[Federal Register Volume 85, Number 164 (Monday, August 24, 2020)]
[Notices]
[Pages 52164-52166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18464]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89593; File No. SR-FICC-2020-006]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Provide for a Passive 
Acknowledgement Process and Make Other Changes

August 18, 2020.

I. Introduction

    On June 19, 2020, 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-2020-006. The proposed rule change was published for comment in 
the Federal Register on July 7, 2020.\3\ The Commission did not receive 
any comment letters on the proposed rule change. For the reasons 
discussed below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 89193 (June 30, 2020), 
85 FR 40723 (July 7, 2020) (SR-FICC-2020-006) (``Notice'').
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II. Description of the Proposed Rule Change

    FICC proposes to modify its Government Securities Division 
(``GSD'') Rulebook (``GSD Rules'') and its Mortgage-Backed Securities 
Division (``MBSD'' and together with GSD, each, a ``Division'') 
Clearing Rules (``MSBD Rules,'' and together with the GSD Rules, 
``Rules'') \4\ in order to (i) provide for a passive acknowledgement 
process whereby any settling bank that does not timely acknowledge that 
it will settle its Funds-Only (Cash) Settlement Figures (as defined 
below) with FICC (i.e., acknowledge its intention to pay to or collect 
from FICC), or notify the Settlement Agent (as defined below) of its 
refusal to settle for one or more members \5\ for which it is the 
designated GSD Funds-Only Settling Bank or MBSD Cash Settling Bank 
(collectively, ``FICC Settling Banks'') and has not otherwise been in 
contact with the Settlement Agent, would be deemed to have acknowledged 
its Funds-Only (Cash) Settlement Figures, (ii) codify FICC's discretion 
to exclude a FICC Settling Bank's balance from the National Settlement 
Service (``NSS'') file in certain circumstances, and (iii) make certain 
technical and conforming changes.
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    \4\ Capitalized terms not defined herein are defined in the 
Rules, available at http://www.dtcc.com/legal/rules-and-procedures.
    \5\ The use of ``members'' here refers to any participant that 
is required to appoint a Funds-Only Settling Bank or Cash Settling 
Bank, which includes GSD Netting Members, GSD Centrally Cleared 
Institutional Triparty (``CCIT'') Members, GSD Sponsoring Members, 
and MBSD Clearing Members. References hereinafter to the term 
``members'' shall be used for ease of reference. See GSD Rule 13, 
Section 4(a) and MBSD Rule 3A, Section (a), supra note 4.
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A. Current Funds-Only (Cash) Settlement Process

