Self-Regulatory Organizations; The Depository Trust Company; National Securities Clearing Corporation; Fixed Income Clearing Corporation; Order Approving Proposed Rule Changes To Adopt the Clearing Agency Risk Management Framework, 44224-44229 [2017-20089]
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Federal Register / Vol. 82, No. 182 / Thursday, September 21, 2017 / Notices
officer or employee of a member
organization has exercised discretionary
authority, as the Exchange believes this
to be important information with
respect to a transaction.
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Rule 1027(e) Discretion as to Time or
Price Excepted
As discussed above the Exchange
proposes to amend Rule 1027(e), which
generally excludes price and time
discretion from the requirements of Rule
1027, to cover foreign currency options.
The Exchange also proposes to correct
an internal cross reference to ‘‘this
paragraph (d)’’ which should read ‘‘this
paragraph (e).’’
III. Discussion and Commission
Findings
After careful review of the proposed
rule change, the Commission finds that
the proposal is consistent with the
requirements of the Exchange Act and
the rules and regulations thereunder
that are applicable to a national
securities exchange.9 Specifically, the
Commission finds that the proposed
rule changes are consistent with Section
6(b)(5) of the Exchange Act,10 which
requires, among other things, that the
rules of a national securities exchange
be designed to prevent fraudulent and
manipulative acts and practices; to
promote just and equitable principles of
trade; to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system; and, in general, to protect
investors and the public interest.
Section 6(b)(5) also requires that the
rules of an exchange not be designed to
permit unfair discrimination among
customers, issuers, brokers, or dealers.
The proposal is designed to ‘‘remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, by
eliminating redundant rule text,
clarifying certain rule text, and
conforming parts of the rule more
closely to CBOE Rule 9.10,
Discretionary Accounts.’’ 11 The
Commission notes that Phlx believes
that harmonizing its rule regarding
discretionary accounts with its CBOE
counterpart will create ‘‘more efficient
regulatory compliance by members of
both exchanges due to reduction of
differences in wording and consequent
potential for inadvertent regulatory
noncompliance.’’ 12 The Commission
9 In approving this rule change, the Commission
has considered the rule’s impact on efficiency,
competition, and capital formation. See 15 U.S.C.
78c(f).
10 15 U.S.C. 78f(b)(5).
11 Notice, 82 FR at 36471.
12 Id.
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further notes that Phlx believes that
harmonizing Rule 1027 with its CBOE
counterpart will ‘‘further the goal of
harmonized examinations and
enforcement of similar rules, thus
reducing duplicative regulatory efforts’’
and thus lowering overall regulatory
costs imposed on member organizations
and, by extension, the general public.13
The Commission notes that the proposal
received no comments from the public.
Taking into consideration the
Exchange’s views about the proposed
amendments, the Commission believes
that the proposal will promote
regulatory efficiency through more
streamlined rule text that avoids
unnecessary redundancy, clarification
of the meaning and scope of the rule,
and greater harmonization of regulatory
requirements across national securities
exchanges, thereby reducing regulatory
burdens, without undermining strong
regulatory protections for investors. The
Commission believes that the approach
proposed by the Exchange is
appropriate and designed to protect
investors and the public interest,
consistent with Section 6(b)(5) of the
Exchange Act. For these reasons, the
Commission finds that the proposed
rule change is consistent with the
Exchange Act and the rules and
regulations thereunder.
IV. Conclusion
It is therefore ordered pursuant to
Section 19(b)(2) 14 of the Exchange Act
that the proposal (SR–PHLX–2017–56),
be and hereby is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–20087 Filed 9–20–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34- 81635; File Nos. SR–DTC–
2017–013; SR–NSCC–2017–012; SR–FICC–
2017–016]
Self-Regulatory Organizations; The
Depository Trust Company; National
Securities Clearing Corporation; Fixed
Income Clearing Corporation; Order
Approving Proposed Rule Changes To
Adopt the Clearing Agency Risk
Management Framework
September 15, 2017.
I. Introduction
On July 14, 2017, The Depository
Trust Company (‘‘DTC’’), National
Securities Clearing Corporation
(‘‘NSCC’’), and Fixed Income Clearing
Corporation (‘‘FICC,’’ each a ‘‘Clearing
Agency,’’ and collectively the ‘‘Clearing
Agencies’’), filed with the Securities and
Exchange Commission (‘‘Commission’’)
proposed rule changes SR–DTC–2017–
013, SR–NSCC–2017–012, and SR–
FICC–2017–016, respectively, pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder.2 The proposed rule
changes were published for comment in
the Federal Register on August 2, 2017.3
The Commission did not receive any
comment letters on the proposed rule
changes. For the reasons discussed
below, the Commission approves the
proposed rule changes.
II. Description of the Proposed Rule
Changes
The proposed rule changes are
proposals by the Clearing Agencies to
adopt the Clearing Agency Risk
Management Framework (‘‘Framework’’)
of the Clearing Agencies, as described
below.
A. Overview of the Framework
The Framework would describe how
each Clearing Agency (i)
comprehensively manages legal, credit,
liquidity, operational, general business,
investment, custody, and other risks
that arise in or are borne by it (‘‘Key
Clearing Agency Risks’’); (ii) manages
risks posed by its participants; 4 (iii)
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 81248 (July
28, 2017), 82 FR 36049 (August 2, 2017) (SR–DTC–
2017–013, SR–NSCC–2017–012, SR–FICC–2017–
016) (‘‘Notice’’).
4 FICC and NSCC refer to their participants as
‘‘Members,’’ while DTC refers to its participants as
‘‘Participants.’’ These terms are defined in the
Clearing Agencies’ Rules. In this filing, as well as
in the Framework, ‘‘participant’’ or ‘‘participants’’
refers to both the Members of FICC and NSCC, and
the Participants of DTC.
2 17
13 See
id.
U.S.C. 78s(b)(2).
15 17 CFR 200.30–3(a)(12).
