[Federal Register Volume 82, Number 246 (Tuesday, December 26, 2017)]
[Notices]
[Pages 61082-61087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27705]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82368; File Nos. SR-DTC-2017-005; SR-FICC-2017-009; SR-
NSCC-2017-006]


Self-Regulatory Organizations; The Depository Trust Company; 
Fixed Income Clearing Corporation; National Securities Clearing 
Corporation; Notice of Filing of Amendments No. 2 and Order Granting 
Accelerated Approval of Proposed Rule Changes, as Modified by 
Amendments Nos. 1 and 2, To Adopt the Clearing Agency Stress Testing 
Framework (Market Risk)

December 19, 2017.

I. Introduction

    On April 7, 2017, The Depository Trust Company (``DTC''), Fixed 
Income Clearing Corporation (``FICC''), and National Securities 
Clearing Corporation (``NSCC,'' each a ``Clearing Agency,'' and 
collectively, the ``Clearing Agencies''), filed with the Securities and 
Exchange Commission (``Commission'') proposed rule changes SR-DTC-2017-
005, SR-FICC-2017-009, and SR-NSCC-2017-006, respectively, pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule changes 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.\4\ On July 19, 2017, the Clearing Agencies each filed 
Amendments No. 1 to their respective proposed rule changes. Amendments 
No. 1 would clarify how the Clearing Agencies would use scenarios to 
estimate the profits and losses (``P&L'') of a member closeout.
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    \3\ See Securities Exchange Act Release No. 80485 (April 19, 
2017), 82 FR 19131 (April 25, 2017) (SR-DTC-2017-005; SR-FICC-2017-
009; SR-NSCC-2017-006) (``Notice'').
    \4\ See Securities Exchange Act Release No. 80876 (June 7, 
2017), 82 FR 27091 (June 13, 2017) (SR-DTC-2017-005; SR-FICC-2017-
009; SR-NSCC-2017-006).
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    On July 24, 2017, the Commission published a notice in the Federal 
Register of filing Amendments No. 1 and order instituting proceedings 
under Section 19(b)(2)(B)(i) of the Act \5\ to determine whether to 
approve or disapprove the proposed rule changes.\6\ On October 16, 
2017, the Commission designated a longer period on the proceedings to 
determine whether to approve or disapprove the proposed rule 
changes.\7\ On December 12, 2017, the Clearing Agencies each filed 
Amendments No. 2 to their respective proposed rule changes 
(hereinafter, ``Proposed Rule Changes''). Amendments No. 2 would 
clarify the historical scenarios that the Clearing Agency would use for 
stress testing. The Commission did not receive any comment letters on 
the Proposed Rule Changes.
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    \5\ 15 U.S.C. 78s(b)(2)(B)(i).
    \6\ See Securities Exchange Act Release No. 81192 (July 24, 
2017), 82 FR 35245 (July 28, 2017) (SR-DTC-2017-005; SR-FICC-2017-
009; SR-NSCC-2017-006).
    \7\ See Securities Exchange Act Release No. 81883 (October 16, 
2017), 82 FR 48858 (October 20, 2017) (SR-DTC-2017-005; SR-FICC-
2017-009; SR-NSCC-2017-006).
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II. Description of the Proposed Rule Changes