    Each Division provides a standardized, automated method for 
settling funds-only, for GSD, and cash, for MBSD, settlement 
(collectively, ``Funds-Only (Cash) Settlement'') obligations, 
respectively, between each Division and its respective members' FICC 
Settling Banks. Each member designates a FICC Settling Bank to settle 
its Funds-Only (Cash) Settlement obligations with FICC. Settlement is 
effected via the NSS.\6\
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    \6\ GSD Rule 13, Section 5(i) and MBSD Rule 11, Section 9(i), 
supra note 4. For a general description of the NSS, see National 
Settlement Service, available at https://www.frbservices.org/financial-services/national-settlement-service/index.html.
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    On each business day, as applicable, each Division calculates 
either a Funds-Only Settlement Amount or Cash Balance figure, 
respectively, for each member and reports to each member and its 
respective FICC Settling Bank a Net Funds-Only Settlement Figure \7\ 
(for GSD) and either a Total Debit Cash Balance Figure or a Total 
Credit Cash Balance Figure \8\ (for MBSD) (collectively, ``Funds-Only 
(Cash) Settlement Figures''). The Depository Trust Company (``DTC'') 
acts as Settlement Agent \9\ for both GSD's funds-only and MBSD's cash 
settlement process.
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    \7\ Net Funds-Only Settlement Figure means the net amount of the 
Funds-Only Settlement Amounts of the Netting Members for which a 
Funds-Only Settling Bank Member is acting. GSD Rule 1, supra note 4. 
For GSD, Funds-Only Settlement Amounts reflect: (i) Changes in the 
value of securities when they are marked to market, (ii) cash 
adjustments related to securities trades, (iii) the pass-through of 
coupon payments for term repos or trade obligations that cross a 
coupon date, and (iv) other items, such as billing invoices. GSD 
Rule 13, Section 1, supra note 4.
    \8\ Total Debit Cash Balance Figure means the sum of the Cash 
Balances which are debits of the Members for which a Cash Settling 
Bank Member is acting. MSBD Rule 1, supra note 4. Total Credit Cash 
Balance Figures means the sum of the Cash Balances which are credits 
of the Members for which a Cash Settling Bank Member is acting. MSBD 
Rule 1, supra note 4. For MBSD, Cash Settlement amounts reflect: (i) 
The To Be Announced (``TBA'') Transaction Adjustment Payment, (ii) 
Net Pool Transaction Adjustment Payment, (iii) principal and 
interest payments for failing net pool settlement obligations (to 
the extent that they are not handled by the FedWire Securities 
Service Automated Claims Adjustment Process), and (iv) other items, 
such as Factor Update Adjustments and billing invoices. MBSD Rule 
11, Section 7, supra note 4.
    \9\ DTC Settlement Operations acts as the Settlement Agent for 
GSD and MBSD. ``Settlement Agent'' means the bank or trust company 
that FICC may, from time to time, designate to act as its agent for 
purposes of interfacing with NSS for funds-only settlement pursuant 
to GSD Rule 13 (for GSD) and for Cash Settlement pursuant to MBSD 
Rule 11. GSD Rule 1 and MBSD Rule 1, supra note 4.
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    Once the FICC Settling Banks receive their Funds-Only (Cash) 
Settlement Figures from the Settlement Agent, the FICC Settling Banks 
submit either (1) acknowledgement that they will settle their Funds-
Only (Cash) Settlement Figures with FICC or (2) refusal to settle such 
amounts on behalf of one or more of their respective members.\10\ The 
acknowledgement or refusal submission occurs through a designated 
terminal system.\11\ If all of the FICC Settling Banks submit 
acknowledgements of their intent to settle, then DTC, as Settlement 
Agent, would submit the requisite file to the relevant Federal Reserve 
Bank (``FRB'') for processing through the NSS.\12\
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    \10\ A FICC Settling Bank that settles only for itself may not 
refuse to settle for itself and, therefore, may opt out of the 
requirement to acknowledge its Funds-Only (Cash) Settlement Figures. 
GSD Rule 13, Section 5(b) and MBSD Rule 11, Section 9, supra note 4. 
The passive acknowledgement process would not apply to such FICC 
Settling Banks that have chosen to opt out. See Notice, supra note 
3, at 40723-24.
    \11\ GSD Rule 13, Section 5(b) and MBSD Rule 11, Section 9(b), 
supra note 4.
    \12\ GSD Rule 13, Section 5(i) and MBSD Rule 11, Section 9(i), 
supra note 4.
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    If a FICC Settling Bank notifies the Settlement Agent that the FICC 
Settling Bank refuses to pay the Funds-Only (Cash) Settlement Figure 
for a member, then FICC would exclude that member's amount and the 
Settlement Agent would provide the FICC Settling Bank with a new Funds-
Only (Cash) Settlement Figure that no longer includes the excluded 
member's amount. The FICC Settling Bank must then immediately send a 
message to the Settlement Agent acknowledging the new amount.\13\ The 
Settlement Agent would then submit the requisite file to the FRB for 
processing through the NSS.
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    \13\ GSD Rule 13, Section 5(c) and MBSD Rule 11, Section 9(c), 
supra note 4.

