Document ID: SEC-2018-0490-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2018-03-26T04:00Z

[Federal Register Volume 83, Number 58 (Monday, March 26, 2018)]
[Notices]
[Pages 12997-12999]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06019]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82913; File No. SR-FICC-2017-021]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Adopt a Recovery & Wind-Down Plan 
and Related Rules

March 20, 2018.

I. Introduction

    On December 18, 2017, 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-2017-021 to adopt a recovery and wind-down plan and related rules 
(``Proposed Rule Change'').\3\ The Proposed Rule Change was published 
for comment in the Federal Register on January 8, 2018.\4\ The 
Commission did not receive any comments on the Proposed Rule Change. On 
February 8, 2018, pursuant to Section 19(b)(2)(A)(ii)(I) of the Act,\5\ 
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.\6\ This order institutes 
proceedings, pursuant to Section 19(b)(2)(B) of the Act,\7\ to 
determine whether to approve or disapprove the Proposed Rule Change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On December 18, 2017, FICC filed this proposal as an advance 
notice (SR-FICC-2017-805) with the Commission pursuant to Section 
806(e)(1) of the Payment, Clearing, and Settlement Supervision Act 
of 2010 (``Clearing Supervision Act'') and Rule 19b-4(n)(1)(i) of 
the Act (``Advance Notice''). On January 24, 2018, the Commission 
extended the review period of the Advance Notice for an additional 
60 days pursuant to Section 806(e)(1)(H) of the Clearing Supervision 
Act. See 12 U.S.C. 5465(e)(1); 17 CFR 240.19b-4(n)(1)(i); 12 U.S.C. 
5465(e)(1)(H); and Securities Exchange Act Release No. 82580 
(January 24, 2018), 83 FR 4341 (January 30, 2018) (SR-FICC-2017-
805).
    \4\ Securities Exchange Act Release No. 82431 (January 2, 2018), 
83 FR 871 (January 8, 2018) (SR-FICC-2017-021) (``Notice'').
    \5\ 15 U.S.C. 78s(b)(2)(A)(ii)(I).
    \6\ Securities Exchange Act Release No. 82669 (February 8, 
2018), 83 FR 6653 (February 14, 2018) (SR-DTC-2017-021; SR-FICC-
2017-021; SR-NSCC-2017-017).
    \7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

II. Summary of the Proposed Rule Change

    As described in the Notice,\8\ FICC proposes to (i) adopt a 
Recovery & Wind-down Plan (``R&W Plan''), (ii) adopt rules to 
facilitate the implementation of the R&W Plan, and (iii) make 
conforming changes to existing rules. Specifically, to facilitate the 
implementation of the R&W Plan, FICC proposes to adopt a proposed wind-
down rule and a proposed market disruption and force majeure rule to 
both FICC's Government Securities Division (``GSD'') Rulebook (``GSD 
Rules'') \9\ and FICC's Mortgage-Backed Securities Division (``MBSD'') 
Clearing Rules (``MBSD Rules'') \10\ (collectively, ``Wind-down Rule'' 
and ``Force Majeure Rule,'' respectively). FICC proposes to make 
conforming changes to existing rules to incorporate the proposed Wind-
down Rule and proposed Force Majeure Rule.\11\
---------------------------------------------------------------------------

    \8\ The description of the Proposed Rule Change is based on the 
statements prepared by FICC in the Notice. See Notice, supra note 4.
    \9\ FICC proposes to adopt GSD Rule 22D (Wind-down of the 
Corporation) and GSD Rule 50 (Market Disruption and Force Majeure). 
See Notice, supra note 4, at 872.
    \10\ FICC proposes to adopt MBSD Rule 17B (Wind-down of the 
Corporation) and MBSD Rule 40 (Market Disruption and Force Majeure). 
See Notice, supra note 4, at 872.
    \11\ FICC proposes to make conforming changes to GSD Rules, MBSD 
Rules, and MBSD Electronic Pool Netting (``EPN'') Rules (``EPN 
Rules''). Specifically, FICC proposes to amend the following GSD 
Rules and MBSD Rules to incorporate the proposed Wind-down Rule and 
proposed Force Majeure Rule, as applicable: GSD Rule 3A (Sponsoring 
Members and Sponsored Members), GSD Rule 3B (Centrally Cleared 
Institutional Triparty Service), GSD Rule 13 (Funds-Only 
Settlement), and MBSD Rule 3A (Cash Settlement Bank Members). See 
Notice, supra note 4, at 872, 881-82. Additionally, FICC proposes to 
amend EPN Rule 1 to provide that EPN Users are bound by proposed 
MBSD Rule 17B (Wind-down of the Corporation) and proposed MBSD Rule 
40 (Market Disruption and Force Majeure). Id. Capitalized terms not 
defined herein are defined in the GSD Rules, MBSD Rules, and EPN 
Rules, as applicable, available at http://www.dtcc.com/legal/rules-and-procedures.
---------------------------------------------------------------------------

