[Federal Register Volume 83, Number 121 (Friday, June 22, 2018)]
[Notices]
[Pages 29150-29152]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-13379]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83457; File No. SR-FICC-2018-004]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Introduce a Floor to the 
Calculation of the Fails Charges and Make Other Changes

June 18, 2018.
    On May 8, 2018, Fixed Income Clearing Corporation (``FICC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-FICC-2018-004, pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on May 17, 2018.\3\ The Commission did not receive 
any comment letters on the proposed rule change. For the reasons 
discussed below, the Commission approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 83222 (May 11, 
2018), 83 FR 23032 (May 17, 2018) (SR-FICC-2018-004) (``Notice'').
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I. Description of the Proposed Rule Change

    The proposed rule change would update FICC's Government Securities 
Division (``GSD'') Rulebook (``GSD Rules'') and FICC's Mortgage-Backed 
Securities Division (``MBSD'') Clearing Rules (``MBSD Rules'') \4\ to 
(i) introduce a floor of one percent to the calculation of the existing 
fails charge rules, (ii) clarify the target rate that may be used in 
the fails charge calculations under certain circumstances, and (iii) 
make certain technical changes to the fails charge provisions to ensure 
consistent use of defined terms.\5\ The proposed rule change would also 
update the MBSD Rules to clarify that a cap applies to the MBSD fails 
charge.\6\ Each of these proposed changes are described below.
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    \4\ The GSD Rules and the MBSD Rules are available at http://www.dtcc.com/legal/rules-and-procedures.
    \5\ Notice, 83 FR at 23032-34.
    \6\ Id.
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A. Proposed One Percent Floor

    In a securities transaction, a settlement fail occurs when the 
seller does not deliver the securities to the buyer on the agreed upon 
settlement date. FICC states that although settlement fails are 
generally not treated as contractual default events, provided that the 
failing seller delivers the securities soon after the settlement date, 
persistent elevated levels of settlement fails create market 
inefficiencies and increase credit risk for market participants.\7\
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    \7\ See Notice, 83 FR at 23033. See also Frequently Asked 
Questions: TMPG Fails Charges (April 23, 2018) at 1, available at 
https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/TMPG-Fails-Charge-FAQ-04-23-2018.pdf (``FAQ'').
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    To help mitigate settlement fails, FICC maintains a fails charge in 
both the GSD Rules and the MBSD Rules.\8\ However, FICC states that 
under the current GSD Rules and MBSD Rules, the respective fails charge 
calculations could result in a zero charge.\9\ Specifically, under the 
GSD version of the current fails charge, if the federal funds target 
rate would rise to three percent, then the calculation of the charge 
would result in a zero charge.\10\ Similarly, under the MBSD version of 
the current fails charge, if the federal funds target rate would rise 
to two percent, then the calculation of the charge would result in a 
zero charge.\11\ To address this issue, FICC proposes to amend the GSD 
Rules and the MBSD Rules to add a one percent floor to the respective 
GSD and MBSD fails charge calculations.\12\
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    \8\ GSD Rule 11; MBSD Rule 12, supra note 4.
    \9\ Id.; Notice, 83 FR at 23034.
    \10\ Id.
    \11\ Id.
    \12\ Id.
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    FICC's proposal comes in response to a recent announcement by the 
Treasury Market Practices Group (``TMPG''),\13\ in

[[Page 29151]]

which the TMPG proposed the same change to its recommended best 
practices to help ensure that there is always a minimum fails charge 
amount.\14\ The TMPG states that its recommendation of a one percent 
floor is driven by the concern that market participants would 
discontinue their fails charge operational processes in a prolonged 
zero charge scenario.\15\ Adding the one percent floor would help 
maintain a fails charge during elevated federal funds target rate 
levels, and thereby help ensure that market participants do not 
discontinue their fails charge operational processes.\16\
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    \13\ The TMPG was formed in 2007, under the sponsorship of the 
Federal Reserve Bank of New York, to help address settlement fails 
and other issues affecting the U.S. Government debt and mortgage-
backed securities markets. The Treasury Market Practices Group: 
Creation and Early Initiatives (August 2017) at 3, available at 
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr822.pdf. The TMPG is a group of market professionals 
that periodically issues recommended trading practices for market 
participants. Id.
    \14\ See Press Release, Federal Reserve Bank of New York, 
Treasury Market Practices Group Seeks Public Comment on Proposed 
Updates to its Fails Charge Practice Recommendation (February 28, 
2018), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/PressRelease_022818.
    \15\ Id.
    \16\ Id.
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    FICC states that as one of the largest participants in U.S. 
Government securities market, it is imperative that FICC implement the 
TMPG's recommendation to help maintain consistency and symmetry within 
the market.\17\
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    \17\ Notice, 83 FR at 23034.
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B. Federal Funds Level Target Range Clarification

