[Federal Register Volume 82, Number 186 (Wednesday, September 27, 2017)]
[Notices]
[Pages 45106-45109]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-20622]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81667; File Nos. SR-DTC-2017-016; SR-NSCC-2017-016; SR-
FICC-2017-020]


Self-Regulatory Organizations; The Depository Trust Company; 
National Securities Clearing Corporation; Fixed Income Clearing 
Corporation; Notice of Filings of Proposed Rule Changes To Adopt the 
Clearing Agency Securities Valuation Framework

September 21, 2017.
    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 September 8, 2017, The Depository Trust Company (``DTC''), National 
Securities Clearing Corporation (``NSCC''), and Fixed Income Clearing 
Corporation (``FICC,'' each a ``Clearing Agency,'' and together with 
DTC and NSCC, the ``Clearing Agencies''), filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule changes as 
described in Items I, II and III below, which Items have been prepared 
primarily by the Clearing Agencies. The Commission is publishing this 
notice to solicit comments on the proposed rule changes from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agencies' Statement of the Terms of Substance of the 
Proposed Rule Changes

    The proposed rule changes would adopt the Clearing Agency 
Securities Valuation Framework (``Framework'') \3\ of the Clearing 
Agencies, as described below, including both of FICC's divisions: the 
Government Securities Division (``GSD'') and the Mortgage-Backed 
Securities Division (``MBSD''). The Framework would be maintained by 
the Clearing Agencies to support their compliance with Rule 17Ad-
22(e)(4)(i) \4\ under the Act and, with respect to NSCC and FICC as 
central counterparties (the ``CCPs''), Rule 17Ad-22(e)(6)(iv) \5\ under 
the Act, as described below.
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    \3\ Pursuant to a telephone call with the Clearing Agencies' 
internal counsel on September 19, 2017, staff in the Commission's 
Office of Clearance and Settlement corrected the title of the 
Framework from ``Clearing Agency Securities Framework'' to 
``Clearing Agency Securities Valuation Framework,'' as it now reads.
    \4\ 17 CFR 240.17Ad-22(e)(4)(i).
    \5\ 17 CFR 240.17Ad-22(e)(6)(iv). Each of the Clearing Agencies 
is a ``covered clearing agency'' as defined in Rule 17Ad-22(a)(5), 
and must comply with subsection (e) of Rule 17Ad-22. As Rule 17Ad-
22(e)(6)(iv) only applies to covered clearing agencies that are 
central counterparties, references thereto and compliance therewith 
apply to the CCPs only and do not apply to DTC.
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    Although the Clearing Agencies would consider the Framework to be a 
rule, the proposed rule changes do not require any changes to the 
Rules, By-laws and Organization Certificate of DTC (``DTC Rules''), the 
Rulebook of GSD (``GSD Rules''), the Clearing Rules of MBSD (``MBSD 
Rules''), or the Rules & Procedures of NSCC (``NSCC Rules''), as the 
Framework would be a standalone document.\6\
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    \6\ Capitalized terms not defined herein are defined in the DTC 
Rules, GSD Rules, MBSD Rules, or NSCC Rules, as applicable, 
available at http://dtcc.com/legal/rules-and-procedures.
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II. Clearing Agencies' Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Changes

    In their filings with the Commission, the Clearing Agencies 
included statements concerning the purpose of and basis for the 
proposed rule changes and discussed any comments they received on the 
proposed rule changes. The text of these statements may be examined at 
the places specified in Item IV below. The Clearing Agencies have 
prepared summaries, set forth in sections A, B, and C below, of the 
most significant aspects of such statements.