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[[Page 52165]]

    The deadline for FICC Settling Banks to acknowledge or refuse is 30 
minutes prior to the time at which debits and credits are executed via 
the NSS.\14\ If a FICC Settling Bank does not acknowledge or refuse by 
this time, the Settlement Agent would use the most recent contact 
information available to contact the FICC Settling Bank. If the 
Settlement Agent is unable to contact the FICC Settling Bank or does 
not receive a response from the FICC Settling Bank as to the 
acknowledgement or refusal, FICC would determine whether to request an 
NSS extension while also determining whether to remove the FICC 
Settling Bank's Funds-Only (Cash) Settlement Figure from the NSS file.
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    \14\ For GSD, the NSS execution times are 10:00 a.m. and 3:15 
p.m.; for MBSD, these times are 10:00 a.m. and 2:45 p.m. GSD 
Schedule of Timeframes, supra note 4, and MBSD Processing Schedule 
and Timeframes, available at http://www.dtcc.com/clearing-services/ficc-mbsd/ficc-mbsd-user-documentation.
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    Under the current process, failure of a FICC Settling Bank to 
timely respond to the Settlement Agent after the Settlement Agent posts 
final settlement figures creates uncertainty with respect to timely 
completion of settlement at FICC. FICC states that it designed the 
proposed rule change to address this issue as discussed below.\15\
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    \15\ See Notice, supra note 3, at 40724.
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B. Proposed Rule Change

    FICC proposes to establish an ``Acknowledgement Cutoff Time'' after 
which FICC would apply the passive acknowledgement process. The 
Acknowledgement Cutoff Time would be defined as the later of: (i) 30 
minutes after the FICC Settling Banks have been notified that such 
payment is due, or (ii) 30 minutes prior to the times established by 
FICC for the execution of Funds-Only (Cash) Settlement debits and 
credits via NSS.
1. Passive Acknowledgement Process
    If a FICC Settling Bank (i) does not submit either (1) an 
acknowledgement that it would settle the Funds-Only (Cash) Settlement 
Figure with FICC, or (2) a refusal to pay the Funds-Only (Cash) 
Settlement Figure, by the Acknowledgement Cutoff Time, and (ii) has not 
been in contact with the Settlement Agent, then the Settlement Agent 
would attempt to contact the FICC Settling Bank. This passive 
acknowledgement process would also apply in situations where the FICC 
Settling Bank receives a new Funds-Only (Cash) Settlement Figure after 
such FICC Settling Bank's refusal to pay the prior Funds-Only (Cash) 
Settlement Figure for one or more members. Additionally, to facilitate 
the Settlement Agent's ability to contact FICC Settling Banks, FICC 
proposes to revise the Rules to state that each FICC Settling Bank must 
ensure that it maintains accurate contact details with the Settlement 
Agent so that the Settlement Agent may contact the FICC Settling Bank 
regarding this settlement process and any settlement issues.
    If the FICC Settling Bank cannot be reached, then the FICC Settling 
Bank would be deemed to have acknowledged that it will settle such 
Funds-Only (Cash) Settlement Figure with FICC. The FICC Settling Bank's 
balance will then, in the ordinary course of settlement processing, be 
debited from or credited to its FRB account through the NSS process 
along with the other FICC Settling Banks.
    However, if the Settlement Agent is able to contact the FICC 
Settling Bank who notifies the Settlement Agent that it needs more time 
to determine whether to acknowledge or refuse, then the FICC Settling 
Bank would not be deemed to have acknowledged its Funds-Only (Cash) 
Settlement Figure. In this circumstance, the FICC Settling Bank balance 
would not, as a matter of course, be included in the NSS file unless 
the FICC Settling Bank subsequently affirmatively acknowledges the 
balance before the Settlement Agent submits the NSS file.
2. Discretion to Exclude Funds-Only (Cash) Settlement Figures From the 
NSS File
    FICC represents that, although it would maintain flexibility for 
FICC Settling Banks requesting extra time, it must facilitate timely 
settlement via NSS for the other Settling Banks.\16\ Therefore, FICC 
proposes to retain its discretion to remove the FICC Settling Bank's 
Funds-Only (Cash) Settlement Figure from the NSS file if: (1) Passive 
acknowledgement does not apply because the FICC Settling Bank has 
notified the Settlement Agent that it cannot yet acknowledge or refuse 
its Funds-Only (Cash) Settlement Figure, and (2) the payment deadline 
(i.e., the time by which it must execute settlement via the NSS) \17\ 
established by FICC is approaching. According to FICC, its discretion 
in this circumstance would facilitate timely processing of the NSS file 
for the other FICC Settling Banks.\18\
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    \16\ See Notice, supra note 3, at 40725.
    \17\ Supra note 14.
    \18\ See Notice, supra note 3, at 40725.
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3. Technical and Conforming Changes
    FICC proposes to make certain technical and conforming changes to 
the Rules to enhance clarity. First, FICC proposes to revise the Rules 
to add a new defined term ``Acknowledgement Cutoff Time.'' \19\ Second, 
FICC proposes to replace certain references to the ``Corporation,'' the 
``Corporation's Operations area,'' and ``DTC'' with ``Settlement 
Agent'' for accuracy and consistency and to clarify the role of the 
Settlement Agent under the relevant Rules.\20\ In addition, FICC 
proposes to move certain current subsections and to revise the 
subsection numbers in the relevant Rules to enhance clarity and 
accuracy.\21\
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    \19\ See id.
    \20\ See id. at 40725-40726.
    \21\ See id. at 40725.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \22\ 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 the rules and regulations thereunder 
applicable to such organization. After careful consideration, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to FICC. In particular, the Commission finds that the 
proposed rule change is consistent with Section 17A(b)(3)(F) of the Act 
\23\ for the reasons described below.
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    \22\ 15 U.S.C. 78s(b)(2)(C).
    \23\ 15 U.S.C. 78q-1(b)(3)(F).
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    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
be designed to promote the prompt and accurate clearance and settlement 
of securities transactions.\24\ As stated in Section II.A above, the 
failure of a FICC Settling Bank to timely acknowledge that it will 
settle its Funds-Only (Cash) Settlement Figure with FICC or refuse to 
pay its Funds-Only (Cash) Settlement Figure creates uncertainty with 
respect to the timely completion of Funds-Only (Cash) Settlement at 
FICC. Additionally, circumstances in which a FICC Settling Bank has 
requested more time to either acknowledge or refuse its Funds-Only 
(Cash) Settlement Figure could create uncertainty with respect to the 
timely completion of Funds-Only (Cash) Settlement at FICC via NSS 
because FICC would not be able to submit the NSS file that includes the 
balance of the requesting FICC Settling Bank.
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    \24\ Id.

