[Federal Register Volume 83, Number 58 (Monday, March 26, 2018)]
[Notices]
[Pages 12990-12992]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06015]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82909; File No. SR-FICC-2017-022]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Amend the Loss Allocation Rules 
and Make Other Changes

March 20, 2018.

I. Introduction

    On December 18, 2017, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
FICC-2017-022 to amend the loss allocation rules and make other changes 
(``Proposed Rule Change'').\3\ The Proposed Rule Change was published 
for comment in the Federal Register on January 8, 2018.\4\ The 
Commission did not receive any comments on the Proposed Rule Change. On 
February 8, 2018, pursuant to Section 19(b)(2)(A)(ii)(I) of the Act,\5\ 
the Commission designated a longer period within which to approve, 
disapprove, or institute proceedings to determine whether to approve or 
disapprove the Proposed Rule Change.\6\ This order institutes 
proceedings, pursuant to Section 19(b)(2)(B) of the Act,\7\ to 
determine whether to approve or disapprove the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On December 18, 2017, FICC filed this proposal as an advance 
notice (SR-FICC-2017-806) with the Commission pursuant to Section 
806(e)(1) of the Payment, Clearing, and Settlement Supervision Act 
of 2010 (``Clearing Supervision Act'') and Rule 19b-4(n)(1)(i) of 
the Act (``Advance Notice''). On January 24, 2018, the Commission 
extended the review period of the Advance Notice for an additional 
60 days pursuant to Section 806(e)(1)(H) of the Clearing Supervision 
Act. See 12 U.S.C. 5465(e)(1); 17 CFR 240.19b-4(n)(1)(i); 12 U.S.C. 
5465(e)(1)(H); and Securities Exchange Act Release No. 82583 
(January 24, 2018), 83 FR 4358 (January 30, 2018) (SR-FICC-2017-
806).
    \4\ Securities Exchange Act Release No. 82427 (January 2, 2018), 
83 FR 854 (January 8, 2018) (SR-FICC-2017-022) (``Notice'').
    \5\ 15 U.S.C. 78s(b)(2)(A)(ii)(I).
    \6\ Securities Exchange Act Release No. 82670 (February 8, 
2018), 83 FR 6626 (February 14, 2018) (SR-DTC-2017-022; SR-FICC-
2017-022; SR-NSCC-2017-018).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change \8\
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    \8\ The Commission notes that the Summary of the Proposed Rule 
Change section does not describe the Proposed Rule Change in its 
entirety. Other changes include, but are not limited to, the 
clarification of defined terms, various aspects of the Clearing Fund 
application, and detailed procedures of the loss allocation. The 
complete Proposed Rule Change can be found in the Notice. See 
Notice, supra note 4. In addition, the text of the Proposed Rule 
Change is available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
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    As described in the Notice,\9\ the proposed rule change consists of 
modifications to FICC's Government Securities Division (``GSD'') 
Rulebook (``GSD Rules'') and Mortgage-Backed Securities Division 
(``MBSD'' and, together with GSD, the ``Divisions'' and, each, a 
``Division'') Clearing Rules (``MBSD Rules,'' and collectively with the 
GSD Rules, the ``Rules'') in order to amend provisions in the Rules 
regarding loss allocation as well as make other changes, as described 
in greater detail below.
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    \9\ The description of the Proposed Rule Change herein is based 
on the statements prepared by FICC in the Notice. See Notice, supra 
note 4. Each capitalized term not otherwise defined herein has its 
respective meaning either (i) as set forth in the Rules, available 
at http://www.dtcc.com/legal/rules-and-procedures.aspx, or (ii) as 
set forth in the Notice.
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    FICC proposes to revise the Rules to primarily change (i) the loss 
allocation process,\10\ (ii) the loss allocation governance for 
Declared Non-Default Loss Events,\11\ and (iii) the application of the 
MBSD Clearing Fund.\12\
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    \10\ See Notice, supra note 4, at 855-59.
    \11\ See id. at 859-60.
    \12\ See id. at 860.
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A. Loss Allocation Process

    FICC states that the Divisions would retain the current core loss 
allocation process.\13\ However, FICC proposes to revise Rule 4 
(Clearing Fund and Loss Allocation) of each Division's Rules to make 
five key changes to FICC's loss allocation process.
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    \13\ Id. at 855.
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    First, FICC proposes to replace the calculation of its corporate 
contribution from up to 25 percent of its retained earnings or such 
higher amount as the Board of Directors shall determine to a defined 
Corporate Contribution.\14\ The proposed Corporate Contribution would 
be defined as an amount equal to 50

