Document ID: SEC-2019-1973-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2019-12-30T05:00Z

[Federal Register Volume 84, Number 249 (Monday, December 30, 2019)]
[Notices]
[Pages 72015-72017]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28087]

[[Page 72015]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87834; File No. SR-FICC-2019-006]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Include a New Foreign Legal Opinion Fee Applicable to Non-U.S. 
Membership Applicants, and Delete a Requirement for Direct Non-U.S. 
Members Relating to Annual Opinion Updates

December 20, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 16, 2019, 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. FICC filed the 
proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and 
Rules 19b-4(f)(2) and (f)(4) thereunder.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(2) and (f)(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 a proposal to amend the FICC 
Government Securities Division (``GSD'') Rulebook (``GSD Rules'') and 
the FICC Mortgage-Backed Securities Division (``MBSD'') Clearing Rules 
(``MBSD Rules'') \5\ to: (i) Include a new foreign legal opinion fee in 
the GSD Fee Structure, and the MBSD Schedule of Charges Broker Account 
Group and MBSD Schedule of Charges Dealer Account Group (with the GSD 
Fee Structure, collectively referred to as the ``FICC Fee Schedules'') 
applicable to non-U.S. Netting Member and non-U.S. Clearing Member 
membership applicants,\6\ and (ii) delete the requirement for direct 
non-U.S. members to submit, on an annual basis, an updated opinion on 
home country law (and if applicable, other non-domestic law), or a 
letter from their outside counsel indicating that there have been no 
material changes in home country law (or other applicable non-domestic 
law) since the date of issuance of the most recent opinion submitted to 
FICC (hereinafter referred to as the ``bring-down opinion'').\7\
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    \5\ Capitalized terms not defined herein are defined in the GSD 
Rules and MBSD Rules, available at http://www.dtcc.com/legal/rules-and-procedures.
    \6\ The proposed fee would also be applicable to applicants that 
are U.S. branches and agencies of non-U.S. banks because such 
applicants are also required to submit a foreign legal opinion as 
part of their application.
    \7\ The annual bring-down opinion requirement does not apply to 
non-U.S. members participating through U.S. branches or agencies.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency 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. The clearing agency 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 the proposed rule change is to amend the GSD Rules 
and the MBSD Rules to: (i) Include a new foreign legal opinion fee in 
the FICC Fee Schedules applicable to non-U.S. membership applicants,\8\ 
and (ii) delete the requirement for direct non-U.S. members to submit a 
bring-down opinion on an annual basis.
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    \8\ Supra note 6.
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Background
    Under FICC's current process applicable to both GSD and MBSD, a 
non-U.S. foreign applicant, including an applicant that is a U.S. 
branch or agency of a non-U.S. bank, provides an extensive legal 
opinion addressing complex issues such as netting, bankruptcy, and 
choice of law issues under the law of the applicant's home jurisdiction 
(the ``foreign insolvency and netting opinion'').\9\ The foreign 
insolvency and netting opinion is provided by outside counsel hired by 
the applicant. The opinion is then reviewed (and negotiated with the 
applicant's counsel, as needed) by FICC and FICC's outside U.S. 
counsel. As such, in this current process, both the applicant and FICC 
are incurring duplicative legal costs.
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    \9\ Section 5 of GSD Rule 2A and Section 3 of MBSD Rule 2A 
reference opinions as one of the possible required documents in the 
application submission. See GSD Rule 2A and MBSD Rule 2A, supra note 
5. The application requirements sheet provided to potential GSD and 
MBSD members outlines the types of opinions required.
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    In addition, GSD and MBSD currently require direct non-U.S. members 
(i.e., those not participating through a U.S. branch or agency) to 
provide bring-down opinions annually. Again, FICC hires its own outside 
U.S. counsel to review the bring-down opinions.
Proposed Process
    In order to address the legal costs for the review of the non-U.S. 
legal opinions for non-U.S. membership applicants, FICC proposes to 
modify the current process for obtaining non-U.S. legal opinions and 
implement a new foreign legal opinion fee (``Foreign Legal Opinion 
Fee''). Such fee would be non-refundable regardless of the outcome of 
the application process.
Proposed Rule Changes
    Pursuant to the proposed rule changes, FICC would select outside 
counsel to provide a foreign insolvency and netting opinion 
satisfactory to FICC regarding the laws of the applicable non-U.S. 
jurisdiction. This would alleviate the burden from membership 
applicants of having to hire their own outside counsel to prepare the 
opinion. Also pursuant to this proposal, the FICC Fee Schedules would 
be amended to provide that the initial non-U.S. membership applicant 
(including one participating through a U.S. branch or agency) from a 
given jurisdiction would be advised of a ``Maximum Estimated Charge'' 
based on the estimated amount provided to FICC by FICC's outside 
counsel with respect to obtaining the foreign insolvency and netting 
opinion for that jurisdiction. The estimate would be prepared on an as-
needed basis and would not be based on a pre-existing schedule. FICC 
would advise the non-U.S. applicant of the Maximum Estimated Charge in 
writing.
    The amount of the Foreign Legal Opinion Fee charged to the 
applicant would be the lesser of a Maximum Estimated Charge and the 
actual costs charged to FICC by outside counsel providing a legal 
opinion in form and substance satisfactory to FICC regarding the laws 
of the non-U.S. jurisdiction. If within five (5) business days after 
FICC advises the non-U.S. membership applicant of the Maximum Estimated 
Charge, as described above, the non-U.S. applicant notifies FICC in 
writing that it will terminate its application, the non-U.S. applicant 
will not be charged the Foreign Legal Opinion Fee. If the application 
is terminated, the Maximum Estimated Charge would no longer

