[Federal Register Volume 82, Number 248 (Thursday, December 28, 2017)]
[Notices]
[Pages 61617-61622]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27997]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82377; 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 of Amendment No. 4, Notice of Filing 
Amendment No. 5, Notice of Filing Amendment No. 6, and Order Granting 
Accelerated Approval of Proposed Rule Changes, as Modified by Amendment 
Nos. 1, 3 and 6, To Adopt the Clearing Agency Liquidity Risk Management 
Framework

December 21, 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\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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. The proposed rule changes, as modified in each 
instance by Amendment No. 3, were published for comment in the Federal 
Register on July 28, 2017, and the Commission instituted proceedings 
under Section 19(b)(2)(B) 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, 
as modified by Amendment Nos. 1 and 3.\7\ The Commission did not 
receive any comment letters on the proposed rule changes, as modified 
by Amendment Nos. 1 and 3.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78s(b)(2)(B).
    \6\ Securities Exchange Act Release No. 81194 (July 24, 2017), 
82 FR 35241 (July 28, 2017) (SR-DTC-2017-004, SR-NSCC-2017-005, SR-
FICC-2017-008) (``Order Instituting Proceedings'').
    \7\ Securities Exchange Act Release No. 81885 (October 20, 
2017), 82 FR 48857 (October 20, 2017) (SR-DTC-2017-004, SR-NSCC-
2017-005, SR-FICC-2017-008).
---------------------------------------------------------------------------

    On December 15, 2017, the Clearing Agencies each filed Amendment 
No. 4 to their respective proposed rule changes, as discussed below. On 
the same day, the Clearing Agencies each filed Amendment No. 5 to their 
respective proposed rule changes to supersede and replace Amendment No. 
4 in its entirety, due to technical errors of Amendment No. 4. On 
December 18, 2017, Clearing Agencies each filed Amendment No. 6 to 
their respective proposed rule changes to supersede and replace 
Amendment No. 5 in its entirety. The Commission is publishing this 
notice to solicit comments on Amendment No. 6 from interested persons 
and is approving on an accelerated basis the proposed rule changes, as 
modified by Amendment Nos. 1, 3, and 6 (hereinafter, ``Amended Proposed 
Rule Changes'').

II. Description of the Proposed Rule Changes as Previously Modified by 
Amendment Nos. 1 and 3, and Notice of Filing Amendment No. 6

A. Proposed Rule Changes as Previously Modified by Amendment Nos. 1 and 
3

    The Clearing Agencies propose to adopt the Clearing Agency 
Liquidity Risk Management Framework (``Framework'') of the Clearing 
Agencies. The Framework would outline the regulatory requirements that 
would be applicable to each Clearing Agency with respect to liquidity 
risk management, and would be owned and managed by the Liquidity 
Product Risk Unit (``LPRU'') of DTCC.\8\
---------------------------------------------------------------------------

    \8\ 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. Notice, 82 FR at 19121.
---------------------------------------------------------------------------

    The Framework would, generally, set forth the Clearing Agencies' 
liquidity resources and liquidity risk management practices, to include 
measurement and monitoring of their respective liquidity risks.\9\ More 
specifically, the Framework would describe FICC and NSCC's liquidity 
risk management strategy and objectives, which are to maintain 
sufficient liquid resources 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.\10\ 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.\11\ The Framework would also state that DTC operates on a 
fully collateralized basis.\12\
---------------------------------------------------------------------------

    \9\ Id.
    \10\ FICC and NSCC refer to their participants as ``Members,'' 
while DTC refers to its participants as ``Participants.'' These 
terms are defined in the respective rules of each of the Clearing 
Agencies. Notice, 82 FR at 19121.
    \11\ Id.
    \12\ Id.
---------------------------------------------------------------------------

    Although the Clearing Agencies would consider the Framework to be a 
rule of each Clearing Agency, the proposed changes do not require any 
changes to the Rules, By-laws and Organization Certificate of DTC 
(``DTC Rules''), the FICC Government Securities Division (``GSD'') 
Rulebook (``GSD Rules''), the FICC Mortgage-

