Document ID: SEC-2022-1164-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2022-09-01T04:00Z

[Federal Register Volume 87, Number 169 (Thursday, September 1, 2022)]
[Notices]
[Pages 53818-53822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-18860]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95616; File No. SR-FICC-2021-009]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving of Proposed Rule Change To Enhance Capital Requirements 
and Make Other Changes

August 26, 2022.

I. Introduction

    On December 13, 2021, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2021-009 (the ``Proposed Rule Change'') 
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 December 29, 
2021.\3\ On January 26, 2022, pursuant to Section 19(b)(2) of the 
Act,\4\ the Commission designated a longer period within which to 
approve, disapprove, or institute proceedings to determine whether to 
approve or disapprove the Proposed Rule Change.\5\ On March 23, 2022, 
the Commission instituted proceedings to determine whether to approve 
or disapprove the Proposed Rule Change.\6\ On June 23, 2022, the 
Commission designated a longer period for Commission action on the 
proceedings to determine whether to approve or disapprove the Proposed 
Rule Change.\7\ The Commission has received comments regarding the 
substance of the Proposed Rule Change.\8\ For the reasons discussed 
below, the Commission is approving the Proposed Rule Change.\9\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 93857 (December 22, 
2021), 86 FR 74130 (December 29, 2021) (File No. SR-FICC-2021-009) 
(``Notice of Filing'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ Securities Exchange Act Release No. 94066 (January 26, 
2022), 87 FR 5523 (February 1, 2022) (SR-FICC-2021-009).
    \6\ Securities Exchange Act Release No. 94497 (March 23, 2022), 
87 FR 18409 (March 30, 2022) (SR-FICC-2021-009).
    \7\ Securities Exchange Act Release No. 95144 (June 23, 2022), 
87 FR 38807 (June 29, 2022) (SR-FICC-2021-009).
    \8\ The Commission received one comment letter that does not 
bear on the Proposed Rule Change. The comment is available at 
https://www.sec.gov/comments/sr-ficc-2021-009/srficc2021009.htm. 
Since the proposed changes contained in this Proposed Rule Change 
are similar to changes proposed simultaneously by FICC's affiliates, 
National Securities Clearing Corporation and The Depository Trust 
Company, the Commission has considered all public comments received 
on the proposals regardless of whether the comments are submitted to 
the Proposed Rule Change or to the proposals filed by FICC's 
affiliates.
    \9\ Capitalized terms not defined herein are defined in FICC's 
Rules, available at https://www.dtcc.com/legal/rules-and-procedures.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    FICC proposes to amend the Government Securities Division (``GSD'') 
Rulebook (the ``GSD Rules'') and the Mortgage-Backed Securities 
Division (``MBSD'') Clearing Rules (the ``MBSD Rules,'' and together 
with the GSD Rules, the ``Rules'') of FICC in order to (A) revise 
FICC's capital requirements for GSD members and MBSD members 
(collectively, ``members''),\10\ (B) streamline FICC's Watch List and 
enhanced surveillance list, and (C) make certain other clarifying, 
technical, and supplementary changes to implement items (A) and (B).
---------------------------------------------------------------------------

    \10\ FICC states that these capital requirements have not been 
updated for nearly 20 years. See Notice of Filing, supra note 3, at 
74130. Although FICC has not updated capital requirements for many 
of its members in nearly 20 years, during that time FICC has adopted 
new membership categories with corresponding capital requirements 
that FICC believes are still appropriate. As such, FICC is not 
proposing changes to capital requirements for all membership 
categories. See id.
---------------------------------------------------------------------------

A. Changes to FICC's Capital Requirements for Members

i. GSD Netting Members and MBSD Clearing Members
    U.S. Broker-Dealer or Future Commission Merchant Members: For 
certain GSD Netting Members \11\ and MBSD Clearing Members,\12\ FICC 
proposes not to change the applicable capital requirements, but to (i) 
provide expressly for equivalence among measures of Excess Net Capital, 
Excess Liquid Capital,\13\ and Excess Adjusted Net Capital,\14\ 
depending on what such members are required to report on their 
regulatory filings \15\ and (ii) make some clarifying and conforming 
language changes to improve the accessibility and transparency of the 
capital requirements, without substantive effect. FICC also proposes to 
clarify that an applicant must satisfy its applicable capital 
requirements when it applies for membership and at all times 
thereafter, and therefore proposes to delete language requiring that a 
member satisfy its capital requirements as of the end of the calendar 
month prior to the effective date of its membership.
---------------------------------------------------------------------------

