Document ID: SEC-2018-1501-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2018-09-27T04:00Z

[Federal Register Volume 83, Number 188 (Thursday, September 27, 2018)]
[Notices]
[Pages 48890-48893]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21000]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84255; File No. SR-FICC-2018-008]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Apply the Government Securities 
Division Corporation Default Rule to Sponsored Members and Make Other 
Changes

September 21, 2018.
    On August 6, 2018, Fixed Income Clearing Corporation (``FICC'') 
filed with the U. S. Securities and Exchange Commission 
(``Commission'') proposed rule change SR-FICC-2018-008, pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The proposed rule change was published 
for comment in the Federal Register on August 21, 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. 83856 (August 15, 2018), 
83 FR 42340 (August 21, 2018) (SR-FICC-2018-008) (``Notice'').
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I. Description of the Proposed Rule Change

    The proposed rule change would modify FICC's Government Securities 
Division (``GSD'') Rulebook (``GSD

[[Page 48891]]

Rules'') \4\ to amend GSD Rule 3A (Sponsoring Members and Sponsored 
Members) to apply GSD Rule 22B (Corporation Default) to Sponsored 
Members. In addition, the proposed rule change would make certain other 
changes as described below.
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    \4\ Capitalized terms not defined herein are defined in the GSD 
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_gov_rules.pdf.
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A. GSD Rule 3A (Sponsoring Members and Sponsored Members)

    FICC proposes to add an introductory paragraph to Section 17 of GSD 
Rule 3A (Sponsoring Members and Sponsored Members) to make it clear 
that for purposes of the Rules, Schedules, Interpretations and 
Statements of Policy referenced in Section 17 of GSD Rule 3A, 
Sponsoring Members and/or Sponsored Members, in their respective 
capacities, would be ``Members.'' FICC states that this change would 
clarify which Rules, Schedules, Interpretations and Statements of 
Policy would govern the rights, liabilities and obligations of 
Sponsoring Members and Sponsored Members in their respective 
capacities.\5\
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    \5\ Notice, 83 FR at 42341.
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    Furthermore, FICC would modify GSD Rule 3A so that GSD Rule 22B 
(Corporation Default) would apply to Sponsored Members in the same 
manner as it applies to all other GSD Members. Specifically, FICC would 
add a new subsection (a) to Section 17 of GSD Rule 3A which would 
provide that GSD Rule 22B would apply to Sponsored Members. This 
proposed change would necessitate a technical change to renumber all 
subsequent subsections in Section 17 of GSD Rule 3A.
    GSD Rule 22B defines the term ``Corporation Default'' and sets 
forth the close out netting process in the event of a Corporation 
Default. Section (b)(ii) of GSD Rule 22B provides that the following 
events shall constitute a Corporation Default: (1) The dissolution of 
FICC (other than pursuant to a consolidation, amalgamation, or merger); 
\6\ (2) the institution by FICC of a proceeding seeking a judgment of 
insolvency or bankruptcy or any other relief under any bankruptcy or 
insolvency law or other similar law affecting creditors' rights, or the 
presentation of a petition for FICC's winding-up or liquidation, or the 
making of a general assignment for the benefit of creditors; \7\ (3) 
the institution of a proceeding against FICC seeking a judgment of 
insolvency or bankruptcy or any other relief under any bankruptcy or 
insolvency law or other similar law affecting creditors' rights, or the 
presentation of a petition for FICC's winding-up or liquidation and, in 
each case, such proceeding or petition resulting in a judgement of 
insolvency or bankruptcy or the entry of an order for relief or the 
making of an order for FICC's winding-up or liquidation; \8\ or (4) 
FICC seeking or becoming subject to the appointment of a receiver, 
trustee, or other similar official pursuant to the federal securities 
laws or Title II of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act \9\ for FICC or for all or substantially all of FICC's 
assets.\10\
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    \6\ See Section (b)(ii)(A) of GSD Rule 22B, supra note 4.
    \7\ See Section (b)(ii)(B) of GSD Rule 22B, supra note 4.
    \8\ See Section (b)(ii)(C) of GSD Rule 22B, supra note 4.
    \9\ 12 U.S.C. 5381 et seq.
    \10\ See Section (b)(ii)(D) of GSD Rule 22B, supra note 4.
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    In addition, subject to the limitations set forth therein, Section 
(b)(i) of GSD Rule 22B provides that a Corporation Default is deemed to 
have occurred on the eighth day after FICC receives notice from a GSD 
Member of FICC's failure to make, when due, an undisputed payment or 
delivery to such Member that is required to be made by FICC under the 
GSD Rules; provided that, such failure remains unremedied throughout 
the seven-day period following FICC's receipt of the notice.\11\
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    \11\ See Section (b)(i) of GSD Rule 22B, supra note 4.
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    FICC states that its provision of clearance and settlement 
services, including the timely settlement of Transactions in the 
ordinary course of business, are a part of FICC's fundamental directive 
as a registered clearing agency under the Act.\12\ FICC further states 
that the seven-day period provided by Section (b)(i) of GSD Rule 22B is 
intended to address the circumstance where FICC experiences an 
operational issue that prevents it from completing such clearance and 
settlement services.\13\ If FICC is not able to rectify the failure and 
satisfy its obligations in seven days, GSD Rule 22B requires an 
immediate termination of Transactions that have been subject to 
Novation pursuant to the GSD Rules but have not yet settled and any 
rights and obligations of the parties thereto.\14\ FICC states that the 
seven-day period is designed to avoid a systemic disruption in such 
circumstance.\15\
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    \12\ Notice, 83 FR at 42342.
    \13\ Id.
    \14\ See Section (a) of GSD Rule 22B, supra note 4.
    \15\ Notice, 83 FR at 42342.
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    In connection with the proposed rule change to apply GSD Rule 22B 
to Sponsored Members, FICC would add language to clarify that (1) the 
commencement of the seven-day period preceding a potential Corporation 
Default, as provided by Section (b)(i) of GSD Rule 22B, would not 
modify FICC's obligations to satisfy any undisputed payment or delivery 
obligation to a Sponsored Member under the GSD Rules, including any 
undisputed interest payment obligation owing to the Sponsored Member on 
an open Sponsored Member Trade, and (2) the undisputed interest payment 
obligation would continue to accrue in favor of the Sponsored Member 
for the duration of the seven-day period. Specifically, FICC would 
specify in the proposed subsection (a) to Section 17 of GSD Rule 3A 
that FICC would be responsible for satisfying any undisputed payment or 
delivery obligation required to be made by FICC to a Sponsored Member 
under the GSD Rules, including, but not limited to, any undisputed 
interest payment obligation that accrues in favor of a Sponsored Member 
on a Sponsored Member Trade that has been subject to Novation pursuant 
to the GSD Rules but has not yet settled and for which FICC has 
received notice from such Sponsored Member of FICC's failure to make, 
when due, such undisputed interest payment to such Sponsored Member 
within the meaning of Section (b)(i) of GSD Rule 22B.