[[Page 61618]]

Backed Securities Division (``MBSD'') Clearing Rules (``MBSD Rules''), 
or the Rules & Procedures of NSCC (``NSCC Rules,'' and together with 
the DTC Rules, GSD Rules, and MBSD Rules, ``Rules''), as the Framework 
would be a standalone document.\13\
---------------------------------------------------------------------------

    \13\ Rules, available at http://www.dtcc.com/en/legal/rules-and-procedures.
---------------------------------------------------------------------------

1. 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,\14\ 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.\15\ The Framework 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; 
\16\ (2) for DTC and NSCC, an annual committed credit facility; \17\ 
(3) for NSCC, its Members' Supplemental Liquidity Deposits; \18\ and 
(4) for GSD and MBSD, a rule-based Capped Contingency Liquidity 
Facility (``CCLF'') program.\19\ The Framework would also state that 
the Clearing Agencies may have access to other available resources that 
may not meet the definition of qualifying liquid resources.\20\
---------------------------------------------------------------------------

    \14\ 17 CFR 240.17Ad-22(a)(14).
    \15\ Notice, 82 FR at 19121.
    \16\ 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). 
Rules, supra note 13.
    \17\ 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 FR at 19121.
    \18\ NSCC Rule 4A (Supplemental Liquidity Deposits). Rules, 
supra note 13.
    \19\ MBSD Rule 17, Section 2a (Procedures for When the 
Corporation Ceases to Act). Rules, supra note 13.
    \20\ Notice, 82 FR at 19121.
---------------------------------------------------------------------------

2. 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 through daily liquidity studies that consider certain 
risk scenarios. The scenarios are designed to measure the sufficiency 
of their available qualifying liquid resources to meet the cash 
settlement obligations of their respective largest Affiliated Family of 
Members in a number of stressed conditions, including extreme but 
plausible scenarios applied under severely adverse market conditions 
that could coincide with the default of a Member.\21\ The Framework 
would provide three types of scenarios: (1) Normal market scenarios, as 
a baseline reference point to assess other stress assumptions; (2) 
scenarios designed to meet the requirements set forth in Rule 17Ad-
22(e)(7)(i) under the Act; and (3) scenarios designed to meet the 
requirements set forth in Rule 17Ad-22(e)(7)(vi) under the Act.\22\ The 
Framework would describe the manner in which the scenarios are 
developed and selected for testing.\23\ The Framework would also 
describe how liquidity stress testing results 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 
and NSCC.\24\
---------------------------------------------------------------------------

    \21\ Notice, 82 FR at 19121 and 19123.
    \22\ Order Instituting Proceedings, 82 FR at 35242.
    \23\ Notice, 82 FR at 19121.
    \24\ Id.
---------------------------------------------------------------------------

    With respect to DTC's measurement of the sufficiency of its 
liquidity resources, the Framework would set forth that the Collateral 
Monitor and the Net Debit Cap \25\ limit DTC's liquidity exposure and, 
thus, DTC's liquidity requirement in default scenarios.\26\ The 
Framework would describe how the Collateral Monitor and the Net Debit 
Cap 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.\27\
---------------------------------------------------------------------------

    \25\ ``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. Rules, supra note 13.
    \26\ Notice, 82 FR at 19121.
    \27\ Id.
---------------------------------------------------------------------------

    The Framework would describe how the Clearing Agencies review the 
limits of outstanding investments and collateral held (if applicable) 
by each Clearing Agency's investment counterparties, and conduct formal 
reviews of the reliability of their liquidity providers in extreme but 
plausible market conditions.\28\ The Framework would further describe 
how the Clearing Agencies undertake due diligence with respect to their 
liquidity providers and conduct a credit analysis of each liquidity 
provider, and how NSCC and DTC conduct operational testing with their 
committed credit facility lenders at least annually.\29\
---------------------------------------------------------------------------