[[Page 12991]]

percent of FICC's General Business Risk Capital Requirement.\15\ FICC's 
General Business Risk Capital Requirement is, at a minimum, equal to 
the regulatory capital that FICC is required to maintain in compliance 
with Rule 17Ad-22(e)(15) under the Act.\16\ In addition, FICC proposes 
to mandatorily apply Corporate Contribution (i) prior to a loss 
allocation among the applicable Division's members, and (ii) to losses 
arising from both Defaulting Member Events and Declared Non-Default 
Loss Events.\17\
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    \14\ Id. at 856.
    \15\ Id.
    \16\ Id.; 17 CFR 240.17Ad-22(e)(15).
    \17\ Notice, supra note 4, at 856.
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    Second, FICC proposes to introduce an Event Period to address the 
allocation of losses and liabilities that may arise from or relate to 
multiple Defaulting Member Events, Declared Non-Default Loss Events, or 
both that arise in quick succession in a Division.\18\ The proposal 
would group together Defaulting Member Events and Declared Non-Default 
Loss Events occurring in a period of 10 Business Days for purposes of 
allocating losses to applicable Tier One Netting Members or Tier One 
Members of the respective Divisions in one or more rounds.\19\
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    \18\ Id. at 856-57.
    \19\ Id. at 857.
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    Third, FICC proposes to introduce a loss allocation ``round,'' 
which would mean ``a series of loss allocations relating to an Event 
Period, the aggregate amount of which is limited by the sum of the Loss 
Allocation Caps of affected Tier One Netting Members or Tier One 
Members, as applicable.'' \20\ FICC would notify applicable members 
subject to a loss allocation of the amounts being allocated to 
them.\21\ Each applicable member would have five Business Days from the 
issuance of such first Loss Allocation Notice for the round to notify 
FICC of its election to withdraw from membership, and thereby benefit 
from its Loss Allocation Cap.\22\
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    \20\ Id.
    \21\ Id.
    \22\ Id. at 857-58.
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    Fourth, FICC proposes to revise its ``look-back'' period to 
calculate a member's loss allocation pro rata share and its Loss 
Allocation Cap.\23\ Currently, the Rules calculate, in general, a Tier 
One Netting Member's or a Tier One Member's pro rata share for purposes 
of loss allocation based on the member's average daily Required Fund 
Deposit over the prior 12 months.\24\ FICC proposes to calculate, in 
general, each member's pro rata share of losses and liabilities in any 
round to be equal to (i) the average of a member's Required Fund 
Deposit for 70 Business Days prior to the first day of the applicable 
Event Period (``Average RFD'') divided by (ii) the sum of Average RFD 
amounts for all members that are subject to a loss allocation in such 
round.\25\ Additionally, FICC proposes that each member's Loss 
Allocation Cap would be equal to the greater of (i) its Required Fund 
Deposit on the first day of the applicable Event Period or (ii) its 
Average RFD.\26\
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    \23\ Id. at 858.
    \24\ Id.
    \25\ Id.
    \26\ Id.
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    Fifth, FICC proposes to revise the cap on a loss allocation and the 
withdrawal process followed by a loss allocation. As proposed, if a 
member provides notice of its withdrawal from membership, in general, 
its maximum amount of losses with respect to any loss allocation round 
would be its Loss Allocation Cap.\27\ FICC further proposes that 
members would have two Business Days after GSD or MBSD issues a first 
round Loss Allocation Notice to pay the amount specified in such 
notice.\28\ Members would have five Business Days from the issuance of 
the first Loss Allocation Notice in any round to decide whether to 
terminate its membership, provided that the member complies with the 
requirements of the proposed withdrawal process.\29\
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    \27\ Id. at 858-59.
    \28\ Id. at 858.
    \29\ Id.
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B. Loss Allocation Governance for Declared Non-Default Loss Events

    FICC proposes to enhance the governance around Declared Non-Default 
Loss Events that would trigger a loss allocation by specifying that the 
Board of Directors would have to determine that there is a non-default 
loss that (i) may present a significant and substantial loss or 
liability, so as to materially impair the ability of FICC to provide 
clearance and settlement services in an orderly manner, and (ii) will 
potentially generate losses to be mutualized among members in order to 
ensure that FICC may continue to offer clearance and settlement 
services in an orderly manner.\30\ FICC would then be required to 
promptly notify members of this determination.\31\
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    \30\ Id. at 859.
    \31\ Id.
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C. Application of the MBSD Clearing Fund

