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[Federal Register Volume 89, Number 232 (Tuesday, December 3, 2024)]
[Notices]
[Pages 95843-95846]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-28256]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101764; File Nos. SR-DTC-2024-009; SR-FICC-2024-010; 
SR-NSCC-2024-006]

Self-Regulatory Organizations; National Securities Clearing 
Corporation; The Depository Trust Company; Fixed Income Clearing 
Corporation; Order Approving Proposed Rule Change To Adopt the Clearing 
Agency Framework for Certain Requirements on Governance and Conflicts 
of Interest

November 26, 2024.

I. Introduction

    On August 15, 2024, National Securities Clearing Corporation 
(``NSCC''), The Depository Trust Company (``DTC''), and Fixed Income 
Clearing Corporation (``FICC,'' each a subsidiary of The Depository 
Trust & Clearing Corporation (``DTCC'') and each a ``Clearing Agency,'' 
and collectively, the ``Clearing Agencies''), filed with the Securities 
and Exchange Commission (``Commission'') proposed rule changes SR-NSCC-
2024-006, SR-DTC-2024-009, and SR-FICC-2024-010, respectively, pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder (``Proposed Rule Changes'').\2\ The 
Proposed Rule Changes were published for comment in the Federal 
Register on September 3, 2024.\3\ The Commission has received no 
comments on the changes proposed. 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. 100841 (Aug. 27, 
2024), 89 FR 71646 (Sep. 3, 2024) (File No. SR-NSCC-2024-006) 
(``NSCC Notice of Filing''); Securities Exchange Act Release No. 
100842 (Aug. 27, 2024), 89 FR 71597 (Sep. 3, 2024) (File No. SR-DTC-
2024-009) (``DTC Notice of Filing''); Securities Exchange Act 
Release No. 100843 (Aug. 27, 2024), 89 FR 71593 (Sep. 3, 2024) (File 
No. SR-FICC-2024-010) (``FICC Notice of Filing'').
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II. Background

    On November 16, 2023, the Commission adopted rules under the Act to 
improve the governance of clearing agencies registered with the 
Commission (``registered clearing agencies'') by reducing the 
likelihood that conflicts of interest may influence the board of 
directors or equivalent governing body (``board'') of a registered 
clearing agency.\4\ The rules identify certain responsibilities of the 
Board, increase transparency into board governance, and, more 
generally, improve the alignment of incentives among owners and 
participants of a registered clearing agency. The Commission adopted 17 
CFR 240.17ad-25 (``Rule 17Ad-25'') under the Act to establish these new 
requirements for board governance and for the management of conflicts 
of interest by registered clearing agencies.
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    \4\ See Clearing Agency Governance and Conflicts of Interest, 
Exchange Act Release No. 98959 (Nov. 16, 2023), 88 FR 84454 (Dec. 5, 
2023) (S7-21-22).
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    The Proposed Rule Changes would adopt a new framework entitled the 
``Clearing Agency Framework for Certain Requirements on Governance and 
Conflicts of Interest'' (``Framework'') to outline the way in which the 
Clearing Agencies and their Boards of Directors (``Boards'') comply 
with certain sections of Rule 17Ad-25,\5\ specifically subsections (g), 
(h), (i), and (j).\6\
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    \5\ See NSCC Notice of Filing, 89 FR 71646; DTC Notice of 
Filing, 89 FR 71598; and FICC Notice of Filing, 89 FR 71594, all at 
note 3 supra.
    \6\ See 17 CFR 240.17ad-25(g), (h), (i) and (j).
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III. Description of the Proposed Rule Change