[[Page 45107]]

(A) Clearing Agencies' Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Changes

1. Purpose
    The Clearing Agencies are proposing to adopt the Framework, which 
would set forth the securities valuation practices adopted by the 
Clearing Agencies for (i) securities eligible for clearance and 
settlement processing by the applicable Clearing Agency and (ii) with 
respect to the CCPs, eligible securities in their respective Clearing 
Funds (each, a ``CUSIP''). The processes and systems described in the 
Framework, and any policies, procedures, or other documents created to 
support those processes, support the Clearing Agencies' compliance with 
the requirements of Rule 17Ad-22(e)(4)(i) \7\ and, with respect to the 
CCPs, Rule 17Ad-22(e)(6)(iv).\8\ The Framework would be owned and 
managed by the head of the DTCC Securities Valuation team, on behalf of 
the Clearing Agencies.\9\
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    \7\ 17 CFR 240.17Ad-22(e)(4)(i).
    \8\ 17 CFR 240.17Ad-22(e)(6)(iv).
    \9\ The parent company of the Clearing Agencies is The 
Depository Trust & Clearing Corporation (``DTCC''). DTCC operates on 
a shared services model with respect to the Clearing Agencies. Most 
corporate functions are established and managed on an enterprise-
wide basis pursuant to intercompany agreements under which it is 
generally DTCC that provides a relevant service to a Clearing 
Agency.
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    The Framework would provide that (i) any changes to the Framework 
must be approved by the Boards or such committee as may be delegated 
authority by the Boards from time to time pursuant to their charters, 
(ii) the head of the Securities Valuation team, or a delegate thereof, 
reviews the Framework at least annually, and (iii) any and all changes 
to the Framework are subject to regulatory review and approval.
    To the extent the Clearing Agencies create any policies, procedures 
or other documents to support the execution of the Framework, the 
Framework would provide that such supplemental documentation is 
subordinate to the Framework, is reasonably and fairly implied by the 
Framework, and complies in all respects with the provisions of the 
Framework.
    As described in more detail below, the Framework would describe the 
manner in which the Clearing Agencies identify, measure, monitor, and 
manage the risks related to the pricing of the CUSIPs. The Framework 
would set forth the methodology of the Clearing Agencies for using 
timely price data and for pricing CUSIPs when pricing data are not 
readily available or reliable. The Framework would also describe the 
methodology for monitoring pricing data with respect to the CUSIPs.
Selection of Pricing Vendors
    Each Clearing Agency would value its applicable CUSIP prices (both 
end-of-day and intraday) primarily via receipt of files from third-
party pricing vendors (``Pricing Vendors'').\10\ For most CUSIPs, 
Pricing Vendors would supply the Clearing Agencies with intraday 
pricing files for each business day on at least an hourly basis.\11\ 
Pricing Vendors would be selected by each Clearing Agency based on a 
review of their service, including, at a minimum, a review of Pricing 
Vendors' securities coverage and a price quality check. Each Clearing 
Agency would perform due diligence on each Pricing Vendor prior to 
engagement thereof, and at least annually thereafter, to assess the 
reliability of such Pricing Vendor. Reliability of a Pricing Vendor 
would be determined by each Clearing Agency based on a range of 
factors, including, without limitation, whether such Pricing Vendor is 
able to provide accurate and timely pricing data with respect to each 
