[Federal Register Volume 89, Number 191 (Wednesday, October 2, 2024)]
[Notices]
[Pages 80296-80299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-22560]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101194; File No. SR-FICC-2024-009]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Modify the GSD Rules Relating to 
the Adoption of a Trade Submission Requirement

September 26, 2024.

I. Introduction

    On June 12, 2024, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-FICC-2024-009 pursuant to Section 19(b) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
\2\ thereunder to modify FICC's Government Securities Division 
(``GSD'') Rulebook (``GSD Rules'') as it relates to the adoption of a 
requirement for its direct participants to submit for clearance and 
settlement all eligible secondary market transactions in U.S. Treasury 
securities to which such direct participant is a counterparty.\3\ The 
Proposed Rule Change was published for public comment in the Federal 
Register on July 1, 2024.\4\ The Commission has received comments 
regarding the substance of the changes proposed in the Proposed Rule 
Change.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing, infra note 4, at 89 FR 54602.
    \4\ Securities Exchange Act Release No. 100417 (June 25, 2024), 
89 FR 54602 (July 1, 2024) (File No. SR-FICC-2024-009) (``Notice of 
Filing'').
    \5\ Comments on the Proposed Rule Change are available at 
https://www.sec.gov/comments/sr-ficc-2024-009/srficc2024009.htm.
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    On August 16, 2024, pursuant to Section 19(b)(2) of the Exchange 
Act,\6\ 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.\7\ The Commission is 
instituting proceedings, pursuant to Section 19(b)(2)(B) of the 
Exchange Act,\8\ to determine whether to approve or disapprove the 
Proposed Rule Change.
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    \6\ 15 U.S.C. 78s(b)(2).
    \7\ Securities Exchange Act Release No. 100693 (Aug. 12, 2024), 
89 FR 66746 (Aug. 16, 2024) (File No. SR-FICC-2024-009).
    \8\ 15 U.S.C. 78s(b)(2)(B).

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[[Page 80297]]

II. Summary of the Proposed Rule Change

A. Background

    FICC, through GSD, serves as a central counterparty and provider of 
clearance and settlement services for the U.S. government securities 
markets, including U.S. Treasury securities. GSD's central counterparty 
services are available directly to entities that are approved to be 
Netting Members \9\ and indirectly to other market participants through 
its indirect access models.
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    \9\ The GSD Rules are available at https://www.dtcc.com/~/media/
Files/Downloads/legal/rules/ficc_gov_rules.pdf. Terms not otherwise 
defined herein are defined in the GSD Rules.
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    On December 13, 2023, the Commission adopted amendments to the 
standards applicable to covered clearing agencies for U.S. Treasury 
securities, such as FICC,\10\ requiring, among other things, that such 
clearing agency establish objective, risk-based, and publicly disclosed 
criteria for participation which (i) require that any direct 
participant of such covered clearing agency submit for clearance and 
settlement all of the eligible secondary market transactions to which 
they are a counterparty; and (ii) identify and monitor its direct 
participants' submission of eligible secondary market transactions to 
which they are a counterparty, including how the covered clearing 
agency would address a failure to submit transactions in accordance 
with this requirement.\11\ According to FICC, the Proposed Rule Change 
is designed to meet these new requirements and to further update FICC's 
risk management framework, including its initial and ongoing 
participation criteria, and requirements relating to financial 
resources, creditworthiness, and operational capability, to limit the 
risks a Netting Member may present to FICC and the other Netting 
Members by ensuring, among other things, that applicants to be Netting 
Members have the financial and operational capabilities to meet the 
obligations of membership on an ongoing basis.\12\
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    \10\ A ``covered clearing agency'' is, among other things, a 
registered clearing agency that provides the services of a central 
counterparty, and a central counterparty is a clearing agency that 
interposes itself between the counterparties to securities 
transactions, acting functionally as the buyer to every seller and 
the seller to every buyer. 17 CFR 240.17Ad-22(a); see also 15 U.S.C. 
78c(a)(23) (defining a clearing agency). FICC is a clearing agency 
registered with the Commission under Section 17A of the Exchange Act 
(15 U.S.C. 78q-1), and it acts as a central counterparty.
    \11\ 17 CFR 240.17ad-22(e)(18)(iv)(A) and (B). See Securities 
Exchange Act Release No. 99149 (Dec. 13, 2023), 89 FR 2714 (Jan. 16, 
2024) (``Adopting Release,'' and the rules adopted therein referred 
to herein as ``Treasury Clearing Rules'').
    \12\ See Notice of Filing, supra note 4, at 54604.
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B. Proposed Changes