14 15
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manages risks related to material
interdependencies and external links;
and (iv) provides services responsive to
market needs.5 The Framework would
be maintained by the General Counsel’s
Office (‘‘GCO’’) of DTCC.6 The
Framework would provide that GCO
reviews the Framework at least
annually, in coordination with all
departments responsible for the
processes described in the Framework.7
B. Comprehensive Management of Key
Clearing Agency Risks
The Framework would state that the
Boards of Directors of the Clearing
Agencies (each a ‘‘Board’’ and together,
the ‘‘Boards’’) have delegated to DTCC
management, on behalf of the Clearing
Agencies, the responsibility for
identifying, assessing, measuring,
monitoring, mitigating, and reporting
Key Clearing Agency Risks through a
process of developing individual risk
tolerance statements for identified
risks.8 The Framework would state that
these risk tolerance statements describe
the applicable risk controls and other
measures used to manage risks.9 If
needed, residual risks may be identified
for either further management or
acceptance, which then follows a
defined escalation and approval
process.10 The Framework would also
state that DTCC management, on behalf
of the Clearing Agencies, is responsible
for the day-to-day management of those
residual risks.11 Finally, the Framework
would describe the governance around
updating risk tolerance statements,
which are reviewed and approved by a
management committee, the Risk
Committee of the Boards, and the
Boards at least annually.12 The
Framework would provide that the
Clearing Agencies manage Key Clearing
Agency Risks through (i) a ‘‘Three Lines
of Defense’’ approach, as described
below, and (ii) the maintenance of risk
management policies, procedures,
Clearing Agencies’ Rules, and
frameworks, as described below.
5 Notice,
82 FR at 36050.
The parent company of the Clearing
Agencies is The Depository Trust & Clearing
Corporation (‘‘DTCC’’). DTCC operates on a shared
services model with respect to the Clearing
Agencies. Most corporate functions are established
and managed on an enterprise-wide basis pursuant
to intercompany agreements under which it is
generally DTCC that provides a relevant service to
a Clearing Agency.
7 Notice, 82 FR at 36050.
8 Id.
9 Id.
10 Id.
11 Id.
12 Id.
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6 Id.
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1. Three Lines of Defense
The Framework would provide that
the Clearing Agencies employ a ‘‘Three
Lines of Defense’’ approach for
comprehensively managing Key
Clearing Agency Risks.13 The
Framework would describe the roles of
personnel and business units in this risk
management approach, which includes
(i) a first line of defense comprised of
the various business lines and
functional units that support the
products and services offered by the
Clearing Agencies (collectively,
‘‘Clearing Agency Business/Support
Areas’’); (ii) a second line of defense
comprised of control functions that
support the Clearing Agencies,
including the organization’s legal,
privacy and compliance areas, as well as
the DTCC Risk Department, which is
specifically dedicated to risk
management concerns (collectively,
‘‘Clearing Agency Control Functions’’);
and (iii) a third line of defense, which
is performed by DTCC Internal Audit.14
For the first line of defense, the
Framework would state that each
Clearing Agency Business/Support Area
would, for example, identify Key
Clearing Agency Risks applicable to its
function, determine the best way to
mitigate such risks, self-test internal
controls, and create and implement
actions plans for risk mitigation.15 For
the second line of defense, the
Framework would state that each
Clearing Agency’s Control Functions
would, for example, work with the
Clearing Agency Business/Support
Areas on efforts to mitigate Key Clearing
Agency Risks, and provide tools to those
groups to enable them to analyze,
monitor and proactively manage those
risks.16 Finally, for the third line of
defense, the Framework would identify
the role of DTCC Internal Audit as
including, for example, directing its
own resources to review and test key
controls that help mitigate significant
Key Clearing Agency Risks, then
reporting on the results of that testing.17
In connection with a description of
the second and the third lines of
defense, the Framework would state that
personnel within the DTCC Risk
Department and the DTCC Internal
Audit are provided with sufficient
authority, resources, independence from
management, and access to the
Boards.18 The Framework would
provide that the DTCC Risk Department
44225
and the DTCC Internal Audit are
functionally independent from all other
Clearing Agency Business/Support
Areas.19 The Framework would also
explain that the personnel within the
DTCC Risk Department and the DTCC
Internal Audit have a direct reporting
line to, and oversight by, the Risk
Committee of the Boards and the Audit
Committee of the Boards, respectively,
which is supported by the charters of
these committees.20 The Framework
would state that a set of senior
management committees provide
oversight of the Three Lines of Defense
approach to manage Key Clearing
Agency Risks as well as other aspects of
the Clearing Agencies’ risk
management.21
2. Policies, Procedures, Clearing
Agencies’ Rules, and Risk Management
Frameworks
The Framework would provide that
the Clearing Agencies maintain a policy
to govern the requirements for
establishing, managing, and assessing
the performance of internal committees
and councils.22 The Framework would
also describe the process by which the
Clearing Agencies maintain risk
management policies, procedures,
Clearing Agencies’ Rules, frameworks,
and other documents designed to
identify, measure, monitor, and manage
Key Clearing Agency Risks.23
The Framework would describe
policies maintained by the Clearing
Agencies that (i) govern the steps taken
to meet their regulatory requirements
related to proposed rule change and
advance notice filings pursuant to
Section 19(b)(1) of the Act,24 and
Section 806(e)(1) of Title VIII of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled the
Payment, Clearing, and Settlement
Supervision Act of 2010,25 and the rules
thereunder (collectively, ‘‘Filing
Requirements’’); and (ii) establish
standards and a holistic approach for
creating and managing risk management
policies, procedures, Clearing Agencies’
