[Federal Register Volume 82, Number 215 (Wednesday, November 8, 2017)]
[Notices]
[Pages 51892-51894]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-24257]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82006; File Nos. SR-DTC-2017-016; SR-NSCC-2017-016; SR-
FICC-2017-020]


Self-Regulatory Organizations; The Depository Trust Company; 
National Securities Clearing Corporation; Fixed Income Clearing 
Corporation; Order Approving Proposed Rule Changes To Adopt the 
Clearing Agency Securities Valuation Framework

November 2, 2017.

I. Introduction

    On September 8, 2017, The Depository Trust Company (``DTC''), 
National Securities Clearing Corporation (``NSCC''), and Fixed Income 
Clearing Corporation (``FICC,'' each a ``Clearing Agency,'' and 
together with DTC and NSCC, the ``Clearing Agencies''), filed with the 
Securities and Exchange Commission (``Commission'') proposed rule 
changes SR-DTC-2017-016, SR-NSCC-2017-016, and SR-FICC-2017-020, 
respectively, pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The proposed 
rule changes were published for comment in the Federal Register on 
September 27, 2017.\3\ The Commission did not receive any comment 
letters on the proposed rule changes. For the reasons discussed below, 
the Commission approves the proposed rule changes.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 81667 (September 21, 
2017), 82 FR 45106 (September 27, 2017) (SR-DTC-2017-016; SR-NSCC-
2017-016; SR-FICC-2017-020) (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Changes

    The Clearing Agencies propose to adopt the Clearing Agency 
Securities Valuation Framework (``Framework'') of the Clearing 
Agencies, as described below.

A. Overview of the Framework

    The Framework would address the manner in which the Clearing 
Agencies select and review ``Pricing Vendors'' and value securities 
that the Clearing Agencies process or otherwise hold. The proposed rule 
changes would set forth the securities valuation practices adopted by 
the Clearing Agencies for securities eligible for clearance and 
settlement processing by the applicable Clearing Agency; and in the 
case of FICC and NSCC, as central counterparties (``CCPs''), securities 
eligible to be held in their respective clearing funds.\4\
---------------------------------------------------------------------------

    \4\ Id.
---------------------------------------------------------------------------

B. Selection of Pricing Vendors

    Each Clearing Agency would price securities for both end-of-day and 
intraday value primarily through pricing data supplied by third-party 
pricing vendors (``Pricing Vendors'').\5\ For most securities, Pricing 
Vendors would supply the Clearing Agencies with intraday pricing data 
on at least an hourly basis.\6\ Pricing Vendors would be selected by 
each Clearing Agency based on a review of their service, including, at 
a minimum, a review of Pricing Vendors' securities coverage and a price 
quality check.\7\
---------------------------------------------------------------------------

    \5\ Id. at 45107.
    \6\ Certain securities may not be priced daily, and others may 
only be priced once each business day. Id.
    \7\ Id.
---------------------------------------------------------------------------

    The Framework would provide that each security be assigned a 
primary source Pricing Vendor (``Primary Pricing Vendor'') and a 
secondary source Pricing Vendor (``Secondary Pricing Vendor'').\8\ In 
the event that the Primary Pricing Vendor becomes unavailable, 
unreliable, or otherwise unusable with respect to a security, the 
Secondary Pricing Vendor would be designated as the replacement for the 
Primary Pricing Vendor with respect to such security.\9\
---------------------------------------------------------------------------

    \8\ Id.
    \9\ Id.
---------------------------------------------------------------------------

    Each Clearing Agency would perform due diligence on each Pricing 
Vendor prior to engagement, and at least annually thereafter, to assess 
the

[[Page 51893]]

reliability of such Pricing Vendor.\10\ Reliability of a Pricing Vendor 
would be determined by each Clearing Agency based on a range of 
factors, including whether such Pricing Vendor can provide accurate and 
timely pricing data with respect to each security.\11\
---------------------------------------------------------------------------

    \10\ Id.
    \11\ Id.
---------------------------------------------------------------------------

C. Monitoring and Pricing

    Each Clearing Agency would monitor and review each applicable 
Pricing Vendor's pricing at least once each business day to determine 
(i) whether any security's price has remained unchanged for an extended 
period; (ii) whether a security has been dropped from the Pricing 
Vendor's file; and (iii) whether any other circumstances exist that may 
call into question the reliability of any security's price.\12\
---------------------------------------------------------------------------