A. Section 1 and Section 2: Executive Summary and Framework Ownership 
and Change Management

    Section 1 of the Proposed Rule Changes constitutes the executive 
summary. Section 1 states that the Framework provides an outline for 
the way in which the Clearing Agencies and their Boards comply with the 
requirements of Rule 17Ad-25(g), (h), (i), and (j). It also states that 
the Clearing Agencies may develop policies, procedures, and other 
supplemental documentation to support execution of the Framework, and 
that, in the event of a conflict between this Framework and such other 
supplemental documentation, the Framework shall prevail. Section 1 
further states that individuals elected to the DTCC Board of Directors 
are also elected to the Boards of each of the Clearing Agencies, and 
that the Framework is applicable to the directors of each of the 
Clearing Agencies and DTCC separately with respect to their role on 
each Board.
    Section 2 of the Proposed Rule Changes covers Framework ownership 
and change management. The Framework would be owned and managed within 
the DTCC General Counsel's Office by an officer on behalf of each 
Clearing Agency. Section 2 states that any changes to the Framework 
shall be approved by either: (1) the Boards; (2) such Board committees 
as may be delegated authority by the Boards from time to time pursuant 
to their charters; or, (3) the General Counsel or Deputy General 
Counsels of the Clearing Agencies, pursuant to authority delegated by 
the Boards and with the advice and direction of the Framework owner. 
Section 2 also states that the Framework would be reviewed and approved 
annually by the Boards or duly authorized committees of the Boards.

B. Section 3: Conflicts of Interest

    Section 3 of the Proposed Rules Changes describes how the Clearing 
Agencies comply with sections (g) and (h) of Rule 17ad-25. Rule 17Ad-
25(g) requires each registered clearing agency to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to identify and document, and mitigate or eliminate existing 
or potential conflicts of interest in the decision-making process of 
the directors or senior managers of the registered clearing agency.\7\ 
Rule 17ad-25(h) requires each registered clearing agency to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to require a director of a registered clearing 
agency to document and inform the registered clearing agency promptly 
of the existence of any relationship or interest that could reasonably 
affect the

[[Page 95844]]

independent judgment or decision-making of the director.\8\
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    \7\ See 17 CFR 240.17ad-25(g).
    \8\ See 17 CFR 240.17ad-25(h)
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    The Proposed Rule Changes require directors to exercise their 
powers in good faith and in the best interests of the Clearing 
Agencies, rather than their own interests or the interests of another 
entity or person. The Proposed Rule Changes state that a conflict of 
interest is present whenever the interests of the Clearing Agencies 
compete with the interests of a director, the director's employer, or 
any other party with which a director is associated, or otherwise 
whenever a director's corporate or personal interests could be viewed 
as affecting his or her objectivity or independent judgment in 
fulfilling the director's duties to the Clearing Agencies.
    The Proposed Rule Changes state that directors are required to 
document and inform the Corporate Secretary of the Clearing Agencies 
promptly of the existence of any relationship or interest that 
reasonably could affect the independent judgment or decision-making of 
the director. The Corporate Secretary would then escalate any 
disclosure to the General Counsel for evaluation. If such disclosure is 
deemed to be an actual conflict of interest, the General Counsel would 
notify the Non-Executive Chairman of the Board and discuss how such 
conflict can be mitigated or eliminated. Upon identification of a 
conflict of interest, the Non-Executive Chairman, in consultation with 
the General Counsel, shall determine how such conflict should be 
addressed on a case-by-case basis. In certain cases, it may be 
advisable for the director to recuse themselves from any discussion or 
vote related to the matter. In other cases, where the conflict is 
limited or indirect, the Non-Executive Chairman, in consultation with 
the General Counsel, may determine that the conflict should be 
disclosed to the full Board of Directors, but that, in light of such 
disclosure to the Board, recusal of the director is unnecessary. The 
Proposed Rule Changes provide that there may be cases where a conflict 
is so significant or pervasive that the director would be unable to 
continue to serve on the Boards. In such instances, the Non-Executive 
Chairman and General Counsel would discuss with the Governance 
Committee. Any measures taken to address a conflict of interest would 
be documented by the Corporate Secretary's Office.
    The Proposed Rule Changes state that all staff, including senior 
managers, must avoid activities or relationships that might affect 
objectivity in business decisions throughout employment with the 
Clearing Agencies. All staff, including senior managers, are required 
to disclose a relationship or interest that reasonably could affect 
objectivity in business decisions for review and determination on the 
appropriate course of action. A course of action for a conflict of 
interest could include actions such as recusal of the staff member from 
the particular matter, such as a vendor selection process or 
disallowing a staff member from being on the board of directors of a 
Clearing Agency vendor or client. The course of action will be 
documented.
    The Proposed Rule Changes also state that the Clearing Agencies 
maintain policies and procedures which provide that the Clearing 
Agencies identify and document existing or potential conflicts of 
interest in the decision-making process involving directors or senior 
managers of the Clearing Agencies and mitigate or eliminate and 
document the mitigation or elimination of such conflicts of 
interest.\9\
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    \9\ As part of the Proposed Rule Changes, the Clearing Agencies 
filed certain materials as Exhibit 3: DTCC Board Charter and Mission 
Statement; DTCC Board Code of Ethics and Conflict of Interest 
Policy; Corporate Secretary's Office Procedures for DTCC Director 
Conflicts of Interest and Independence Assessment; DTCC Risk 
Management Advisory Council Charter; and DTCC Gifts, Entertainment 
and Conflicts of Interest Policy and Procedures. Pursuant to 17 CFR 
240.24b-2, FICC requested confidential treatment of Exhibit 3.
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C. Section 4: Management of Risks From Relationships With Service 
Providers for Core Services