    \28\ Id.
    \29\ Notice, 82 FR at 19121 and 19123.
---------------------------------------------------------------------------

    The Framework would describe how the Clearing Agencies would 
address foreseeable liquidity shortfalls that would not be covered by 
their existing liquid resources.\30\ For example, DTC would address a 
foreseeable, same-day liquidity shortfall through adjustments to the 
Net Debit Cap reductions, as provided under the DTC Rules.\31\ In 
addition, the Framework would describe how the Clearing Agencies' 
existing qualifying liquid resources may be replenished in accordance 
with the respective rules of the Clearing Agencies.\32\ For example, 
the Framework would describe how the Clearing Agencies may use proceeds 
that may be available from the liquidation of a defaulting 
participant's portfolio (including the sale of collateral used to 
secure a borrowing) to repay liquidity borrowings, thus replenishing 
the relevant Clearing Agency's liquid resources.\33\
---------------------------------------------------------------------------

    \30\ Id.
    \31\ Notice, 82 FR at 19123.
    \32\ Notice, 82 FR at 19121 and 19123.
    \33\ Notice, 82 FR at 19123.
---------------------------------------------------------------------------

    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 the 
liquidity risks of the Clearing Agencies 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 Board of Executives of each Clearing Agency for review 
and approval at least annually.\36\
---------------------------------------------------------------------------

    \34\ Id.
    \35\ Notice, 82 FR at 19121-19122.
    \36\ Notice, 82 FR at 19122.
---------------------------------------------------------------------------

B. Notice of Filing of Amendment No. 6

    Amendment No. 6, which supersedes and replaces Amendment Nos. 4 and 
5, added additional detail and clarity to the proposal, as well as 
making some technical corrections. Specifically, Amendment No. 6 
clarifies that DTC's structural features, including the Collateral 
Monitor, Net Debit Cap, and Participants Fund enable it to maintain 
sufficient qualifying liquid resources by limiting the liquidity 
requirements in

[[Page 61619]]

default scenarios. Similarly, in order to more accurately describe 
DTC's current practices with respect to the Collateral Monitor and Net 
Debit Cap, Amendment No. 6 deletes a description in the proposal 
stating that the Collateral Monitor and the Net Debit Cap 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.
    Amendment No. 6 revises the Framework to (1) update the citation of 
the proposed rule change filing regarding FICC GSD's CCLF program, 
which was approved by the Commission on November 15, 2017, and (2) 
state that FICC GSD's CCLF program will become a qualifying liquid 
resource of FICC GSD on November 15, 2018.\37\
---------------------------------------------------------------------------

    \37\ MBSD Rule 17, Section 2a (Procedures for When the 
Corporation Ceases to Act). Rules, supra note 13. See Securities 
Exchange Act Release Nos. 82090 (November 15, 2017), 82 FR 55427 
(November 21, 2017) (SR-FICC-2017-002); 81054 (June 29, 2017), 82 FR 
31356 (July 6, 2017) (SR-FICC-2017-802).
---------------------------------------------------------------------------

    Amendment No. 6 also modifies and elaborates FICC and NSCC's 
liquidity sufficiency testing that is performed daily with respect to 
three types of scenarios: (1) Normal market scenarios, as a baseline 
reference point to assess other stress assumptions, (2) scenarios 
designed to meet the requirements set forth in Rule 17Ad-22(e)(7)(i) 
\38\ under the Act (``Level 2 Scenarios''), and (3) scenarios designed 
to meet the requirements set forth in Rule 17Ad-22(e)(7)(vi)(A) \39\ 
under the Act (``Level 3 Scenarios''). The Framework is further 
modified by Amendment No. 6 to state that daily liquidity studies may 
also be performed for informational and monitoring purposes using 
stress scenarios that exceed the requirements of Rule 17Ad-
22(e)(7)(vi)(A) under the Act.\40\
---------------------------------------------------------------------------

    \38\ 17 CFR 240.17Ad-22(e)(7)(i).
    \39\ 17 CFR 240.17Ad-22(e)(7)(vi)(A).
    \40\ Id.
---------------------------------------------------------------------------

