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[Federal Register Volume 89, Number 229 (Wednesday, November 27, 2024)]
[Notices]
[Pages 93689-93691]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27754]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101685; File Nos. SR-DTC-2024-003; SR-FICC-2024-006; 
SR-NSCC-2024-003]

Self-Regulatory Organizations; The Depository Trust Company; 
Fixed Income Clearing Corporation; National Securities Clearing 
Corporation; Order Approving Proposed Rule Change To Amend the Clearing 
Agency Risk Management Framework

November 21, 2024.

I. Introduction

    On March 11, 2024, The Depository Trust Company (``DTC''), Fixed 
Income Clearing Corporation (``FICC''), and National Securities 
Clearing Corporation (``NSCC,'' each a ``Clearing Agency,'' and 
collectively, the ``Clearing Agencies''), filed with the Securities and 
Exchange Commission (``Commission'') proposed rule changes SR-DTC-2024-
003, SR-FICC-2024-006, and SR-NSCC-2024-003, respectively, pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder (the ``Proposed Rule Changes'').\2\ The 
Proposed Rule Changes were published for comment in the Federal 
Register on March 26, 2024.\3\ The Commission has received comments on 
the changes proposed.\4\ For the reasons discussed below, the 
Commission is approving the Proposed Rule Changes.
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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. 99802 (Mar. 20, 
2024), 89 FR 21118 (Mar. 26, 2024) (File No. SR-DTC-2024-003) (``DTC 
Notice of Filing''); Securities Exchange Act Release No. 99805 (Mar. 
20, 2024), 89 FR 21068 (Mar. 26, 2024) (File No. SR-FICC-2024-006) 
(``FICC Notice of Filing''); Securities Exchange Act Release No. 
99803 (Mar. 20, 2024), 89 FR 21091 (Mar. 26, 2024) (File No. SR-
NSCC-2024-003) (``NSCC Notice of Filing'').
    \4\ Specifically, the Commission received comments on the FICC 
Notice of Filing, and the comments are available at https://www.sec.gov/comments/sr-ficc-2024-006/srficc2024006.htm. The 
comments generally relate to issues raised in other FICC proposed 
rule changes that are not relevant to the Notices of Filing. See, 
Securities Exchange Act Release Nos. 99817 (SR-FICC-2024-005) and 
99844 (SR-FICC-2024-007). The Commission considers the relevant 
comments related to the FICC Notice of Filing in its analysis at 
Section IV infra.
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II. Background

    On December 13, 2023, the Commission adopted rules under the Act to 
amend the standards applicable to covered clearing agencies providing 
central counterparty services for transactions in U.S. Treasury 
securities to require policies and procedures be reasonably designed to 
ensure that the covered clearing agency has appropriate means to 
facilitate access to clearance and settlement services of all eligible 
secondary market transactions in U.S. Treasury securities, including 
those of indirect participants.\5\ The adopted rules also require that 
these policies and procedures be reviewed annually by the board of 
directors of such covered clearing agencies for U.S. Treasury 
securities.\6\ Currently, FICC is the only Clearing Agency providing 
clearance and settlement services to the U.S. Treasury securities 
market.
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    \5\ See Standards for Covered Clearing Agencies for U.S. 
Treasury Securities and Application of the Broker-Dealer Customer 
Protection Rule with Respect to U.S. Treasury Securities, Exchange 
Act Release No. 99149 (Feb. 15, 2023), 88 FR 13872 (Jan. 16, 2024) 
(S7-23-22) (``Treasury Clearing Adopting Release'').
    \6\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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    To address the new requirements, the Clearing Agencies propose to 
amend their Clearing Agency Risk Management Framework (``Framework).\7\ 
Specifically, the Proposed Rule Changes would add a new section to the 
Framework regarding ``Solicitation of Participant and Stakeholder 
Views''. This subsection would: (i) describe generally Clearing Agency 
participant and industry stakeholder outreach in the development and 
evaluation of new programs or risk management practices, and (ii) 
provide for the annual review of FICC's Government Securities Division 
(``GSD'') access models by FICC's Board of Directors. The proposal 
would also make other conforming and clean up changes to the text of 
the Framework, as described below.
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    \7\ The Framework provides an outline for, among other things, 
how each of the Clearing Agencies comprehensively manages the risks, 
including the legal, credit, liquidity, operational, general 
business, investment, custody, and other risks, that arise in or are 
borne by it.
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III. Description of the Proposed Rule Changes

