Document ID: SEC-2018-1499-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2018-09-26T04:00Z

[Federal Register Volume 83, Number 187 (Wednesday, September 26, 2018)]
[Notices]
[Pages 48675-48678]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-20885]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84236; File No. SR-FICC-2018-006]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Granting Approval of Proposed Rule Change To Codify the 
Processing of Conditional Prepayment Rate Claims in the MBSD Rules and 
Make Other Changes

September 20, 2018.
    On July 26, 2018, Fixed Income Clearing Corporation (``FICC'') 
filed with the U.S. Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2018-006 pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on August 8, 2018.\3\ The Commission did not 
receive any comment letters on the proposed rule change. For the 
reasons discussed below, the Commission approves the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 83767 (August 2, 2018), 
83 FR 39143 (August 8, 2018) (SR-FICC-2018-006) (``Notice'').
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I. Description of the Proposed Rule Change

    The proposed rule change would make amendments to FICC's Mortgage-
Backed Securities Division (``MBSD'') Clearing Rules (``MBSD Rules'') 
\4\ in order to (i) add terms governing MBSD's current processing of 
conditional prepayment rate (``CPR'') claims to the MBSD Rules, and 
(ii) make certain clarifications and corrections in the MBSD Rules, as 
described below.\5\
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    \4\ Available at http://www.dtcc.com/legal/rules-and-procedures.
    \5\ Notice, 83 FR, at 39144.
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A. CPR Claims

    Mortgage pools \6\ are often traded in To-Be-Announced (``TBA'') 
trades, which are trades for which the actual identities of and/or the 
number of pools underlying each trade are unknown at the time of trade 
execution.\7\ MBSD guidelines provide that two business days prior to 
the established settlement date of the TBA settlement obligations, the 
FICC MBSD clearing member (``Clearing Member'') that has an obligation 
to deliver pools for the TBA transaction (i.e., the ``seller'') must 
allocate the pools to be delivered.\8\ FICC states that pursuant to the 
MBSD Rules, Clearing Members may substitute an underlying pool after it 
has been allocated with respect to a pool deliver obligation by 
providing instructions to FICC.\9\
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    \6\ A mortgage pool is a collection of mortgage loans or other 
collateral assembled by an originator or master services as 
collateral for a mortgaged-back security. Id.
    \7\ Notice, 83 FR, at 39144.
    \8\ Id.
    \9\ Id.
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    CPR is the percentage of the outstanding loan balance for a pool 
that is expected to be repaid over a one-year period.\10\ A CPR claim 
arises when an underlying TBA pool is allocated or substituted with a 
pool that pays down at a faster rate (i.e., has a higher CPR) than the 
average pay down rate for pools of the same type as the underlying pool 
being replaced.\11\ The result is that the buyer is receiving a pool 
with less value than anticipated based on the TBA terms.
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    \10\ Id.
    \11\ Notice, 83 FR, at 39144.
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    As provided in the SIFMA Guidelines,\12\ the industry currently has 
a process pursuant to which a buyer may make a CPR claim against the 
seller. The CPR claim process is intended to compensate the buyer for 
the excess amount that it is paying for the pool being delivered.\13\ 
Pursuant to SIFMA Guidelines, an entity is entitled to make a CPR claim 
if (i) the allocation or substitution giving rise to the CPR claim 
occurred after the factor release date \14\ following the scheduled 
contractual settlement date relating to the trade; (ii) the pools 
involved in the claim meet the criteria for fast paying pools in 
accordance with SIFMA Guidelines; (iii) the amount of the CPR claim is 
$10,000 or greater, or, in the

[[Page 48676]]