[[Page 72016]]

apply and FICC would obtain a new Maximum Estimated Charge from FICC's 
outside counsel if it receives a subsequent application from that 
jurisdiction. If the initial non-U.S. membership applicant does not 
terminate its application within five (5) business days of FICC 
advising it of the Maximum Estimated Charge, then the non-U.S. 
applicant would be billed for the Foreign Legal Opinion Fee in the 
amount that would be determined as described above. Promptly after 
FICC's outside counsel has provided to FICC a final invoice stating the 
actual amount to be charged to FICC for the foreign legal opinion, FICC 
would send an invoice to the applicant. Payment by the non-U.S. 
membership applicant would be due within ten (10) business days of the 
non-U.S. applicant's receipt of an invoice, including payment 
instructions, from FICC.
    The FICC Fee Schedules would not expressly include an absolute 
maximum amount for the Foreign Legal Opinion Fee because, based on 
FICC's experience in reviewing foreign legal opinions, the level of 
review required for FICC to gain comfort that the law of the 
applicant's jurisdiction does not provide material impediments to 
enforcement of the GSD Rules and MBSD Rules, as applicable, can vary 
significantly by jurisdiction, resulting in significant variance in 
counsel costs to FICC. The FICC Fee Schedules would not include an 
absolute minimum amount for the Foreign Legal Opinion Fee because FICC 
would not charge an applicant a Foreign Legal Opinion Fee that is in an 
amount that is higher than the actual amount billed by FICC's outside 
counsel to provide the applicable foreign insolvency and netting 
opinion.
    Each subsequent non-U.S. membership applicant (``Subsequent Non-
U.S. Applicant'') from the same jurisdiction would be charged a Foreign 
Legal Opinion Fee in an amount equal to the Foreign Legal Opinion Fee 
charged to the first non-U.S. membership applicant from the same 
jurisdiction that was charged a Foreign Legal Opinion Fee. FICC would 
notify each Subsequent Non-U.S. Applicant in writing of the amount of 
the Foreign Legal Opinion Fee that was determined as described above. 
If within five (5) business days after FICC advises the Subsequent Non-
U.S. Participant Applicant of the applicable Foreign Legal Opinion Fee, 
the applicant notifies FICC in writing that it will terminate its 
membership application, the applicant would not be charged a Foreign 
Legal Opinion Fee. If the Subsequent Non-U.S. Applicant does not 
terminate its application within five (5) business days of FICC 
advising it of the amount of the Foreign Legal Opinion Fee, then the 
applicant would be billed accordingly. Payment by the Non-U.S. 
Participant Applicant of the full amount of the Foreign Legal Opinion 
Fee would be due within ten (10) business days of the applicant's 
receipt of an invoice, including payment instructions, from FICC.
    Pursuant to the proposed rule change, FICC would delete from GSD 
Rule 3, Section 2 and MBSD Rule 3, Section 2 the requirement for direct 
foreign members to submit the annual bring-down opinions. FICC will 
instead periodically monitor to identify any significant changes in 
relevant non-U.S. jurisdictions that may be of interest to FICC. FICC 
would not charge members for this monitoring service.
2. Statutory Basis
    Section 17A(b)(3)(D) of the Act requires that the GSD Rules and 
MBSD Rules provide for the equitable allocation of reasonable dues, 
fees, and other charges among its participants.\10\ FICC believes the 
proposed Foreign Legal Opinion Fee would be equitably allocated because 
in accordance with the amendment to the FICC Fee Schedules as described 
above, a Foreign Legal Opinion Fee in the same amount would be charged 
to all subsequent applicants domiciled in the jurisdiction for which an 
applicable foreign legal opinion was obtained. In addition, FICC 
believes that the proposed Foreign Legal Opinion Fee would be 
reasonable because (i) it would be capped in the amount of the Maximum 
Estimated Charge, as described above, (ii) the amount of a Foreign 
Legal Opinion Fee charged to an applicant would not be greater than the 
costs FICC may incur in connection with obtaining the applicable 
foreign legal opinion, as described above, and (iii) it would eliminate 
the cost to FICC associated with the review of foreign legal opinions. 
Therefore, FICC believes that the proposed rule change would provide 
for the equitable allocation of reasonable fees among its participants, 
and is consistent with Section 17A(b)(3)(D).\11\
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    \10\ 15 U.S.C. 78q-1(b)(3)(D).
    \11\ Id.
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    Section 17A(b)(3)(F) of the Act, requires, inter alia, that the GSD 
Rules and MBSD Rules are not designed to permit unfair discrimination 
in the admission of participants in the use of the clearing agency.\12\ 
FICC believes the proposed rule changes are consistent with this 
provision because the proposal for FICC to obtain a single foreign 
netting and insolvency opinion from FICC outside counsel for all new 
non-U.S. membership applicants domiciled within a jurisdiction, rather 
than requiring each applicant to obtain an opinion from its own outside 
counsel in its jurisdiction, would provide for enhanced consistency in 
the review performed by FICC by eliminating the need for it to review 
multiple legal opinions submitted by each applicant individually. 
Similarly, FICC believes that removing the annual bring-down opinion 
requirement would provide for enhanced consistency in FICC's review of 
material changes in applicable non-U.S. law and would eliminate the 
situation whereby multiple direct foreign members from the same 
jurisdiction are each submitting separate bring-down opinions/letters. 
Therefore, FICC believes that the proposed rule change would not permit 
unfair discrimination in the admission of members in the use of FICC, 
and is consistent with the provisions of Section 17A(b)(3)(F).\13\
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ Id.
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    Rule 17Ad-22(e)(18) under the Act requires that FICC 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.\14\ FICC believes that the proposed rule changes regarding the 
Foreign Legal Opinion Fee and elimination of the annual bring-down 
requirement have been designed to meet the applicable provisions of 
Rule 17Ad-22(e)(18). This is because the netting and insolvency opinion 
requirement for non-U.S. applicants, which is a risk-based requirement 
in that it allows FICC to learn and address any potential legal risk 
arising from a non-U.S. jurisdiction's laws, would remain under the 
proposed rule changes. The proposed rule change would not adversely 
affect fair and open access because the requirement for such legal 
opinion exists today in that non-U.S. applicants must procure and pay 
for their own opinion currently. Moreover, the Foreign Legal Opinion 
Fee would constitute a publicly disclosed requirement for applying as a 
non-U.S.