    Pursuant to TMPG guidelines, if the Federal Open Market Committee 
(``FOMC'') specifies a target range in lieu of a target level, the 
lower limit of the target range announced by the FOMC would be used in 
the calculation of the fails charge.\18\ Further, if the FOMC were to 
terminate its policy of specifying or announcing a federal funds rate 
target level or range, then the rate used to calculate the fails charge 
would be a successor rate and source recommended by the TMPG.\19\
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    \18\ U.S. Treasury Securities: Fails Charge Trading Practice 
(July 13, 2016) at 3, available at https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/Fails-Charge-Trading-Practice-2016-07-13.pdf (``Fails Charge Trading Practice'').
    \19\ Id.
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    While FICC states that it would follow the TMPG guidelines in this 
regard,\20\ this practice is currently not stated in the fails charge 
rule provisions in each of the GSD Rules and the MBSD Rules. Therefore, 
FICC proposes to update the relevant provisions to reflect that FICC 
would follow this practice if those circumstances arose.\21\ 
Additionally, FICC proposes to add defined terms for ``FOMC'' and 
``TMPG'' in each of GSD Rule 1 and MBSD Rule 1.\22\
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    \20\ Notice, 83 FR at 23034.
    \21\ Id.
    \22\ Id.
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C. Technical Changes

    FICC proposes to make a technical change regarding references to 
the federal funds rate in the fails charge calculation in both the GSD 
Rules and the MBSD Rules. Specifically, FICC would replace current term 
``Target Fed funds target rate'' in Section 14 of GSD Rule 11 and the 
current term ``fed funds target rate'' in MBSD Rule 12 with the new 
term ``target level for the federal funds rate,'' which is the term 
used by the TMPG in its guidance.\23\ FICC states that this non-
substantive change would enhance clarity across the GSD Rules and MBSD 
Rules and enhance consistency with the TMPG guidance.\24\
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    \23\ Id.
    \24\ Id.
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    FICC also proposes to amend certain terms in the fails charge 
provisions of both the GSD Rules and MBSD Rules in order to use defined 
terms and to enhance clarity and consistency within the rules. 
Specifically, in GSD Rule 11, Section 14, and in MBSD Rule 12, FICC 
would replace the term ``Fedwire'' with the defined term ``FedWire.'' 
\25\ In MBSD Rule 12, FICC would replace each reference to the terms 
``pool delivery obligation'' and ``pool deliver obligation'' with the 
defined term ``Pool Deliver Obligation.'' \26\ In MBSD Rule 12, FICC 
would capitalize the word ``contractual'' in the term ``contractual 
Settlement Date.'' \27\ Finally, FICC would replace the term ``business 
day'' with the capitalized and defined term ``Business Day.'' \28\
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    \25\ Id.
    \26\ Id.
    \27\ Id.
    \28\ Id.
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D. MBSD Fails Charge Cap Clarification

    While the GSD Rules expressly set forth the fails charge cap (i.e., 
three percent per annum), the MBSD Rules currently do not.\29\ The MBSD 
fails charge cap follows the same convention as the GSD fails charge 
cap, which is the percentage that is applied to the target federal 
funds rate.\30\ For MBSD, this cap is two percent per annum.\31\ FICC 
proposes to clarify the MBSD fails charge provision by adding language 
regarding the two percent per annum cap on the fails charge.\32\
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    \29\ GSD Rule 11; MBSD Rule 12, supra note 4.
    \30\ Id.
    \31\ MBSD Rule 12, supra note 4.
    \32\ Notice, 83 FR at 23034.
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E. Implementation Timeframe

