[Federal Register Volume 80, Number 11 (Friday, January 16, 2015)]
[Notices]
[Pages 2452-2455]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-00576]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 74033; File No. SR-FICC-2014-12]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify the Fee Schedule in the Mortgage-Backed Securities Division 
Clearing Rules

January 12, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 30, 2014 the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by FICC. FICC filed the proposal pursuant to 
Section 19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-4(f)(2) thereunder 
\4\ so that the proposal was effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change is filed by FICC and consists of 
modifications to the fee schedule in the Mortgage-Backed Securities 
Division (``MBSD'') Clearing Rules (the ``Clearing Rules'').

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, FICC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FICC has prepared

[[Page 2453]]

summaries, set forth in sections A, B, and C below, of the most 
significant aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(i) Purpose
    FICC is proposing to add a fee (the ``development fee'') to the 
MBSD Clearing Rules to cover the development cost of the MBSD Novation 
Service. Clearing members will be assessed the development fee as of 
January 1, 2015 and it will remain in effect for three (3) consecutive 
years. FICC will collect this fee on a monthly basis through the cash 
settlement process and the fee will be identified as line item ``NOV'' 
on each clearing member's cash obligation settlement report.
    The cumulative amount of the development fees collected over the 
three (3) year period is expected to cover FICC's estimated cost of 
developing the MBSD Novation Service. If the actual development cost is 
materially greater than estimated, then FICC may increase transaction 
fees in order to make up the difference,\5\ but will not increase the 
development fees. If the actual development cost is less than the 
estimated development cost, FICC will apportion the excess fees 
collected to other MBSD service enhancements and/or return excess fees 
to clearing members on a pro rata basis.
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    \5\ Any such fee increase will be subject to rule filing 
approval by the Commission.
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    The MBSD Novation Service will be the subject of a future FICC rule 
filing subject to the Commission's review and approval. If FICC does 
not receive the Commission's approval or materially modifies the 
proposed service for any reason, FICC will suspend monthly billing of 
the development fee and, following consultation with members, submit a 
new fee filing to the Commission that either terminates or modifies the 
fee structure to account for any changes in development costs 
associated with the change to the service.
    FICC has discussed the development fee with each of the clearing 
members.
A. MBSD Novation Service--Overview of the Service for Which the 
Development Fee Is Proposed To Be Charged
    Through the MBSD Novation Service, FICC will provide MBSD clearing 
members an enhancement to the current processing of their transactions 
from an operational perspective. Specifically, FICC will step in as the 
counterparty to all subsequent trades resulting from the to-be-
announced (``TBA'') netting process; and FICC will also step in as the 
counterparty to all pool allocations to complete each clearing member's 
TBA trades in preparation for the pool netting process. This will allow 
FICC to eliminate the Notification of Settlement \6\ (``NOS'') process. 
Currently, FICC is unaware of each clearing member's allocation 
activities with respect to their settlement balance order trades, 
trade-for-trade transactions or specified pool trades. As a result of 
such activity settling away from FICC, FICC relies on each clearing 
member's submission of NOS to inform FICC of when such member's trades 
have settled. With the MBSD Novation Service, all clearing members will 
submit all trade activity showing FICC as the counterparty which will 
allow for the elimination of the NOS process.
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    \6\ As defined in the MBSD Clearing Rules, the term 
``Notification of Settlement'' means an instruction submitted to 
FICC by a purchasing or selling clearing member pursuant to the MBSD 
Clearing Rules reflecting settlement of a settlement balance order 
trade, trade-for-trade transaction or specified pool trade. The MBSD 
Clearing Rules are available on DTCC's Web site, http://www.dtcc.com/legal/rules-and-procedures.aspx.
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    The MBSD Novation Service will provide further enhancements by 
allowing additional types of trades to settle with FICC as the 
counterparty, namely, trades carrying stipulations (referred to as 
``STIP trades'') and specified pool trades. Additionally, the service 
will simplify the processing of specified pool trades by allowing 
clearing members to match specified pool trades based on pool number or 
pool CUSIP number without the need for inclusion of a reference to a 
TBA CUSIP.
B. MBSD Novation Service--Development
    FICC will begin the development phase for this initiative during 
the second quarter of 2015. The overall development will include the 
following:
1. Technical Specifications & System Build (Second Quarter 2015--Third 
Quarter 2015)
    The technical specifications for this service will include the 
design of new messaging specifications, the development of a new 
allocation engine, and the development of a new netting engine to 
process TBA transactions. Upon completion, FICC's Technology team and 
Product Management team will confirm that the technical specifications 
are consistent with FICC's internal business requirements for this 
service. Next, the Technology team will begin to build the components 
for the system. The technical specifications are expected to be 
completed during the second quarter of 2015 and the system build will 
commence shortly thereafter with completion by the end of the third 
quarter of 2015.
2. Internal Testing (Fourth Quarter 2015)
    The system build for the MBSD Novation Service may connect with 
DTCC's other existing systems. As a result, each of the existing 
systems must be thoroughly tested to ensure that they continue to 
operate as expected.
    The existing systems that will be tested include the following:
    a. Real-Time Trade Matching (RTTM[supreg]),
    b. Electronic Pool Notification,
    c. Pool Netting,
    d. Billing system, and
    e. Report Center.
    Upon the completion of the system build, the internal testing of 
existing systems will commence. Internal testing is expected to begin 
during the fourth quarter of 2015 and continue for approximately 3 to 6 
months.
3. External Member Testing (Second Quarter 2016)
    During the external member testing phase, all clearing members and 
service bureaus will test the new processing, including the messaging 
aspects. Clearing members will be expected to complete their testing 
with FICC prior to the implementation of the MBSD Novation Service. 
External member testing is expected to begin during the second quarter 
of 2016 and continue for approximately 9 to 12 months.
4. Production Phase (Second Quarter 2017)
    It is expected that the MBSD Novation Service will be placed into 
production over a 6 month period. This will provide MBSD and its 
clearing members with an opportunity to adjust to the new processing. 
Initially, TBA CUSIPs with limited trade volumes will be processed 
through the service and TBA CUSIPs with the highest trade volumes will 
be the last to be processed through the service.
C. Development Fee Calculation
    The development fees that FICC is proposing to charge clearing 
members are based upon the cost estimates for the design, build, 
testing and production of the MBSD Novation Service as discussed above. 
FICC has calculated the development fee for each clearing member as 
summarized below.
    FICC will assign each single entity clearing member and family of