    The Proposed Rule Changes would adopt the Clearing Agency Stress 
Testing Framework (Market Risk) (``Framework''), which would set the 
Clearing Agencies' procedures for identifying, measuring, monitoring, 
and managing their credit exposures to members. Although the Framework 
would be a rule of each Clearing Agency, the Proposed Rule Changes do 
not require any changes to the Rules, By-Laws and Organizational 
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.\8\
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    \8\ 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''). Each division serves as a central counterparty, 
becoming the buyer and seller to each of their respective members' 
securities transactions and guarantying settlement of those 
transactions, even if a member defaults. GSD provides, among other 
things, clearance and settlement for trades in U.S. Government debt 
issues. MBSD provides, among other things, clearance and settlement 
for trades in mortgage-backed securities. GSD and MBSD maintain 
separate sets of rules, margin models, and clearing funds. Notice, 
82 FR at 19131.
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    In general, the Framework would describe the stress-testing 
practices adopted by the Clearing Agencies. The Clearing Agencies 
designed their stress testing to help ensure the sufficiency of each 
Clearing Agency's total prefunded-financial resources.\9\ The Framework 
would describe (i) the sources of each Clearing Agency's total 
prefunded-financial resources; (ii) the Clearing Agencies' stress-
testing methodologies; (iii) the Clearing Agencies' stress-testing 
governance and execution processes; and (iv) the Clearing Agencies' 
model-validation practices.\10\
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    \9\ Notice, 82 FR at 19132.
    \10\ Id.
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A. Sources of Prefunded-Financial Resources

    The Framework would outline the prefunded-financial resources and 
related stress-testing methodologies of the Clearing Agencies. The 
Framework would begin by describing the applicable regulatory 
requirements, with respect to credit risk management, of each Clearing 
Agency and how the Clearing Agencies address those requirements.\11\ 
The Framework would address those requirements by describing how each 
Clearing Agency maintains sufficient prefunded-financial resources to 
cover fully the credit exposures to each of their respective members 
with a high degree of confidence.\12\ The Framework would also describe 
how the Clearing Agencies maintain additional prefunded-financial 
resources that, at a minimum, would enable them to cover a wide range 
of foreseeable stress scenarios that include, but are not limited to, 
the default of the affiliated family of members (``Affiliated Family'') 
that would potentially cause the largest aggregate credit exposure to 
the Clearing Agency in extreme but plausible market conditions (``Cover 
One Requirement'').\13\ Because the credit risks and prefunded-
financial resources of each Clearing Agency differ, the Framework would 
describe the prefunded-financial resources and related stress-testing 
methodologies of the Clearing Agencies separately.\14\
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    \11\ Id.
    \12\ Id.
    \13\ See 17 CFR 240.17Ad-22(e)(4)(iii).
    \14\ Notice, 82 FR at 19132.
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    With respect to FICC and NSCC, the Framework would describe that 
the prefunded-financial resources are their respective clearing funds, 
containing deposits from their members of both cash and eligible 
securities.\15\ The Framework would describe that such deposits are 
calculated for each individual member pursuant to the GSD Rules, MBSD 
Rules, or NSCC Rules, as applicable, and each member's deposit

[[Page 61083]]