    \12\ Id.
---------------------------------------------------------------------------

    Each security's end-of-day price would be date stamped, and each 
intraday price would be time and date stamped. Both end-of-day and 
intraday prices would be identified with a Pricing Vendor source.\13\ 
In the event that both a Primary Pricing Vendor and a Secondary Pricing 
Vendor become unavailable, unreliable, or otherwise unusable with 
respect to a security, the applicable Clearing Agency would assign such 
security its last available price.\14\ If pricing data for a security 
is unavailable from a Pricing Vendor, or if the last available price is 
deemed to be unreliable or unusable, the applicable Clearing Agency 
would establish a price for the security based on valuation models, 
where applicable, and in accordance with the policies and procedures 
that support the Framework.\15\
---------------------------------------------------------------------------

    \13\ Id.
    \14\ Id.
    \15\ Id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act 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 rules and regulations thereunder applicable to such 
organization.\16\ After carefully considering the proposed rule 
changes, the Commission finds that the proposed rule changes are 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to the Clearing Agencies. 
Specifically, the Commission finds that the proposed rule changes are 
consistent with Section 17A(b)(3)(F) of the Act \17\ as well as Rules 
17Ad-22(e)(4)(i) \18\ and (e)(6)(iv) \19\ under the Act.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2)(C).
    \17\ 15 U.S.C. 78q-1(b)(3)(F).
    \18\ 17 CFR 240.17Ad-22(e)(4)(i).
    \19\ 17 CFR 240.17Ad-22(e)(6)(iv).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a registered clearing agency be designed to promote prompt and 
accurate clearance and settlement, and assure the safeguarding of 
securities and funds which are in the custody or control of the 
Clearing Agencies or for which they are responsible.\20\
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described above, the Framework would describe the manner in 
which the Clearing Agencies select and review their Pricing Vendors, 
and how the Clearing Agencies value securities that the Clearing 
Agencies process or otherwise hold. By describing the Clearing 
Agencies' Pricing Vendors selection process and securities valuation 
practices in a clear and comprehensive manner, the Framework is 
designed to provide (i) reliable sources of timely price data, and (ii) 
a sound valuation practice when pricing data is not readily available. 
In doing so, the Framework would help the Clearing Agencies to promptly 
and accurately value (i) the securities that the Clearing Agencies 
process for clearance and settlement purposes; (ii) for DTC, the 
available collateral for a participant's net settlement obligation, 
which DTC monitors to help mitigate the credit risk that participants 
\21\ present to DTC; \22\ and (iii) for NSCC and FICC, the securities 
held in their respective clearing funds, which are maintained to help 
mitigate the credit risk that participants present to NSCC and FICC, as 
applicable.\23\ By establishing a framework for accurately valuing 
securities that the Clearing Agencies process and hold for risk 
management purposes, the Framework would better position the Clearing 
Agencies to continue their critical operations and services, promptly 
and accurately, and mitigate the risk of financial loss to the Clearing 
Agencies and their non-defaulting participants due to a participant 
default.
---------------------------------------------------------------------------

    \21\ DTC refers to its participants as ``Participants,'' while 
NSCC and FICC refer to their participants as ``Members.'' These 
terms are defined in the rules of each of the Clearing Agencies. In 
this order, ``participant'' or ``participants'' refers to both the 
Participants of DTC and the Members of FICC and NSCC.
    \22\ DTC: Disclosure under the Principles for Financial Market 
Infrastructures, available at http://www.dtcc.com/legal/policy-and-compliance.
    \23\ NSCC: Disclosure under the Principles for Financial Market 
Infrastructures, and FICC: Disclosure under the Principles for 
Financial Market Infrastructures, available at http://www.dtcc.com/legal/policy-and-compliance.
---------------------------------------------------------------------------

    Therefore, the Commission finds that the proposed rule changes are 
designed to help promote prompt and accurate clearance and settlement, 
and assure the safeguarding of securities and funds which are in the 
custody or control of the Clearing Agencies or for which they are 
responsible, consistent with Section 17A(b)(3)(F) of the Act.\24\
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(4)(i)