Rules, frameworks, and other
documents, including periodic reviews
and governance approval of such
documents (‘‘Document Standards’’).26
The Framework would provide that,
with respect to those documents that
address Key Clearing Agency Risks, the
19 Id.
20 Notice,
13 Id.
21 Notice,
14 Id.
22 Id.
15 Id.
23 Id.
16 Id.
24 Id.;
17 Id.
82 FR at 36050–51.
82 FR at 36051.
25 Notice,
15 U.S.C. 78s(b)(1).
82 FR at 36051; 12 U.S.C. 5465(e)(1).
26 Notice, 82 FR at 36051.
18 Id.
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Document Standards require annual
approval by the Boards.27
The Framework would describe how
the Clearing Agencies maintain the
Clearing Agencies’ Rules, which support
the Clearing Agencies’ ability to provide
for a well-founded, clear, transparent
and enforceable legal basis for each
aspect of their activities in all relevant
jurisdictions.28 Maintenance of the
Clearing Agencies’ Rules is supported
by the policy governing the Filing
Requirements and the Document
Standards, described above.29 The
Framework would state that the
Clearing Agencies’ Rules establish the
membership onboarding process of the
Clearing Agencies.30 The Framework
would also state that the Clearing
Agencies may adopt and maintain other
risk management frameworks, separate
from the Framework, that address, in
whole or in part, the management of
other Key Clearing Agency Risks such as
the management of operational,
liquidity, and market risks.31
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C. Information and Incentives for
Management of Risks by Participants
The Framework would describe how
the Clearing Agencies provide their
respective participants with information
and incentives to enable them to
monitor, manage, and contain the risks
they pose (including the risks by their
customers) to the respective Clearing
Agencies.32 The Framework would
identify some of the sources of the
information that are made available to
the Clearing Agencies’ participants,
including, for example, (i) materials on
the DTCC Web site, such as the Clearing
Agencies’ Rules, user guides, and
training courses, and regularly updated
disclosures made pursuant to the
guidelines published by the Committee
on Payment and Settlement Systems
and the Technical Committee of the
International Organization of Securities
Commissions; and (ii) reports regarding
the Clearing Agencies’ margin and
liquidity requirements and their
transaction volumes and values, as
applicable.33
The Framework would also describe
some of the incentives used by the
Clearing Agencies to enable their
participants to monitor, manage, and
contain risks they pose to the Clearing
Agencies, including, for example, (i)
daily margin requirements, pursuant to
the Clearing Agencies’ Rules, which are
calculated in close correlation to the
risk each participant poses to the
relevant Clearing Agency; and (ii) other
tools within the Clearing Agencies’
Rules that enable the Clearing Agencies
to enforce their respective Rules against
their participants.34
D. Management of Risks Related to
Material Interdependencies and
External Links
The Framework would describe how
the Clearing Agencies regularly review
the material risks they bear from and
pose to other entities as a result of
material interdependencies and external
links.35 The Framework would identify
some of the Clearing Agencies’ material
interdependencies between the Clearing
Agencies and other entities which may
include, for example, Clearing Agencies’
participants, settling banks, investment
counterparties, liquidity providers,
vendors, and service providers.36 With
respect to the links between the Clearing
Agencies and material external
interdependent entities, the Framework
would describe how the Clearing
Agencies review and monitor any
resulting risks that are driven by the
nature of the relationship.37 For
example, risks related to the Clearing
Agencies’ link to their respective
participants and settling banks are
addressed through tools found within
the Clearing Agencies’ Rules, as these
entities are bound by the Rules.38 The
Framework would also describe the
Clearing Agencies’ management and
monitoring of risks that have the
potential of creating systemic risks.39 In
addition, the Framework would provide
how the Clearing Agencies utilize a
series of comprehensive reviews that
include input from a cross-functional
group to identify, monitor, and manage
risks related to all external links of the
Clearing Agencies.40
The Framework would provide that
risks arising from links to vendors are
identified, assessed, controlled, and
monitored through a comprehensive
review and vetting process.41 The
Framework would describe how a riskbased approach is employed to assess
the need and level of due diligence
activities associated with the evaluation
of potential vendors and with the reevaluation of existing vendors.42 The
Framework would state that this process
involves the review of certain
information related to a proposed
vendor relationship, which should focus
on confidentiality, integrity, availability,
and recoverability related to that
relationship.43 The Framework would
also describe how risk related to
existing vendor relationships is
reviewed periodically, throughout the
lifecycle of the relationship.44
E. Scope of Services Responsive to
Market Needs
The Framework would describe how
the Clearing Agencies meet the
requirements of their participants and
the markets they serve.45 The
Framework would describe the Clearing
Agencies’ structured approach for the
implementation of new initiatives,
which includes conducting a
comprehensive risk assessment of new
initiatives.46 These reviews address,
among other matters, compliance with
applicable laws, regulations, and
standards.47
The Framework would also describe
the Clearing Agencies’ role in industrywide strategic initiatives through
participation on industry working
groups and the development and
publication of concept papers.48 The
Framework would describe how the
Clearing Agencies use periodic surveys
and employ product-aligned customer
service representatives to ensure clients
receive the support they need.49 The
Framework would describe the Clearing
Agencies’ process for escalating and
responding to certain customer
complaints.50 The Framework would
also describe the Clearing Agencies’
‘‘Core Balanced Business Scorecard,’’
which is used by the Clearing Agencies
to review and track the effectiveness of
their operations, information technology
service levels, financial performance,
human capital, as well as their
participants’ experiences.51
F. Recovery and Orderly Wind-Down
The Framework would provide that
the Clearing Agencies may maintain
policies and procedures to govern the
development of plans for recovery and
orderly wind-down.52 Such documents
would define the roles and
responsibilities of relevant business
43 Id.
34 Id.
44 Id.
35 Id.
45 Notice,
27 Id.
36 Id.
46 Id.
28 Id.
37 Id.
47 Id.
29 Id.
38 Id.
48 Id.
30 Id.
39 Id.
49 Id.
31 Id.
40 Notice,
50 Id.
82 FR at 36051–52.
41 Notice, 82 FR at 36051.
42 Id.
32 Id.
33 Id.
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82 FR at 36052.
51 Id.
52 Id.
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units in the development and
documentation of the plans and would
outline the general content of the
plans.53
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III. 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.54 After carefully
considering the proposed rule changes,
the Commission finds that the proposed
rule changes are consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
the Clearing Agencies. Specifically, the
Commission finds that the proposed
rule changes are consistent with Section
17A(b)(3)(F) of the Act 55 and Rules
17Ad–22(e)(1), (e)(3)(i), (e)(3)(iii),
(e)(3)(iv), (e)(20), and (e)(21) under the
Act.56
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act
requires, in part, that the rules of a
registered clearing agency be designed
to assure the safeguarding of securities
and funds which are in the custody or
control of the Clearing Agencies or for
which they are responsible.57
As described above, the Framework
would provide some of the ways the
Clearing Agencies comprehensively
manage Key Clearing Agency Risks,
which include legal, credit, liquidity,
operational, general business,
investment, custody, and other risks
that arise in or are borne by the Clearing
Agencies. For example, the Framework
would describe how the Clearing
Agencies use the ‘‘Three Lines of
Defense’’ approach to assessing,
measuring, monitoring, mitigating, and
reporting those risks, and would
identify the roles and responsibilities of
each line of defense within that
approach. The Framework would also
provide other risk management
activities, including the establishment
and maintenance of certain management
committees that would perform
oversight of the Clearing Agencies’
businesses and related risk
management. Furthermore, the
Framework would describe information
and incentives offered by the Clearing
53 Id.
54 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
56 17 CFR 240.17Ad–22(e)(1), (e)(3)(i), (e)(3)(iii),
(e)(3)(iv), (e)(20), and (e)(21).