    \11\ The GSD Netting Members include Dealer Netting Members, 
Futures Commission Merchant Netting Members, and Inter-Dealer Broker 
Netting Members.
    \12\ The MBSD Clearing Members include Dealer Clearing Members 
and Inter-Dealer Broker Clearing Members.
    \13\ FICC proposes to define, in both the GSD and MBSD Rules, 
Excess Liquid Capital as the difference between the Liquid Capital 
of a Government Securities Broker or Government Securities Dealer 
and the minimum Liquid Capital that such Government Securities 
Broker or Government Securities Dealer must have to comply with the 
requirements of 17 CFR Section 402.2(a), (b) and (c), or any 
successor rule or regulation thereto.
    \14\ FICC proposes to define, in both the GSD and MBSD Rules, 
Excess Adjusted Net Capital as the difference between the adjusted 
net capital of a Futures Commission Merchant and the minimum 
adjusted net capital that such Futures Commission Merchant must have 
to comply with the requirements of 17 CFR Section 1.17(a)(1) or 
(a)(2), or any successor rule or regulation thereto.
    \15\ In addition to these requirements, FICC is proposing that 
MBSD Inter-Dealer Clearing Members have a Net Worth of $25 million.
---------------------------------------------------------------------------

    U.S. Bank and Trust Company Members: For GSD Bank Netting Members 
and MBSD Bank Clearing Members, FICC proposes to (1) change the measure 
of capital requirements for banks and trust companies from equity 
capital to common equity tier 1 capital (``CET1 Capital''),\16\ (2) 
raise the minimum capital requirements for banks and trust companies 
from $100 million to $500 million, and (3) require

[[Page 53819]]

U.S. banks and trust companies to be well capitalized (``Well 
Capitalized'').\17\
---------------------------------------------------------------------------

    \16\ Under the proposal, CET1 Capital would be defined as an 
entity's common equity tier 1 capital, calculated in accordance with 
such entity's regulatory and/or statutory requirements.
    \17\ FICC proposes to incorporate the definition of ``Well 
Capitalized'' as that term is defined by the Federal Deposit 
Insurance Corporation in its capital adequacy rules and regulations. 
See 12 CFR 324.403(b)(1). See 12 CFR 324.403(b)(1).
---------------------------------------------------------------------------

    The proposal would align FICC's capital requirements with banking 
regulators' changes to regulatory capital requirements over the past 
several years, which have standardized and harmonized the calculation 
and measurement of bank capital and leverage throughout the world.\18\ 
Consistent with these changes by banking regulators, FICC states that 
it believes that the appropriate capital measure for members that are 
banks and trust companies should be CET1 Capital and that FICC's 
capital requirements for members should be enhanced to be consistent 
with these increased regulatory capital requirements.\19\ FICC further 
states that it believes the proposed capital requirements for banks 
better measures the capital available to bank members to absorb losses 
arising out of their clearance and settlement activities at FICC or 
otherwise, and would help FICC more effectively manage and mitigate the 
credit risks posed by its members.\20\
---------------------------------------------------------------------------

    \18\ See Notice of Filing, supra note 3, at 74134.
    \19\ See id.
    \20\ See id. at 74141.
---------------------------------------------------------------------------

    Additionally, FICC states that requiring U.S. banks and trust 
companies to be Well Capitalized ensures that bank members are well 
capitalized while also allowing CET1 Capital to be relative to either 
the risk-weighted assets or average total assets of the bank or trust 
company.\21\ FICC further states that expressly tying the definition of 
Well Capitalized to the FDIC's definition of ``well capitalized'' will 
ensure that the proposed requirement keeps pace with future changes to 
regulatory capital requirements.\22\
---------------------------------------------------------------------------

