Document ID: SEC-2014-2100-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2014-12-12T05:00Z

[Federal Register Volume 79, Number 239 (Friday, December 12, 2014)]
[Notices]
[Pages 73927-73930]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-29179]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73787; File No. SR-FICC-2014-06]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Amend the Rules of the 
Government Securities Division and the Mortgage-Backed Securities 
Division on Insolvency and Ceasing To Act

December 8, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\, and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 25, 2014, 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 the clearing agency. 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.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to the rules of the 
Government Securities Division (``GSD Rules'') of FICC and the rules of 
the Mortgage-Backed Securities Division (``MBSD Rules'') of FICC (each 
of GSD and MBSD, a ``Division'' of FICC) on insolvency and ceasing to 
act that simplify in certain respects FICC's process in a cease to act 
situation and provide greater legal certainty for FICC and its members, 
particularly in an intra-day cease to act situation.

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 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

1. Purpose
    The purpose of this filing is to amend the GSD Rules and the MBSD 
Rules on insolvency and ceasing to act in order to simplify in certain 
respects FICC's process in a cease to act situation and provide greater 
legal certainty for FICC and its members, particularly in an intra-day 
cease to act situation.
Background
    In connection with lessons learned from a recent close-out 
simulation exercise conducted by The Depository Trust & Clearing 
Corporation, FICC's parent company, in which FICC participated, and 
related review of the GSD Rules and the MBSD Rules, certain potential 
challenges with administering certain aspects of the GSD Rules and the 
MBSD Rules on insolvency and ceasing to act described below, 
particularly in an intra-day cease to act situation, were identified.
``Time of Insolvency'' and ``Cut-Off Time''
    Currently, GSD and MBSD include in their insolvency rules (GSD Rule 
22, MBSD Rule 16) and cease to act rules (GSD Rule 22A, MBSD Rule 17) 
the

[[Page 73928]]