    First, the Proposed Rule Change would adopt an ongoing membership 
requirement that all Netting Members submit for clearance and 
settlement eligible secondary market transactions to which they are a 
party and would specify the scope of this requirement by defining 
``Eligible Secondary Market Transactions,'' adopting such and related 
definitions from the Treasury Clearing Rules.\13\ Specifically, under 
FICC's proposed rules, an Eligible Secondary Market Transaction would 
include: a repurchase or reverse repurchase agreement collateralized by 
U.S. Treasury securities in which one of the counterparties is a direct 
participant; a purchase or sale between a direct participant and any 
counterparty, if the direct participant of the covered clearing agency 
brings together multiple buyers and sellers using a trading facility 
(such as a limit order book) and is a counterparty to both the buyer 
and seller in two separate transactions; and a purchase or sale between 
a direct participant and a registered broker-dealer, government 
securities broker, or government securities dealer. Under FICC's 
proposed rules, an Eligible Secondary Market Transaction would not 
include: any purchase or sale transaction in U.S. Treasury securities 
or repurchase or reverse repurchase agreement collateralized by U.S. 
Treasury securities in which one counterparty is a central bank, a 
sovereign entity, an international financial institution, or a natural 
person; any repurchase or reverse repurchase agreement collateralized 
by U.S. Treasury securities in which one counterparty is a covered 
clearing agency providing central counterparty services or a 
derivatives clearing organization, or is regulated as a central 
counterparty in its home jurisdiction; any repurchase or reverse 
repurchase agreement collateralized by U.S. Treasury securities in 
which one counterparty is a state or local government; or any 
repurchase or reverse repurchase agreement collateralized by U.S. 
Treasury securities entered into between a direct participant and an 
affiliated counterparty provided that the affiliated counterparty 
submit for clearance and settlement all other repurchase or reverse 
repurchase agreements collateralized by U.S. Treasury securities to 
which the affiliate is a party. In addition, FICC proposes conforming 
certain aspects of those defined terms to the GSD Rules to provide 
Netting Members with clarity on the scope of this trade submission 
requirement. FICC states that these changes would be consistent with 
and implement the changes to Rule 17Ad-22(e)(18)(iv)(A) \14\ regarding 
the requirement for its direct participants to submit for clearance and 
settlement all Eligible Secondary Market Transactions.\15\
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    \13\ Supra note 11. See also 17 CFR 240.17ad-22(a).
    \14\ 17 CFR 240.17ad-22(e)(18)(iv)(A).
    \15\ See Notice of Filing, supra note 4, at 54604.
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    Second, the Proposed Rule Change would adopt provisions to enable 
FICC to identify and monitor Netting Members' ongoing compliance with 
the proposed trade submission requirement. These provisions would 
include affirmative obligations of Netting Members to notify FICC of 
non-compliance and confirm their ongoing compliance with this 
requirement. These would consist of requirements for Netting Members to 
provide FICC annual attestation regarding ongoing compliance with the 
trade submission requirement, and to conduct an independent review of 
ongoing compliance with the trade submission requirement on a triennial 
basis to be provided to FICC and the Netting Member's most senior 
governing body. These provisions would also provide FICC with the 
authority to request information or review a Netting Member's books and 
records to monitor and verify, as needed, such compliance.
    The Proposed Rule Change would also adopt disciplinary measures 
that FICC would take if a Netting Member fails to meet its obligations 
under the new rules, which would include continuing fines, to be 
incorporated into the GSD Fine Schedule, until the failure has been 
remediated and notifications to applicable regulatory authorities. FICC 
states that these changes would facilitate its ability to identify and 
monitor the trade submission requirement, as required of FICC under 
Rule 17Ad-22(e)(18)(iv)(B) \16\ regarding the identification and 
monitoring of its direct participants' submission of Eligible Secondary 
Market Transactions for clearing.\17\
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    \16\ 17 CFR 240.17ad-22(e)(18)(iv)(B).
    \17\ See Notice of Filing, supra note 4, at 54606.