    \21\ See id. at 74134.
    \22\ See id.
---------------------------------------------------------------------------

Foreign Broker-Dealer and Bank Members
    Currently, a member who is a foreign broker-dealer or bank is 
subject to a multiplier that requires such member to maintain capital 
of either 1.5, 5, or 7 times its otherwise-applicable capital 
requirements.\23\
---------------------------------------------------------------------------

    \23\ The applicable multiplier is based on which generally 
accepted accounting standards (``GAAP'') the non-U.S. member uses to 
prepare its financial statements, when not prepared in accordance 
with U.S. GAAP. See Section 4(b) of Rule 2A of the GSD Rules and 
Section 2(e) of Rule 2A of the MBSD Rules, supra note 9.
---------------------------------------------------------------------------

    Foreign Broker-Dealer Members: FICC proposes to require a Foreign 
Netting Member or Foreign Person Clearing Member \24\ who is a broker 
or dealer to maintain a minimum of $25 million in total equity capital. 
FICC states the multiplier was designed to account for the less 
transparent nature of accounting standards other than U.S. GAAP.\25\ 
However, given that accounting standards have converged over the years, 
FICC no longer believes the multiplier is necessary and its retirement 
would be a welcomed simplification for both FICC and its members.\26\
---------------------------------------------------------------------------

    \24\ Under the proposal, this requirement would not apply to a 
Dealer Clearing Member or Inter-Dealer Broker Clearing Member.
    \25\ See id. at 74191.
    \26\ See id. at 74191.
---------------------------------------------------------------------------

    Non-U.S. Bank Members: Like U.S. bank members, FICC proposes that 
non-U.S. bank members maintain at least $500 million in CET1 Capital. 
FICC proposes additional requirements for non-U.S. bank members \27\ as 
follows: (1) comply with the greater of (i) the member's home country 
minimum capital and ratio requirements, including any applicable 
buffers, or (ii) the minimum capital and ratio standards promulgated by 
the Basel Committee on Banking Supervision,\28\ (2) provide an 
attestation for itself, its parent bank, and its parent bank holding 
company detailing the minimum capital requirements, including any 
applicable buffers, and capital ratios required by their home country 
regulator,\29\ and (3) notify FICC of (i) any breach of its minimum 
capital, including buffers, and ratio requirements within two business 
days, or (ii) any changes to its requirements within 15 calendar days.
---------------------------------------------------------------------------

    \27\ For GSD, this includes a Foreign Netting Member that is 
bank or trust company established or chartered under the laws of a 
non-U.S. jurisdiction and not applying to become a Bank Netting 
Member through a U.S. branch or agency. For MBSD, Foreign Person 
that is a Clearing Member who is a bank or trust company established 
or chartered under the laws of a non-U.S. jurisdiction and not 
applying to become a Bank Clearing Member through a U.S. branch or 
agency.
    \28\ See Basel Committee on Banking Supervision, The Basel 
Framework, available at https://www.bis.org/basel_framework/index.htm?export=pdf. NSCC states that the proposal will align 
NSCC's capital requirements with banking regulators' changes to 
regulatory capital requirements over the past several years, which 
have standardized and harmonized the calculation and measurement of 
bank capital and leverage throughout the world. See Notice of 
Filing, supra note 3, at 74190. See also supra note 30. NSCC 
proposes tying its minimum requirement to the requirements 
promulgated by the Basel Committee on Banking Supervision to ensure 
that its non-U.S. bank members meet minimum international standards 
where their home country requirements may be more lenient.
    \29\ FICC also proposes to require non-U.S. bank members to 
periodically provide new attestations on at least an annual basis 
and upon request by FICC.
---------------------------------------------------------------------------

    Other Foreign Members: FICC proposes that it may, based on 
information provided by or concerning an applicant that is a Foreign 
Netting Member or a Foreign Person who is a Clearing Member, also 
assign minimum financial requirements for the applicant based on (i) 
how closely the applicant resembles another existing category of 
Netting Member or Clearing Member and (ii) the applicant's risk 
profile, which assigned minimum financial requirements would be 
promptly communicated to, and discussed with, the applicant.\30\
---------------------------------------------------------------------------