57 15 U.S.C. 78q–1(b)(3)(F).
55 15
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Agencies to their participants to manage
and contain the risks. The Framework
would also describe some of the ways to
manage risks posed by material
interdependency relationships and
external links, and address the market
needs efficiently and effectively.
By providing transparency to their
risk management practices, the
Framework is designed to help the
Clearing Agencies be in a better position
to prevent and manage the risks that
arise in or are borne by the Clearing
Agencies. By better managing the risks
that arise in or are borne by the Clearing
Agencies, the Framework is designed to
help reduce the possibility that a
Clearing Agency fails. By better
positioning the Clearing Agencies to
continue their critical operations and
services, and mitigating the risk of
financial loss contagion caused by a
Clearing Agency failure, the Framework
is designed to help assure the
safeguarding of securities and funds
which are in the custody or control of
the Clearing Agencies, or for which they
are responsible. Accordingly, the
Commission believes that the proposed
rule changes are consistent with Section
17A(b)(3)(F) of the Act.58
B. Consistency With Rule 17Ad–22(e)(1)
Rule 17Ad–22(e)(1) under the Act
requires that each covered clearing
agency establish, implement, maintain
and enforce written policies and
procedures reasonably designed to,
provide for a well-founded, clear,
transparent and enforceable legal basis
for each aspect of its activities in all
relevant jurisdictions.59
As described above, the Framework
would describe the policies maintained
by the Clearing Agencies that govern the
Filing Requirements and the Document
Standards. In addition, the Framework
would describe how the Clearing
Agencies maintain the Clearing
Agencies’ Rules. The Clearing Agencies’
Rules are the key legal basis for each of
the Clearing Agencies’ respective
activities described in the Clearing
Agencies’ Rules. For example, as part of
the membership onboarding process, all
participants must execute membership
agreements, which binds them to the
relevant Clearing Agency’s Rules and
subjects them to an enforceable contract
governing the rights and obligations of
the Clearing Agencies and those
participants. The Framework would also
describe how the Clearing Agencies’
Rules are published on the DTCC Web
site, and how the Clearing Agencies
adhere to the Filing Requirements. The
58 Id.
59 17
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Framework would also describe how the
Clearing Agencies review and assess
risk related to their contractual
arrangements with vendors, service
providers, and other external parties
with which the Clearing Agencies may
establish links. The Framework would
also describe the process by which the
Clearing Agencies review new
initiatives prior to implementation,
which include a review of the legal risks
that may be posed by those initiatives.
By organizing and describing in a
central location the policies and
procedures that the Clearing Agencies
use to manage Key Clearing Agency
Risks, as well as the Clearing Agencies’
policies, procedures, Rules, frameworks,
and other documents, the Framework is
designed to help the Clearing Agencies
manage, in a more clear and transparent
way, the policies and procedures that
define the rights and obligations of the
Clearing Agencies, their participants,
and other external parties. In doing so,
the Framework also helps provide for a
well-founded and enforceable legal
basis for the activities of the Clearing
Agencies. Therefore, the Commission
believes that the Framework is
consistent with the requirements of Rule
17Ad–22(e)(1).60
C. Consistency With Rule 17Ad–
22(e)(3)(i), (e)(3)(iii), and (e)(3)(iv)
Rule 17Ad–22(e)(3)(i) under the Act
requires, in part, that each covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
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 the covered
clearing agency, which includes risk
management policies, procedures and
systems designed to identify, measure,
monitor and manage the range of risks
that arise in or are borne by the covered
clearing agency, that are subject to
review on a specified periodic basis and
approved by the board of directors
annually.61
As described above, the Framework
would describe how the Clearing
Agencies maintain comprehensive
policies, procedures, and other
documents, including the Framework
and certain other risk management
frameworks, which are designed to help
identify, measure, monitor, and manage
Key Clearing Agency Risks. The
Framework would state that the
documents that address Key Clearing
60 Id.
CFR 240.17Ad–22(e)(1).
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Agency Risks are subject to annual
approval by each of the Boards pursuant
to the Document Standards.
Furthermore, the Framework would
describe how the Clearing Agencies
identify, assess, measure, monitor,
mitigate, and report risks through
individual risk tolerance statements for
identified risks, which are reviewed and
approved by the Boards at least
annually. Accordingly, the Commission
believes that the Framework is
consistent with Rule 17Ad–22(e)(3)(i).62
Rule 17Ad–22(e)(3)(iii) under the Act
requires, in part, that each covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
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 the covered
clearing agency, which provides risk
management and internal audit
personnel with sufficient authority,
resources, independence from
management, and access to the board of
directors.63
As described above, in connection
with a description of the second and the
third lines of defense, the Framework
would state that personnel within the
DTCC Risk Department and the DTCC
Internal Audit are provided with
sufficient authority, resources,
independence from management, and
access to the Boards. In particular, the
Framework would describe how both
the DTCC Risk Department and the
DTCC Internal Audit are functionally
independent from all other Clearing
Agency Business/Support Areas. The
Framework would also indicate how the
senior management within both of those
groups report directly to appropriate
committees of the Boards. Accordingly,
the Commission believes that the
Framework is consistent with Rule
17Ad–22(e)(3)(iii).64
Rule 17Ad–22(e)(3)(iv) under the Act
requires, in part, that each covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
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 the covered
clearing agency, which provides risk
management and internal audit
personnel with a direct reporting line to,
and oversight by, a risk management
committee and an independent audit
committee of the board of directors,
respectively.65
As described above, the Framework
would describe, as the third line of
defense, how senior management within
the DTCC Risk Department and the
DTCC Internal Audit have a direct
reporting line to, and oversight by, the
Risk Committee of the Boards and the
Audit Committee of the Boards,
respectively, which is supported by the
charters of these committees.