would be referred to in the Framework as its ``Required Deposit.'' \16\
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    \15\ Id. Any eligible security is subject to a haircut. GSD Rule 
4 (Clearing Fund and Loss Allocation), MBSD Rule 4 (Clearing Fund 
and Loss Allocation), and NSCC Rule 4 (Clearing Fund), supra note 8.
    \16\ Id.
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    With respect to DTC, the Framework would describe that its 
prefunded-financial resources are cash deposits to its Participants 
Fund.\17\ The Framework would also describe that DTC may use its risk 
management control, the Collateral Monitor, to monitor and assure that 
the settlement obligations of each member are fully collateralized.\18\
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    \17\ Id. DTC Rule 4 (Participants Fund and Participants 
Investment). Supra note 8.
    \18\ Notice, 82 FR at 19132. ``Collateral Monitor'' is defined 
in DTC Rule 1, Section 1 (Definitions), and its calculation is 
further provided for in the DTC Settlement Service Guide of the DTC 
Rules. Supra note 8.
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B. Stress-Testing Methodology
    The Framework would describe the stress-testing methodologies that 
the Clearing Agencies use to test the sufficiency of their total 
prefunded-financial resources against the Cover One Requirement. The 
Framework would state that the stress testing is designed to identify 
potential weaknesses in the methodologies used to calculate members' 
Required Deposits and to determine collateral haircuts.\19\
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    \19\ Id.
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    The Framework would describe in detail the three key components of 
the development of stress-testing methodologies:
    1. Risk Identification. The Clearing Agencies would identify the 
principal credit-risk drivers that are representative and specific to 
each Clearing Agency's clearing and/or collateral portfolio under 
stressed market conditions.\20\
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    \20\ Id.
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    2. Scenario Development. The Clearing Agencies would construct 
comprehensive and relevant sets of extreme but plausible historical and 
hypothetical stress scenarios for the identified risk drivers.\21\ The 
Framework would describe how the Clearing Agencies would develop and 
select both historical and hypothetical scenarios that reflect stressed 
market conditions.\22\ Historical scenarios would be based on stressed 
market conditions that occurred on specific dates in the past.\23\ In 
contrast, hypothetical stress scenarios would be theoretical market 
conditions.\24\
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    \21\ Id.
    \22\ Id.
    \23\ Notice, 82 FR at 19133.
    \24\ Id.
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    3. Risk Measurement and Aggregation. The Clearing Agencies would 
calculate the risk metrics of each Clearing Agency's actual portfolio 
to estimate the P&L of a close out over a suitable stressed period of 
risk, deficiencies, and coverage ratios.\25\ The Framework would 
describe how the Clearing Agencies would develop P&L estimation 
methodologies, and how they would calculate risk metrics that are 
applicable to such methodologies under the chosen stress-testing 
scenarios.\26\ The Clearing Agencies could use a number of P&L 
methodologies for stress-testing purposes, including risk sensitivity, 
index mapping, and actual or approximate historical shock 
approaches.\27\
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    \25\ Id.
    \26\ Id.
    \27\ Id.
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    The Framework would further describe the stress-testing methodology 
by stating that the Clearing Agencies would calculate member stress 
deficiencies,\28\ Affiliated Family deficiencies,\29\ and Cover One 
Ratios daily.\30\
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    \28\ The Framework would define ``member stress deficiency'' for 
each scenario as, with respect to FICC and NSCC, the stress loss 
exceeding the applicable member's Required Deposits. The Framework 
would define ``member stress deficiency'' for each scenario at DTC 
as the shortfall of a member's Collateral Monitor. Id.
    \29\ The Framework would define ``Affiliated Family deficiency'' 
as the aggregate of all member stress deficiencies within the 
applicable Affiliated Family. Id.
    \30\ The Framework would define ``Cover One Ratio'' as the ratio 
of Affiliated Family deficiency over the total value of the relevant 
Clearing Agency's clearing fund (or, for DTC, the Participants 
Fund), excluding the value of the applicable Affiliated Family's 
Required Deposits. Id.
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    The Framework would further state that FICC and NSCC would consider 
non-Cover-One Ratio coverages, such as comparing member stress 
deficiencies against such member's known financial resources (e.g., 
equity capital base), to keep abreast of potential financial 
vulnerabilities facing such member.\31\ Additionally, the Framework 
would state that DTC would also test the adequacy of its collateral 
haircuts by measuring the amount of stress losses that exceed the 
haircut applied to the collateral securities (i.e., ``Haircut 
Deficiency'').\32\
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    \31\ Id.
    \32\ Id.
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    Moreover, the Framework would state that the Clearing Agencies 
measure both specific and generic wrong-way risk for each Clearing 
Agency's members and Affiliated Families.\33\ To measure specific 
wrong-way risk, for each given Member and its Affiliated Family and 
each given scenario, the securities issued by the Affiliated Family 
would be subject to shocks that reflect the default of a Member's 
Affiliated Family. To measure general wrong-way risk, the Framework 
would apply historical scenarios during the 2008 financial crisis to 
securities issued by the Affiliated Family as well as securities issued 
by the non-Affiliated Family.
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    \33\ Id.
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    The Framework would also describe the reverse stress-testing 
analysis that is performed by FICC and NSCC on at least a semi-annual 
basis.\34\ The analysis would provide another means for FICC and NSCC, 
as central counterparties, to test the sufficiency of the Clearing 
Agencies' respective prefunded financial resources.\35\ In conducting 
reverse stress-testing, FICC and NSCC would utilize scenarios of 
multiple defaults, extreme market shocks, or shocks for other risk 
factors, which would cause those Clearing Agencies, as applicable, to 
exhaust all of their respective prefunded financial resources.\36\
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    \34\ Id.
    \35\ Id.
    \36\ Id.
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C. Stress-Testing Governance and Execution Process

