Document ID: SEC-2020-0835-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2020-05-27T04:00Z

[Federal Register Volume 85, Number 102 (Wednesday, May 27, 2020)]
[Notices]
[Pages 31837-31838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11284]

[[Page 31837]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88910; File No. SR-FICC-2020-002]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change To Amend the Government 
Securities Division Rulebook Relating to the Legal Entity Identifier 
Requirement

May 20, 2020.

I. Introduction

    On March 25, 2020, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
FICC-2020-002. The proposed rule change was published for comment in 
the Federal Register on April 9, 2020.\3\ The Commission did not 
receive any comment letters on the proposed rule change. For the 
reasons discussed below, the Commission is approving 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. 88557 (April 3, 2020), 
85 FR 19979 (April 9, 2020) (SR-FICC-2020-002) (``Notice'').
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II. Description of the Proposed Rule Change

    FICC proposes to modify its Government Securities Division 
(``GSD'') \4\ Rulebook (``Rules'') \5\ to require: (1) Netting and CCIT 
Member applicants to obtain and provide a Legal Entity Identifier 
(``LEI'') \6\ to FICC as part of its membership application and Netting 
and CCIT Members to have a current LEI on file with FICC at all times; 
and (2) Sponsoring Member applicants to provide FICC with an LEI for 
each Sponsored Member applicant as part of its Sponsoring Member 
application and Sponsoring Members to have a current LEI on file with 
FICC for each existing Sponsored Member and to provide an LEI for each 
newly added Sponsored Member it would like to sponsor into membership. 
Additionally, FICC proposes to require any Netting Member, CCIT Member, 
or Sponsoring Member who fails to maintain current LEIs on file to 
indemnify FICC for any losses and Legal Actions that arise due to that 
failure.
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    \4\ FICC operates two divisions, GSD and the Mortgage Backed 
Securities Division (``MBSD''). GSD provides trade comparison, 
netting, risk management, settlement, and central counterparty 
services for the U.S. Government securities market. MBSD provides 
the same services for the U.S. mortgage-backed securities market. 
GSD and MBSD maintain separate sets of rules, margin models, and 
clearing funds. The proposed rule change relates solely to GSD.
    \5\ Capitalized terms not defined herein are defined in the 
Rules, available at http://www.dtcc.com/legal/rules-and-procedures.
    \6\ A ``Legal Entity Identifier'' is a 20-character reference 
code used to uniquely identify legally distinct entities that engage 
in financial transactions. The Legal Entity Identifier is based on 
the ISO 17442 standard developed by the International Organization 
for Standardization and satisfies the standards implemented by the 
Global Legal Entity Identifier Foundation. See https://www.gleif.org/en/about-lei/introducing-the-legal-entity-identifier-lei.
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A. Background

    The Office of Financial Research (``OFR'') of the U.S. Department 
of the Treasury has adopted a rule (``OFR Regulation'') establishing a 
data collection for centrally cleared transactions in the U.S. 
repurchase agreement (``repo'') market.\7\ To facilitate this 
collection, OFR requires ``covered reporters,'' defined as certain 
central counterparties who clear repo transactions, to submit to OFR 
daily reports including trade and collateral information on all repo 
transactions cleared through any of its services. FICC meets the 
definition of a covered reporter because it acts as the central 
counterparty (``CCP'') \8\ in repo transactions cleared through its 
services. FICC offers its repo transaction clearing services through 
its Netting System services and CCIT Services. To comply with this 
requirement, FICC must submit, as part of its daily reports, the LEI of 
each clearing member involved in each reported repo transaction.\9\
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    \7\ 84 FR 4975 (February 20, 2019) (hereinafter the 
``Release''). The OFR Regulation is codified at 12 CFR part 1610.
    \8\ As a CCP, FICC interposes itself between counterparties to a 
repo transaction, acting functionally as the buyer to every seller 
and the seller to every buyer to ensure the performance of each 
contract. 17 CFR 240.17Ad-22(a)(2).
    \9\ In the Release, OFR recognizes that certain rule changes may 
be necessary for a covered reporter like FICC to comply with this 
requirement and notes that it expects such covered reporters to 
effectuate rulemaking, subject to any necessary regulatory approval, 
to require that its participants obtain and provide LEIs to meet a 
covered reporter's OFR reporting requirements. Release, supra note 
7, at 4980-81.
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    OFR states in the Release that the reporting requirement will 
enhance the ability of the Financial Stability Oversight Council 
(``Council''),\10\ Council member agencies,\11\ and OFR to identify and 
monitor risks to financial stability because the repo market serves a 
crucial role in providing short-term funding, among other critical 
functions, for U.S. markets.\12\ Specifically, the Release explains 
that the LEI requirement will facilitate an understanding of repo 
market participants' exposures, concentrations, and network 
structures.\13\
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    \10\ The Council was established by the Dodd-Frank Wall Street 
Reform and Consumer Protection Act. The Council is charged with 
identifying risks to the financial stability of the United States, 
among other things. See https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc.
    \11\ The Council member agencies are the Board of Governors of 
the Federal Reserve System, Commodity Futures Trading Commission, 
Federal Deposit Insurance Corporation, Federal Housing Finance 
Agency, National Credit Union Administration, Office of the 
Comptroller of the Currency, Securities and Exchange Commission, 
Treasury Department, and Consumer Financial Protection Bureau. See 
https://www.treasury.gov/initiatives/fsoc/about/Pages/FSOC-Member-Agencies.aspx.
    \12\ See Release, supra note 7, at 4975.
    \13\ See id. at 4980.
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B. Proposed Rule Changes