    FICC proposes to implement the proposed changes on July 2, 
2018.\33\ FICC states that it would announce such implementation date 
by Important Notice.\34\
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    \33\ Id.
    \34\ Id.
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II. 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.\35\ The Commission believes the proposal is consistent 
with Act, specifically Section 17A(b)(3)(F) of the Act \36\ and Rule 
17Ad-22(e)(23)(ii) \37\ under the Act.
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    \35\ 15 U.S.C. 78s(b)(2)(C).
    \36\ 15 U.S.C. 78q-1(b)(3)(F).
    \37\ 17 CFR 240.17Ad-22(e)(23)(ii).
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A. Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency, such as FICC, be designed to promote the prompt 
and accurate clearance and settlement of securities transactions.\38\
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    \38\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed above, the proposed rule change would update both the 
GSD Rules and the MBSD Rules of FICC to add a one percent floor to the 
respective GSD and MBSD fails charge calculations. In the absence of 
such a floor, during periods of elevated target levels for the federal 
funds rate, the current GSD and MBSD fails charge calculations could 
result in a zero charge to a seller that fails to deliver securities to 
a buyer promptly.
    As discussed above, persistent elevated levels of settlement fails 
can create market inefficiencies and increase credit risk for market 
participants, which could negatively affect the prompt and accurate 
clearance and settlement of securities transactions. Fails charges are 
designed to address such negative effects by encouraging market 
participants to complete their securities settlement obligations 
promptly.
    FICC's proposal to implement a one percent floor to the fails 
charge calculations would advance FICC's efforts to discourage 
settlement fails by ensuring that the fails charge calculation would 
not produce a zero charge, particularly during periods of elevated 
target levels for the federal funds rate. In turn, ensuring that the 
respective

[[Page 29152]]

GSD and MBSD fails charge calculations do not produce a zero charge 
would encourage market participants to maintain their fails charge 
operational processes. Accordingly, the Commission finds that the 
proposed rule change is designed to help ensure that settlement in the 
applicable markets covered by FICC's processes occurs on a timely 
basis, and thereby promotes the prompt and accurate clearance and 
settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.\39\
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    \39\ Id.
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B. Rule 17Ad-22(e)(23)(ii) Under the Act

    Rule 17Ad-22(e)(23)(ii) under the Act requires each covered 
clearing agency \40\ to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide 
sufficient information to enable participants to identify and evaluate 
the risks, fees, and other material costs they incur by participating 
in the covered clearing agency.\41\
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    \40\ A ``covered clearing agency'' means, among other things, a 
clearing agency registered with the Commission under Section 17A of 
the Act (15 U.S.C. 78q-1 et seq.) that is designated systemically 
important by the Financial Stability Oversight Committee (``FSOC'') 
pursuant to the Payment, Clearing, and Settlement Supervision Act of 
2010 (12 U.S.C. 5461 et seq.). See 17 CFR 240.17Ad-22(a)(5)-(6). 
Because FICC is a registered clearing agency with the Commission 
that has been designated systemically important by FSOC, FICC is a 
covered clearing agency.
    \41\ 17 CFR 240.17Ad-22(e)(23)(ii).
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    As discussed above, the proposed rule change would update both the 
GSD Rules and the MBSD Rules to clarify the target rate that may be 
used in the fails charge calculations under certain circumstances and 
make certain technical changes to the fails charge provisions to ensure 
consistent use of defined terms. The proposed rule change also would 
update the MBSD Rules to clarify that a cap applies to the MBSD fails 
charge.
    These clarifications are designed help ensure that the GSD and MBSD 
fails charges are transparent and clear to market participants. 
Increasing transparency and clarity around these charges would help 
market participants better understand the operation of the fails 
charges, and thereby provide market participants with increased 
predictability and certainty regarding their obligations to FICC. 
Accordingly, the Commission finds that the proposed rule change would 
help establish, implement, and maintain FICC's rules in a manner 
reasonably designed to provide sufficient information to enable 
participants to identify and evaluate the risks, fees, and other 
material costs they incur by participating in FICC, consistent with 
Rule 17Ad-22(e)(23)(ii) under the Act.\42\
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    \42\ Id.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act, in particular 
the requirements of Section 17A of the Act \43\ and the rules and 
regulations thereunder.
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    \43\ 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 change SR-FICC-2018-004 be, and hereby is, 
approved.\44\
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    \44\ In approving the proposed rule change, the Commission 
considered the proposal's 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.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-13379 Filed 6-21-18; 8:45 am]
BILLING CODE 8011-01-P