    The Framework would describe the Clearing Agencies' stress-testing 
governance and execution processes. Stress testing would be conducted 
daily for each of the Clearing Agencies, and stress-testing risk 
metrics also would be generated each day.\37\ The Cover One Ratios and 
member stress deficiencies would be monitored against pre-established 
thresholds.\38\ Breaches of these pre-established thresholds would 
initially be subject to more detailed studies to identify any potential 
impact to the applicable Clearing Agencies' Cover One Requirement.\39\ 
The Framework would describe that, to the extent such studies indicate 
a potential impact to a Clearing Agency's Cover One Requirement, the 
threshold breach would be escalated internally and analyzed to 
determine if (i) there is a need to adjust the stress-testing 
methodology, or (ii) the threshold breach indicates an issue with a 
particular member.\40\ Based on that analysis, the Clearing Agencies 
would determine the appropriate course of action.\41\
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    \37\ Id.
    \38\ According to the Clearing Agencies, risk-threshold levels 
are chosen to assist each Clearing Agency in achieving a high degree 
of confidence that its Cover One Requirement is met daily. Id.
    \39\ Id.
    \40\ Id.
    \41\ Id.
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D. Model Validation

    The Framework would describe the process the Clearing Agencies 
would use to validate their stress-testing

[[Page 61084]]

procedures. The Clearing Agencies would each conduct a comprehensive 
analysis of their respective daily stress-testing results, existing 
scenario sets (including any changes to such scenarios for the period 
since the last review), and the performance of the stress-testing 
methodologies along with key underlying parameters and assumptions.\42\ 
The analysis would be performed at least monthly and would be conducted 
to assess whether each Clearing Agency's stress-testing components 
appropriately determine the sufficiency of the Clearing Agency's 
prefunded-financial resources.\43\ The Framework would state that such 
analysis may occur more frequently than monthly if, for example, (i) 
the products cleared or markets served by a Clearing Agency display 
high volatility or become less liquid, or (ii) the size or 
concentration of positions held by the applicable Clearing Agency's 
members increases significantly.\44\
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    \42\ Id.
    \43\ Id.
    \44\ Id.
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    The Framework would state that the results of the analysis are 
reviewed monthly by the DTCC Enterprise Stress Testing Council.\45\ The 
Framework would also state that daily stress-testing results are 
summarized and reported monthly to the DTCC Risk Management 
Committee.\46\ Finally, the Framework would state that stress-testing 
methodologies and related models are subject to independent model 
validation on at least an annual basis.\47\
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    \45\ Id.
    \46\ Id.
    \47\ Id.
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E. Notice of Filing of Amendments No. 2

    As proposed, the Framework did not specify the historical scenarios 
the Clearing Agencies would use in their stress testing. The Clearing 
Agencies filed Amendments No. 2 to clarify that, at a minimum, the 
Clearing Agencies would use certain specific historical scenarios.