    Currently, FICC does not require that its Members obtain LEIs or 
provide LEIs to FICC either as part of application materials or as a 
Member.\14\ FICC proposes to add a new defined term to its Rules for a 
Legal Entity Identifier. FICC uses the terminology of the Global Legal 
Entity Identifier in defining LEI in its GSD Rules.\15\ Moreover, to 
comply with the OFR Regulation, FICC proposes to modify the GSD Rules 
to require certain Member applicants and Members to obtain, provide, 
and maintain current LEIs on file with FICC in the two following areas.
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    \14\ See Notice, supra note 3, at 19980.
    \15\ See supra note 6. The Global Legal Entity Identifier 
Foundation was established by the Financial Stability Board in June 
2014 to support the implementation and use of Legal Entity 
Identifiers. The Financial Stability Board is an international body 
that monitors and makes recommendations about the global financial 
system. www.fsb.org.
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(1) Netting and CCIT Member Applicants and Members
    FICC proposes to amend the GSD Rules to include the following two 
requirements for its Netting Members and CCIT Members and for 
applicants to become such Members. First, FICC proposes to amend its 
GSD Rules to require each Netting Member applicant and each CCIT Member 
applicant to obtain and provide an LEI to FICC as part of its 
membership application. This change will be implemented upon Commission 
approval.
    Second, FICC proposes to amend its GSD Rules to add language that 
would require each Netting Member and each CCIT Member to have a 
current LEI on file with FICC at all times. Existing Netting Members 
and CCIT Members will have 60 calendar days from the date of the 
Commission's approval to submit their LEIs to FICC.
    Additionally, FICC proposes to provide that a Netting Member or 
CCIT

[[Page 31838]]

Member must indemnify FICC, among others (collectively, the ``LEI 
Indemnified Parties''), for any and all losses, liabilities, expenses, 
and Legal Actions \16\ suffered or incurred by the LEI Indemnified 
Parties arising from a Netting Member's or CCIT Member's failure to 
have its current LEI on file with FICC. FICC states that the proposed 
indemnity clause is appropriate because, in fulfilling its regulatory 
obligations under the OFR Regulation, FICC would be relying upon 
Netting Members and CCIT Members to keep their LEI on file with FICC 
current.\17\
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    \16\ The proposed rule change would define ``Legal Action,'' to 
mean and include any claim, counterclaim, demand, action, suit, 
countersuit, arbitration, inquiry, proceeding or investigation 
before any federal, state or foreign court or other tribunal, or any 
investigative or regulatory agency or self-regulatory organization. 
Notice, supra note 3, at 19980.
    \17\ See id.
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(2) Sponsoring Members Applicants and Members
    FICC proposes to amend the GSD Rules to include the following three 
requirements for its Sponsoring Member applicants and Sponsoring 
Members. First, each Netting Member or CCIT Member who submits an 
application to FICC in order to become a Sponsoring Member must submit 
the LEIs of its Sponsored Member applicants as part of the Sponsoring 
Member application. This change will be implemented upon Commission 
approval.
    Second, each Sponsoring Member must provide the LEI for each of its 
existing Sponsored Members so that FICC has a current LEI for each such 
Sponsored Member at all times. For existing Sponsored Members, 
Sponsoring Members will have 60 calendar days from the date of the 
Commission's approval to submit the LEIs to FICC. Third, each 
Sponsoring Member must provide the LEI for any new Sponsored Member it 
wishes to sponsor into membership as a Sponsored Member. This change 
will be implemented upon Commission approval.
    Additionally, FICC proposes to include an indemnity clause, as 
described above, for Sponsoring Members because, like Netting Members 
and CCIT Members, FICC would be relying on the Sponsoring Members to 
keep Sponsored Member LEIs on file with FICC current.\18\
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    \18\ See id. at 19981.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \19\ 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. After careful consideration, 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 Section 17A(b)(3)(F) of the Act,\20\ for the reasons 
described below.
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    \19\ 15 U.S.C. 78s(b)(2)(C).
    \20\ 15 U.S.C. 78q-1(b)(3)(F).
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    Section 17A(b)(3)(F) of the Act requires, in part, that clearing 
agency rules be designed to protect investors and the public 
interest.\21\ As stated in Section II.A above, the OFR Regulation will 
enhance the ability of the Council to identify and monitor risks to 
financial stability because the repo market serves a crucial role in 
providing short-term funding, among other critical functions, for U.S. 
markets. Specifically, the LEI requirement will facilitate an 
understanding of repo market participants' exposures, concentrations, 
and network structures. Therefore, the Commission believes the proposed 
rule change could serve to protect investors and the public interest.
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    \21\ Id.
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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 
\22\ and the rules and regulations promulgated thereunder.
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    \22\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\23\ that proposed rule change SR-FICC-2020-002, be, and hereby is, 
APPROVED.\24\
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    \23\ 15 U.S.C. 78s(b)(2).
    \24\ In approving the proposed rule change, the Commission 
considered the proposals' 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.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11284 Filed 5-26-20; 8:45 am]
BILLING CODE 8011-01-P