are defined in 
DTC Rule 1, Section 1 (Definitions), and their calculations are 
further provided for in the DTC Settlement Service Guide of the DTC 
Rules. Supra note 8.
    \29\ Notice, 82 at 19121.
    \30\ Id.
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    The Framework would describe how the Clearing Agencies review the 
limits of outstanding investments and collateral held (if applicable) 
of each Clearing Agency's investment counterparties, and conduct formal 
reviews of the reliability of their qualified liquidity providers in 
extreme but plausible market conditions.\31\ The Framework would 
further describe how the Clearing Agencies undertake due diligence with 
respect to their liquidity providers, and how NSCC and DTC conduct 
operational testing with their committed credit facility lenders at 
least annually.\32\
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    \31\ Id.
    \32\ Id.
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    The Framework would describe how the Clearing Agencies would 
address foreseeable liquidity shortfalls that would not be covered by 
their existing liquid resources, and would describe how their existing 
qualified liquid resources may be replenished.\33\ The Framework would 
state that the Clearing Agencies' liquidity risk models are subject to 
independent model validation on at least an annual basis.\34\ The 
Framework would describe the manner in which Clearing Agency liquidity 
risks are assessed and escalated through liquidity risk management 
controls that include a statement of risk tolerances that are specific 
to liquidity risk (``Liquidity Risk Tolerance Statement''), and an 
operational risk profile of LPRU, which contains consolidated risk and 
control data.\35\ Finally, the Framework would state that the Liquidity 
Risk Tolerance Statement is reviewed by management within the LPRU 
annually, and is escalated to the Risk Committee of the Boards for 
review and approval at least annually.\36\
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    \33\ Id.
    \34\ Id.
    \35\ Notice, 82 at 19121-19122.
    \36\ Notice, 82 at 19122.
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III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Changes and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act,\37\ to determine whether the Proposed Rule 
Changes should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the Proposed Rule Changes. As noted above, institution 
of proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, the 
Commission seeks and encourages interested persons to comment on the 
Proposed Rule Changes, and provide arguments to support the 
Commission's analysis as to whether to approve or disapprove the 
Proposed Rule Changes.
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    \37\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\38\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the Proposed 
Rule Changes' consistency with the Act and the rules thereunder. 
Specifically, the Commission believes that the Proposed Rule Changes 
raise questions as to whether they are consistent with (i) Section 
17A(b)(3)(F) of the Act,\39\ which requires, in part, that the rules of 
the Clearing Agencies be designed to promote the prompt and accurate 
clearance and settlement of securities transactions, and to assure the 
safeguarding of securities and funds which are in the custody or 
control of the Clearing Agencies or for which they are responsible, and 
(ii) Rule 17Ad-22(e)(7) under the Act, which requires, in general, that 
each covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to, among other 
things effectively measure, monitor, and manage the liquidity risks 
that arise in or are borne by the covered clearing agency, including 
measuring, monitoring, and managing its settlement and funding flows on 
an ongoing and timely basis, and its use of intraday liquidity.\40\
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    \38\ Id.
    \39\ 15 U.S.C. 78q-1(b)(3)(F).
    \40\ 17 CFR 240.17Ad-22(e)(7).
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IV. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
Proposed Rule Changes. In particular, the Commission invites the 
written views of interested persons concerning whether the Proposed 
Rule Changes are consistent with Section 17A(b)(3)(F) of the Act,\41\ 
Rule 17Ad-22(e)(7) under the Act,\42\ or any other provision of the 
Act, rules, and regulations thereunder.
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    \41\ 15 U.S.C. 78q-1(b)(3)(F).
    \42\ 17 CFR 240.17Ad-22(e)(7).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Proposed Rule Changes should be 
approved or disapproved on or before August 18, 2017. Any person who 
wishes to file a rebuttal to any other person's submission must file 
that rebuttal on or before September 1, 2017. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-DTC-2017-004, SR-NSCC-2017-005, or SR-FICC-2017-008 on 
the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.

All submissions should refer to File Number SR-DTC-2017-004, SR-NSCC-
2017-005, or SR-FICC-2017-008. One of these file numbers should be 
included on the subject line if email is used. To help the Commission 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the 
submission, all subsequent amendments, all written statements with 
respect to the Proposed Rule Changes that are filed with the 
Commission, and all written communications relating to the Proposed 
Rule Changes between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549 on official

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business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
the filing also will be available for inspection and copying at the 
principal office of the Clearing Agencies, and on DTCC's Web site 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly.
    All submissions should refer to File Number SR-DTC-2017-004, SR-
NSCC-2017-005, or SR-FICC-2017-008 and should be submitted on or before 
August 18, 2017. If comments are received, any rebuttal comments should 
be submitted on or before September 1, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-15907 Filed 7-27-17; 8:45 am]
BILLING CODE 8011-01-P


