Document ID: SEC-2018-1424-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2018-09-13T04:00Z

[Federal Register Volume 83, Number 178 (Thursday, September 13, 2018)]
[Notices]
[Pages 46530-46532]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19872]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84057; File No. SR-FICC-2018-005]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Granting Approval of Proposed Rule Change To Correct Certain 
References and Provide Transparency to Existing Processes in the 
Mortgage-Backed Securities Division Electronic Pool Notification Rules

September 7, 2018.
    On July 13, 2018, Fixed Income Clearing Corporation (``FICC'') 
filed with the U.S. Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2018-005 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 July 26, 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.83682 (July 20, 2018), 83 
FR 35513 (July 26, 2018) (SR-FICC-2018-005) (``Notice'').
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I. Description of the Proposed Rule Change

    The proposed rule change would amend FICC's Mortgage-Backed 
Securities Division (``MSBD'') electronic pool notification (``EPN'') 
service (``EPN Service'') rules (``EPN Rules'').\4\
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    \4\ MBSD maintains two sets of rulebooks: The EPN Rules and the 
MSBD rules (``MBSD Rules''). Notice, 83 FR at 35513. The EPN Rules 
govern MBSD's EPN Service, while the MBSD Rules govern MBSD's 
clearance and settlement service. Id. The EPN Rules are available at 
http://www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_mbsd_epnrules.pdf. The MBSD Rules are available at http://
www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_mbsd_rules.pdf.
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A. Background

    FICC states that the EPN Service provides an automated manner for 
market participants with an obligation to deliver pools of mortgages to 
transmit mortgage pool information efficiently and reliably to their 
counterparties in real time.\5\ Market participants that wish to use 
the EPN Service (i.e., become ``EPN Users'') are required to submit an 
application to MBSD.\6\ The application process and the use of the EPN 
Service are governed by the EPN Rules.\7\ MBSD's clearing members 
(``Clearing Members'') are required to be EPN Users; however, one can 
be an EPN User and not a Clearing Member.\8\
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    \5\ Notice, 83 FR at 33513. See also ``EPN Overview,'' available 
at http://www.dtcc.com/clearing-services/ficc-mbsd/epn.
    \6\ Notice, 83 FR at 33513.
    \7\ Id.
    \8\ Id.
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B. Proposed Amendments to the EPN Rules To Include an EPN User's 
Ongoing Reporting Obligations

    FICC proposes to amend the EPN Rules by adding a ``General 
Continuance Standards'' section. The proposed section would describe 
two existing MBSD practices with respect to reporting obligations of 
EPN Users.\9\ First, the proposed section would state that an EPN User 
shall promptly inform FICC, both orally and in writing, if such EPN 
User no longer complies with any of the EPN Rules' requirements for 
admission to membership.\10\ This notification must occur within two 
business days from the date on which the EPN User first learns of its 
non-compliance.\11\ Second, the proposed section would state that an 
EPN User shall notify FICC of certain investigations or proceedings. 
Specifically, an EPN User must notify FICC within two business days 
after learning (i) that the EPN User is or will become the subject of 
an investigation or a proceeding, and (ii) that said investigation or 
proceeding would cause the EPN User to fall out of compliance with any 
of the requirements for membership set forth in the EPN Rules.\12\ 
However, the EPN User would not be required to provide such a 
notification to FICC if doing so would cause the EPN User to violate an 
applicable law, rule, or regulation.\13\
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    \9\ Notice, 83 FR at 35514.
    \10\ These membership standards are set forth in EPN Rules, 
Article III, Rule 1, Sections 2-3, supra note 4.
    \11\ Notice, 83 FR at 35514. 
    \12\ Id.
    \13\ Id.
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C. Proposed Changes To Amend the EPN Rules To Define Circumstances 
Under Which FICC May Determine an EPN User's Compliance With EPN Rules