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[[Page 80298]]

    Lastly, FICC proposes to amend certain of the initial 
qualifications for direct membership with GSD and the ongoing 
membership obligations of Netting Members. The changes related to 
initial membership requirements include explicitly requiring adequate 
liquidity through adequate resources; allowing FICC to review a 
Guarantor when an applicant or Member relies on such; requiring 
applicants to provide FICC with a business plan that demonstrates the 
applicant's ability to meet FICC requirements and that they have at 
least one year of ``operating and management history and outlook'' or, 
absent one year, permitting FICC to determine whether the applicant has 
personnel with sufficient operational and financial background and 
experience; and clearly stating that FICC can deny an applicant's 
membership under certain circumstances, and if denied under any 
circumstance, not permit reapplication until the applicant has 
adequately addressed the reason for the denial. The changes related to 
ongoing membership requirements relate to the production of financial 
statements by Affiliates of a Member; Member's responses to FICC's 
annual and periodic due diligence information requests; Member's 
notifications to FICC if the Member breaches its GSD membership 
standards; and an adequate assurances condition on Funds-Only Settling 
Bank Members that could limit the number of Netting Members for which 
the bank provides settlement services.
    FICC states that these changes would clarify and strengthen 
membership standards to help mitigate the credit exposure that Netting 
Members present to FICC and, thus, continue to promote the safety and 
soundness of FICC, its Members, and the industry it serves, and that 
these changes would be consistent with FICC's authority under Section 
17A(b)(4)(B) of the Exchange Act.\18\
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    \18\ 15 U.S.C. 78q-1(b)(4)(B). See Notice of Filing, supra note 
4, at 54608.
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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 Exchange Act to determine whether the Proposed Rule 
Change should be approved or disapproved.\19\ 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, 
which would 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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    \19\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\20\ 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 Exchange Act 
\21\ and the rules thereunder, including the following provisions:
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    \20\ Id.
    \21\ 15 U.S.C. 78q-1.
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    <bullet> Section 17A(b)(3)(F) of the Exchange Act,\22\ which 
requires, among other things, that the rules of a clearing agency are 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions, as well as to foster cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions; and, in general, to protect investors and the 
public interest;
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    \22\ 15 U.S.C. 78q-1(b)(3)(F).
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    <bullet> Section 17A(b)(3)(G) of the Exchange Act,\23\ which 
requires that the rules of a clearing agency provide that its 
participants shall be appropriately disciplined for violation of any 
provision of the rules of the clearing agency by expulsion, suspension, 
limitation of activities, functions, and operations, fine, censure, or 
any other fitting sanction;
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    \23\ 15 U.S.C. 78q-1(b)(3)(G).
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    <bullet> Section 17A(b)(3)(I) of the Exchange Act,\24\ which 
requires that the rules of a clearing agency do not impose any burden 
on competition not necessary or appropriate;
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    \24\ 15 U.S.C. 78q-1(b)(3)(I).
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    <bullet> Section 17A(b)(4)(B) of the Exchange Act,\25\ which 
requires that a registered clearing agency may deny participation to, 
or condition the participation of, any person if such person does not 
meet such standards of financial responsibility, operational 
capability, experience, and competence as are prescribed by the rules 
of the clearing agency, and may examine and verify the qualifications 
of an applicant to be a participant in accordance with procedures 
established by the rules of the clearing agency;
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    \25\ 15 U.S.C. 78q-1(b)(4)(B).
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    <bullet> Rule 17ad-22(e)(18)(i) under the Exchange Act,\26\ which 
requires that a covered clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
establish objective, risk-based, and publicly disclosed criteria for 
participation, which permit fair and open access by direct and, where 
relevant, indirect participants and other financial market utilities;
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    \26\ 17 CFR 240.17ad-22(e)(18)(i).
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    <bullet> Rule 17ad-22(e)(18)(ii) under the Exchange Act,\27\ which 
requires that a covered clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
establish objective, risk-based, and publicly disclosed criteria for 
participation, which require participants to have sufficient financial 
resources and robust operational capacity to meet obligations arising 
from participation in the clearing agency;
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    \27\ 17 CFR 240.17ad-22(e)(18)(ii).
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    <bullet> Rule 17ad-22(e)(18)(iii) under the Exchange Act,\28\ which 
requires that a covered clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
establish objective, risk-based, and publicly disclosed criteria for 
participation, which monitor compliance with such participation 
requirements on an ongoing basis;
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    \28\ 17 CFR 240.17ad-22(e)(18)(iii).
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    <bullet> Rule 17ad-22(e)(18)(iv)(A) under the Exchange Act,\29\ 
which requires that a covered clearing agency establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to establish objective, risk-based, and publicly disclosed 
criteria for participation, which, when the covered clearing agency 
provides central counterparty services in transactions in U.S. Treasury 
securities, require that any direct participant of such covered 
clearing agency submit for clearance and settlement all of the eligible 
secondary market transactions to which such direct participant is a 
counterparty;
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    \29\ 17 CFR 240.17ad-22(e)(18)(iv)(A).
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    <bullet> Rule 17ad-22(e)(18)(iv)(B) under the Exchange Act,\30\ 
which requires that a covered clearing agency establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to establish objective, risk-based, and publicly disclosed 
criteria for participation,