A. Subsection 3.4.1 General Solicitation of Views

    The Clearing Agencies state that they routinely solicit their 
participants' and other industry stakeholders' views when developing 
and evaluating products, services, or risk management practices so they 
may best meet the industry's needs.\8\ To codify this practice, the 
proposal would add a new subsection to the Framework (entitled 
``General Solicitation of Views''), which identifies several ways that 
the Clearing Agencies may seek the views of participants and 
stakeholders. Such methods would include targeted outreach to firms 
expected to be impacted by a proposal, widely distributed surveys, ad 
hoc forums, and standing advisory councils assembled to consider issues 
relevant to a proposal. This list of outreach methods is illustrative, 
not exhaustive.
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    \8\ See DTC Notice of Filing, supra note 3, 89 FR at 21119; FICC 
Notice of Filing, supra note 3, 89 FR at 21069; and NSCC Notice of 
Filing, supra note 3, 89 FR at 21091.
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    The subsection would also identify the industry stakeholders that 
may participate in such advisory councils, including for example, 
representatives from transfer agents, liquidity providers, market 
infrastructures, institutional and retail investors, customers of the 
Clearing Agencies' participants, securities issuers, and securities 
holders. The Clearing Agencies state that the proposed changes in 
subsection 3.4.1 do not create any obligation for the Clearing Agencies 
to conduct such outreach in any particular circumstances.\9\
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    \9\ See DTC Notice of Filing, supra note 3, 89 FR at 21119; FICC 
Notice of Filing, supra note 3, 89 FR at 21069; and NSCC Notice of 
Filing, supra note 3, 89 FR at 21092.
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B. Subsection 3.4.2 Required Solicitation of Views--Annual Review of 
GSD Access Models

    The Clearing Agencies propose adding a new subsection to the 
Framework (entitled ``Required Solicitation of Views--Annual Review of 
GSD Access Models'') in connection with the recently adopted 
requirement in Rule 17ad-22(e)(18)(iv)(C) that the board of directors 
of a covered clearing agency annually review the policies and 
procedures that the covered clearing agency uses to ensure that they 
have appropriate means to facilitate access to clearance and settlement 
services of all eligible secondary market transactions in U.S. Treasury 
securities, including those of indirect participants.\10\ To assist the 
board in their review of GSD access models, the Proposed Rule Changes 
would establish an advisory council comprised of participants, their 
customers, and other industry stakeholders. This advisory council 
review of GSD's access models would be escalated to the FICC Board of 
Directors, or a committee thereof, with its annual review of GSD's 
access models, which

[[Page 93690]]

would also be required by this new subsection.
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    \10\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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    FICC's goal in the annual review of FICC/GSD's access models is to 
determine whether the GSD Clearing Rules and any other written policies 
and procedures are reasonably designed to ensure appropriate and 
flexible means to facilitate access to clearance and settlement of all 
eligible secondary market transactions in U.S. Treasury securities, 
including those of indirect participants.\11\ In furtherance of this 
goal, the new subsection would require that the annual review include 
the following: (1) document any instance in which FICC treats 
transactions differently based on either the identity of the submitting 
participant, the fact that an indirect participant is a party to the 
transaction, the method of execution, or any other way, and confirm 
that any variation in treatment is both necessary and appropriate to 
meet the minimum standards regarding, among other things, operations, 
governance, and risk management identified in the Standards for Covered 
Clearing Agencies; (2) consider whether to enable GSD's Netting 
Members, as defined in the GSD Rules,\12\ to submit eligible 
transactions for clearance and settlement that have been executed by 
two indirect participants of FICC/GSD (``done-away''); (3) consider the 
volumes and proportion of the markets that are being centrally cleared 
through different access models in determining whether FICC/GSD's 
access models are meeting the needs of the market; and (4) consider 
whether it is appropriate to develop and propose an additional category 
or categories of Netting Members to the GSD Rules to reflect the types 
of legal entities that applied to be a Netting Member over the prior 12 
months and did not fit into one of the existing Netting Member 
categories.\13\
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    \11\ See DTC Notice of Filing, supra note 3, 89 FR at 21119; 
FICC Notice of Filing, supra note 3, 89 FR at 21069; and NSCC Notice 
of Filing, supra note 3, 89 FR at 21092.
    \12\ See Fixed Income Clearing Corporation Government Securities 
Division Rulebook, Rule 1 (defining Netting Member and associated 
terms), available at https://www.dtcc.com/~/media/files/downloads/
legal/rules/ficc_gov_rules.pdf.
    \13\ In a separate proposed rule change, FICC proposed to add a 
framework to consider an applicant who does not meet the eligibility 
requirements of any existing categories. See Securities Exchange Act 
Release No. 99817 (Mar. 21, 2024), 89 FR 21362, 21373 (Mar. 27, 
2024) (File No. SR-FICC-2024-005).
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C. Other Conforming and Clean Up Changes