CUSIP.
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    \10\ When pricing data is not available from Pricing Vendors, 
the price would be procured from other internal or external sources.
    \11\ Certain CUSIPs may not be priced daily, and others may only 
be priced once each business day.
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    The Framework would provide that each CUSIP is assigned a primary 
source Pricing Vendor (``Primary Pricing Vendor'') and a secondary 
source Pricing Vendor (``Secondary Pricing Vendor''). In the event that 
the Primary Pricing Vendor becomes unavailable, unreliable, or 
otherwise unusable with respect to a CUSIP, the Secondary Pricing 
Vendor would be designated as the replacement for the Primary Pricing 
Vendor with respect to such CUSIP.
Monitoring and Pricing
    Each Clearing Agency would monitor and review each applicable 
Pricing Vendor's pricing at least once each business day to determine 
(i) whether any CUSIP's price has remained unchanged for an extended 
period, (ii) whether a CUSIP has been dropped from the Pricing Vendor's 
file, and (iii) whether any other circumstances exist that may call 
into question the reliability of any CUSIP's price.
    Each CUSIP's end-of-day price would be date stamped and identified 
with its Pricing Vendor source. In the event that both Primary Pricing 
Vendor and Secondary Pricing Vendor become unavailable, unreliable, or 
otherwise unusable with respect to a CUSIP for an end-of-day price, the 
applicable Clearing Agency would assign such CUSIP its last available 
price.
    Each CUSIP's intraday price would be time and date stamped and 
identified with its Pricing Vendor source. In the event that both 
Primary Pricing Vendor and Secondary Pricing Vendor become unavailable, 
unreliable, or otherwise unusable with respect to a CUSIP for a 
specific intraday interval, the applicable Clearing Agency would assign 
such CUSIP its last available price.
    If pricing data for a CUSIP is not available from Pricing Vendors 
or if the last available price is deemed to be unreliable or unusable 
with respect to a CUSIP, the applicable Clearing Agency would establish 
a price for the CUSIP based on valuation models, where applicable, and 
in accordance with the policies and procedures that support the 
Framework.
2. Statutory Basis
    The Clearing Agencies believe that the proposed rule changes are 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a registered clearing agency. In 
particular, the Clearing Agencies believe that the Framework is 
consistent with Section 17A(b)(3)(F) of the Act \12\ as well as Rule 
17Ad-22(e)(4) (i)\13\ and, with respect to the CCPs, Rule 17Ad-
22(e)(6)(iv) \14\ promulgated under the Act, for the reasons described 
below.
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22(e)(4)(i).
    \14\ 17 CFR 240.17Ad-22(e)(6)(iv).
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    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 to 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible.\15\ As described above, the Framework would set forth the 
manner in which the Clearing Agencies identify, measure, monitor, and 
manage the risks related to the pricing of securities processed or 
otherwise held by the Clearing Agencies. The processes, systems, and 
controls used by the Clearing Agencies to identify, measure, monitor, 
and manage such risks, as described in the Framework, and the policies 
and procedures that support these activities, would help assure that 
each Clearing Agency is using reliable sources of timely price data as 
well as procedures and sound valuation models when pricing data are not 
readily available or reliable. Using reliable