[[Page 80299]]

which, when the covered clearing agency provides central counterparty 
services in transactions in U.S. Treasury securities, identify and 
monitor its direct participants' submission of transactions for 
clearing as required by Rule 17ad-22(e)(18)(iv)(A), including how the 
clearing agency would address a failure to submit transactions in 
accordance with Rule 17ad-22(e)(18)(iv)(A); and
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    \30\ 17 CFR 240.17ad-22(e)(18)(iv)(B).
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    <bullet> Rule 17ad-22(e)(23)(ii) under the Exchange Act,\31\ which 
requires that a covered clearing agency 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.
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    \31\ 17 CFR 240.17ad-22(e)(23)(ii).
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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), (G), and (I), and 
(b)(4)(B) \32\ and Rules 17ad-22(e)(18)(i), (ii), (iii), (iv)(A) and 
(B), and (e)(23)(ii) \33\ of the Exchange Act, or any other provision 
of the Exchange 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 Exchange Act,\34\ any request for an opportunity to 
make an oral presentation.\35\
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    \32\ 15 U.S.C. 78q-1(b)(3)(F), 15 U.S.C. 78q-1(b)(3)(G), 15 
U.S.C. 78q-1(b)(3)(I), and 15 U.S.C. 78q-1(b)(4)(B).
    \33\ 17 CFR 240.17Ad-22(e)(18)(i), 17 CFR 240.17Ad-
22(e)(18)(ii), 17 CFR 240.17Ad-22(e)(18)(iii), 17 CFR 240.17Ad-
22(e)(18)(iv)(A), 17 CFR 240.17Ad-22(e)(18)(iv)(B), and 17 CFR 
240.17Ad-22(e)(23)(ii).
    \34\ 17 CFR 240.19b-4(g).
    \35\ Section 19(b)(2) of the Exchange 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 Acts Amendments of 1975, Senate Comm. 
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    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 of Filing \36\ in addition to any other comments 
they may wish to submit about the Proposed Rule Change.
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    \36\ See Notice of Filing, supra note 4.
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    Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form
    (https://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#7e0c0b121b531d1113131b100a0d3e0d1b1d50191108"><span class="__cf_email__" data-cfemail="641611080149070b0909010a1017241701074a030b12">[email protected]</span></a>. Please include 
file number SR-FICC-2024-009 on the subject line.

Paper Comments

    <bullet> 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-2024-009. 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 (https://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 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FICC and on FICC's 
website (www.dtcc.com/legal/sec-rule-filings).
    Do not include personal identifiable information in submissions; 
you should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection.
    All submissions should refer to File Number SR-FICC-2024-009 and 
should be submitted on or before October 23, 2024. Rebuttal comments 
should be submitted by November 6, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(31).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-22560 Filed 10-1-24; 8:45 am]
BILLING CODE 8011-01-P


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