B. GSD Rule 22B (Corporation Default)

    FICC proposes to clarify the third sentence of Section (a) of GSD 
Rule 22B regarding the close out netting process upon a Corporation 
Default. Specifically, FICC would delete a reference to Section 2(a) of 
GSD Rule 22A in that sentence and modify the reference to Section 2(b) 
of GSD Rule 22A to specifically refer to Section 2(b)(i) of GSD Rule 
22A.
    FICC states that the reference to Section 2(a) of GSD Rule 22A is 
meant to set forth Transactions that would not be subject to the close 
out netting process in the event of a Corporation Default by referring 
(by way of analogy) to Transactions that FICC would not close out in 
the event FICC ceases to act for a GSD Member.\16\ However, Section (a) 
of GSD Rule 22B already contains a statement regarding which 
Transactions are subject to the close out netting process in the event 
of a Corporation Default: ``all Transactions which have been subject to 
Novation pursuant to these [GSD] Rules. . . .'' \17\ Accordingly, FICC 
would delete the reference to Section 2(a) of GSD Rule 22A in the

[[Page 48892]]

third sentence of Section (a) of GSD Rule 22B.
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    \16\ Notice, 83 FR at 42342.
    \17\ See Section (a) of GSD Rule 22B, supra note 4.
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    In addition, FICC would modify the reference to Section 2(b) of GSD 
Rule 22A in the third sentence of Section (a) of GSD Rule 22B to 
specifically refer to Section 2(b)(i) of GSD Rule 22A. Section (a) of 
GSD Rule 22B provides, in part, that ``the Board shall determine a 
single net amount owed by or to each Member . . . by applying the close 
out . . . procedures of Section 2(a) and (b) of [GSD] Rule 22A . . . 
.'' \18\ FICC states that the reference to the entirety of Section 2(b) 
of GSD Rule 22A could cause confusion for GSD Members because only 
subsection (i) of Section 2(b) of GSD Rule 22A, which speaks 
specifically to final net settlement positions, is relevant in the 
context of GSD Rule 22B.\19\ Therefore, FICC would amend the reference 
to point specifically to Section 2(b)(i) of GSD Rule 22A.
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    \18\ Id.
    \19\ Notice, 83 FR at 42342.
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    FICC also proposes to delete ``, to the extent applicable,'' and 
``and application'' from the third sentence of Section (a) of GSD Rule 
22B. FICC states that it is proposing to delete ``, to the extent 
applicable,'' because Section 2(b)(i) of GSD Rule 22A would always be 
applicable for purposes of the Board determining a single net amount 
owed by or to each Member under GSD Rule 22B after a Corporation 
Default has occurred.\20\ Likewise, FICC would delete ``and 
application'' from the third sentence of Section (a) of GSD Rule 22B 
because, FICC states, it is extraneous wording that is unnecessary and 
not relevant in the context of Section 2(b)(i) of GSD Rule 22A.\21\
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    \20\ Id.
    \21\ Id.
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    Lastly, FICC proposes to clarify the third sentence of Section (a) 
of GSD Rule 22B by stating that, although GSD Rule 22B would apply to 
Sponsored Members pursuant to this proposal, the loss allocation 
provisions of GSD Rule 4 (Clearing Fund and Loss Allocation) referenced 
in GSD Rule 22B would not apply to Sponsored Members. Specifically, 
FICC would add ``, to the extent such provisions are otherwise 
applicable to such Member'' following the reference in that sentence to 
the loss allocation provisions in GSD Rule 4. FICC states that this 
proposed change would be consistent with Section 12(a) of GSD Rule 3A, 
which provides that Sponsored Members are not obligated for 
allocations, pursuant to GSD Rule 4, of loss or liability incurred by 
FICC.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act 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.\22\ The Commission believes the proposal is consistent 
with Act, specifically Section 17A(b)(3)(F) of the Act \23\ and Rule 
17Ad-22(e)(23)(i) under the Act.\24\
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    \22\ 15 U.S.C. 78s(b)(2)(C).