    FICC proposes to delete language currently in MBSD Rule 4 (Clearing 
Fund and Loss Allocation), Section 5 (Use of Clearing Fund) that limits 
certain uses by FICC of the MBSD Clearing Fund to ``unexpected or 
unusual'' requirements for funds that represent a ``small percentage'' 
of the MBSD Clearing Fund.\32\ Specifically, FICC proposes to delete 
the limiting language with respect to FICC's use of the MBSD Clearing 
Fund to cover losses and liabilities incident to its clearance and 
settlement business outside the context of an MBSD Defaulting Member 
Event so as to not have such language interpreted as impairing FICC's 
ability to access the MBSD Clearing Fund in order to manage non-default 
losses.\33\ FICC also proposes to delete the limiting language with 
respect to FICC's use of the MBSD Clearing Fund to provide liquidity to 
meet its settlement obligation.\34\
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    \32\ Id. at 860.
    \33\ Id.
    \34\ Id.
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III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \35\ to determine whether the Proposed Rule 
Change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the Proposed Rule Change. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
and provide the Commission with arguments to support the Commission's 
analysis as to whether to approve or disapprove the Proposed Rule 
Change.
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    \35\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\36\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the Proposed 
Rule Change's consistency with Section 17A of the Act,\37\ and the 
rules thereunder, including the following provisions:
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    \36\ Id.
    \37\ 15 U.S.C. 78q-1.
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     Section 17A(b)(3)(F) of the Act,\38\ which requires, among 
other things, that the rules of a clearing agency, such as FICC, must 
be designed to promote the prompt and accurate clearance and settlement 
of securities transactions, to

[[Page 12992]]

assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible, and to protect investors and the public interest;
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    \38\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17Ad-22(e)(13) under the Act,\39\ which requires, in 
general, a covered clearing agency, such as FICC, to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to ensure the covered clearing agency has the 
authority and operational capacity to take timely action to contain 
losses and liquidity demands and continue to meet its obligations.
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    \39\ 17 CFR 240.17Ad-22(e)(13).
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     Rule 17Ad-22(e)(23)(i) under the Act,\40\ which requires a 
covered clearing agency, such as FICC, to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to publicly disclose all relevant rules and material 
procedures, including key aspects of its default rules and procedures.
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    \40\ 17 CFR 240.17Ad-22(e)(23)(i).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Rule Change. In particular, the Commission invites 
the written views of interested persons concerning whether the Proposed 
Rule Change is consistent with Section 17A(b)(3)(F) of the Act,\41\ 
Rule 17Ad-22(e)(13) under the Act,\42\ Rule 17Ad-22(e)(23)(i) under the 
Act,\43\ or any other provision of the Act, or the rules and 
regulations thereunder. Although there do not appear to be any issues 
relevant to approval or disapproval that would be facilitated by an 
oral presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4(g) under the Act,\44\ any request for 
an opportunity to make an oral presentation.\45\
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    \41\ 15 U.S.C. 78q-1(b)(3)(F).
    \42\ 17 CFR 240.17Ad-22(e)(13).
    \43\ 17 CFR 240.17Ad-22(e)(23)(i).
    \44\ 17 CFR 240.19b-4(g).
    \45\ Section 19(b)(2) of the Act grants to the Commission 
flexibility to determine what type of proceeding--either oral or 
notice and opportunity for written comments--is appropriate for 
consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Proposed Rule Change should be approved 
or disapproved by April 16, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
April 30, 2018.
    The Commission asks that commenters address the sufficiency of 
FICC's statements in support of the Proposed Rule Change, which are set 
forth in the Notice,\46\ in addition to any other comments they may 
wish to submit about the Proposed Rule Change.
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    \46\ See Notice, supra note 4.
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    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-FICC-2017-022 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FICC-2017-022. 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 filing also will be available for inspection 
and copying at the principal office of FICC and on The Depository Trust 
& Clearing Corporation'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-FICC-2017-022 and should be 
submitted on or before April 16, 2018. Rebuttal comments should be 
submitted by April 30, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-06015 Filed 3-23-18; 8:45 am]
 BILLING CODE 8011-01-P