    Amendment No. 6 also modifies the Framework to describe the purpose 
of the three types of stress scenario described above. Specifically, 
Amendment No. 6 revised the Framework to state that Level 2 Scenarios 
assume a wide range of foreseeable stress scenarios that include, but 
are not limited to, the default of the Affiliated Family of Members 
that would generate the largest aggregate payment obligation for the 
FICC or NSCC in extreme but plausible market conditions. In this way, 
the Framework would state that these daily liquidity studies are 
designed to meet the requirements of Rule 17Ad-22(e)(7)(i) under the 
Act.\41\ Meanwhile, Amendment No. 6 further revised the Framework to 
state that Level 3 Scenarios assume certain standard and predetermined 
parameters which are designed to be extreme but plausible and meet the 
requirements set forth in Rule 17Ad-22(e)(7)(vi)(A) under the Act.\42\
---------------------------------------------------------------------------

    \41\ 17 CFR 240.17Ad-22(e)(7)(i).
    \42\ 17 CFR 240.17Ad-22(e)(7)(vi)(A).
---------------------------------------------------------------------------

    Amendment No. 6 also revises the Framework to provide the analysis 
and escalation process for any liquidity shortfalls that are identified 
through the daily studies utilizing the Level 2 and Level 3 Scenarios. 
Amendment No. 6 modifies the Framework to describe how the liquidity 
stress testing is regularly reviewed and analyzed, including an 
evaluation of the appropriateness of existing scenarios, and would also 
describe how these analyses are escalated on at least a monthly basis. 
The Framework is further revised by Amendment No. 6 to state that 
liquidity stress testing is comprehensively analyzed on a weekly basis, 
and how the results of the analysis are escalated on a monthly basis 
and used to evaluate the adequacy of the qualifying liquid resources of 
FICC or NSCC. Amendment No. 6 also modifies the Framework to describe 
the manner in which Level 2 and Level 3 scenarios are developed and 
selected for testing.
    Furthermore, Amendment No. 6 revises the Framework to state that 
the Clearing Agencies may have access to other available resources that 
do not meet the definition of qualifying liquid resources. Amendment 
No. 6 also revises the Framework to state that each of the Clearing 
Agencies would annually test borrowing of their liquidity resources to 
confirm providers are operationally able to perform their commitments 
and are familiar with the drawdown process.

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.\43\ After carefully considering the Amended Proposed Rule 
Changes, the Commission finds that the Amended 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 Amended Proposed Rule 
Changes are consistent with Section 17A(b)(3)(F) of the Act \44\ and 
Rule 17Ad-22(e)(7) under the Act.\45\
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78s(b)(2)(C).
    \44\ 15 U.S.C. 78q-1(b)(3)(F).
    \45\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------

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 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.\46\ As described above, the Framework would set forth the 
Clearing Agencies' liquidity risk management strategy and objectives, 
which are to maintain sufficient liquid resources (1) in the case of 
FICC and NSCC, to meet the potential amount of funding required to 
settle outstanding transactions of a defaulting Member, or Affiliated 
Family of Members, in a timely manner, or (2) in the case of DTC, 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.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Framework would address how each Clearing Agency holds liquid 
resources to effect the cash settlement obligations of their largest 
Affiliated Family of Members or Participants. In order to do so, the 
Framework would identify each of the liquid resources available to each 
Clearing Agency. In addition, the Framework would describe how each 
Clearing Agency measures and monitors the sufficiency of its liquid 
resources to meet its obligation across a range of stress scenarios. 
The Framework would provide how the Clearing Agencies conduct reviews 
of the reliability of their liquidity providers, how the Clearing 
Agencies would address foreseeable liquidity shortfalls, and how the 
Clearing Agencies would replenish their liquid resources. The Framework 
also would describe how liquidity risks to each Clearing Agency are 
assessed and escalated through liquidity risk management controls.
    By providing for the maintenance and monitoring of each Clearing 
Agency's liquidity resources, the Framework helps position the Clearing 
Agencies to better withstand the liquidity risks that