    \30\ The member must also continue to maintain compliance with 
its home country's minimum financial requirements. See Section 
3(a)(v) of Rule 2A of the GSD Rules and Section 1(j) of Rule 2A of 
the MBSD Rules, supra note 9.
---------------------------------------------------------------------------

    Insurance Company Netting Members: FICC proposes to leave the 
capital requirements applicable to Insurance Company Netting Members 
unchanged, however FICC proposes to (i) specify the calculation of the 
existing risk-based capital ratio and (ii) correct typographical errors 
and make some clarifying and conforming language changes and add a 
paragraph heading to improve the accessibility and transparency of the 
capital requirements, without substantive effect.\31\ FICC also 
proposes to clarify that an applicant must satisfy its applicable 
capital requirements when it applies for membership and at all times 
thereafter, and therefore proposes to delete language requiring that a 
member satisfy its capital requirements as of the end of the calendar 
month prior to the effective date of its membership.
---------------------------------------------------------------------------

    \31\ FICC proposes to make some clarifying and conforming 
language changes to improve the accessibility and transparency of 
the capital requirements, without substantive effect, including, for 
GSD, Registered Investment Company Netting Members, and, for MBSD, 
Unregistered Investment Pool Clearing Members, Government Securities 
Issuer Clearing Members, Insured Credit Union Clearing Members, and 
Registered Investment Company Clearing Members.
---------------------------------------------------------------------------

Other Types of Netting Members and Clearing Members
    Currently, other types of entities applying to be a Netting Member 
or Clearing Member, are required to satisfy such minimum standards of 
financial responsibility as determined by FICC. FICC proposes to adopt 
more specific standards for these different types of members.
    Government Securities Issuer Netting Members: Currently, FICC does 
not have a capital requirement for this particular category of Netting 
Member. FICC proposes to require equity capital of at least $100 
million.

[[Page 53820]]

    Other Netting Members and Clearing Members: Similar to other 
foreign member applicants discussed above, for other Netting Members or 
Clearing Members with no specific financial responsibilities 
requirements, FICC proposes that such Netting Members or Clearing 
Members be in compliance with their regulator's minimum financial 
requirements. FICC also proposes that it may, based on information 
provided by or concerning an applicant applying to become a Netting 
Member or Clearing Member, also assign minimum financial requirements 
for the applicant based on (i) how closely the applicant resembles an 
existing category of Netting Member or Clearing Member and (ii) the 
applicant's risk profile, which assigned minimum financial requirements 
would be promptly communicated to, and discussed with, the applicant.
ii. GSD Funds-Only Settling Bank Members and MBSD Cash Settling Bank 
Members
    FICC proposes to require that a Funds-Only Settling Bank or a Cash 
Settling Bank Member that, in accordance with such entity's regulatory 
and/or statutory requirements, calculates a Tier 1 RBC Ratio must have 
a Tier 1 RBC Ratio \32\ equal to or greater than the Tier 1 RBC Ratio 
that would be required for such Funds-Only Settling Bank to be Well 
Capitalized. FICC does not currently have a capital requirement for 
Funds-Only Settling Banks or Cash Settling Bank Members.
---------------------------------------------------------------------------

    \32\ For both GSD and MBSD, FICC proposes to define the Tier 1 
RBC Ratio is the ratio of an entity's tier 1 capital to its total 
risk-weighted assets, calculated in accordance with such entity's 
regulatory and/or statutory requirements.
---------------------------------------------------------------------------