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.\48\ 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. In 
particular, the Commission believes the proposal is consistent with 
Section 17A(b)(3)(F) of the Act,\49\ as well as Rule 17Ad-22(e)(4) 
thereunder.\50\
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    \48\ 15 U.S.C. 78s(b)(2)(C).
    \49\ 15 U.S.C. 78q-1(b)(3)(F).
    \50\ 17 CFR 240.17Ad-22(e)(4).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    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.\51\
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    \51\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, the Framework would describe (i) the sources of 
each Clearing Agency's total prefunded-financial resources; (ii) the 
Clearing Agencies' stress-testing methodologies; (iii) the Clearing 
Agencies' stress-testing governance and execution processes; and (iv) 
the Clearing Agencies' model-validation practices. Moreover, the 
Framework would describe the Clearing Agencies' stress testing 
practices in a clear and comprehensive manner. Therefore, the Framework 
could help improve the Clearing Agencies' ability to determine and 
evaluate the credit risk presented by Clearing Agencies' members by 
testing (i) the sufficiency of their credit resources in a variety of 
extreme but plausible scenarios, and (ii) the potential losses to the 
Clearing Agencies from a participant default.
    The improved ability to evaluate credit risk could enable the 
Clearing Agencies to deploy their risk-management tools more 
effectively to manage the credit and market presented by such members. 
Through such preparation, the Framework could decrease the possibility 
of a member default. By enabling the Clearing Agencies to use their 
risk-management tools to monitor its credit and market more 
effectively, the proposed Framework is designed to help mitigate the 
risk that the Clearing Agencies and their non-defaulting members would 
suffer a loss from a member default.
    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.\52\
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    \52\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(4)(i), (iii), (iv), (v), and (vi)

    Rule 17Ad-22(e)(4) under the Act requires, in part, that the 
Clearing Agencies establish, implement, maintain and enforce written 
policies and procedures reasonably designed to effectively identify, 
measure, monitor, and manage their credit exposures to participants and 
those arising from its payment, clearing, and settlement processes.\53\ 
Specifically, Rule 17Ad-22(e)(4)(i) under the Act requires that a 
covered clearing agency maintain sufficient financial resources to 
cover its credit exposure to each participant fully with a high degree 
of confidence.\54\ As described above, the descriptions in the 
Framework, both individually and collectively, are designed by the 
Clearing Agencies to evaluate the credit exposure presented by many of 
the Clearing Agencies' members. The Clearing Agencies would construct 
comprehensive and relevant sets of extreme but plausible historical and 
hypothetical stress scenarios for the identified risk drivers.\55\ The 
Clearing Agencies would also calculate the risk metrics of each 
Clearing Agency's actual portfolio to estimate the P&L of resolving a 
participant default over a suitable stressed period of risk, 
deficiencies, and coverage ratios. Thus, the Framework would help the 
Clearing Agencies to determine the financial resources necessary to 
cover their credit exposure, as applicable, with a high degree of 
confidence, consistent with Rule 17Ad-22(e)(4)(i).\56\
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    \53\ 17 CFR 240.17Ad-22(e)(4).
    \54\ 17 CFR 240.17Ad-22(e)(4)(i).
    \55\ Id.
    \56\ Id.
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    Rule 17Ad-22(e)(4)(iii) under the Act requires that, to the extent 
not already maintained pursuant to Rule 17Ad-22(e)(4)(i) under the Act, 
the Clearing Agencies maintain additional financial resources that, at 
minimum, enable them to cover a wide range of foreseeable stress 
scenarios that include, but are not limited to, the default of the 
participant family that would potentially cause the largest aggregate 
credit exposure for the covered clearing agency in extreme but 
plausible market conditions.\57\
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    \57\ 17 CFR 240.17Ad-22(e)(4)(iii).
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    As described above, the Framework would describe how the Clearing 
Agencies have developed and carried out a credit-risk management 
strategy to (i) maintain prefunded financial

[[Page 61085]]