concept of a ``Time of Insolvency'', which is defined to mean the time 
at which FICC determines to its reasonable satisfaction that a member 
is ``insolvent'' within the meaning of GSD Rule 22 or MBSD Rule 16, 
respectively.
    This ``Time of Insolvency'' concept is separate from the time at 
which FICC ceases to act for a member, and such ``Time of Insolvency'' 
is currently used in the GSD Rules and the MBSD Rules as a line of 
demarcation when determining FICC's obligations with respect to pending 
transactions involving the insolvent member. Specifically, transactions 
with the insolvent member that are not compared or deemed compared in 
accordance with the GSD Rules or the MBSD Rules, respectively, prior to 
the ``Time of Insolvency'' are not eligible to be part of the close-out 
process, unless otherwise determined by the Board of Directors of FICC 
in order to promote orderly settlement.
    For a non-insolvency cease to act situation, the GSD Rules and the 
MBSD Rules on ceasing to act (GSD Rule 22A, MBSD Rule 17) currently 
include the concept of a ``Cut-Off Time'', which is defined to mean a 
time specified in advance by FICC in a notice to its membership at 
which it will cease to act for a member. Like the ``Time of 
Insolvency'' concept, ``Cut-Off Time'' is currently used in the GSD 
Rules and the MBSD Rules when determining FICC's obligations with 
respect to pending transactions involving the defaulted member.
    Identifying an exact time at which a member has become 
``insolvent'' for purposes of establishing a ``Time of Insolvency'' may 
pose potential challenges for FICC in circumstances where the member is 
deemed ``insolvent'' based upon the determination or action of a third 
party, such as the member's regulator, supervisory authority or a court 
of competent jurisdiction. In an intra-day cease to act situation where 
transaction data is being submitted to FICC in real-time, these 
potential challenges with identifying an exact ``Time of Insolvency'' 
may create a lack of legal certainty for FICC and its members regarding 
FICC's obligations with respect to pending transactions involving the 
insolvent member. In light of the foregoing, FICC proposes to remove 
the ``Time of Insolvency'' concept from the GSD Rules and the MBSD 
Rules and instead simply rely on the single time it ceases to act for 
an insolvent member for purposes of determining its obligations with 
respect to pending transactions involving such insolvent member.
    In order to also simplify its process in non-insolvency cease to 
act situations, FICC proposes to remove the separate ``Cut-Off Time'' 
concept from the GSD Rules and the MBSD Rules and instead rely on the 
single time it ceases to act for a defaulted member for purposes of 
determining its obligations with respect to pending transactions 
involving such defaulted member.\3\
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    \3\ It should be noted that this proposed change will more 
closely align the GSD Rules and the MBSD Rules with the rules of 
FICC's affiliate, National Securities Clearing Corporation 
(``NSCC''). Under its Rule 18 (Procedures for When the Corporation 
Declines or Ceases to Act), NSCC relies on the time it declines or 
ceases to act for a member when determining which transactions 
involving such member will be excluded from its operations, rather 
than on a separate ``Time of Insolvency'' or ``Cut-Off Time'', as 
applicable.
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Transactions Deemed Compared Based Solely on Non-Defaulting Member Data
    Currently, the provisions of the GSD Rules and the MBSD Rules on 
ceasing to act (GSD Rule 22A, MBSD Rule 17), and the related prongs of 
the ``Compared Trade'' definition in Rule 1 of each of the Division's 
Rules, provide that, in the context of FICC ceasing to act for a 
member, a transaction involving such member that would not otherwise be 
compared or deemed compared under the GSD Rules or the MBSD Rules, 
respectively, may, in certain circumstances, be deemed a compared trade 
based solely on data submitted by a non-defaulting member. The 
determination of whether such a transaction should be deemed a compared 
trade is currently based on a multi-pronged facts and circumstances-
based test, including determinations as to whether the transaction was 
executed prior to FICC ceasing to act for the defaulted member, whether 
the transaction was entered into in good faith and not primarily in 
order to take advantage of the defaulted member's financial condition 
and whether the transaction is an Off-the-Market Transaction as defined 
in Rule 1 of each of the Division's Rules.
    Administering such a multi-pronged facts and circumstances-based 
test for individual transactions in a cease to act situation, 
particularly an intra-day cease to act situation where transaction data 
is being submitted to FICC in real-time, may pose potential challenges 
to FICC and create a lack of legal certainty for FICC and its members 
regarding FICC's obligations with respect to individual pending 
transactions involving the insolvent or otherwise defaulted member. In 
order to simplify FICC's process in a cease to act situation and 
provide FICC and its members with greater ex ante legal certainty 
regarding the rules applicable to pending transactions involving an 
insolvent or otherwise defaulted member, FICC proposes to remove the 
multi-pronged facts and circumstances-based test and the related 
provisions of each of the Division's Rules and instead simply rely on 
the compared trade definitions under each of the Division's Rules, 
subject to the discretion of the Board of Directors of FICC to 
determine otherwise in order to promote orderly settlement with respect 
to transactions the data on which have been submitted only by non-
defaulting members.
Proposed GSD Rule Changes
    FICC is proposing to amend the GSD Rules as follows:
    In Rule 1--``Definitions'', the following definitions have been 
revised:
    The term ``Compared Trade'' is revised to remove the prong of the 
definition which provides that, in the context of FICC ceasing to act 
for a member under GSD Rule 22A, a transaction involving such member 
that would not otherwise be a Compared Trade under the GSD Rules may, 
in certain circumstances, be deemed a Compared Trade based solely on 
data submitted by a non-defaulting member.
    The term ``Off-the-Market Transaction'' is revised to conform the 
text and the numbering of the definition with the text and numbering of 
the parallel ``Off-the-Market Transaction'' definition in the MBSD 
Rules.
    In Rule 3A--``Sponsoring Members and Sponsored Members'', Sections 
15(a) and 16(a) are revised to remove references to Rule 22, current 
Section 3 (Notification of Insolvency) and related conforming changes 
to the text of such sections are made. Section 15(b) is revised to 
remove the reference to the ``Time of Insolvency'' concept and to align 
the text regarding the actions taken by FICC in connection with the 
insolvency of a Sponsored Member with the parallel text included in 
Section 16 relating to the actions taken by FICC in connection with the 
insolvency of a Sponsoring Member. Consistent with the numbering of 
Section 15, Section 16(a) is revised to make the second paragraph a new 
subsection (b). New Section 16(b) is also revised to align the text 
regarding the actions taken by FICC in connection with the insolvency 
of a Sponsoring Member with the parallel text included in Section 15(b) 
relating to the actions taken by FICC in connection with the insolvency 
of a Sponsored Member.
    In Rule 22--``Insolvency of a Member'', current Section 3, which 
provides for FICC to notice its membership and the Securities and

[[Page 73929]]