    The proposed ``General Continuance Standards'' section would 
identify when FICC may review an EPN User's access to the EPN Service. 
The proposed ``General Continuance Standards'' section also would 
identify when FICC may seek written assurances from EPN Users.
    First, the proposal would identify five circumstances when FICC 
would assess if an EPN User should retain access to the EPN Service: 
(i) If an EPN User experiences a Reportable Event; \14\ (ii) if an EPN 
User fails to maintain the requirements for admission to membership; 
\15\ (iii) if an EPN User violates any EPN Rule or other agreement with 
FICC; (iv) if an EPN User fails to satisfy any obligation to FICC in a 
timely manner; or (v) if FICC otherwise deems it necessary or 
advisable, in order to protect FICC, its other EPN Users, or its 
creditors or investors, to safeguard securities and funds in the 
custody or control of FICC, or to promote the prompt and accurate 
processing, clearance or settlement of securities transactions.\16\
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    \14\ As part of the proposal, FICC would include ``Reportable 
Event'' as a new defined term in the ``Definitions and General 
Provisions'' section of the EPN Rules. ``Reportable Event'' would be 
defined as ``an event that would effect a change in control of an 
EPN User or could have a substantial impact on such EPN User's 
business and/or financial condition, including, but not limited to: 
(a) Material organizational changes including mergers, acquisitions, 
changes in corporate form, name changes, changes in the ownership of 
an EPN User or its affiliates, and material changes in management; 
and (b) status as a defendant in litigation, which could reasonably 
impact the EPN User's financial condition or ability to conduct 
business.'' Id. Distinct from any other notification obligations, an 
EPN User would be required to submit to FICC written notice of any 
Reportable Event at least 90 calendar days prior to the effective 
date of such Reportable Event unless the EPN User demonstrates that 
(i) the EPN User could not have reasonably done so, and (ii) the EPN 
User provided written notice and oral notice to FICC as soon as 
possible. Id.
    \15\ Such requirements may include, but are not limited to, 
operational testing and related reporting requirements that FICC may 
imposed from time to time. Notice, 83 FR at 35514. 
    \16\ Id.
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    Second, the proposed ``General Continuance Standards'' section 
would state that FICC may require an EPN User to provide written 
assurances to FICC.\17\ The proposal would authorize FICC to require 
written assurances from an EPN User if FICC has reason to believe that 
an EPN User may fail to comply with any of the EPN Rules.\18\ 
Specifically, FICC could require an EPN User to

[[Page 46531]]

provide written assurances of a credible nature that the EPN User shall 
not violate any of the EPN Rules.\19\ These written assurances could 
take the specific format of, but would not be limited to such specific 
formats, notarized statements, affidavits, and/or officers' 
certificates.\20\
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    \17\ Id.
    \18\ Id.
    \19\ FICC has discretion to request that the EPN User's written 
assurance references specific timeframes and details. Id.
    \20\ Id.
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D. Proposed Clarifying Changes to the EPN Rules

    FICC also proposes clarifying corrections to the EPN Rules. 
Specifically, the proposal would replace references to ``FICC'' with 
``the Corporation'' in the section entitled ``FICC Mortgage-Backed 
Securities Division (`MBSD') EPN Schedule of Charges.'' \21\ FICC 
states that it proposes this change because ``FICC'' is not a term that 
is defined in the EPN Rules.\22\ In addition, FICC proposes to replace 
the reference to ``The Depository Trust Corporation'' with ``The 
Depository Trust & Clearing Corporation,'' which FICC states is an 
erroneous reference.\23\ Additionally, FICC states that to accommodate 
the introduction of the new ``General Continuance Standards'' section, 
FICC proposes to change the numbering of the existing 
``Confidentiality'' provision in EPN Rule 1 (Requirements Applicable to 
EPN Users) of Article III (EPN Users) from ``Sec. 8'' to ``Sec. 9.'' 
\24\
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    \21\ Notice, 83 FR at 35513.
    \22\ Id.
    \23\ Id.
    \24\ Notice, 83 FR at 35514.
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II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \25\ 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, 
Rule 17Ad-22(e)(18) under the Act, and Rule 17Ad-22(e)(23)(i) under the 
Act, as discussed below.\26\
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    \25\ 15 U.S.C. 78s(b)(2)(C).
    \26\ 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)