iii. GSD Sponsoring Members
    FICC proposes to leave the required equity capital for a Bank 
Netting Member applying to become a Category 1 Sponsoring Member 
unchanged, however FICC proposes to (i) replace the previous references 
to such Bank Netting Member or its bank holding company being ``well-
capitalized'' with the new defined term Well Capitalized and (ii) make 
some clarifying and conforming language changes to improve the 
accessibility and transparency of the capital requirements, without 
substantive effect.
    FICC also proposes to clarify that an applicant must satisfy its 
applicable capital requirements when it applies for membership and at 
all times thereafter, and therefore proposes to delete language 
requiring that a member satisfy its capital requirements as of the end 
of the calendar month prior to the effective date of its membership.
iv. GSD CCIT Members
    FICC proposes to leave the capital requirements for a CCIT Member 
unchanged but delete the required multiplier for a CCIT Member that 
does not prepare its financial statements in accordance with U.S. 
GAAP.\33\ FICC also proposes to fix a typographical error and clarify 
existing language that the eligibility, qualifications and standards 
set forth in respect of an applicant shall continue to be met upon an 
applicant's admission as a CCIT Member and at all times while a CCIT 
Member.
---------------------------------------------------------------------------

    \33\ See supra text accompanying note 23.
---------------------------------------------------------------------------

v. Implementation Timeframe
    FICC proposes to implement the proposed changes to its membership 
capital requirements one year after the Commission's approval of the 
Proposed Rule Change.\34\ During the one-year period, FICC would 
periodically provide members with an estimate of their capital 
requirements based on the proposal.\35\
---------------------------------------------------------------------------

    \34\ The changes to FICC's Watch List and enhanced surveillance 
list discussed in Section II.B below will not be subject to the one 
year delayed implementation.
    \35\ See Notice of Filing, supra note 3, at 74141.
---------------------------------------------------------------------------

B. Changes to FICC's Watch List and Enhanced Surveillance List

    FICC currently uses two credit risk monitoring systems: a Watch 
List and a separate list of members subject to enhanced surveillance 
(``enhanced surveillance list''). The current Watch List includes 
members that have either (1) receive a heightened credit risk rating 
based on FICC's Credit Risk Rating Matrix (``CRRM''),\36\ or (2) been 
deemed to pose a heightened credit risk to FICC or other members.\37\ 
FICC may require a member placed on the Watch List to post additional 
collateral above the member's margin calculated pursuant to FICC's 
margin methodology.\38\ Members on the Watch List are also subject to 
more thorough monitoring by FICC of its financial condition and 
operational capability.\39\
---------------------------------------------------------------------------

    \36\ FICC members generally are subject to the CRRM, in which 
each member is rated on a scale of one to seven with seven 
reflecting the highest credit risk posed to FICC. Members who 
receive a CRRM rating of five to seven are currently, automatically 
placed on the Watch List. See Rule 1 and Section 12 of Rule 3 of the 
GSD Rules and Rule 1 and Section 11 of Rule 3 of the MBSD Rules, 
supra note 9.
    \37\ See id. In making its determination, NSCC may consider any 
information NSCC obtains through continuously monitoring its members 
for compliance with its membership requirements.
    \38\ See Section 12(e) of Rule 3 of the GSD Rules and Section 
11(e) of Rule 3 of the MBSD Rules, supra note 9.
    \39\ See Section 12(f) of Rule 3 of the GSD Rules and Section 
11(f) of Rule 3 of the MBSD Rules, supra note 9.
---------------------------------------------------------------------------

    FICC also maintains a separate enhanced surveillance list, which 
includes members who are subject to a more thorough monitoring of its 
financial condition and operational capability based on FICC's 
determination that the member poses heightened credit risks, which may 
include members already on or soon to be on the Watch List.\40\ Members 
on the enhanced surveillance list are reported to FICC's management 
committees, are regularly reviewed by FICC senior management, and may 
be required to make more frequent financial disclosures to FICC.\41\
---------------------------------------------------------------------------

    \40\ See id.
    \41\ See id.
---------------------------------------------------------------------------

    FICC believes that maintaining two separate lists has confused 
various FICC stakeholders,\42\ so FICC proposes to remove references to 
an enhanced surveillance list from its Rules.\43\ FICC also proposes to 
remove members with a CRRM rating of five from being automatically 
included on the Watch List. FICC states that members with a CRRM rating 
of five represent the largest single CRRM rating category, but FICC 
does not believe all such members present heightened credit 
concerns.\44\ FICC would still retain the authority to place a member 
with a CRRM rating of five on the Watch List or otherwise if FICC deems 
the member poses a heightened risk to FICC. FICC believes that these 
procedures would allow it to appropriately monitor the credit risks 
presented to it by its members and that the enhanced surveillance list 
is not necessary because members on the enhanced surveillance list are 
subject to the same potential consequences as members placed on the 
Watch List.\45\
---------------------------------------------------------------------------