resources to comply with a Cover One Requirement; (ii) test the 
sufficiency; (iii) provide governance for the testing; and (iv) 
validate the testing models for the requirement. The Framework would 
also describe how each Clearing Agency tests the sufficiency of its 
prefunded resources daily to support compliance with this requirement. 
Such testing could better enable the Clearing Agencies to determine 
their respective Cover One Requirement in extreme but plausible 
scenarios by determining the impact of member defaults in various 
scenarios. With this identification of Cover One Requirement, the 
Clearing agencies could size their margin requirements to maintain 
their Cover One Requirement. Thus, the Commission believes the Proposed 
Rule Changes are consistent with Rule 17Ad-22(e)(4)(iii).\58\
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    \58\ Id.
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    Rule 17Ad-22(e)(4)(iv) under the Act requires that a covered 
clearing agency include prefunded financial resources, exclusive of 
assessments for additional guaranty fund contributions or other 
resources that are not prefunded, when calculating financial resources 
available to meet the standards under Rule 17Ad-22(e)(4)(i) through 
(iii) under the Act, as applicable.\59\ Because the credit risks and 
prefunded-financial resources of each Clearing Agency differ, the 
Framework would describe the prefunded-financial resources and related 
stress-testing methodologies of the Clearing Agencies separately.
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    \59\ 17 CFR 240.17Ad-22(e)(4)(iv).
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    With respect to FICC and NSCC, the Framework would describe the 
prefunded-financial resources are their respective clearing funds, 
containing deposits from their members of both cash and eligible 
securities. With respect to DTC, the Framework would describe that its 
prefunded-financial resources are cash deposits to its Participants 
Fund. The Framework would also describe that DTC may use its risk 
management control, the Collateral Monitor, to help monitor and ensure 
that the settlement obligations of each member are fully 
collateralized. Such identification is designed to meet the financial 
resources availability requirements under Rule 17Ad-22(e)(4)(i) and 
(iii). Therefore, the Commission believes the Framework is consistent 
with Rule 17Ad-22(e)(4)(iv) under the Act.\60\
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    \60\ Id.
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    Rule 17Ad-22(e)(4)(v) under the Act requires that the Clearing 
Agencies maintain the financial resources under Rule 17Ad-22(e)(4)(iii) 
under the Act, in combined or separately maintained clearing or 
guaranty funds.\61\ As described above, the Framework would identify 
the sources of prefunded resources to comply with each Clearing 
Agency's Cover One Requirement. The Framework would require NSCC and 
FICC to maintain those prefunded sources in their respective clearing 
funds. The Framework also would require DTC to maintain its prefunded 
sources in its Participants Fund. Thus, the Commission believes the 
Framework is consistent with Rule 17Ad-22(e)(v) under the Act.\62\
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    \61\ 17 CFR 240.17Ad-22(e)(4)(v).
    \62\ Id.
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    Rule 17Ad-22(e)(4)(vi)(A) under the Act requires that a covered 
clearing agency test the sufficiency of its total financial resources 
available to meet the minimum financial resource requirements under 
Rule 17Ad-22(e)(4)(i) through (iii) under the Act by conducting stress 
testing of its total financial resources daily using standard 
predetermined parameters and assumptions.\63\ As described above, the 
Framework would describe the Clearing Agencies' stress-testing 
methodologies and validation. Specifically, the Framework would state 
how the Clearing Agencies would conduct stress tests on a daily basis, 