Accordingly, the Commission believes
that the Framework is consistent with
Rule 17Ad–22(e)(3)(iv).66
D. Consistency With Rule 17Ad–
22(e)(20)
Rule 17Ad–22(e)(20) under the Act
requires that each covered clearing
agency establish, implement, maintain
and enforce written policies and
procedures reasonably designed to
identify, monitor and manage risks
related to any link the covered clearing
agency establishes with one or more
other clearing agencies, financial market
utilities, or trading markets.67
As described above, the Framework
would describe how the Clearing
Agencies review both proposed and
existing links with other entities,
including those links that may result in
material interdependencies. For
example, the Framework would
describe some of the ways the Clearing
Agencies manage risks related to their
links with, as applicable, participants,
settling banks, investment
counterparties, liquidity providers,
vendors, and service providers, and
would also describe how the Clearing
Agencies identify and address risks that
have the potential of creating systemic
impact. With respect to links with
vendors, the Framework would describe
how the Clearing Agencies apply a
comprehensive vendor review and
vetting process.
By providing written policies and
procedures to identify, monitor, and
manage risks related to links that the
Clearing Agencies’ establish, the
Commission believes that the
Framework is consistent with Rule
17Ad–22(e)(20).68
E. Consistency With Rule 17Ad–
22(e)(21)
Rule 17Ad–22(e)(21) under the Act
requires that each covered clearing
agency establish, implement, maintain
65 17
62 Id.
63 17
CFR 240.17Ad–22(e)(3)(iv).
and enforce written policies and
procedures reasonably designed to be
efficient and effective in meeting the
requirements of its participants and the
markets it serves, and have the covered
clearing agency’s management regularly
review the efficiency and effectiveness
of its (i) clearing and settlement
arrangements; (ii) operating structure,
including risk management policies,
procedures, and systems; (iii) scope of
products cleared or settled; and (iv) use
of technology and communication
procedures.69
As described above, the Framework
would describe some of the ways in
which the Clearing Agencies review the
efficiency and effectiveness of their
businesses and operations. For example,
the Framework would describe how the
Clearing Agencies employ a structured
approach to the pre-implementation
reviews of new initiatives (including
initiatives related to their clearing and
settlement arrangements, scope of
products cleared or settled, and use of
technology and communication
procedures). The Framework would also
describe the Clearing Agencies’ Core
Balanced Business Scorecard, which is
used to review the effectiveness of the
Clearing Agencies’ operations,
information technology services levels,
financial performance, and other aspects
of their business, including their
respective participants’ experiences.
The Framework would also describe
some of the steps the Clearing Agencies
take in order to be efficient and effective
in reviewing and meeting the
requirements of their participants and
the markets they serve, including the
maintenance of a policy to address
escalation, tracking, and resolution of
certain customer complaints.
By establishing a framework that
would (i) help support bring initiatives
to market in a more timely and efficient
manner through the pre-implementation
reviews; (ii) help provide the Clearing
Agencies insight into the efficiency and
effectiveness of their businesses and
operations through the Core Balanced
Business Scorecard; and (iii) help
manage the Clearing Agencies’
participants’ complaints through a
specific policy, the Commission
believes that the Framework is
consistent with Rule 17Ad–22(e)(21).70
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule changes are consistent with the
requirements of the Act and in
particular with the requirements of
66 Id.
CFR 240.17Ad–22(e)(3)(iii).
67 17
64 Id.
VerDate Sep<11>2014
CFR 240.17Ad–22(e)(20).
68 Id.
17:52 Sep 20, 2017
Jkt 241001
PO 00000
Frm 00078
69 17
CFR 240.17Ad–22(e)(21).
70 Id.
Fmt 4703
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E:\FR\FM\21SEN1.SGM
21SEN1
Federal Register / Vol. 82, No. 182 / Thursday, September 21, 2017 / Notices
Section 17A of the Act 71 and the rules
and regulations thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that
proposed rule changes SR–DTC–2017–
013, SR–NSCC–2017–012, and SR–
FICC–2017–016 be, and hereby are,
approved.72
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.73
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–20089 Filed 9–20–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81640; File No. SR–NYSE–
2017–30]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Order
Instituting Proceedings To Determine
Whether To Approve or Disapprove a
Proposed Rule Change, as Modified by
Amendment No. 2, To Amend Section
102.01B of the NYSE Listed Company
Manual To Provide for the Listing of
Companies That List Without a Prior
Exchange Act Registration and That
Are Not Listing in Connection With an
Underwritten Initial Public Offering and
Related Changes to Rules 15, 104, and
123D
asabaliauskas on DSKBBXCHB2PROD with NOTICES
September 15, 2017.
I. Introduction
On June 13, 2017, New York Stock
Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’),
pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’) 2 and Rule 19b–4
thereunder,3 a proposed rule change to
amend (i) Footnote (E) to Section
102.01B of the NYSE Listed Company
Manual (the ‘‘Manual’’) to modify the
provisions relating to the qualification
of companies listing without a prior
Exchange Act registration; (ii) Rule 15 to
add a Reference Price for when a
security is listed under Footnote (E) to
Section 102.01B; (iii) Rule 104 to
specify DMM requirements when a
security is listed under Footnote (E) to
Section 102.10B and there has been no
71 15
U.S.C. 78q–1.
approving the Proposed Rule Changes, the
Commission considered the proposals’ impact on
efficiency, competition and capital formation. 15
U.S.C. 78c(f).
73 17 CFR 200.30–3(a)(12).
1 15 U.S.C.78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
72 In
VerDate Sep<11>2014
17:52 Sep 20, 2017
Jkt 241001
trading in the private market for such
security; and (iv) Rule 123D to specify
that the Exchange may declare a
regulatory halt in a security that is the
subject of an initial listing on the
Exchange.
The proposed rule change was
published for comment in the Federal
Register on June 20, 2017.4 The
Exchange filed Amendment No. 1 to the
proposed rule change on July 28, 2017
which, as noted below, was later
withdrawn. On August 3, 2017, the
Commission extended the time period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to approve or
disapprove the proposed rule change, to
September 18, 2017.5 On August 16,
2017, the Exchange withdrew
Amendment No. 1 and filed
Amendment No. 2 to the proposed rule
change, which amended and replaced
the proposed rule change as originally
filed.6 Amendment No. 2 was published
for comment in the Federal Register on
August 24, 2017.7 The Commission
received one comment on the proposal.8
This order institutes proceedings under
Section 19(b)(2)(B) of the Exchange Act
to determine whether to approve or
disapprove the proposal.