    \42\ See Notice of Filing, supra note 3, at 74140.
    \43\ For any members currently on the enhanced surveillance list 
that are not also on the Watch List, FICC will add these members to 
the Watch List. See id.
    \44\ See id. FICC states that the majority of members with a 
CRRM rating of 5 are either rated ``investment grade'' by external 
rating agencies or, in the absence of external ratings, FICC 
believes are equivalent to investment grade, as many of these 
members are primary dealers and large foreign banks. See id.
    \45\ See id. at 74133, 74140.
---------------------------------------------------------------------------

C. Other Changes

    FICC proposes to (1) revise or add headings and sub-headings as 
appropriate, (2) revise defined terms and add appropriate defined terms 
to facilitate the proposed changes, (3) rearrange and consolidate 
paragraphs to promote readability, (4) fix

[[Page 53821]]

typographical and other errors, and (5) make specified other changes in 
order to improve clarity and the accessibility and transparency of the 
Rules.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \46\ provides that the Commission 
shall 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 careful review of the Proposed Rule Change 
and consideration of the comments on the proposal, the Commission finds 
that the Proposed Rule Change is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to FICC. In 
particular, the Commission finds that the Proposed Rule Change is 
consistent with Sections 17A(b)(3)(F) of the Act,\47\ and Rules 17Ad-
22(e)(4) and (e)(18) thereunder,\48\ for the reasons described below.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78s(b)(2)(C).
    \47\ 15 U.S.C. 78q-1(b)(3)(F).
    \48\ 17 CFR 240.17Ad-22(e)(4) and (e)(18).
---------------------------------------------------------------------------

A. Consistency with Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions, assure 
the safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible, and 
protect investors and the public interest; and are not designed to 
permit unfair discrimination in the admission of participants or among 
participants in the use of the clearing agency.\49\ Based on its review 
of the record, the Commission finds that the proposal is consistent 
with Section 17A(b)(3)(F) of the Act.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

i. Prompt and Accurate Clearance and Settlement and Safeguarding of 
Securities and Funds
    The Commission believes that the proposal is designed to promote 
the prompt and accurate clearance and settlement of securities 
transactions, and assure the safeguarding of securities and funds which 
are in the custody or control of FICC. The Commission believes that 
membership standards at covered clearing agencies should seek to limit 
the potential for member defaults and, as a result, losses to non-
defaulting members in the event of a member default. As the Commission 
stated when adopting the Covered Clearing Agency Standards, using risk-
based criteria helps to protect investors by limiting the participants 
of a covered clearing agency to those for which the covered clearing 
agency has assessed the likelihood of default.\50\ More specifically, 
the Commission believes that membership standards related to minimum 
capital requirements serve as one tool in limiting this default risk by 
ensuring that members have sufficient capital to meet its obligations 
and to absorb losses.
---------------------------------------------------------------------------

    \50\ See Securities Exchange Act Release No. 78961 (September 
28, 2016), 81 FR 70786, 70839 (October 13, 2016) (S7-03-14) 
(``Covered Clearing Agency Standards'').
---------------------------------------------------------------------------