    FICC states that the R&W Plan is intended to be used by FICC's 
Board of Directors and management in the event that FICC encounters 
scenarios that could potentially prevent it from being able to provide 
its critical services as a going concern.\12\ The R&W Plan would be 
structured to provide a roadmap, define the strategy, and identify the 
tools available to FICC to either (i) recover in the event it 
experiences losses that exceed its prefunded resources or (ii) wind-
down its business in a manner designed to permit the continuation of 
its critical services in the event that such recovery efforts are not 
successful.\13\ The R&W Plan would include tools that are provided for 
in FICC's existing rules, policies, procedures, and contractual 
arrangements,\14\ as well as the proposed Wind-down Rule and the 
proposed Force Majeure Rule.\15\
---------------------------------------------------------------------------

    \12\ See Notice, supra note 4, at 872.
    \13\ Id. at 873.
    \14\ Contractual arrangements include, for example, FICC's 
existing committed or pre-arranged liquidity arrangements.
    \15\ See Notice, supra note 4, at 872.
---------------------------------------------------------------------------

    FICC states that the proposed Wind-down Rule and the proposed Force 
Majeure Rule are designed to (i) facilitate the implementation of the 
R&W Plan when necessary; (ii) provide Members and Limited Members with 
transparency around critical provisions of the R&W Plan that relate to 
their rights, responsibilities, and obligations; \16\ and (iii) provide 
FICC

[[Page 12998]]

with the legal basis to implement the provisions of the R&W Plan that 
concern the proposed Wind-down Rule and the proposed Force Majeure 
Rule, when necessary.\17\
---------------------------------------------------------------------------

    \16\ Consistent with the Notice, references to ``Members'' refer 
to GSD Netting Members and MBSD Clearing Members. References to 
``Limited Members'' refer to participants of GSD or MBSD other than 
GSD Netting Members and MBSD Clearing Members, including, for 
example, GSD Comparison-Only Members, GSD Sponsored Members, GSD 
CCIT Members, and MBSD EPN Users. Id. at 872 n.6.
    \17\ See Notice, supra note 4, at 872.
---------------------------------------------------------------------------

    As an overview, the R&W Plan would provide, among other matters, 
(i) an overview of the business of FICC and its parent, The Depository 
Trust & Clearing Corporation (``DTCC''); (ii) an analysis of FICC's 
intercompany arrangements and an existing link to another financial 
market infrastructures; (iii) a description of FICC's services, and the 
criteria used to determine which services are considered critical; (iv) 
a description of the FICC and DTCC governance structure; (v) a 
description of the governance around the overall recovery and wind-down 
program; (vi) a discussion of tools available to FICC to mitigate 
credit/market \18\ and liquidity risks, including recovery indicators 
and triggers, and the governance around management of a stress event 
along a ``Crisis Continuum'' timeline; (vii) a discussion of potential 
non-default losses and the resources available to FICC to address such 
losses, including recovery triggers and tools to mitigate such losses; 
\19\ (viii) an analysis of the recovery tools' characteristics, 
including how they are comprehensive, effective, and transparent, how 
the tools provide appropriate incentives to Members to, among other 
things, control and monitor the risks they may present to FICC, and how 
FICC seeks to minimize the negative consequences of executing its 
recovery tools; and (ix) the framework and approach for the orderly 
wind-down and transfer of FICC's business,\20\ including an estimate of 
the time and costs to effect a recovery or orderly wind-down of 
FICC.\21\
---------------------------------------------------------------------------