and the three risk components the Clearing Agencies would use for the 
stress testing methodologies for these tests. Likewise, the Framework 
would describe how the stress testing methodologies are developed 
through risk identification, scenario development, and risk measurement 
and aggregation. Therefore, the Commission believes the Framework is 
consistent with Rule 17Ad-22(e)(4)(vi)(A) under the Act.\64\
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    \63\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
    \64\ Id.
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    Rule 17Ad-22(e)(4)(vi)(B) under the Act requires that a covered 
clearing agency test the sufficiency of its total financial resources 
available to meet the minimum financial resource requirements under 
Rule 17Ad-22(e)(4)(i) through (iii) under the Act by conducting a 
comprehensive analysis on at least a monthly basis of the existing 
stress testing scenarios, models, and underlying parameters and 
assumptions, and consider modifications to ensure they are appropriate 
for determining the covered clearing agency's required level of default 
protection in light of current and evolving market conditions.\65\
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    \65\ 17 CFR 240.17Ad-22(e)(4)(vi)(B).
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    As described above, the Framework, with respect to model 
validation, would state that the stress-testing methodologies are 
reviewed and analyzed monthly to determine if the components continue 
to be appropriate for determining sufficiency of the Clearing Agencies' 
prefunded financial resources. The analysis would be performed at least 
monthly and would be conducted to assess whether each Clearing Agency's 
stress-testing components appropriately determine the sufficiency of 
the Clearing Agency's prefunded-financial resources.\66\ The Framework 
would state that such analysis may occur more frequently than monthly 
if, for example, (i) the products cleared or markets served by a 
Clearing Agency display high volatility or become less liquid, or (ii) 
the size or concentration of positions held by the applicable Clearing 
Agency's members increases significantly. The Framework also would 
state that the results of the analysis are reviewed monthly by the DTCC 
Enterprise Stress Testing Council. For these reasons, the Commission 
believes the Framework is consistent with Rule 17Ad-22(e)(4)(vi)(B) 
under the Act.\67\
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    \66\ Id.
    \67\ Id.
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    Rule 17Ad-22(e)(4)(vi)(C) under the Act requires that a covered 
clearing agency test the sufficiency of its total financial resources 
available to meet the minimum financial resource requirements under 
Rule 17Ad-22(e)(4)(i) through (iii) under the Act by conducting a 
comprehensive analysis of stress testing scenarios, models, and 
underlying parameters and assumptions more frequently than monthly when 
the products cleared or markets served display high volatility or 
become less liquid, or when the size or concentration of positions held 
by the covered clearing agency's members increases significantly.\68\
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    \68\ 17 CFR 240.17Ad-22(e)(4)(vi)(C).
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    As described above, the Framework would describe that the stress-
testing validations are performed at least monthly, and may occur more 
frequently than monthly if, for example, (i) the products cleared or 
markets served by a Clearing Agency display high volatility or become 
less liquid, or (ii) the size or concentration of positions held by the 
applicable Clearing Agency's members increases significantly. The 
Framework also would state that the analysis is designed to assess 
whether each Clearing Agency's stress-testing components are 
appropriate for determining the sufficiency of its prefunded financial 
resources in light of current and evolving market conditions. As such, 
the Commission believes the Framework