    Covered clearing agencies employ membership standards as the first 
line of defense in their risk management, ensuring that its members, 
among other things, hold sufficient financial resources to meet the 
obligations that they may incur as a member of the covered clearing 
agency. These requirements are separate from the collection of margin, 
which addresses the risk of the cleared transactions. Instead, capital 
requirements seek to ensure that FICC has sufficiently addressed the 
member's counterparty credit risk, that is, that the member has 
sufficient financial resources both to meet its margin requirements or 
potential loss allocation in the event of a member default; these 
requirements are not a substitute for margin.
    The Commission also considered other factors as support for its 
determination that these proposed minimum capital requirements are 
reasonable. The Commission understands that FICC has not revised these 
requirements in over 20 years. During that time, the Commission 
recognizes that there have been significant changes to the financial 
markets during that timeframe, such as new risks arising from cyber 
threats and online trading technologies, and heightened operational 
risk due to a more sophisticated and complex business environment. In 
addition, the Commission understands that FICC considered several 
factors, including inflation and the capital requirements of other 
financial market infrastructures, and the Commission agrees that these 
factors support the reasonableness of the proposed minimum capital 
requirements.\51\ Further, the Commission believes that the consistency 
between the proposed requirements and those of other financial market 
infrastructures tends to indicate that such requirements should address 
the obligations attendant to participating in a financial market 
infrastructure like FICC, i.e., that they are tailored to ensure that a 
member can meet its requirements to FICC in the event of, for example, 
a loss allocation or an intraday margin call. Finally, based on its 
supervisory experience, the Commission understands that trading volume, 
in terms of both number of transactions and notional value, have 
increased significantly across the FICC membership during that time 
period.\52\ The Commission believes that this significant increase in 
trading volumes represents additional risk for FICC and supports the 
need for the proposed minimum capital requirements. Taken together, the 
Commission believes that these factors support its determination 
regarding the reasonableness of the proposed minimum capital 
requirements, as they would allow FICC to ensure that its members have 
capital sufficient to address the risks posed by their activities in 
addition to the margin for particular transactions.
---------------------------------------------------------------------------

    \51\ See Notice, supra note 3, at 74186, (citing, e.g., The 
Options Clearing Corporation, OCC Rules, Rule 301(a), available at 
https://www.theocc.com/Company-Information/Documents-and-Archives/ByLaws-and-Rules (requiring broker-dealers to have initial net 
capital of not less than $2,500,000); Chicago Mercantile Exchange 
Inc., CME Rulebook, Rule 970.A.1, available at https://www.cmegroup.com/rulebook/CME/I/9/9.pdf (requiring clearing members 
to maintain capital of at least $5 million, with banks required to 
maintain minimum tier 1 capital of at least $5 billion).
    \52\ See, e.g., DTCC Annual Reports, available at https://www.dtcc.com/about/annual-report, and CPMI-IOSCO Quantitative 
Disclosures for FICC, section 23.1 (setting forth daily average 
volumes by asset class and average notional value), available at 
https://www.dtcc.com/legal/policy-and-compliance.
---------------------------------------------------------------------------

    For most members, the changes would increase the minimum capital 
requirements and ensure that members, such as U.S. and foreign bank 
members, would continue to hold sufficient financial resources 
consistent with those requirements and their applicable regulatory 
obligations, although they would not actually increase the amounts held 
as the members generally meet the new requirements already based on 
their current capital. Through these changes, FICC should be able to 
ensure members have sufficient capital to meet its obligations and to 
absorb losses, which could further limit the potential for a member 
default. In turn, limiting the potential for a member default should 
promote the prompt and accurate clearance and settlement of securities 
transactions. In addition, FICC's proposed minimum capital requirements 
would thereby further limit potential losses to non-defaulting members 
in the event of a member

[[Page 53822]]

default, which helps assure the safeguarding of securities and funds 
which are in the custody or control of FICC.
    Additionally, the Commission believes FICC's proposal to streamline 
its credit risk monitoring systems into one Watch List, as described 
above in Section II.B., would eliminate existing confusion and should 
enhance FICC's efficiency in monitoring its members' credit risk by 
focusing on only those members that present heightened credit risk. 
Similarly, the Commission believes FICC's proposal to make clarifying 
and transparency changes, as described above in Section II.C., would 
remove ambiguity and ensure FICC's Rules are clear and accurate, which 
would help ensure FICC's members understand its obligations to FICC and 
FICC's clearance and settlement activities. Therefore, the Commission 
believes these changes should promote the prompt and accurate clearance 
and settlement of securities transactions.
ii. Protection of Investors and the Public Interest
    The Commission believes that FICC's proposal to increase the 
capital requirements applicable to its members would protect investors 
and the public interest. As discussed above in Section III.A.1, the 
Commission believes the proposal is designed to strengthen FICC's risk 
management practices. Because a defaulting member could place stresses 
on FICC with respect to FICC's ability to meet its clearance and 
settlement obligations upon which the broader financial system relies, 
it is important that FICC has strong membership requirements to ensure 
that its members are able to meet their obligations. By reducing the 
risk of a member default and any subsequent allocation of losses, the 
proposal should help to protect investors and the public interest by 
helping to ensure that investors' securities transactions are cleared 
and settled promptly and accurately and to assure the safeguarding of 
securities and funds which are in FICC's custody or control.
    For the reasons discussed in this Sections III.A., the Commission 
finds that the Proposed Rule Change is consistent with the requirements 
of Section 17A(b)(3)(F) of the Act.\53\
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(4)