[[Page 72017]]

applicant to GSD and MBSD. Finally, while the proposal would eliminate 
the bring-down opinion requirement, FICC would continue to periodically 
monitor in order to identify any significant changes in relevant non-
U.S. jurisdictions that may be of interest to FICC.
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    \14\ 17 CFR 240.17Ad-22(e)(18).
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(B) Clearing Agency's Statement on Burden on Competition

    FICC believes that the proposed changes to the FICC Fee Schedules 
to impose the Foreign Legal Opinion Fee could impose a burden on 
competition because it would implement a new fee payable by a non-U.S. 
applicant in connection with a membership application to FICC, which 
currently does not exist in the FICC Fee Schedules. FICC does not 
believe that any burden on competition imposed by the changes to the 
FICC Fee Schedules would be significant because the Foreign Legal 
Opinion Fee is unlikely to cause a material impact to a non-U.S. 
membership applicant's overall cost of applying for FICC membership due 
to the fact that, absent the proposal, these applicants would have 
incurred the cost of obtaining the foreign legal opinion themselves. 
FICC believes that any burden on competition that is created by the 
proposed changes to the FICC Fee Schedules would be necessary in 
furtherance of the purposes of the Act \15\ in order to cover costs to 
FICC associated with obtaining the foreign legal opinion that is 
necessary for FICC to determine whether it would face legal risks in 
connection with admitting a foreign membership applicant. FICC also 
believes that any burden that is created by the Foreign Legal Opinion 
Fee would be appropriate in furtherance of the Act \16\ because it 
would be capped at the Maximum Estimated Charge and would not be 
greater than the costs FICC may incur in connection with obtaining the 
applicable foreign legal opinion.
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    \15\ 15 U.S.C. 78q-1(b)(3)(I).
    \16\ Id.
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    FICC believes that the elimination of the annual bring-down 
requirement could promote competition because it would eliminate the 
cost of obtaining the bring-down opinion/letter currently incurred by 
direct foreign members, potentially lowering their operating costs.

(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 changes have not 
been solicited or received. FICC will notify the Commission of any 
written comments received by FICC.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \17\ and paragraph (f) of Rule 19b-4 
thereunder.\18\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FICC-2019-006 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-2019-006. 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 website (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 website 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 DTCC's website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FICC-2019-006 and should be submitted on 
or before January 21, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-28087 Filed 12-27-19; 8:45 am]
BILLING CODE 8011-01-P