[[Page 61086]]

is consistent with Rule 17Ad-22(e)(4)(vi)(C) under the Act.\69\
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    \69\ Id.
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    Rule 17Ad-22(e)(4)(vi)(D) under the Act requires that a covered 
clearing agency test the sufficiency of its total financial resources 
available to meet the minimum financial resource requirements under 
Rule 17Ad-22(e)(4)(i) through (iii) under the Act by reporting the 
results of its analyses under Rule 17Ad-22(e)(4)(vi)(B) and (C) to 
appropriate decision makers at the covered clearing agency, including 
but not limited to, its risk management committee or board of 
directors, and use these results to evaluate the adequacy of and adjust 
its margin methodology, model parameters, models used to generate 
clearing or guaranty fund requirements, and any other relevant aspects 
of its credit risk management framework, in supporting compliance with 
the minimum financial resources requirements set forth in Rule 17Ad-
22(e)(4)(i) through (iii) under the Act.\70\
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    \70\ 17 CFR 240.17Ad-22(e)(4)(vi)(D).
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    As described above, the Framework would provide for stress-testing 
governance and model validation. To the extent the stress-testing 
methodology indicates a potential impact to a Clearing Agency's Cover 
One Requirement, the Framework would describe the threshold parameters 
that would results in the Clearing Agency escalating internally and 
analyzing to determine if (i) there is a need to adjust the stress-
testing methodology, or (ii) the threshold breach indicates an issue 
with a particular member. Additionally, the model validation 
description in the Framework would state that the results of the 
stress-testing methodologies are reviewed monthly by the DTCC 
Enterprise Stress Testing Council. The Framework also would state that 
the DTCC Enterprise Stress Testing Council would consider the results 
in evaluating the adequacy of the stress-testing methodologies and 
would determine if adjustments to the stress-testing methodologies are 
appropriate to support the Clearing Agencies' compliance with the 
minimum financial resources requirements set forth in Rule 17Ad-
22(e)(4)(i) through (iii) under the Act.
    The Framework also would state that daily stress testing results 
are summarized and reported monthly to the DTCC Risk Management 
Committee. Based on its review of the information provided, the 
committee may determine to inform or further escalate any concerns to 
the Risk Committees of the Boards, as it deems necessary. Therefore, 
the Commission believes that the Framework is consistent with Rule 
17Ad-22(e)(vi)(D) under the Act.\71\
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    \71\ Id.
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    Rule 17Ad-22(e)(4)(vii) under the Act requires a covered clearing 
agency to perform a model validation for its credit risk models not 
less than annually or more frequently as may be contemplated by the 
covered clearing agency's risk management framework established 
pursuant to Rule 17Ad-22(e)(3) under the Act.\72\ As described above, 
the model validation portion of the Framework would provide that the 
Clearing Agencies' stress-testing methodologies and models are subject 
to independent model validation on at least an annual basis. Therefore, 
the Commission believes that the Framework is consistent with Rule 
17Ad-22(e)(4)(vii) under the Act.\73\
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    \72\ 17 CFR 240.17Ad-22(e)(4)(vii).
    \73\ Id.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether these filings, as 
modified by Amendments No. 2, are consistent with the Act. 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 [email protected]. Please include 
File Number SR-DTC-2017-005, SR-FICC-2017-009, or SR-NSCC-2017-006 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-2017-005, SR-FICC-
2017-009, or SR-NSCC-2017-006. This file number 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 website 
(http://www.sec.gov/rules/sro.shtml). Copies of the submission, all 
subsequent amendments, all written statements with respect to the 
proposed rule change that are filed with the Commission, and all 
written communications relating to the proposed rule change 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 website viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE, Washington, DC 20549 on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
the filings also will be available for inspection and copying at the 
principal office of DTCC and on DTCC's website (http://dtcc.com/legal/sec-rule-filings.aspx). All comments received will be posted without 
change. Persons submitting comments are cautioned that we do not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-DTC-2017-005, 
SR-FICC-2017-009, or SR-NSCC-2017-006 and should be submitted on or 
before January 16, 2018.

V. Accelerated Approval of Proposed Rule Changes

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Exchange Act,\74\ to approve the Proposed Rule Changes prior to the 
30th day after the date of publication of Amendments No. 2 in the 
Federal Register. As discussed above, Amendments No. 2 make clear which 
specific historical scenarios, at a minimum, the Clearing Agencies 
would use for stress testing.
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    \74\ 15 U.S.C. 78s(b)(2).
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    By listing the specific historic scenarios, Amendments No. 2 
provides for a more clear and comprehensive Framework, which could help 
improve the Clearing Agencies' ability to determine and evaluate the 
credit risk presented by Clearing Agencies' members. That improved 
ability could better enable the Clearing Agencies to deploy their risk-
management tools more effectively to manage the credit and market 
presented by such members and, thus, help mitigate the risk that the 
Clearing Agencies and their non-defaulting members would suffer a loss 
from a member default.
    Therefore, the Commission finds that Amendments No. 2 are designed 
to help 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.\75\ 
Accordingly, the Commission finds good cause for approving the proposed 
rule changes, as modified by Amendments No. 2, on an accelerated

[[Page 61087]]

basis, pursuant to Section 19(b)(2) of the Exchange Act.\76\
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    \75\ 15 U.S.C. 78q-1(b)(3)(F).
    \76\ Id.
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VI. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Changes are consistent with the requirements of the Act, 
in particular the requirements of Section 17A of the Act \77\ and the 
rules and regulations promulgated thereunder.
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    \77\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that proposed rule changes SR-DTC-2017-005, SR-FICC-2017-009, and SR-
NSCC-2017-006, as modified by Amendments Nos. 1 and 2, be, and hereby 
are, APPROVED on an accelerated basis.\78\
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    \78\ 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.\79\
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    \79\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-27705 Filed 12-22-17; 8:45 am]
BILLING CODE 8011-01-P