[[Page 61620]]

arise in or are borne by them and to be better positioned to continue 
their critical operations and services. In turn, such improved 
positioning in these areas could help promote the prompt and accurate 
clearance and settlement of securities transactions by the Clearing 
Agencies and reduce the possibility of the Clearing Agencies' failure, 
which could help mitigate the risk of financial loss contagion that 
could be caused by such a failure. With such aims, the Framework could 
help further assure the safeguarding of securities and funds which are 
in the custody or control of the Clearing Agencies, or for which they 
are responsible. Accordingly, the Commission finds that the Amended 
Proposed Rule Changes are consistent with the requirements of Section 
17A(b)(3)(F) of the Act.\47\
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Section 17Ad-22(e)(7)(i), (ii), (iv), (v), (vi), 
(vii), (viii), and (ix)

    Rule 17Ad-22(e)(7) under the Act requires 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.\48\ Specifically, 
Rule 17Ad-22(e)(7)(i) under the Act requires each covered clearing 
agency to maintain sufficient liquid resources at the minimum in all 
relevant currencies to effect same-day and, where appropriate, intraday 
and multiday settlement of payment obligations with a high degree of 
confidence under a wide range of foreseeable stress scenarios that 
includes, but is not limited to, the default of the participant family 
that would generate the largest aggregate payment obligation for the 
covered clearing agency in extreme but plausible market conditions.\49\ 
Meanwhile, Rule 17Ad-22(e)(7)(ii) under the Act requires each covered 
clearing agency to hold qualifying liquid resources to meet the minimum 
liquidity resource requirement under Rule 17Ad-22(e)(7)(i) in each 
relevant currency for which the covered clearing agency has payment 
obligations owed to clearing members.\50\
---------------------------------------------------------------------------

    \48\ 17 CFR 240.17Ad-22(e)(7).
    \49\ 17 CFR 240.17Ad-22(e)(7)(i).
    \50\ 17 CFR 240.17Ad-22(e)(7)(ii).
---------------------------------------------------------------------------

    The Framework would provide that FICC and NSCC maintain liquid 
resources sufficient to meet the potential amount of funding required 
to settle outstanding transactions of a defaulting Member or Affiliated 
Family of Members in a timely manner. The Framework would further 
provide that DTC maintain sufficient available liquidity resources to 
complete system-wide settlement on each business day, with a high 
degree of confidence and notwithstanding the failure to settle of the 
Participant or Affiliated Family of Participants with the largest 
settlement obligation. The Framework would also describe how FICC and 
NSCC perform daily liquidity studies, which are designed to measure the 
sufficiency of their available liquid resources to meet the cash 
settlement obligations of their largest Affiliated Family of Members in 
a number of stress conditions including extreme but plausible scenarios 
applied under severely adverse market conditions that could coincide 
with the default of a participant.
    Furthermore, the Framework would provide that the Clearing Agencies 
hold qualifying liquid resources sufficient to meet their minimum 
liquidity resource requirement and identify each of the qualifying 
liquid resources available to each Clearing Agency, which include (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; (2) for DTC and NSCC, an annual committed credit 
facility; (3) for NSCC, its Members' Supplemental Liquidity Deposits; 
and (4) for GSD and MBSD, their respective rule-based CCLF program. As 
such, the Commission finds that the Framework is consistent with Rule 
17Ad-22(e)(7)(i) and (ii).\51\
---------------------------------------------------------------------------

    \51\ 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(iv) under the Act requires that a covered 
clearing agency undertake due diligence to confirm that it has a 
reasonable basis to believe each of its liquidity providers, whether or 
not such liquidity provider is a clearing member, has (A) sufficient 
information to understand and manage the liquidity provider's liquidity 
risks; and (B) the capacity to perform as required under its 
commitments to provide liquidity to the covered clearing agency.\52\ 
Further, Rule 17Ad-22(e)(7)(v) under the Act requires that a covered 
clearing agency maintain and test with each liquidity provider, to the 
extent practicable, the covered clearing agency's procedures and 
operational capacity for accessing each type of relevant liquid 
resource under Rule 17Ad-22(e)(7)(i) at least annually.\53\
---------------------------------------------------------------------------