Exchange Commission (SEC) regarding the insolvency of a member, is 
removed in order to clarify that the membership and the SEC will only 
receive one notice from FICC at the time it ceases to act for a member 
in accordance with the provisions of Section 1 of Rule 22A (Procedures 
for When the Corporation Ceases to Act), whether FICC ceases to act for 
the member for insolvency or non-insolvency related reasons. Section 4 
(Ceasing to Act for the Member) is renumbered as new Section 3 and 
revised to remove the reference to the ``Time of Insolvency'' concept.
    In Rule 22A--``Procedures for When the Corporation Ceases to Act'', 
Section 1 (Notification) is revised to clarify that FICC will notice 
the SEC as well as its membership of every decision to cease to act for 
a member. Section 1 is further revised to remove the requirement that 
FICC establish a separate ``Time of Insolvency'', in the event it 
ceases to act because of a member's insolvency, or ``Cut-Off Time'', in 
the event it ceases to act for a member for non-insolvency related 
reasons.
    Sections 2, 2(a) and 2(b) are revised remove the ``Time of 
Insolvency'' and ``Cut-Off Time'' concepts, and instead rely on the 
time FICC ceases to act for a member for purposes of determining its 
obligations with respect to pending transactions involving such member. 
Section 2(a) is further revised to use the defined term ``Compared 
Trade'' for purposes of clarifying which transactions are eligible to 
be part of the close-out process as of the time FICC ceases to act for 
a member, subject to the discretion of the Board of Directors of FICC 
to determine otherwise in order to promote orderly settlement.
    Section 2(c), which provides that, in the context of FICC ceasing 
to act for a member, a transaction involving such member that would not 
otherwise be compared or deemed compared under the GSD Rules may, in 
certain circumstances, be deemed compared based solely on data 
submitted by a non-defaulting member, based on a multi-pronged facts 
and circumstances-based test, is removed. FICC would instead rely on 
the ``Compared Trade'' definition in GSD Rule 1 when determining its 
obligations with respect to pending transactions involving an insolvent 
or otherwise defaulted member, subject to the discretion of the Board 
of Directors of FICC to determine otherwise in order to promote orderly 
settlement with respect to transactions the data on which have been 
submitted only by non-defaulting members.
Proposed MBSD Rule Changes
    FICC is proposing to amend the MBSD Rules as follows:
    In Rule 1--``Definitions'', the following definitions have been 
revised:
    The term ``Compared Trade'' is revised to remove the prong of the 
definition which provides that, in the context of FICC ceasing to act 
for a member under MBSD Rule 17, a transaction involving such member 
that would not otherwise be compared or deemed compared under the MBSD 
Rules may, in certain circumstances, be deemed a Compared Trade based 
solely on data submitted by a non-defaulting member. The ``Compared 
Trade'' definition is further clarified to reference the specific MBSD 
Rules (Rule 5 and Rule 7) pursuant to which a transaction would be 
compared or deemed compared by MBSD.
    In Rule 16--``Insolvency of a Member'', current Section 3, which 
provides for FICC to notice its membership and the Securities and 
Exchange Commission (SEC) regarding the insolvency of a member, is 
removed in order to clarify that the membership and the SEC will only 
receive one notice from FICC at the time it ceases to act for a member 
in accordance with the provisions of Section 1 of Rule 17 (Procedures 
for When the Corporation Ceases to Act), whether FICC ceases to act for 
the member for insolvency or non-insolvency related reasons. Section 4 
(Ceasing to Act for the Member) is renumbered as new Section 3 and 
revised to remove the reference to the ``Time of Insolvency'' concept.
    In Rule 17--``Procedures for When the Corporation Ceases to Act'', 
Section 1 (Notification) is revised to clarify that FICC will notice 
the SEC as well as its membership of every decision to cease to act for 
a member. Section 1 is further revised to remove the requirement that 
FICC establish a separate ``Time of Insolvency'', in the event it 
ceases to act because of a member's insolvency, or ``Cut-Off Time'', in 
the event it ceases to act for a member for non-insolvency related 
reasons.
    Sections 2, 2(a), 2(d) and 2(e) are revised to remove the ``Time of 
Insolvency'' and ``Cut-Off Time'' concepts, and instead rely on the 
time FICC ceases to act for a member for purposes of determining its 
obligations with respect to pending transactions involving such member.
    Section 2(g), which provides that, in the context of FICC ceasing 
to act for a member, a transaction involving such member that would not 
otherwise be compared or deemed compared under the MBSD Rules may, in 
certain circumstances, be deemed compared based solely on data 
submitted by a non-defaulting member, based on a multi-pronged facts 
and circumstances-based test, is removed. FICC would instead rely on 
the compared trade definitions in the MBSD Rules when determining its 
obligations with respect to pending transactions involving an insolvent 
or otherwise defaulted member, subject to the discretion of the Board 
of Directors of FICC to determine otherwise in order to promote orderly 
settlement with respect to transactions the data on which have been 
submitted only by non-defaulting members.
2. Statutory Basis
    The proposed rule is consistent with Section 17A(b)(3)(F) \4\ of 
the Securities and Exchange Act of 1934, as amended, and the rules and 
regulations promulgated thereunder because it will promote the prompt 
and accurate clearance and settlement of securities transactions and 
remove impediments to and perfect the mechanism of a national system 
for the prompt and accurate clearance and settlement of securities 
transactions in that it will simplify in certain respects FICC's 
process in a cease to act situation and provide greater legal certainty 
for FICC and its members as to FICC's obligations with respect to 
pending transactions involving an insolvent or otherwise defaulted 
member, particularly in an intra-day cease to act situation.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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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 because it relates to 
changes to FICC's insolvency and cease to act rules that would apply 
equally to all members of each Division of FICC.

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

    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

[[Page 73930]]

to be appropriate and publishes its reasons for so finding or (ii) as 
to which the self-regulatory organization consents, the Commission 
will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

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

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or
     Send an email to rule-comment@sec.gov. Please include File 
No. SR-FICC-2014-06 on the subject line.

Paper Comments

     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-FICC-2014-06. 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 at http://www.dtcc.com/~/media/Files/Downloads/legal/rule-
filings/2014/ficc/SR-FICC-2014-06.pdf. 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-2014-06 and should be submitted on 
or before January 2, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-29179 Filed 12-11-14; 8:45 am]
BILLING CODE 8011-01-P