[[Page 2454]]

members \7\ to one of four tiers based on the fees paid by such member 
or family of members, as applicable, during the period of January 1st 
through August 31st of the previous year (the ``calculation 
period'').\8\ FICC will then charge the tiered development fee to the 
single entity clearing member or calculate a portion of the tiered fee 
for each clearing member within the family of members. This portion 
will be based upon the fees generated by the clearing member during the 
calculation period. As noted above, the development fee will be 
collected as part of MBSD's cash settlement process.
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    \7\ As used herein, ``family of members'' means collectively, 
each MBSD clearing member that controls or is controlled by another 
MBSD clearing member and each such member that is under the common 
control of any organization, entity or individual. ``Control'' for 
these purposes means the direct or indirect ownership of more than 
50% of the voting securities or other voting interests of any 
organization, entity or person.
    \8\ FICC selected January 1st through August 31st as the 
calculation period in order to give clearing members enough time to 
consider the fees as they assess their budget.
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    The tiered development fee for 2015, 2016 and 2017 will be set 
during October of the previous year for the calculation period. The 
2015 development fee was determined in October 2014 by calculating the 
amount of fees paid by clearing members from January 1, 2014 through 
August 31, 2014; the 2016 development fee will be determined in October 
2015 by calculating the amount of fees paid by clearing members from 
January 1, 2015 through August 31, 2015; and the 2017 development fee 
will be determined in October 2016 by calculating the amount of fees 
paid by clearing members from the period of January 1, 2016 through 
August 31, 2016.
    Below is the tiered development fee for 2015, 2016 and 2017 which 
is applicable to single entity clearing members and each family of 
members, as applicable. Tier 1 represents single entity clearing 
members and families of members, as applicable, that have generated 
fees over $1,000,000.00 during the calculation period; Tier 2 
represents single entity clearing members and families of members, as 
applicable, that have generated fees in the amount of $250,000.00 to 
$999,999.99 during the calculation period; Tier 3 represents single 
entity clearing members and families of members, as applicable, that 
have generated fees in the amount of $100,000.00 to $249,999.99 during 
the calculation period; and Tier 4 represents single entity clearing 
members and families of members, as applicable, that have generated 
fees under $100,000.00 during the calculation period. As noted above, 
once FICC has determined the appropriate tier development fee based on 
the single entity clearing members or families fees, FICC will charge 
as follows:
    1. Each single entity clearing member will be charged the entire 
amount of the tiered development fee; and
    2. each clearing member within a family will be charged a portion 
of the tiered development fee based upon such clearing member's fees 
during the calculation period.
    As noted above, all MBSD clearing members will be billed once a 
month through FICC's cash settlement process.