    The proposal would make other conforming and clean up changes to 
the Framework. The Clearing Agencies would amend Section 1 of the 
Framework to: (1) include the annual review of GSD's access models in 
the list of regulatory requirements that are addressed in the 
Framework, and (2) update the description of the contents of Section 3 
of the Framework to include the solicitation of participant and 
stakeholder views and annual review of GSD's access models as part of 
the Clearing Agencies' management of risks.
    The Clearing Agencies would also remove the defined term 
``Management Committee'' wherever referenced and replace it with 
``senior management committee'' while maintaining the current makeup 
and responsibilities of the current Management Committee, as described 
in the Framework. The Clearing Agencies state that the proposed change 
would allow the Framework to continue to be accurate notwithstanding 
any future name changes to the committee.\14\
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    \14\ See DTC Notice of Filing, supra note 3, 89 FR at 21120; 
FICC Notice of Filing, supra note 3, 89 FR at 21070; and NSCC Notice 
of Filing, supra note 3, at 3.
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    Other minor grammatical and clean up changes would also be made to 
the Framework.

IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \15\ 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. After carefully considering the Proposed Rule 
Changes, the Commission finds that the Proposed Rule Changes are 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to the Clearing Agencies. In 
particular, the Commission finds that the Proposed Rule Changes are 
consistent with Section 17A(b)(3)(F) \16\ of the Act and Rule 17Ad-
22(e)(18)(iv)(C),\17\ each promulgated under the Act.
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    \15\ 15 U.S.C. 78s(b)(2)(C).
    \16\ 15 U.S.C. 78q-1(b)(3)(F).
    \17\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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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 registered clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions and assure 
the safeguarding of securities and funds which are in their custody or 
control or for which they are responsible.\18\
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    \18\ See supra note 13.
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    As described above in Section III.A, the Clearing Agencies 
routinely solicit their participants' and other industry stakeholders' 
views. The Proposed Rule Changes would codify that the Clearing 
Agencies use this practice, which should help ensure that the Clearing 
Agencies have mechanisms in place to be informed of the views of their 
participants and other industry stakeholders. By allowing specifically 
for formal engagement and transparency on their risk management 
practices, the Proposed Rule Changes should continue to encourage 
communication and provide a formal mechanism to help the Clearing 
Agencies identify and evaluate any unintended consequences a proposal 
or practice may have on its direct and indirect participants and obtain 
recommendations on how to meet its goals through alternative 
approaches. In addition, as described in Section III.B, the Proposed 
Rule Changes would establish an annual advisory council for FICC's GSD 
to assist the FICC Board of Directors, or a committee thereof, in its 
required annual review of GSD access models, and the Proposed Rule 
Changes would also identify several things that the advisory council 
would have to do as part of its review. Adopting this advisory council 
and a plan for its work, as well as requiring annual review by the FICC 
Board of Directors, should help FICC work to meet its regulatory 
obligations to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to ensure that it has 
appropriate means to facilitate access, including for indirect 
participants, to its clearance and settlement services by providing a 
method by which FICC can be informed by its participants and other 
industry stakeholders as to access issues. This change should help 
ensure that FICC solicits and considers such views when making 
decisions about how to structure its access models, which should, in 
turn, help further continued prompt and accurate clearance and 
settlement in the U.S. Treasury market, consistent with Section 
17A(b)(3)(F) of the Act.\19\
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    \19\ 15 U.S.C. 78q-1(b)(3)(F).
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    Finally, the proposed conforming and clean-up changes should help 
to ensure that the Framework is clear and accurate. The risk management 
functions described in the Framework allow the Clearing Agencies to 
continue their critical operations and services, and better 
understanding of the Framework should help promote the prompt and 
accurate clearance and settlement of securities transactions,

[[Page 93691]]

consistent with Section 17A(b)(3)(F) of the Act.\20\
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    \20\ 15 U.S.C. 78q-1(b)(3)(F).
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    Accordingly, and for the reasons stated above, the Commission finds 
that the Proposed Rule Changes are consistent with Section 17A(b)(3)(F) 
of the Act.