    \52\ 17 CFR 240.17Ad-22(e)(7)(iv).
    \53\ 17 CFR 240.17Ad-22(e)(7)(v).
---------------------------------------------------------------------------

    The Framework would describe how the Clearing Agencies undertake 
due diligence with respect to their liquidity providers, and conduct 
testing with those providers at least annually. The Framework would 
describe how the Clearing Agencies review the limits of outstanding 
investments and collateral held of each Clearing Agency's investment 
counterparties, and conduct formal reviews of the reliability of their 
liquidity providers in extreme but plausible market conditions to test 
the liquidity providers' reliability. These reviews, as described in 
the Framework, would also include a credit analysis of each liquidity 
provider. Further, the Framework would describe annual operational 
testing of the DTC and NSCC committed credit facility, which is 
conducted to confirm the lenders are operationally able to perform 
their commitments and are familiar with the drawdown process, and would 
state that each of the Clearing Agencies would annually test borrowing 
of their liquidity resources to confirm providers are operationally 
able to perform their commitments and are familiar with the drawdown 
process. The due diligence and testing required above are designed to 
inform the Clearing Agencies to confirm that they have a reasonable 
basis to believe each of the liquidity providers has sufficient 
information to understand and manage the liquidity provider's liquidity 
risk and the capacity to perform as required. In addition, the due 
diligence and testing are designed to maintain and check the Clearing 
Agencies' procedures and operational capacity for accessing their 
respective liquid resources. Therefore, the Commission finds that the 
Framework is consistent with Rules 17Ad-22(e)(7)(iv) and (v) under the 
Act.\54\
---------------------------------------------------------------------------

    \54\ 17 CFR 240.17Ad-22(e)(7)(iv) and (v).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(vi) under the Act requires that a covered 
clearing agency determine the amount and regularly test the sufficiency 
of the liquid resources held for purposes of meeting the minimum liquid 
resource requirement under Rule 17Ad-22(e)(7)(i) by, at a minimum: (A) 
Conducting stress testing of its liquid resources at least once each 
day using standard and predetermined parameters and assumptions; (B) 
conducting a comprehensive analysis on at least a monthly basis of the 
existing stress testing scenarios, models, and underlying parameters 
and assumptions used in evaluating liquidity needs and resources, and 
considering modifications to ensure they are appropriate for 
determining the clearing agency's identified liquidity needs and

[[Page 61621]]

resources in light of current and evolving market conditions; (C) 
conducting a comprehensive analysis of the scenarios, models, and 
underlying parameters and assumptions used in evaluating liquidity 
needs and resources more frequently than monthly when the products 
cleared or markets served display high volatility or become less 
liquid, when the size or concentration of positions held by the 
clearing agency's participants increases significantly, or in other 
appropriate circumstances described in such policies and procedures; 
and (D) reporting the results of its analyses under Rule 17Ad-
22(e)(7)(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 using these results to evaluate 
the adequacy of and adjust its liquidity risk management methodology, 
model parameters, and any other relevant aspects of its liquidity risk 
management framework.\55\
---------------------------------------------------------------------------

    \55\ 17 CFR 240.17Ad-22(e)(7)(vi).
---------------------------------------------------------------------------