    Section 4 of the Proposed Rule Changes describes how the Clearing 
Agencies comply with section (i) of Rule 17Ad-25. Rule 17Ad-25(i) 
requires each registered clearing agency to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to require senior management to manage the risks from 
relationships with service providers for core services.\10\ The 
Clearing Agencies would identify service providers for core services 
and would adopt the definition of ``service provider for core 
services'' from Rule 17Ad-25(a), which is ``any person that, through a 
written service provider agreement for services provided to or on 
behalf of the registered clearing agency, on an ongoing basis, directly 
supports the delivery of clearance or settlement functionality or any 
other purposes material to the business of the registered clearing 
agency.'' \11\
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    \10\ See 17 CFR 240.17ad-25(i).
    \11\ See 17 CFR 240.17ad-25(a).
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    Specifically, senior management would be required to: (1) evaluate 
and document the risks related to agreements with service providers for 
core services, including under changes to circumstances and potential 
disruptions, and whether the risks can be managed in a manner 
consistent with the Clearing Agencies' risk management framework; \12\ 
and, (2) perform ongoing monitoring of the relationship and report to 
the Boards for their evaluation of any action taken by senior 
management to remedy significant deterioration in performance or 
address changing risks or material issues identified through such 
monitoring, or if the risk or material issues identified cannot be 
remedied, senior management would be required to assess and document 
weaknesses or deficiencies in the relationship with the service 
provider for core services for submission to the Board.\13\ Service 
providers for core services can be external service providers or 
internal (i.e., intercompany affiliates such as DTCC or one of its 
subsidiaries). The Clearing Agencies employ a proportionate and risk-
based approach adapted to the distinct characteristics and risks 
presented by these two different categories of service providers.\14\ 
Regarding internal service providers, deficiencies are assessed as part 
of the Clearing agencies' risk tolerance framework. Clearing Agencies 
and their affiliates are all held directly accountable by a common 
governance arrangement to a set of performance level and risk 
management standards based upon the Clearing Agencies' 
requirements.\15\ Regarding external service providers, deficiencies 
are assessed against criteria established by the Third Party Risk 
Department, who submits deficiency information to the Board or relevant 
Board committee. Because external service providers are not subject to 
the same governance arrangements and standards as intercompany 
affiliates, the Clearing Agencies must use different mechanisms (e.g., 
negotiating and enforcing express contractual terms) to ensure a 
comparable degree of risk management and monitoring. Given the 
difference in accountability mechanisms, the Clearing Agencies rely 
upon a dedicated third party risk management function to manage and 
monitor external relationship risks