B. Section 17Ad-22(e)(18)(iv)(C) of the Act

    Section 17Ad-22(e)(18)(iv)(C) under the Act requires, among other 
things, that a covered clearing agency serving the U.S. Treasury 
market, like FICC, establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to ensure that the covered 
clearing agency has appropriate means to facilitate access to clearance 
and settlement services of all eligible secondary market transactions 
in U.S. Treasury securities, including those of indirect participants, 
and that the board of directors for the covered clearing agency, like 
FICC, annually review such policies and procedures.\21\ The Proposed 
Rule Changes, as described in Section III.B above, would establish an 
advisory council and framework for that council's work and would 
provide for annual review by the FICC Board of Directors as to FICC's 
policies and procedures regarding access to its clearance and 
settlement services.
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    \21\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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    One commenter addressed certain aspects of this proposal. 
Specifically, the commenter states that FICC's rules ``should provide 
that indirect participants will be allotted at least 50% of the 
representation on the council.'' \22\ The Commission agrees that 
indirect participant representation on the proposed council is 
important. Under the Proposed Rule Changes, the advisory council would 
include representatives not only from FICC participants, but also their 
customers, that is, indirect participants who rely on FICC's services 
to access FICC's clearance and settlement services. Though not 
required, the use of an advisory council is consistent with Rule 17ad-
22(e)(18)(iv)(C), and that rule does not mandate the particular 
composition of the advisory council that FICC has chosen to establish.
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    \22\ Letter from Jiri Krol, Deputy CEO, Global Head of 
Government Affairs, Alternative Investment Management Association, 
at 8 (Apr. 23, 2024), available at https://www.sec.gov/comments/sr-ficc-2024-006/srficc2024006.htm (``AIMA Letter'').
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    The Commission recently adopted Rule 17ad-25(j) \23\ which requires 
each registered clearing agency to establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to solicit, 
consider, and document its consideration of the views of participants 
and other relevant stakeholders. The Commission therefore has given 
clearing agencies discretion in the design and structure of stakeholder 
outreach.\24\ The Commission also stated in the Rule 17ad-25(j) final 
rule release that such ``other relevant stakeholders'' generally would 
include investors, customers of clearing agency participants, and 
securities issuers.\25\
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    \23\ 17 CFR 240.17ad-25(j).
    \24\ Clearing Agency Governance and Conflicts of Interest, 
Securities Exchange Act Release No. 98959 (Nov. 16, 2023), 88 FR 
84454, 84483 (Dec. 5, 2023).
    \25\ See id.
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    Pursuant to the Proposed Rule Changes, FICC would include indirect 
participants on its advisory council. The Commission supports the 
inclusion of indirect participants and encourages FICC to solicit views 
from a variety of indirect participants who may have differing needs.
    The commenter further stated that FICC should, ``explicitly 
describe how and to what extent the feedback and recommendations made 
by the indirect participant members on the council (or indirect 
participants at large) will be considered and/or incorporated into the 
review process and potential changes to the access models.'' \26\ 
Within the Proposed Rule Changes, FICC has outlined specific points of 
consideration, and specific data to document and analyze in furtherance 
of the annual review by the Board of Directors, or a committee thereof, 
of GSD access models as noted in Section III.B above. In addition, 
pursuant to the Proposed Rule Changes, the advisory council's review 
would be escalated to the FICC Board of Directors, or a committee 
thereof, to assist in their annual review. Rule 17ad-22(e)(18)(iv)(C) 
does not require the use of an advisory council.
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    \26\ AIMA Letter, supra note 22, at 8.
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    Accordingly, the Commission finds that the Proposed Rule Changes 
are consistent with the requirements of Rule 17ad-22(e)(18)(iv)(C).\27\
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    \27\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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V. 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 \28\ and 
the rules and regulations promulgated thereunder.
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    \28\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\29\ that proposed rule changes SR-DTC-2024-003, SR-FICC-2024-006, and 
SR-NSCC-2024-003 be, and hereby are, approved.\30\
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    \29\ 15 U.S.C. 78s(b)(2).
    \30\ In approving the Proposed Rule Changes, the Commission 
considered their 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.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-27754 Filed 11-26-24; 8:45 am]
BILLING CODE 8011-01-P
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