II. Description of the Amended
Proposal
1. Listing Standards
Generally, Section 102 of the Manual
sets forth the minimum numerical
standards for domestic companies, or
foreign private issuers that choose to
follow the domestic standards, to list
equity securities on the Exchange.
Section 102.01B of the Manual requires
a listed company to demonstrate at the
time of listing an aggregate market value
of publicly-held shares of either $40
million or $100 million, depending on
the type of listing.9 Section 102.01B also
4 See Securities Exchange Act Release No. 80933
(June 15, 2017), 82 FR 28200 (June 20, 2017).
5 See Securities Exchange Act Release No. 81309
(August 3, 2017), 82 FR 37244 (August 9, 2017).
6 See Notice, infra note 7, at n. 8, which describes
the changes proposed in Amendment No. 2 from
the original proposal. Amendment No. 2 replaced
the original proposal in its entirety so the
description below describes the proposal, as
modified by Amendment No. 2.
7 See Securities Exchange Act Release No. 81440
(August 18, 2017), 82 FR 40183 (August 24, 2017)
(‘‘Notice’’).
8 See Letter from James J. Angel, Associate
Professor of Finance, Georgetown University, to
SEC (July 28, 2017).
9 Section 102.01B of the Manual states that a
company must demonstrate ‘‘. . . an aggregate
market value of publicly-held shares of $40 million
for companies that list either at the time of their IPO
(C) or as a result of a spin-off or under the Affiliated
Company standard or, for companies that list at the
PO 00000
Frm 00079
Fmt 4703
Sfmt 4703
44229
states that, in these cases, the Exchange
relies on written representations from
the underwriter, investment banker or
other financial advisor, as applicable,
with respect to this valuation.10 While
Footnote (E) to Section 102.01B states
that the Exchange generally expects to
list companies in connection with a firm
commitment underwritten initial public
offering (‘‘IPO’’), upon transfer from
another market, or pursuant to a spinoff, Section 102.01B of the Manual also
contemplates that companies that have
not previously had their common equity
securities registered under the Exchange
Act, but which have sold common
equity securities in a private placement,
may wish to list their common equity
securities on the Exchange at the time
of effectiveness of a registration
statement 11 filed solely for the purpose
of allowing existing shareholders to sell
their shares.12 Specifically, Footnote (E)
to Section 102.01B of the Manual
permits the Exchange, on a case by case
basis, to exercise discretion to list such
companies and provides that the
Exchange will determine that such a
company has met the $100 million
aggregate market value of publicly-held
shares requirement based on a
combination of both (i) an independent
third-party valuation (a ‘‘Valuation’’) 13
of the company and (ii) the most recent
trading price for the company’s common
stock in a trading system for
unregistered securities operated by a
national securities exchange or a
registered broker-dealer (a ‘‘Private
Placement Market’’).14 Under the
time of their Initial Firm Commitment Underwritten
Public Offering (C), and $100,000,000 for other
companies (D)(E).’’ Section 102.01B also requires a
company to have a closing price, or if listing in
connection with an IPO or Initial Firm Commitment
Underwritten Public Offering, a price per share of
at least $4.00 at the time of initial listing.
10 See Section 102.01B, Footnote (C) of the
Manual which states that for companies listing at
the time of their IPO or Initial Firm Commitment
Underwritten Public Offering, the Exchange will
rely on a written commitment from the underwriter
to represent the anticipated value of the company’s
offering. For spin-offs, the Exchange will rely on a
representation from the parent company’s
investment banker (or other financial advisor) in
order to estimate the market value based upon the
distribution ratio.
11 The reference to a registration statement refers
to a registration statement effective under the
Securities Act of 1933 (‘‘Securities Act’’).
12 See Section 102.01B, Footnote (E) of the
Manual.
13 See Section 102.01B, Footnote (E) of the
Manual which sets forth specific requirements for
the Valuation. Among other factors, any Valuation
used for purposes of Footnote (E) must be provided
by an entity that has significant experience and
demonstrable competence in the provision of such
valuations.
14 Section 102.01B, Footnote (E) also sets forth
specific factors for relying on a Private Placement
Market Price including that such price must be a
E:\FR\FM\21SEN1.SGM
Continued
21SEN1
]]>Agencies
[Federal Register Volume 82, Number 182 (Thursday, September 21, 2017)]
[Notices]
[Pages 44224-44229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-20089]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34- 81635; File Nos. SR-DTC-2017-013; SR-NSCC-2017-012;
SR-FICC-2017-016]
Self-Regulatory Organizations; The Depository Trust Company;
National Securities Clearing Corporation; Fixed Income Clearing
Corporation; Order Approving Proposed Rule Changes To Adopt the
Clearing Agency Risk Management Framework
September 15, 2017.
I. Introduction
On July 14, 2017, The Depository Trust Company (``DTC''), National
Securities Clearing Corporation (``NSCC''), and Fixed Income Clearing
Corporation (``FICC,'' each a ``Clearing Agency,'' and collectively the
``Clearing Agencies''), filed with the Securities and Exchange
Commission (``Commission'') proposed rule changes SR-DTC-2017-013, SR-
NSCC-2017-012, and SR-FICC-2017-016, respectively, pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule
19b-4 thereunder.\2\ The proposed rule changes were published for
comment in the Federal Register on August 2, 2017.\3\ The Commission
did not receive any comment letters on the proposed rule changes. For
the reasons discussed below, the Commission approves the proposed rule
changes.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 81248 (July 28, 2017),
82 FR 36049 (August 2, 2017) (SR-DTC-2017-013, SR-NSCC-2017-012, SR-
FICC-2017-016) (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Changes
The proposed rule changes are proposals by the Clearing Agencies to
adopt the Clearing Agency Risk Management Framework (``Framework'') of
the Clearing Agencies, as described below.
A. Overview of the Framework
The Framework would describe how each Clearing Agency (i)
comprehensively manages legal, credit, liquidity, operational, general
business, investment, custody, and other risks that arise in or are
borne by it (``Key Clearing Agency Risks''); (ii) manages risks posed
by its participants; \4\ (iii)
[[Page 44225]]
manages risks related to material interdependencies and external links;
and (iv) provides services responsive to market needs.\5\ The Framework
would be maintained by the General Counsel's Office (``GCO'') of
DTCC.\6\ The Framework would provide that GCO reviews the Framework at
least annually, in coordination with all departments responsible for
the processes described in the Framework.\7\
---------------------------------------------------------------------------
\4\ FICC and NSCC refer to their participants as ``Members,''
while DTC refers to its participants as ``Participants.'' These
terms are defined in the Clearing Agencies' Rules. In this filing,
as well as in the Framework, ``participant'' or ``participants''
refers to both the Members of FICC and NSCC, and the Participants of
DTC.