case that an entity is submitting a re-transmittal \15\ of a CPR claim, 
the CPR claim is $500 or greater; and (iv) 90 percent of the buyer's 
claimable unit has settled.\16\
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    \12\ Available at https://www.sifma.org/resources/general/tba-market-governance/ under ``Uniform Practices Manual.'' The SIFMA 
Guidelines are trading, clearing and settlement guidelines prepared 
by SIFMA intended to reflect common industry practices relating to 
confirming, comparing and settling mortgage-backed securities.
    \13\ Notice, 83 FR, at 39144.
    \14\ The term ``factor release date'' means, with respect to a 
pool, the date on which the Federal National Mortgage Association 
(``Fannie Mae''), the Federal Home Loan Mortgage Corporation 
(``Freddie Mac'') or the Government National Mortgage Association 
(``Ginnie Mae''), as applicable, release the ``factor'' that 
represents the percentage of the agency's original balance of the 
pool that remains outstanding as of such date. Id.
    \15\ A re-transmittal of a CPR claim occurs when a party with 
the pool deliver obligation passes the CPR claims it received to the 
entities that sent it the pools it used for delivery. Id.
    \16\ Notice, 83 FR, at 39144.
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    The proposed rule change would codify FICC's existing CPR claims 
process in the MBSD Rules, including adding a provision providing that 
a Clearing Member's cash settlement obligations would include the 
positive or negative amount of any valid CPR claim.\17\ FICC states 
that the proposed MBSD CPR claims process would generally follow the 
CPR claims process set forth in the SIFMA Guidelines and MBSD's current 
CPR claims process, with the following exceptions:
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    \17\ Id.
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1. Definition of Claimable Unit
    The proposed rule change would add to the MBSD Rules two 
definitions of ``claimable unit,'' the use of which would depend on the 
type of transaction.\18\ According to SIFMA Guidelines and FICC's 
current process, CPR claims are based on a ``claimable unit'' which 
defines the pool or group of pools that are included in a particular 
CPR claim.\19\ Also according to SIFMA Guidelines, a claimable unit is 
based on all pools allocated for a trade between factor release dates 
that have the same underlying TBA characteristics, such as product, 
coupon, trade date, settlement date and price.\20\
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    \18\ Id.
    \19\ Id.
    \20\ Id.
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    FICC states that it currently processes CPR claims using a 
different definition of claimable unit than the SIFMA definition. FICC 
states that its CPR claims process currently uses a definition of 
claimable unit based on characteristics of pools after MBSD Pool 
Netting \21\ takes place rather than based on underlying TBA 
characteristics. The Pool Netting process generally reduces the number 
of pool settlements by aggregating and matching offsetting allocated 
pools submitted by Clearing Members to arrive at a single net position 
per counterparty in a particular pool number.\22\ FICC states that if a 
pool obligation is a result of Pool Netting, FICC is unable to track 
the pool obligation to an original TBA trade or trades and would be 
unable to group pool obligations for CPR claims based on TBA 
characteristics as provided in SIFMA Guidelines.\23\
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    \21\ Pursuant to the MBSD Rules, the term ``Pool Netting'' means 
the service provided to Clearing Members, as applicable, and the 
operations carried out by FICC in the course of providing such 
service in accordance with MBSD Rule 8.
    \22\ Notice, 83 FR, at 39145.
    \23\ Id.
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    FICC proposes to use the same definition of claimable unit for CPR 
claims as SIFMA Guidelines if the pool obligations upon which the CPR 
claims are based have not been through MBSD Pool Netting. FICC states 
that this definition would be used for pool allocations or 
substitutions for pool obligations that have been allocated after the 
factor release date because pool obligations allocated after the factor 
release date do not go through the Pool Netting process.\24\ As a 
result, FICC states that it would be able to track the pool obligation 
to an original TBA trade, which would allow FICC to group the pool 
obligation with other pool obligations based on TBA 
characteristics.\25\
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    \24\ Id.
    \25\ Id.
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    FICC proposes to use a different definition of a claimable unit 
from the SIFMA Guidelines definition for CPR claims based on pool 
obligations that are a result of Pool Netting.\26\ FICC proposes to 
define a claimable unit for such pool obligations based on pool 
characteristics after Pool Netting, rather than based on the original 
TBA pool characteristics.\27\ FICC states that this definition would be 
used for substitutions for pool obligations that are a result of Pool 
Netting because FICC would be unable to track the pool obligation to an 
original TBA trade and thus unable to group such pool obligation with 
other pool obligations based on TBA characteristics.\28\
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    \26\ Id.
    \27\ Id.
    \28\ Id.
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2. Re-Transmittal Threshold
    The minimum threshold for a re-transmittal of a CPR claim under 
SIFMA Guidelines is $500.\29\ FICC's current process provides that the 
minimum threshold for re-transmittals is $5,000.\30\ FICC proposes to 
use the $500 re-transmittal minimum threshold for allocations (and 
related substitutions), where the allocations were made after the 
applicable factor release date, in order to be more consistent with 
SIFMA Guidelines and established industry practice.\31\ Meanwhile, FICC 
proposes to use a $5,000 re-transmittal threshold for substitutions 
relating to allocations that were made prior to the factor release date 
following the contractual settlement date to avoid having to process 
multiple smaller transactions, which FICC believes would likely be 
administratively burdensome.\32\
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    \29\ Id.
    \30\ Id.
    \31\ Id.
    \32\ Id.
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B. Proposed MBSD Rule Changes