[[Page 95845]]

separately from the internal functions.\16\ Business owners of each 
service provider for core services are responsible for documenting any 
deficiencies.
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    \12\ See NSCC Notice of Filing, 89 FR 71648; DTC Notice of 
Filing, 89 FR 71599; and FICC Notice of Filing, 89 FR 71595, all at 
note 3 supra.
    \13\ Id.
    \14\ Id.
    \15\ Id.
    \16\ Id.
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    The Proposed Rule Changes state that the Boards of the Clearing 
Agencies would: (1) review and approve the procedures regarding service 
providers for core services; (2) review and approve any agreement that 
would establish a relationship with a service providers for core 
services along with the required risk evaluation prepared by senior 
management; and, (3) evaluate any action taken by senior management to 
remedy significant deterioration in performance or address changing 
risks or material issues identified through senior management's 
monitoring of service providers for core services.\17\
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    \17\ Id.
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    The Proposed Rule Changes also state that the Clearing Agencies 
currently maintain policies and procedures that manage risks related to 
service providers for core services.\18\
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    \18\ As part of the Proposed Rule Changes, the Clearing Agencies 
filed certain materials as Exhibit 3: Excerpts from DTCC Risk 
Tolerance Procedures: Intercompany Agreement Review and Storage 
Procedure; and Excerpts from DTCC Third Party Risk Policy and 
Procedures. Pursuant to 17 CFR 240.24b-2, FICC requested 
confidential treatment of Exhibit 3.
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D. Section 5: Solicitation of Stakeholder Viewpoints on Material 
Developments in Risk Management and Operations

    Rule 17Ad-25(j) requires each registered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to require the board of directors to 
solicit, consider, and document its consideration of the views of 
participants and other relevant stakeholders of the registered clearing 
agency on material developments in its governance and operations on a 
recurring basis.\19\ Section 5 of the Proposed Rule Changes states that 
in support of their compliance with Rule 17Ad-25(j), the Clearing 
Agencies have established various advisory councils (``Advisory 
Councils'') made up of representatives of the Clearing Agencies' 
participants and other relevant stakeholders. In order to ensure 
appropriate stakeholders are consulted for different types of material 
developments at the Clearing Agencies, the Clearing Agencies have 
established a joint Advisory Council to consider material developments 
in risk management across the Clearing Agencies and separate business-
line specific Advisory Councils to consider material developments in 
operations. The Clearing Agencies may also use other mechanisms, such 
as ad hoc group meetings of Clearing Agency participants and other 
relevant stakeholders, to assist the Boards of the Clearing Agencies in 
meeting their obligations under Rule 17Ad-25(j).
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    \19\ See 17 CFR 240.17ad-25(j).
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    The Proposed Rule Changes state further that the Advisory Councils 
and the ad hoc mechanisms assist the Boards of the Clearing Agencies in 
their obligation to solicit, consider, and document their consideration 
of the views of participants and other relevant stakeholders of the 
Clearing Agencies regarding material developments in their respective 
risk management and operations on a recurring basis. Senior management 
of the Clearing Agencies would bring material developments in the 
Clearing Agencies' risk management and operations to the Advisory 
Councils (or ad hoc mechanisms) for their consideration. Senior 
management would document the views of the participating stakeholders 
on such developments. Senior management would then escalate the views 
on material developments in the Clearing Agencies risk management and 
operations to the Boards for their consideration. The Boards will 
consider and document their consideration of the views of Clearing 
Agency participants and other relevant stakeholders regarding material 
developments in the Clearing Agencies' risk management and operations 
that are escalated by senior management via the Advisory Councils or 
other appropriate means.\20\
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    \20\ See NSCC Notice of Filing, 89 FR 71648; DTC Notice of 
Filing, 89 FR 71599; and FICC Notice of Filing, 89 FR 71595, all at 
note 3 supra.
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    The Proposed Rule Changes also define ``material developments'' as 
including developments that would significantly affect the risk and/or 
operational profile of a Clearing Agency and/or would significantly 
affect the rights and obligations of relevant stakeholders. Providing 
information on such material developments enables stakeholders to 
identify and evaluate the risk, fees and other significant costs they 
incur by participating or otherwise interacting with a Clearing Agency. 
``Material developments'' in the Clearing Agencies' risk management and 
operations would cover areas such as financial risk management, margin 
methodologies, cyber and operational resiliency, default management, 
fee structures, the introduction of new cleared products and services, 
access models, and the design and functioning of the processes and 
technology systems that support the infrastructure of the Clearing 
Agencies and the way that participants and other relevant stakeholders 
connect to such systems.\21\
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    \21\ As part of the Proposed Rule Changes, the Clearing Agencies 
filed certain materials as Exhibit 3: DTC Asset Services Advisory 
Council Charter; FICC Advisory Council Charter; NSCC and DTC 
Clearance and Settlement Advisory Council Charter; and Risk 
Management Advisory Council Charter. Pursuant to 17 CFR 240.24b-2, 
FICC requested confidential treatment of Exhibit 3.
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IV. 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 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) \23\ of the Act and Rules 17ad-
25(g), (h), (i), and (j),\24\ each promulgated under the Act.
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    \22\ 15 U.S.C. 78s(b)(2)(C).
    \23\ 15 U.S.C. 78q-1(b)(3)(F).
    \24\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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A. Consistency With Sections 17A(b)(3)(A) and (F) of the Act