    As described above, the Framework would describe how FICC and NSCC 
would use the three types of stress scenarios to test their daily 
liquidity to ensure their liquidity resources are sufficient to meet 
the obligations of their largest Affiliated Family of Members. For 
example, under a Level 3 Scenario, FICC or NSCC could assume certain 
standard and predetermined parameters that are designed to be extreme 
but plausible. The Framework would also state that daily liquidity 
studies may be performed for informational and monitoring purposes 
using stress scenarios that exceed the requirements of Rule 17Ad-
22(e)(7)(vi)(A).\56\ Furthermore, the Framework would further describe 
the analysis and escalation process for any liquidity shortfalls that 
are identified through the daily studies utilizing the Level 2 and 
Level 3 Scenarios. The Framework would also provide how liquidity 
stress testing is comprehensively analyzed on a weekly basis, and how 
these analyses are escalated on at least a monthly basis and used to 
evaluate the adequacy of the qualifying liquid resources of FICC or 
NSCC. Because the Framework is designed to stress test the sufficiency 
of the liquid resources daily, conduct a comprehensive analysis of 
liquidity stress testing on a weekly basis, and report the results of 
such analysis to the management committee responsible for oversight of 
risk management matters, the Commission finds that the Framework 
concerning FICC and NSCC is consistent with Rule 17Ad-22(e)(7)(vi) 
under the Act.\57\
---------------------------------------------------------------------------

    \56\ 17 CFR 240.17Ad-22(e)(7)(vi)(A).
    \57\ 17 CFR 240.17Ad-22(e)(7)(vi).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(vii) under the Act requires that a covered 
clearing agency perform a model validation of its liquidity 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).\58\ The Framework would describe how 
the Clearing Agencies' liquidity risk models are subject to independent 
model validations on at least an annual basis. As such, the Commission 
finds that the Framework is consistent with Rule 17Ad-22(e)(7)(vii) 
under the Act.\59\
---------------------------------------------------------------------------

    \58\ 17 CFR 240.17Ad-22(e)(7)(vii) and 17 CFR 240.17Ad-22(e)(3).
    \59\ 17 CFR 240.17Ad-22(e)(7)(vii).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(viii) under the Act requires that a covered 
clearing agency address foreseeable liquidity shortfalls that would not 
be covered by the covered clearing agency's liquid resources and seek 
to avoid unwinding, revoking, or delaying the same-day settlement of 
payment obligations.\60\ As described above, the Framework would 
describe how each of the Clearing Agencies addresses foreseeable 
liquidity shortfalls that would not be covered by their existing liquid 
resources through, for example, modification to its existing liquid 
resources. Therefore, the Commission finds that the Framework is 
consistent with Rule 17Ad-22(e)(7)(viii) under the Act.\61\
---------------------------------------------------------------------------

    \60\ 17 CFR 240.17Ad-22(e)(7)(viii).
    \61\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(ix) under the Act requires that a covered 
clearing agency describe the covered clearing agency's process to 
replenish any liquid resources that the clearing agency may employ 
during a stress event.\62\ The Framework would describe how the 
Clearing Agencies' existing liquid resources may be replenished in 
accordance with the respective rules of the Clearing Agencies. For 
example, the Framework would describe how the Clearing Agencies may use 
proceeds that may be available from the liquidation of a defaulting 
Member or Participant's portfolio (including the sale of collateral 
used to secure a borrowing) to repay liquidity borrowings, thus 
replenishing the relevant Clearing Agency's liquid resources. 
Therefore, the Commission finds that the Framework is consistent with 
Rule 17Ad-22(e)(7)(ix) under the Act.\63\
---------------------------------------------------------------------------

    \62\ 17 CFR 240.17Ad-22(e)(7)(ix).
    \63\ Id.
---------------------------------------------------------------------------

IV. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments concerning Amendment 
No. 6 to File Number SR-DTC-2017-004, SR-NSCC-2017-005, or SR-FICC-
2017-008. In particular, the Commission invites the written views of 
interested persons concerning whether Amendment No. 6 is consistent 
with Section 17A(b)(3)(F) of the Act,\64\ Rule 17Ad-22(e)(7) under the 
Act,\65\ or any other provision of the Act, rules, and regulations 
thereunder. Comments may be submitted by any of the following methods:
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 78q-1(b)(3)(F).
    \65\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------

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-2017-004, 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 website (http://www.sec.gov/rules/sro.shtml). Copies of the 
submission, all subsequent amendments, all written statements with 
respect to Amendment No. 6 that are filed with the Commission, and all 
written communications relating to Amendment No. 6 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 filing also will be available for inspection and copying at the 
principal office of the Clearing Agencies, and on DTCC's website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change.