------------------------------------------------------------------------
                                     2016 Monthly        2017 Monthly
  2015 Monthly development fee      development fee     development fee
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Tier 1 $20,000/mo...............  Tier 1 $18,000/mo.  Tier 1 $18,000/mo.
Tier 2 $10,000/mo...............  Tier 2 $8,000/mo..  Tier 2 $8,000/mo.
Tier 3 $6,000/mo................  Tier 3 $4,000/mo..  Tier 3 $4,000/mo.
Tier 4 $1,000/mo................  Tier 4 $1,000/mo..  Tier 4 $1,000/mo.
------------------------------------------------------------------------

    The cumulative amount of the development fees collected over the 
three (3) year period is expected to cover the cost of developing the 
MBSD Novation Service. FICC believes that the development fees are 
reasonable because they are based on FICC's estimates of the cost of 
the project which involves the stages referred to above (design, 
testing and moving into production). FICC believes that the development 
fees are proposed to be applied fairly because each clearing member 
will be charged an amount that is consistent with the previous year's 
fees that such member has paid, which is directly correlated to the 
member's (or its overall family's) usage of MBSD's clearing and 
settlement service.
(ii) Statutory Basis
    FICC believes that the proposed rule changes are consistent with 
the requirements of Section 17A of the Securities Exchange Act of 1934, 
as amended (the ``Act'').
    The proposed development fee will facilitate the establishment of a 
service that will promote the prompt and accurate clearance and 
settlement of securities transactions; the MBSD Novation Service will 
result in more transactions settled with FICC as central counterparty 
and will provide operational efficiencies for MBSD securities 
transaction processing.
    In connection with Section 17A(b)(3)(F) of the Act \9\ the 
Commission has stated that ``continued and improved understanding of . 
. . costs associated with using a covered clearing agency's services 
should promote confidence generally in the covered clearing agency's 
ability to set and manage appropriately . . . costs.'' \10\ The 
proposed development fee improves the membership's understanding of the 
associated costs and helps FICC manage the costs by (1) disclosing the 
specific amount that clearing members will be charged for the 
development of this service, (2) providing a discrete time period for 
the allocation of such charges and (3) providing members with the 
opportunity to budget in advance for the associated costs.
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ Release No. 34-71699 (March 12, 2014), 79 FR 16865 (March 
26, 2014).
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    The proposed prefunding fee enables FICC to maintain a certain 
level of financial resources in accordance with Rule 17Ad-22(c)(1) of 
the Clearing Agency Standards \11\ while balancing the request of 
clearing members for services that are operationally beneficial for 
them.
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    \11\ Release No. 34-68080 (October 22, 2012), 77 FR 66219 
(November 2, 2012).
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    The development fee is also consistent with Section 17A(b)(3)(D) of 
the Act,\12\ which requires that the MBSD Rules provide for the 
equitable allocation of reasonable fees among its participants. As 
noted above, the development fee will be applied fairly among the 
clearing members because the charges are based upon the previous year's 
activity, which is directly correlated to the member's usage of MBSD's 
clearing and settlement service.
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    \12\ 5 U.S.C. 78q-1(b)(3)(D).
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    The proposed fee is reasonable as required by Section 17A(b)(3)(D) 
of the Act because FICC intends to collect only the approximate cost of 
developing the service that clearing members have requested. Collecting 
this amount in

[[Page 2455]]

advance is reasonable because it allows FICC to use amounts collected 
in a targeted manner to develop this specific service, rather than 
raising overall fees, where the amount collected over any given period 
may vary based on transaction volumes and clearing members will have 
less certainty as to the amounts they will pay.

(B) Clearing Agency's Statement on Burden on Competition

    FICC does not believe that the proposed rule change will have any 
impact, or impose any burden, on competition. As noted above, the 
development fees will be applied fairly among the clearing members 
because each clearing member or family of members, as applicable, will 
be charged an amount that is consistent with the previous year's fees, 
which is directly correlated to the member's or family's usage of 
MBSD's clearing and settlement service. FICC does not believe that 
calculating the proposed development fee with respect to a family of 
members, where applicable, imposes a burden on competition. If FICC 
assessed the proposed development fee on an individual entity without 
regard to the activity of its family members, it is possible that the 
family of members would be charged a significantly higher fee for the 
same amount of activity conducted by a single firm with no family 
members in MBSD (which would result in the fee being cost prohibitive 
for the family). This aspect of the development fee has been discussed 
with the MBSD members and no member raised an issue in this regard.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    Written comments relating to the proposed rule change have not yet 
been solicited or received. FICC will notify the Commission of any 
written comments received by FICC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The forgoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \13\ and Rule 19b-4(f)(2) \14\ thereunder. 
At any time within 60 days of the filing of the proposed rule change, 
the Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
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    \13\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \14\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#582a2d343d753b3735353d362c2b182b3d3b763f372e"><span class="__cf_email__" data-cfemail="2153544d440c424e4c4c444f5552615244420f464e57">[email protected]</span></a>. Please include 
File Number SR-FICC-2014-12 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-2014-12. 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 Web site (http://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 Web site 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 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of FICC and on its 
Web site (http://www.dtcc.com/legal/sec-rule-filings.aspx). All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FICC-2014-12 and should be 
submitted on or before February 6, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-00576 Filed 1-15-15; 8:45 am]
BILLING CODE 8011-01-P


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