\5\ Notice, 82 FR at 36050.
\6\ Id. The parent company of the Clearing Agencies is The
Depository Trust & Clearing Corporation (``DTCC''). DTCC operates on
a shared services model with respect to the Clearing Agencies. Most
corporate functions are established and managed on an enterprise-
wide basis pursuant to intercompany agreements under which it is
generally DTCC that provides a relevant service to a Clearing
Agency.
\7\ Notice, 82 FR at 36050.
---------------------------------------------------------------------------
B. Comprehensive Management of Key Clearing Agency Risks
The Framework would state that the Boards of Directors of the
Clearing Agencies (each a ``Board'' and together, the ``Boards'') have
delegated to DTCC management, on behalf of the Clearing Agencies, the
responsibility for identifying, assessing, measuring, monitoring,
mitigating, and reporting Key Clearing Agency Risks through a process
of developing individual risk tolerance statements for identified
risks.\8\ The Framework would state that these risk tolerance
statements describe the applicable risk controls and other measures
used to manage risks.\9\ If needed, residual risks may be identified
for either further management or acceptance, which then follows a
defined escalation and approval process.\10\ The Framework would also
state that DTCC management, on behalf of the Clearing Agencies, is
responsible for the day-to-day management of those residual risks.\11\
Finally, the Framework would describe the governance around updating
risk tolerance statements, which are reviewed and approved by a
management committee, the Risk Committee of the Boards, and the Boards
at least annually.\12\ The Framework would provide that the Clearing
Agencies manage Key Clearing Agency Risks through (i) a ``Three Lines
of Defense'' approach, as described below, and (ii) the maintenance of
risk management policies, procedures, Clearing Agencies' Rules, and
frameworks, as described below.
---------------------------------------------------------------------------
\8\ Id.
\9\ Id.
\10\ Id.
\11\ Id.
\12\ Id.
---------------------------------------------------------------------------
1. Three Lines of Defense
The Framework would provide that the Clearing Agencies employ a
``Three Lines of Defense'' approach for comprehensively managing Key
Clearing Agency Risks.\13\ The Framework would describe the roles of
personnel and business units in this risk management approach, which
includes (i) a first line of defense comprised of the various business
lines and functional units that support the products and services
offered by the Clearing Agencies (collectively, ``Clearing Agency
Business/Support Areas''); (ii) a second line of defense comprised of
control functions that support the Clearing Agencies, including the
organization's legal, privacy and compliance areas, as well as the DTCC
Risk Department, which is specifically dedicated to risk management
concerns (collectively, ``Clearing Agency Control Functions''); and
(iii) a third line of defense, which is performed by DTCC Internal
Audit.\14\
---------------------------------------------------------------------------
\13\ Id.
\14\ Id.
---------------------------------------------------------------------------
For the first line of defense, the Framework would state that each
Clearing Agency Business/Support Area would, for example, identify Key
Clearing Agency Risks applicable to its function, determine the best
way to mitigate such risks, self-test internal controls, and create and
implement actions plans for risk mitigation.\15\ For the second line of
defense, the Framework would state that each Clearing Agency's Control
Functions would, for example, work with the Clearing Agency Business/
Support Areas on efforts to mitigate Key Clearing Agency Risks, and
provide tools to those groups to enable them to analyze, monitor and
proactively manage those risks.\16\ Finally, for the third line of
defense, the Framework would identify the role of DTCC Internal Audit
as including, for example, directing its own resources to review and
test key controls that help mitigate significant Key Clearing Agency
Risks, then reporting on the results of that testing.\17\
---------------------------------------------------------------------------
\15\ Id.
\16\ Id.
\17\ Id.
---------------------------------------------------------------------------
In connection with a description of the second and the third lines
of defense, the Framework would state that personnel within the DTCC
Risk Department and the DTCC Internal Audit are provided with
sufficient authority, resources, independence from management, and
access to the Boards.\18\ The Framework would provide that the DTCC
Risk Department and the DTCC Internal Audit are functionally
independent from all other Clearing Agency Business/Support Areas.\19\
The Framework would also explain that the personnel within the DTCC
Risk Department and the DTCC Internal Audit have a direct reporting
line to, and oversight by, the Risk Committee of the Boards and the
Audit Committee of the Boards, respectively, which is supported by the
charters of these committees.\20\ The Framework would state that a set
of senior management committees provide oversight of the Three Lines of
Defense approach to manage Key Clearing Agency Risks as well as other
aspects of the Clearing Agencies' risk management.\21\
---------------------------------------------------------------------------
\18\ Id.
\19\ Id.
\20\ Notice, 82 FR at 36050-51.
\21\ Notice, 82 FR at 36051.
---------------------------------------------------------------------------
2. Policies, Procedures, Clearing Agencies' Rules, and Risk Management
Frameworks
The Framework would provide that the Clearing Agencies maintain a
policy to govern the requirements for establishing, managing, and
assessing the performance of internal committees and councils.\22\ The
Framework would also describe the process by which the Clearing
Agencies maintain risk management policies, procedures, Clearing
Agencies' Rules, frameworks, and other documents designed to identify,
measure, monitor, and manage Key Clearing Agency Risks.\23\
---------------------------------------------------------------------------
\22\ Id.
\23\ Id.
---------------------------------------------------------------------------
The Framework would describe policies maintained by the Clearing
Agencies that (i) govern the steps taken to meet their regulatory
requirements related to proposed rule change and advance notice filings
pursuant to Section 19(b)(1) of the Act,\24\ and Section 806(e)(1) of
Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, entitled the Payment, Clearing, and Settlement Supervision Act of
2010,\25\ and the rules thereunder (collectively, ``Filing
Requirements''); and (ii) establish standards and a holistic approach
for creating and managing risk management policies, procedures,
Clearing Agencies' Rules, frameworks, and other documents, including
periodic reviews and governance approval of such documents (``Document
Standards'').\26\ The Framework would provide that, with respect to
those documents that address Key Clearing Agency Risks, the
[[Page 44226]]
Document Standards require annual approval by the Boards.\27\
---------------------------------------------------------------------------
\24\ Id.; 15 U.S.C. 78s(b)(1).