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[[Page 52166]]

    The introduction of a passive acknowledgement process, in which a 
FICC Settling Bank has not responded by the Acknowledgement Cutoff Time 
and cannot be reached by the Settlement Agent would be deemed to have 
passively acknowledged its Funds-Only (Cash) Settlement Figure, could 
enhance settlement certainty because it would allow FICC to submit the 
NSS file for settlement of all FICC Settling Banks' obligations despite 
an unresponsive FICC Settling Bank. Additionally, the change to 
expressly allow FICC to exclude a FICC Settling Bank's balance from the 
NSS file, where the FICC Settling Bank has requested more time, would 
allow FICC to submit the NSS file without the FICC Settling Bank's 
balance and thus complete Funds-Only (Cash) Settlement for all other 
members. Therefore, the Commission believes the changes are designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions, consistent with Section 17A(b)(3)(F) of the Act.\25\
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    \25\ Id.
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    Further, the technical and conforming changes should ensure that 
the Rules remain clear and accurate to FICC members. Having clear and 
accurate Rules should facilitate FICC members' understanding of those 
rules and provide members with increased predictability and certainty 
regarding their obligations. Therefore, the Commission believes the 
technical and conforming changes would also promote the prompt and 
accurate clearance and settlement of securities, consistent with 
Section 17A(b)(3)(F) of the Act.\26\
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    \26\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act 
and, in particular, with the requirements of Section 17A of the Act 
\27\ and the rules and regulations promulgated thereunder.
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    \27\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\28\ that proposed rule change SR-FICC-2020-006, be, and hereby is, 
approved.\29\
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    \28\ 15 U.S.C. 78s(b)(2).
    \29\ In approving the proposed rule change, 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.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18464 Filed 8-21-20; 8:45 am]
BILLING CODE 8011-01-P