[[Page 61622]]

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-2017-004, SR-NSCC-2017-
005, or SR-FICC-2017-008 and should be submitted on or before January 
18, 2018. If comments are received, any rebuttal comments should be 
submitted on or before February 1, 2018.

V. Accelerated Approval of the Amended Proposed Rule Changes

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\66\ to approve the Amended Proposed Rule Changes prior to the 
30th day after the date of publication of Amendment No. 6 in the 
Federal Register.
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    As discussed more fully above, the Commission finds that the 
Framework could help Clearing Agencies to withstand the liquidity risks 
that arise in or are borne by the Clearing Agencies, and to continue 
their critical operations and services, which helps to promote the 
prompt and accurate clearance and settlement of securities 
transactions, consistent with Section 17A(b)(3)(F) of the Act.\67\ By 
maintaining liquidity resources and monitoring sufficiency of the 
available liquidity resources, the Commission further finds that the 
Framework is designed to help reduce the possibility of the Clearing 
Agencies' failure, as well as mitigate the risk of financial loss 
contagion caused by the Clearing Agencies' failure. Therefore, the 
Framework could help further 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).\68\
---------------------------------------------------------------------------

    \67\ 15 U.S.C. 78q-1(b)(3)(F).
    \68\ Id.
---------------------------------------------------------------------------

    More specifically regarding Amendment No. 6, the amendment 
clarifies and modifies the Framework by (1) providing more accurate 
descriptions of DTC's Collateral Monitor and Net Debit Cap, (2) 
modifying and elaborating on FICC and NSCC's daily liquidity stress 
testing to ensure that their respective liquidity resources are 
sufficient to meet the cash settlement obligations of their respective 
largest Affiliated Family of Members, and (3) providing the analysis 
and escalation process for liquidity shortfalls that are identified 
through the daily testing with respect to Level 2 and Level 3 
Scenarios.
    By providing more accurate descriptions of DTC's liquidity risk 
management tools, Amendment No. 6 would help ensure that the DTC Rules 
are transparent and clear, which would help enable its Participants to 
better identify and understand the risks they incur by participating in 
DTC. In addition, by providing additional detail around FICC and NSCC's 
daily liquidity sufficiency testing, as well as the analysis and 
escalation process for liquidity shortfalls, Amendment No. 6 could help 
mitigate the risk that FICC and NSCC would be unable to promptly meet 
their settlement obligations due to insufficient liquidity. By doing 
so, the Commission finds that Amendment No. 6 could help FICC and NSCC 
to be in a better position to withstand their respective liquidity 
risks, thereby promoting the prompt and accurate clearance and 
settlement of securities, consistent with Section 17A(b)(3)(F) of the 
Act.\69\
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Accordingly, the Commission finds good cause for approving the 
Amended Proposed Rule Changes on an accelerated basis, pursuant to 
Section 19(b)(2) of the Act.\70\
---------------------------------------------------------------------------

    \70\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes, as modified by Amendment No. 1, 3, and 6 are 
consistent with the requirements of the Act and in particular with the 
requirements of Section 17A of the Act \71\ and the rules and 
regulations thereunder.
---------------------------------------------------------------------------

    \71\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule changes SR-DTC-2017-004, SR-NSCC-2017-005, or 
SR-FICC-2017-008 as modified by Amendment Nos. 1, 3, and 6 be, and 
hereby are, APPROVED on an accelerated basis.\72\
---------------------------------------------------------------------------

    \72\ In approving the Amended Proposed Rule Changes, the 
Commission considered the proposals' impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \73\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\73\
    Eduardo Aleman,
Assistant Secretary.
[FR Doc. 2017-27997 Filed 12-27-17; 8:45 am]
 BILLING CODE 8011-01-P