    Section 17A(b)(3)(F) of the Act \27\ 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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    \27\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, FICC proposes to make three changes to the EPN 
Rules. First, FICC proposes to add ongoing reporting obligations on EPN 
Users. These obligations would require an EPN User to notify FICC 
within two business days after the EPN User has, or could, fail to 
comply with EPN Service membership requirements. The Commission 
believes that codifying an affirmative duty to notify FICC would afford 
FICC a better opportunity to take timely action, once notified, to 
preserve the EPN Service's functionality, as FICC deemed necessary. By 
providing additional means to preserve the functionality of the EPN 
Service--a critical component of MBSD's settlement of mortgage-backed 
securities--the proposal is designed to promote the prompt and accurate 
clearance and settlement of such securities transactions.
    Second, as described above, the proposal would identify 
circumstances when FICC could reassess an EPN User's access to the EPN 
Service. By including a ``Reportable Event,'' as defined by the 
proposal, as one of these circumstances, the proposal would allow FICC 
to review an EPN User's fitness after learning (i) of an EPN User's 
significant corporate event or (ii) an EPN User becoming the subject of 
an investigation or proceeding. The proposal also would allow FICC to 
require an EPN User to provide written assurances that the EPN User 
remains in compliance with the EPN Rules. The Commission believes that 
these proposed changes would codify existing practices that help ensure 
that FICC can, on its own accord, determine if an EPN User's access to 
the EPN Service should be reassessed due to possible threats to the EPN 
Service's functionality. By enabling FICC to better protect the EPN 
Service, which is essential for MBSD's settlement of mortgage-backed 
securities, the proposal is designed to promote the prompt and accurate 
clearance and settlement of such securities transactions.
    Third, as described above, FICC proposes clarifying changes to the 
EPN Rules. The proposed corrections to references in the ``EPN Schedule 
of Charges'' and ``Requirements Applicable to EPN Users'' sections of 
the EPN Rules would help clarify the EPN Rules for EPN Users. 
Similarly, FICC's renumbering of the Rules to accommodate the proposed 
``General Continuance Standards'' also would help maintain the clarity 
of the EPN Rules for EPN Users. By proposing changes to the EPN Rules 
to improve clarity, the Commission believes that the proposed changes 
are designed to help EPN Users better understand and remain compliant 
with the EPN Rules; thus promoting the prompt and accurate clearance 
and settlement of securities transactions.
    As each of the aforementioned changes is 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)(18)

    Rule 17Ad-22(e)(18) under the Act requires, inter alia, a covered 
clearing agency \28\ to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to monitor 
compliance with participation requirements on an ongoing basis.\29\
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    \28\ 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 Payment, Clearing, and Settlement 
Supervision Act of 2010 (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.asp. Therefore, FICC is a covered 
clearing agency.
    \29\ 17 CFR 240.17Ad-22(e)(18).
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    As described above, FICC proposes to amend the EPN Rules to (1) 
include an EPN User's ongoing reporting obligations, and (2) define 
circumstances under which FICC may determine an EPN User's compliance 
with the EPN Rules. The Commission believes that these changes would 
help ensure that FICC is promptly made aware of the potential need to 
reassess an EPN User's access to the EPN Service due to the EPN User's 
possible violation of the EPN Rules. As such, the proposed changes are 
designed to give FICC the ability to timely monitor an EPN User's 
compliance with the EPN Rules. Therefore, the Commission finds that 
proposed changes are consistent with Rule 17Ad-22(e)(18).

C. Consistency With Rule 17Ad-22(e)(23)

    Rule 17Ad-22(e)(23) under the Act requires, inter alia, a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide for publicly 
disclosing all

[[Page 46532]]

relevant rules and material procedures.\30\
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    \30\ 17 CFR 240.17Ad-22(e)(23)(i).
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    As described above, the proposed rule changes would amend the EPN 
Rules to reflect existing FICC practices. Specifically, the proposed 
changes would (1) include an EPN User's ongoing reporting obligations, 
(2) define circumstances under which FICC may determine an EPN User's 
compliance with the EPN Rules, and (3) make corrections to the EPN 
Rules for clarity. As such, the Commission believes these proposed 
changes to codify and correct FICC's existing practices in the EPN 
Rules would assist in publicly disclosing all relevant and material 
procedures regarding the EPN Service.
    Therefore, the Commission finds that the proposal is designed to 
provide for publicly disclosing all relevant rules and material 
procedures, 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 \31\ and the rules and 
regulations thereunder.
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    \31\ 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-2018-005 be, and hereby is, 
approved.\32\
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    \32\ 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.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-19872 Filed 9-12-18; 8:45 am]
 BILLING CODE 8011-01-P