    Rule 17Ad-22(e)(4)(i) under the Act requires that a 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, 
including by maintaining sufficient financial resources to cover its 
credit exposure to each participant fully with a high degree of 
confidence.\54\
---------------------------------------------------------------------------

    \54\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    Increasing membership capital requirements, as described above in 
Section II.A., would help ensure that members maintain sufficient 
capital to meet their obligations to FICC, including potential future 
obligations required to fund its trading activity with FICC or to 
absorb losses allocated to it. By ensuring members' ability to meet 
their financial obligations to FICC, the proposal, in turn, will help 
ensure FICC continues to maintain sufficient financial resources to 
cover its credit exposure to each participant fully with a high degree 
of confidence.
    Additionally, the proposal to revise the Watch List, as described 
above in Section II.B, could help FICC better allocate its resources 
for monitoring its credit exposures to members, which, in turn, could 
help FICC more effectively manage and mitigate its credit exposures to 
its members. Therefore, the Commission finds the Proposed Rule Change 
is consistent with Rule 17Ad-22(e)(4)(i) under the Exchange Act.

C. Consistency With Rule 17Ad-22(e)(18)

    Rule 17Ad-22(e)(18) under the Act requires that a covered clearing 
agency establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to establish objective, risk-based, and 
publicly disclosed criteria for participation, which permit fair and 
open access by direct and, where relevant, indirect participants and 
other financial market utilities, require participants to have 
sufficient financial resources and robust operational capacity to meet 
obligations arising from participation in the clearing agency, and 
monitor compliance with such participation requirements on an ongoing 
basis.\55\
---------------------------------------------------------------------------

    \55\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

    As described above in Section II.A., the proposal will increase 
FICC's minimum capital requirements for its members. For both U.S. and 
non-U.S. bank and trust company members, the proposal will revise how 
net capital is defined to incorporate a measurement used by banking 
regulators and impose additional financial requirements on non-U.S. 
bank and trust company members tied to home country regulatory 
requirements and international standards. For non-U.S. broker-dealers 
and government securities issuers, the proposal would eliminate 
conditional and discretionary minimum capital requirements in favor of 
establishing objective minimum capital requirements. The proposal will 
also establish a category for all other members, which will impose 
minimum financial requirements tied to that entity's regulatory 
requirements, which FICC may increase based on how closely it resembles 
another membership type and its risk-profile.
    Additionally, as discussed above in Section III.A.i, the Commission 
understands that FICC considered several additional risks faced by its 
members, both qualitative and quantitative, in determining its proposed 
capital requirements.\56\ Therefore, the Commission concludes the 
proposal is reasonably designed to establish objective, risk-based, and 
publicly disclosed criteria for participation. For the reasons 
described above, the Commission finds that the Proposed Rule Change is 
consistent with Rule 17Ad-22(e)(18) under the Act.\57\
---------------------------------------------------------------------------

    \56\ See Notice of Filing, supra note 3, at 74131.
    \57\ Id.
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act, 
and in particular with the requirements of Section 17A of the Act \58\ 
and the rules and regulations promulgated thereunder.
---------------------------------------------------------------------------

    \58\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\59\ that proposed rule change SR-FICC-2021-009, be, and hereby is, 
approved.\60\
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78s(b)(2).
    \60\ In approving the Proposed Rule Change, 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.\61\
---------------------------------------------------------------------------

    \61\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-18860 Filed 8-31-22; 8:45 am]
BILLING CODE 8011-01-P