    \18\ FICC states that FICC manages its credit exposure to 
Members as part of its market risk management strategy. Id. at 875.
    \19\ As described in more detail in the Notice, this section of 
the R&W Plan would describe the proposed Force Majeure Rule, which 
would govern how FICC would address extraordinary events that may 
occur outside its control. See Notice, supra note 4, at 881. The 
proposed Force Majeure Rule would identify the events or 
circumstances that would be considered a ``Market Disruption 
Event,'' including, for example, events that lead to the suspension 
or limitation of trading or banking in the markets in which FICC 
operates, or the unavailability or failure of any material payment, 
bank transfer, wire or securities settlement systems. Id. Under the 
proposed Force Majeure Rule, during the pendency of a Market 
Disruption Event, FICC would be entitled to (i) suspend the 
provision of any or all services, and (ii) take, or refrain from 
taking, or require its Members and Limited Members to take, or 
refrain from taking, any actions it considers appropriate to 
address, alleviate, or mitigate the event and facilitate the 
continuation of FICC's services as may be practicable. Id.
    \20\ This section of the R&W Plan would refer to the proposed 
Wind-down Rule.
    \21\ See Notice, supra note 4, at 872.
---------------------------------------------------------------------------

    The framework and approach for orderly wind-down would provide (i) 
for the transfer of FICC's business, assets, and memberships of both 
GSD and MBSD to another legal entity; (ii) that FICC would effectuate 
the transfer in connection with proceedings under Chapter 11 of the 
U.S. Bankruptcy Code; \22\ and (iii) that after effectuating this 
transfer, FICC would liquidate any remaining assets in an orderly 
manner in bankruptcy proceedings.\23\ FICC states that it believes that 
the proposed transfer approach to a wind-down would meet its objectives 
of (i) assuring that FICC's critical services will be available to the 
market as long as there are Members in good standing, and (ii) 
minimizing disruption to the operations of Members and financial 
markets generally that might be caused by FICC's failure.\24\
---------------------------------------------------------------------------

    \22\ 11 U.S.C. 101 et seq.
    \23\ See Notice, supra note 4, at 878.
    \24\ Id.
---------------------------------------------------------------------------

III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \25\ to determine whether the Proposed Rule 
Change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the Proposed Rule Change. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
and provide the Commission with arguments to support the Commission's 
analysis as to whether to approve or disapprove the Proposed Rule 
Change.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\26\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the Proposed 
Rule Change's consistency with Section 17A of the Act,\27\ and the 
rules thereunder, including the following provisions:
---------------------------------------------------------------------------

    \26\ Id.
    \27\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

     Section 17A(b)(3)(F) of the Act,\28\ which requires, among 
other things, that the rules of a clearing agency, such as FICC, must 
be designed to 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 to protect investors and the public interest; and
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

     Rule 17Ad-22(e)(3)(ii) under the Act,\29\ which requires a 
covered clearing agency,\30\ such as FICC, to, among other things, 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable, maintain a sound risk 
management framework for comprehensively managing legal, credit, 
liquidity, operational, general business, investment, custody, and 
other risks that arise in or are borne by FICC, which includes plans 
for the recovery and orderly wind-down of FICC necessitated by credit 
losses, liquidity shortfalls, losses from general business risk, or any 
other losses.
---------------------------------------------------------------------------

    \29\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \30\ See 17 CFR 240.17Ad-22(a)(5) for the definition of a 
covered clearing agency.
---------------------------------------------------------------------------

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Rule Change. In particular, the Commission invites 
the written views of interested persons concerning whether the Proposed 
Rule Change is consistent with Section 17A(b)(3)(F) of the Act,\31\ 
Rule 17Ad-22(e)(3)(ii) under the Act,\32\ or any other provision of the 
Act, or the rules and regulations thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval that would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4(g) under the 
Act,\33\ any request for an opportunity to make an oral 
presentation.\34\
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78q-1(b)(3)(F).
    \32\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \33\ 17 CFR 240.19b-4(g).
    \34\ Section 19(b)(2) of the Act grants to the Commission 
flexibility to determine what type of proceeding--either oral or 
notice and opportunity for written comments--is appropriate for 
consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and

[[Page 12999]]

arguments regarding whether the Proposed Rule Change should be approved 
or disapproved by April 16, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
April 30, 2018.
    The Commission asks that commenters address the sufficiency of 
FICC's statements in support of the Proposed Rule Change, which are set 
forth in the Notice,\35\ in addition to any other comments they may 
wish to submit about the Proposed Rule Change.
---------------------------------------------------------------------------

    \35\ See Notice, supra note 4.
---------------------------------------------------------------------------

    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 [email protected]. Please include 
File Number SR-FICC-2017-021 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FICC-2017-021. 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-2017-021 and should be submitted on 
or before April 16, 2018. Rebuttal comments should be submitted by 
April 30, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
---------------------------------------------------------------------------

    \36\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-06019 Filed 3-23-18; 8:45 am]
 BILLING CODE 8011-01-P