[[Page 45108]]

sources of timely price data as well as procedures and sound valuation 
models when pricing data are not readily available or reliable (i) with 
respect to the CCPs, would improve their margin system accuracy and 
(ii) with respect to DTC, is essential for the daily settlement of 
securities transactions in a fully collateralized system. Since margin 
and collateral play key roles in the applicable Clearing Agency's risk 
management process, having accurate margin system and collateral 
valuation would assist the Clearing Agencies to continue the prompt and 
accurate clearance and settlement of securities transactions and 
continue to assure the safeguarding of securities and funds which are 
in their custody or control or for which they are responsible. 
Therefore, the Clearing Agencies believe the Framework is consistent 
with the requirements of Section 17A(b)(3)(F) of the Act.\16\
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
    \16\ Id.
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    Rule 17Ad-22(e)(4)(i) under the Act requires that each covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to effectively identify, 
measure, monitor, and manage its credit exposures to participants and 
those arising from its payment, clearing, and settlement processes by 
maintaining sufficient financial resources to cover its credit exposure 
to each participant with a high degree of confidence.\17\ The Framework 
would describe how the Clearing Agencies identify, measure, monitor, 
and manage the risks related to the pricing of securities processed or 
otherwise held by the Clearing Agencies. The processes, systems, and 
controls used by the Clearing Agencies to identify, measure, monitor, 
and manage such risks, as described in the Framework, and the policies 
and procedures that support these activities, would help assure that 
each Clearing Agency is using (i) reliable sources of timely price data 
when pricing securities processed or otherwise held by the applicable 
Clearing Agency and (ii) procedures and sound valuation models when 
pricing data are not readily available or reliable. When pricing 
securities, using reliable sources of timely price data as well as 
procedures and sound valuation models when pricing data are not readily 
available or reliable is essential to each Clearing Agency's ability to 
effectively identify, measure, monitor and manage its credit exposure 
to participants and those arising from its payment, clearing, and 
settlement processes by maintaining sufficient financial resources to 
cover its credit exposure to each participant with a high degree of 
confidence. Therefore, the Clearing Agencies believe the Framework is 
consistent with the requirements of Rule 17Ad-22(e)(4)(i).\18\
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    \17\ 17 CFR 240.17Ad-22(e)(4)(i).
    \18\ Id.
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    Rule 17Ad-22(e)(6)(iv) under the Act requires that each covered 
clearing agency that is a central counterparty establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to cover its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum, uses 
reliable sources of timely price data and uses procedures and sound 
valuation models for addressing circumstances in which pricing data are 
not readily available or reliable.\19\ The Framework would describe how 
the CCPs identify, measure, monitor, and manage the risks related to 
the pricing of securities processed or otherwise held by the CCPs. The 
processes, systems, and controls used by the CCPs to identify, measure, 
monitor, and manage such risks, as described in the Framework, and the 
policies and procedures that support these activities, would help 
assure that each CCP is using reliable sources of timely price data as 
well as procedures and sound valuation models when pricing data are not 
readily available or reliable. Specifically, the Framework would set 
forth the methodology for pricing securities processed or otherwise 
held by each CCP, including monitoring pricing data with respect to the 
securities eligible for clearance and settlement processing by the CCP 
and for eligible securities held in its Clearing Fund. In addition, the 
Framework would describe how each CCP would price securities when 
pricing data are not readily available or reliable. By setting forth 
how the CCPs would use timely price data when pricing securities and 
how each CCP would price securities when pricing data are not readily 
available or reliable, the CCPs believe the Framework is consistent 
with the requirements of Rule 17Ad-22(e)(6)(iv).\20\
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    \19\ 17 CFR 240.17Ad-22(e)(6)(iv).
    \20\ Id.
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(B) Clearing Agencies' Statement on Burden on Competition

    None of the Clearing Agencies believe that the Framework would have 
any impact, or impose any burden, on competition because the proposed 
rule changes reflect some of the existing securities valuation 
practices that the Clearing Agencies employ, which have been designed 
to assist the Clearing Agencies in using reliable sources of timely 
price data as well as procedures and sound valuation models for 
addressing circumstances in which pricing data are not readily 
available or reliable. The proposed rule changes would not effectuate 
any changes to the Clearing Agencies' processes described therein as 
they currently apply to their respective members or participants.

(C) Clearing Agencies' Statement on Comments on the Proposed Rule 
Changes Received From Members, Participants, or Others

    The Clearing Agencies have not solicited or received any written 
comments relating to this proposal. The Clearing Agencies will notify 
the Commission of any written comments received by the Clearing 
Agencies.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the clearing agency consents, the Commission will:
    (A) By order approve or disapprove such proposed rule changes, or
    (B) institute proceedings to determine whether the proposed rule 
changes should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
changes are 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#e597908980c8868a8888808b9196a5968086cb828a93"><span class="__cf_email__" data-cfemail="196b6c757c347a7674747c776d6a596a7c7a377e766f">[email protected]</span></a>. Please include 
File Number SR-DTC-2017-016, SR-NSCC-2017-016, or SR-FICC-2017-020 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.

All submissions should refer to File Number SR-DTC-2017-016, SR-NSCC-
2017-016, or SR-FICC-2017-020. One of these file numbers should be 
included on the subject line if email is used. To help the Commission 
process

[[Page 45109]]

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 changes that are filed with the Commission, and all 
written communications relating to the proposed rule changes 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 the Clearing Agencies and on DTCC's Web site 
(http://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-DTC-2017-016, SR-NSCC-2017-016, or SR-
FICC-2017-020, and should be submitted on or before October 18, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-20622 Filed 9-26-17; 8:45 am]
 BILLING CODE 8011-01-P


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