    To codify the CPR claims process as described above, the proposed 
rule change would add a description of the CPR claim process in a new 
Section 10 of MBSD Rule 9, including a defined term for ``CPR Claim.'' 
\33\ In addition, the proposed rule change would specify the validation 
process for CPR claims, which, as described above, would codify 
existing FICC practices relating to CPR claims and provide that the 
process for CPR claims is consistent with SIFMA Guidelines, in each 
case, with the exceptions noted above.\34\
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    \33\ Id.
    \34\ Id.
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    Specifically, the proposed rule change would specify that CPR 
claims submitted would be reviewed by FICC to validate the following: 
(i) The claimable unit with respect to the CPR claim meets the criteria 
for fast paying pools as set forth in SIFMA Guidelines; (ii) the CPR 
claim amount is $10,000 or greater, unless the CPR claim is a re-
transmittal of a CPR claim, in which case, (a) if the CPR claim relates 
to an allocation of a pool effected after the factor release date 
following the contractual settlement date and/or substitution of 
related pools, the amount is $500 or greater, or (b) if the CPR claim 
relates to a substitution of a pool that was allocated prior to the 
factor release date following the contractual settlement date, the 
amount is $5,000 or greater; and (iii) 90 percent of the Clearing 
Member's claimable unit has settled.
    Consistent with FICC's current CPR claims process, the proposed 
rule change would also specify that (1) FICC maintains the right to 
process CPR claims with no minimum denomination, (2) CPR claims may be 
apportioned to more than one participant, (3) CPR claims may be 
comprised of both debits and credits, (4) FICC would process all CPR 
claims on the Class ``B'' settlement date in the month following the 
transmittal month, and (5) FICC would notify the Clearing Member that 
the CPR claim has been rejected if the CPR claim is determined to be 
invalid.
    In addition, that the proposed rule change would specify that FICC 
shall not guaranty CPR claim payments, and any credit to be received 
with respect to a CPR claim would be reduced to the extent the 
corresponding debit in

[[Page 48677]]

connection with a CPR claim is not paid.\35\
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    \35\ Id.
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    FICC states that to ensure that Clearing Members understand the 
potential credits and debits relating to CPR claims, the proposed rule 
change would add credits and debits relating to CPR claims in Section 7 
of MBSD Rule 11 as items for end of day cash balance computations.\36\
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    \36\ Id.
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    FICC states that to further describe the CPR claims process as set 
forth above, a cross-reference for the defined term ``CPR Claim'' and 
new defined terms ``Claimable Unit'' and ``Factor Release Date'' would 
be added to MBSD Rule 1, which are consistent with existing FICC 
practices relating to CPR claims and with SIFMA Guidelines, in each 
case, with the exceptions noted above.\37\
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    \37\ Id.
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    FICC states that the definitions for Fannie Mae, Freddie Mac, and 
Ginnie Mae would be corrected in MBSD Rule 1 to be consistent with 
industry practice and with their usage throughout the MBSD Rules.\38\ 
In addition, the definition of ``SIFMA Guidelines'' would be clarified 
by adding a link identifying the location of the SIFMA Guidelines on 
the SIFMA website.\39\
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    \38\ Id.
    \39\ Id.
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II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \40\ 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. The Commission believes the proposal is 
consistent with the Act, specifically Section 17A(b)(3)(F) of the Act 
and Rule 17Ad-22(e)(23)(i) under the Act, as discussed below.\41\
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    \40\ 15 U.S.C. 78s(b)(2)(C).
    \41\ 15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(20).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act \42\ requires, inter alia, that the 
rules of the clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions.
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    \42\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, FICC proposes to codify its existing CPR claims 
process and to specify the validation process for CPR claims. First, 
FICC proposes to specify that CPR claims submitted would be reviewed by 
FICC to validate (i) the claimable unit with respect to the CPR claim 
meets the criteria for fast paying pools as set forth in SIFMA 
Guidelines; (ii) the CPR claim amount is $10,000 or greater, unless the 
CPR claim is a re-transmittal of a CPR claim, in which case, (a) if the 
CPR claim relates to an allocation of a pool effected after the factor 
release date following the contractual settlement date and/or 
substitution of related pools, the amount is $500 or greater, or (b) if 
the CPR claim relates to a substitution of a pool that was allocated 
prior to the factor release date following the contractual settlement 
date, the amount is $5,000 or greater; and (iii) 90 percent of the 
Clearing Member's claimable unit has settled.
    Consistent with FICC's current CPR claims process, FICC also 
proposes to specify that (1) FICC maintains the right to process CPR 
claims with no minimum denomination, (2) CPR claims may be apportioned 
to more than one participant, (3) CPR claims may be comprised of both 
debits and credits, (4) FICC would process all CPR claims on the Class 
``B'' settlement date in the month following the transmittal month, and 
(5) FICC would notify the Clearing Member that the CPR claim has been 
rejected if the CPR claim is determined to be invalid.
    In addition, FICC proposes to specify that FICC shall not guaranty 
CPR claim payments, and any credit to be received with respect to a CPR 
claim would be reduced to the extent the corresponding debit in 
connection with a CPR claim is not paid.
    These proposed changes would codify FICC's existing processes 
surrounding CPR claims and make the CPR claims process more consistent 
with SIFMA Guidelines. The Commission believes that the codification 
would enable Clearing Members to better understand how CPR claims would 
be validated and processed through FICC's facilities and how FICC's CPR 
claims process would differ from SIFMA Guidelines with respect to the 
definition of claimable unit and the re-transmittal minimum threshold, 
as set forth above. By enabling Clearing Members to better understand 
the CPR claims process, the proposal is designed to help ensure that 
CPR claims are submitted and processed correctly and thus promote the 
prompt and accurate clearance and settlement of such securities 
transactions.
    Additionally, FICC proposes to make several clarifying changes. 
First, as described above, the proposed rule change would add credits 
and debits relating to CPR claims in Section 7 of MBSD Rule 11 as items 
for end of day cash balance computations. In Second, a cross-reference 
for the defined term ``CPR Claim'' and new defined terms ``Claimable 
Unit'' and ``Factor Release Date'' would be added to MBSD Rule 1, which 
are consistent with existing FICC practices relating to CPR claims and 
with SIFMA Guidelines, in each case, with the exceptions noted above. 
Third, the proposed rule change would correct the definitions for 
Fannie Mae, Freddie Mac and Ginnie Mae in MBSD Rule 1 to be consistent 
with industry practice and with their usage throughout the MBSD Rules. 
Fourth, FICC proposes to add a description of the CPR claim process in 
a new Section 10 of MBSD Rule 9, including a defined term for ``CPR 
Claim.'' Finally, the definition of ``SIFMA Guidelines'' would be 
clarified by adding a link identifying the location of the SIFMA 
Guidelines on the SIFMA website.
    By proposing these clarifying changes to the CPR claims rules, the 
Commission believes that the proposed changes are designed to help 
Clearing Members better understand and remain compliant with the CPR 
claims rules to help ensure that CPR claims are submitted and processed 
correctly, and thus promoting the prompt and accurate clearance and 
settlement of such securities transactions.
    As each of the aforementioned changes are designed to promote the 
prompt and accurate clearance and settlement of securities 
transactions, the Commission finds that the proposal is consistent with 
the requirements of Section 17A(b)(3)(F).