    \23\ 15 U.S.C. 78q-1(b)(3)(F).
    \24\ 17 CFR 240.17Ad-22(e)(23)(i).
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A. Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency, such as FICC, be designed to promote the prompt 
and accurate clearance and settlement of securities transactions.\25\
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    \25\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, the proposed rule change would apply GSD Rule 
22B to Sponsored Members in the same manner as it applies to all other 
GSD Members. The proposed rule change is designed to ensure that all 
GSD Members are subject to a common, transparent legal framework in a 
Corporation Default situation. The Commission believes that having a 
common, transparent legal framework in a Corporation Default situation 
would help facilitate an orderly close out netting of obligations 
between FICC and the GSD Members in the event that a Corporation 
Default occurs. In turn, an orderly close out netting of obligations 
between FICC and the GSD Members would help provide clarity and 
certainty to market participants in a time of distress regarding their 
rights and obligations, and the rights and obligations of FICC. By 
providing clarity and certainty of such rights and obligations, the 
Commission believes the proposed rule change is designed to promote the 
prompt and accurate clearance and settlement of securities 
transactions. Therefore, the Commission finds that the proposed rule 
change to apply GSD Rule 22B to Sponsored Members in the same manner as 
it applies to all other GSD Members is consistent with Section 
17A(b)(3)(F) of the Act.

B. Rule 17Ad-22(e)(23)(i) Under the Act

    Rule 17Ad-22(e)(23)(i) under the Act requires that each covered 
clearing agency,\26\ establish, implement, maintain and enforce written 
policies and procedures reasonably designed to publicly disclose all 
relevant rules and material procedures, including key aspects of its 
default rules and procedures.\27\
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    \26\ 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 Financial Stability Oversight Council 
(``FSOC'') pursuant to the Clearing Supervision Act (12 U.S.C. 5461 
et seq.). See 17 CFR 240.17Ad-22(a)(5)-(6). Because FICC is a 
registered clearing agency with the Commission that has been 
designated systemically important by FSOC, FICC is a covered 
clearing agency.
    \27\ 17 CFR 240.17Ad-22(e)(23)(i).
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    As described above, the proposed rule changes to (i) apply GSD Rule 
22B (Corporation Default) to Sponsored Members in the same manner as it 
applies to all other GSD Members, and (ii) clarify that the loss 
allocation provisions of GSD Rule 4 (Clearing Fund and Loss Allocation) 
referenced in GSD Rule 22B would not apply to Sponsored Members, are 
designed to publicly clarify the application of these specific rules 
with respect to the rights and obligations of Sponsored Members in the 
event Corporation Default occurs. In addition, the proposed rule 
changes to (i) amend the third sentence of Section (a) of GSD Rule 22B 
by (A) deleting the unnecessary and potentially confusing reference to 
Section 2(a) of GSD Rule 22A and (B) modifying the reference to Section 
2(b) of GSD Rule 22A to specifically refer to Section 2(b)(i) of GSD 
Rule 22A, and (ii) make clarifying and/or technical changes in GSD Rule 
3A and GSD Rule 22B, are designed to enhance the clarity and accuracy 
of these public rules with respect to the rights and obligations of 
Sponsored Members in the event Corporation Default. As such, the 
Commission finds that the proposed rule changes are reasonably designed 
to publicly disclose relevant rules and material procedures, including 
key aspects of its default rules and procedures, consistent with 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 \28\ and the rules and 
regulations thereunder.
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    \28\ 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-2018-008 be, and hereby is, 
APPROVED.\29\
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    \29\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-21000 Filed 9-26-18; 8:45 am]
BILLING CODE 8011-01-P