    Rule 17Ad-22(e)(4)(i) under the Act requires that each covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to effectively identify, 
measure, monitor, and manage its credit exposures to participants and 
those arising from its payment, clearing, and settlement processes by 
maintaining sufficient financial resources to cover its credit exposure 
to each participant fully with a high degree of confidence.\25\
---------------------------------------------------------------------------

    \25\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    As described above, the Framework would describe how the Clearing 
Agencies select and review their Pricing Vendors, and how the Clearing 
Agencies price securities that the Clearing Agencies process or 
otherwise hold, even when pricing data becomes unavailable or 
unreliable. In doing so, the Framework would help ensure that each 
Clearing Agency uses (i) reliable sources of timely price data when 
pricing securities processed or otherwise held by the Clearing Agency 
and (ii) clear valuation procedures when pricing data is not readily 
available or reliable. The Framework would further provide that the 
prices provided by each Pricing Vendor would be reviewed at least 
daily, which would help ensure that prices are accurate and reliable.
    By codifying these aforementioned practices in the Framework, the 
Framework is designed to help ensure that securities are priced 
appropriately. By appropriately pricing securities, the Clearing 
Agencies can more accurately calculate the value of the securities that 
the Clearing Agencies monitor or held for risk management purposes, as 
described above. Based on the value of the securities, a Clearing 
Agency may require a participant to provide more financial resources or 
limit the participants' activities pursuant to the Clearing Agency's 
rules, in order to better manage the credit risk presented

[[Page 51894]]

by the participant.\26\ Therefore, the Commission finds that the 
proposed rule changes are designed to help ensure that the Clearing 
Agencies maintain sufficient financial resources to cover their credit 
exposure to each participant with a high degree of confidence, 
consistent with Rule 17Ad-22(e)(4)(i) under the Act.\27\
---------------------------------------------------------------------------

    \26\ See the GSD Rulebook of FICC, Rule 4--Clearing Fund and 
Loss Allocation; the MBSD Clearing Rules of FICC, Rule 4--Clearing 
Fund and Loss Allocation; Rules and Procedures of NSCC, Procedure 
XV--Clearing Fund Formula and Other Matters; By-Laws and 
Organizational Certificate of DTC, Rule 4--Participants Fund and 
Participants Investment, available at http://dtcc.com/legal/rules-and-procedures.
    \27\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(6)(iv)

    Rule 17Ad-22(e)(6)(iv) under the Act requires that each covered 
clearing agency that is a CCP to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to cover 
its credit exposures to its participants by establishing a risk-based 
margin system that, at a minimum, uses reliable sources of timely price 
data and uses procedures and sound valuation models for addressing 
circumstances in which pricing data are not readily available or 
reliable.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 240.17Ad-22(e)(6)(iv).
---------------------------------------------------------------------------

    As described above, the Framework provides that NSCC and FICC, each 
a CCP, would perform due diligence on each Pricing Vendor prior to 
engagement, and at least annually thereafter, to assess the reliability 
of such Pricing Vendor. The Framework also describes how NSCC and FICC 
would select two Pricing Vendors for each security in case one becomes 
unavailable, unreliable, or otherwise unusable. In the event that both 
Primary and Secondary Pricing Vendors become unavailable, unreliable, 
or unusable, the Framework provides that NSCC and FICC would assign 
each affected security its last available price. The Framework would 
further provide that, if the last available price is unavailable, 
unreliable, or otherwise unusable for a security, NSCC and FICC would 
establish a price for that security based on valuation models (where 
applicable) and in accordance with the policies and procedures that 
support the Framework. By setting forth how NSCC and FICC would select 
Pricing Vendors that can provide timely and reliable pricing data, and 
how NSCC and FICC would price securities when pricing data is not 
readily available or reliable, the Commission finds that the proposed 
rule changes are consistent with Rule 17Ad-22(e)(6)(iv) under the 
Act.\29\
---------------------------------------------------------------------------

    \29\ Id.
---------------------------------------------------------------------------

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes are consistent with the requirements of the Act 
and in particular with Section 17A(b)(3)(F) \30\ of the Act and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that proposed rule changes SR-DTC-2017-016, SR-NSCC-2017-016, or SR-
FICC-2017-020 be, and hereby are, APPROVED.\31\
---------------------------------------------------------------------------

    \31\ In approving the Proposed Rule Changes, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
---------------------------------------------------------------------------

    \32\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-24257 Filed 11-7-17; 8:45 am]
 BILLING CODE 8011-01-P