    Section 17A(b)(3)(A) of the Act \25\ requires, among other things, 
that the Clearing Agencies be so organized and have the capacity to be 
able to comply with the provisions of the Act and the rules and 
regulations thereunder. Section 17A(b)(3)(F) of the Act \26\ requires, 
among other things, that the Clearing Agencies' rules must be designed 
to promote the prompt and accurate clearance and settlement of 
securities transactions, and to foster cooperation and coordination 
with persons engaged in the clearance and settlement of securities 
transactions. Based on review of the record, and for the reasons 
discussed below,\27\ the Proposed Rule Changes are consistent with the 
Clearing Agencies being so organized and having the capacity to comply 
with the Act and the rules and regulations thereunder, and the Proposed 
Rule Changes are designed to promote the prompt and accurate clearance 
and settlement of securities transactions and to foster cooperation and 
coordination with persons engaged

[[Page 95846]]

in the clearance and settlement of securities transactions. 
Accordingly, the Proposed Rule Changes are consistent with Section 
17A(b)(3)(A) and (F) of the Act.
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    \25\ 15 U.S.C. 78q-1(b)(3)(A).
    \26\ 15 U.S.C. 78q-1(b)(3)(F).
    \27\ See Sections IV.B, C, and D infra.
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B. Consistency With Rule 17Ad-25(g) and (h) Under the Act

    Rule 17Ad-25(g) requires each registered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to identify and document, and mitigate 
or eliminate existing or potential conflicts of interest in the 
decision-making process of the directors or senior managers of the 
registered clearing agency. Also, Rule 17Ad-25(h) requires each 
registered clearing agency to establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to require 
a director to document and inform the registered clearing agency 
promptly of the existence of any relationship or interest that 
reasonably could affect the independent judgment or decision-making of 
the director.
    As described above, the Proposed Rule Changes outline the written 
policies and procedures that provide that the Clearing agencies 
identify, document, and mitigate or eliminate existing or potential 
conflicts of interest in the decision-making process involving 
directors or senior managers. The Proposed Rule Changes require 
directors to document and inform the Corporate Secretary promptly of 
any relationship or interest that reasonably could affect the 
independent judgment or decision-making of the director. This is then 
escalated to the General Counsel's office who shall notify the Non-
Executive Chairman if it is determined that a conflict exists. These 
conflicts may be addressed in several pre-established ways. Based on 
the foregoing, the proposed changes are consistent with the 
requirements of Rules 17ad-25(g) and (h).