B. Consistency with Rule 17Ad-22(e)(23)(i)

    Rule 17Ad-22(e)(23)(i) under the Act requires a covered clearing 
agency \43\ to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide for publicly 
disclosing all relevant rules and material procedures.\44\
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    \43\ A ``covered clearing agency'' means, among other things, a 
clearing agency registered with the Commission under Section 17A of 
the Exchange Act (15 U.S.C. 78q-1 et seq.) that is designated 
systemically important by the Financial Stability Oversight Counsel 
(``FSOC'') pursuant to the Clearing Supervision Act (12 U.S.C. 5461 
et seq.). See 17 CFR 240.17Ad-22(a)(5)-(6). On July 18, 2012, FSOC 
designated FICC as systemically important. U.S. Department of the 
Treasury, ``FSOC Makes First Designations in Effort to Protect 
Against Future Financial Crises,'' available at https://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx. 
Therefore, FICC is a covered clearing agency.
    \44\ 17 CFR 240.17Ad-22(e)(23)(i).
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    As described above, the proposed rule changes would (1) codify 
FICC's existing CPR claims process and (2) make clarifications to the 
existing CPR claims process. The Commission

[[Page 48678]]

believes these proposed changes to codify and clarify FICC's existing 
practices in regards to the CPR claims process would assist in publicly 
disclosing all relevant and material procedures regarding the CPR 
claims process. Therefore, the Commission finds that the proposal is 
consistent Rule 17Ad-22(e)(23)(i) under the Act.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act, in particular 
the requirements of Section 17A of the Act \45\ and the rules and 
regulations thereunder.
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    \45\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that proposed rule change SR-FICC-2018-006 be, and hereby is, 
approved.\46\
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    \46\ In approving the proposed rule change, the Commission 
considered the proposal's 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.\47\
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    \47\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2018-20885 Filed 9-25-18; 8:45 am]
 BILLING CODE 8011-01-P