C. Consistency With Rule 17Ad-25(i) Under the Act

    Rule 17Ad-25(i) requires each registered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to require senior management to: (1) 
evaluate and document the risks related to an agreement with a service 
provider for core services, including under changes to circumstances 
and potential disruptions, and whether the risks can be managed in a 
manner consistent with the clearing agency's risk management framework; 
(2) submit to the board for review and approval any agreement that 
would establish a relationship with a service provider for core 
services; (3) be responsible for establishing the policies and 
procedures that govern relationships and manage risks related to such 
agreements with service providers for core services and require the 
board of directors to be responsible for reviewing and approving such 
policies and procedures; and (4) perform ongoing monitoring of the 
relationship, and report to the board of directors for its evaluation 
of any action taken by senior management to remedy significant 
deterioration in performance or address changing risks or material 
issues identified through such monitoring; or if the risks or issues 
cannot be remedied, require senior management to assess and document 
weaknesses or deficiencies in the relationship with the service 
provider for submission to the board of directors.\28\ As described 
above in Section III.C, the Proposed Rule Changes require senior 
management to evaluate and document risks related to agreements with 
services providers for core services, perform ongoing monitoring of the 
relationship, and report to the Boards for their evaluation of any 
action taken by senior management to remedy significant deterioration 
in performance or address changing risks or material issues identified 
through such monitoring, consistent with Rule 17Ad-25(i)(1) and (4). 
The Proposed Rule Changes also state that the Boards would review and 
approve the procedures regarding, and any agreements that establish a 
relationship with, service providers for core services, consistent with 
Rule 17Ad-25(i)(2) and (3). The Proposed Rule Changes further state 
that if the risk or material issues identified cannot be remedied, 
senior management is required to assess and document weaknesses or 
deficiencies in the relationship with the service provider for core 
services for submission to the Board for evaluation, consistent with 
Rule 17Ad-25(i)(4). Based on the foregoing, the proposed changes are 
consistent with the requirements of Rule 17Ad-25(i).
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    \28\ 17 CFR 240.17ad-25(i).
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D. Consistency With Rule 17Ad-25(j) Under the Act

    Rule 17Ad-25(j) requires registered clearing agencies to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to require the board of directors to solicit, 
consider, and document its consideration of the views of participants 
and other relevant stakeholders of the registered clearing agency 
regarding material developments in its risk management and operations 
on a recurring basis. The Proposed Rule Changes require a formal and 
regular process for solicitation, consideration, and documenting the 
consideration of participants and other relevant stakeholders. Based on 
the foregoing, the proposed changes are consistent with the 
requirements of Rules 17ad-25(j).
    Accordingly, the Commission finds these proposed changes consistent 
with the requirements of Rule 17Ad-25.\29\
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    \29\ 17 CFR 240.17ad-25.
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V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Changes are consistent with the requirements of the Act 
and in particular with the requirements of and in particular, Section 
17A(b)(3)(A) and (F) of the Act \30\ and Rule 17Ad-25 thereunder.\31\
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    \30\ 15 U.S.C. 78q-1(b)(3)(A).
    \31\ 17 CFR 240.17ad-25.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\32\ that proposed rule changes SR-NSCC-2024-006, SR-DTC-2024-009, and 
SR-FICC-2024-010 be, and hereby are, approved.\33\
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    \32\ 15 U.S.C. 78s(b)(2).
    \33\ In approving the Proposed Rule Changes, the Commission 
considered its 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.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-28256 Filed 12-2-24; 8:45 am]
BILLING CODE 8011-01-P
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