\25\ Notice, 82 FR at 36051; 12 U.S.C. 5465(e)(1).
\26\ Notice, 82 FR at 36051.
\27\ Id.
---------------------------------------------------------------------------
The Framework would describe how the Clearing Agencies maintain the
Clearing Agencies' Rules, which support the Clearing Agencies' ability
to provide for a well-founded, clear, transparent and enforceable legal
basis for each aspect of their activities in all relevant
jurisdictions.\28\ Maintenance of the Clearing Agencies' Rules is
supported by the policy governing the Filing Requirements and the
Document Standards, described above.\29\ The Framework would state that
the Clearing Agencies' Rules establish the membership onboarding
process of the Clearing Agencies.\30\ The Framework would also state
that the Clearing Agencies may adopt and maintain other risk management
frameworks, separate from the Framework, that address, in whole or in
part, the management of other Key Clearing Agency Risks such as the
management of operational, liquidity, and market risks.\31\
---------------------------------------------------------------------------
\28\ Id.
\29\ Id.
\30\ Id.
\31\ Id.
---------------------------------------------------------------------------
C. Information and Incentives for Management of Risks by Participants
The Framework would describe how the Clearing Agencies provide
their respective participants with information and incentives to enable
them to monitor, manage, and contain the risks they pose (including the
risks by their customers) to the respective Clearing Agencies.\32\ The
Framework would identify some of the sources of the information that
are made available to the Clearing Agencies' participants, including,
for example, (i) materials on the DTCC Web site, such as the Clearing
Agencies' Rules, user guides, and training courses, and regularly
updated disclosures made pursuant to the guidelines published by the
Committee on Payment and Settlement Systems and the Technical Committee
of the International Organization of Securities Commissions; and (ii)
reports regarding the Clearing Agencies' margin and liquidity
requirements and their transaction volumes and values, as
applicable.\33\
---------------------------------------------------------------------------
\32\ Id.
\33\ Id.
---------------------------------------------------------------------------
The Framework would also describe some of the incentives used by
the Clearing Agencies to enable their participants to monitor, manage,
and contain risks they pose to the Clearing Agencies, including, for
example, (i) daily margin requirements, pursuant to the Clearing
Agencies' Rules, which are calculated in close correlation to the risk
each participant poses to the relevant Clearing Agency; and (ii) other
tools within the Clearing Agencies' Rules that enable the Clearing
Agencies to enforce their respective Rules against their
participants.\34\
---------------------------------------------------------------------------
\34\ Id.
---------------------------------------------------------------------------
D. Management of Risks Related to Material Interdependencies and
External Links
The Framework would describe how the Clearing Agencies regularly
review the material risks they bear from and pose to other entities as
a result of material interdependencies and external links.\35\ The
Framework would identify some of the Clearing Agencies' material
interdependencies between the Clearing Agencies and other entities
which may include, for example, Clearing Agencies' participants,
settling banks, investment counterparties, liquidity providers,
vendors, and service providers.\36\ With respect to the links between
the Clearing Agencies and material external interdependent entities,
the Framework would describe how the Clearing Agencies review and
monitor any resulting risks that are driven by the nature of the
relationship.\37\ For example, risks related to the Clearing Agencies'
link to their respective participants and settling banks are addressed
through tools found within the Clearing Agencies' Rules, as these
entities are bound by the Rules.\38\ The Framework would also describe
the Clearing Agencies' management and monitoring of risks that have the
potential of creating systemic risks.\39\ In addition, the Framework
would provide how the Clearing Agencies utilize a series of
comprehensive reviews that include input from a cross-functional group
to identify, monitor, and manage risks related to all external links of
the Clearing Agencies.\40\
---------------------------------------------------------------------------
\35\ Id.
\36\ Id.
\37\ Id.
\38\ Id.
\39\ Id.
\40\ Notice, 82 FR at 36051-52.
---------------------------------------------------------------------------
The Framework would provide that risks arising from links to
vendors are identified, assessed, controlled, and monitored through a
comprehensive review and vetting process.\41\ The Framework would
describe how a risk-based approach is employed to assess the need and
level of due diligence activities associated with the evaluation of
potential vendors and with the re-evaluation of existing vendors.\42\
The Framework would state that this process involves the review of
certain information related to a proposed vendor relationship, which
should focus on confidentiality, integrity, availability, and
recoverability related to that relationship.\43\ The Framework would
also describe how risk related to existing vendor relationships is
reviewed periodically, throughout the lifecycle of the
relationship.\44\
---------------------------------------------------------------------------
\41\ Notice, 82 FR at 36051.
\42\ Id.
\43\ Id.
\44\ Id.
---------------------------------------------------------------------------
E. Scope of Services Responsive to Market Needs
The Framework would describe how the Clearing Agencies meet the
requirements of their participants and the markets they serve.\45\ The
Framework would describe the Clearing Agencies' structured approach for
the implementation of new initiatives, which includes conducting a
comprehensive risk assessment of new initiatives.\46\ These reviews
address, among other matters, compliance with applicable laws,
regulations, and standards.\47\
---------------------------------------------------------------------------
\45\ Notice, 82 FR at 36052.
\46\ Id.
\47\ Id.
---------------------------------------------------------------------------
The Framework would also describe the Clearing Agencies' role in
industry-wide strategic initiatives through participation on industry
working groups and the development and publication of concept
papers.\48\ The Framework would describe how the Clearing Agencies use
periodic surveys and employ product-aligned customer service
representatives to ensure clients receive the support they need.\49\
The Framework would describe the Clearing Agencies' process for
escalating and responding to certain customer complaints.\50\ The
Framework would also describe the Clearing Agencies' ``Core Balanced
Business Scorecard,'' which is used by the Clearing Agencies to review
and track the effectiveness of their operations, information technology
service levels, financial performance, human capital, as well as their
participants' experiences.\51\
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\48\ Id.
\49\ Id.
\50\ Id.
\51\ Id.
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F. Recovery and Orderly Wind-Down
The Framework would provide that the Clearing Agencies may maintain
policies and procedures to govern the development of plans for recovery
and orderly wind-down.\52\ Such documents would define the roles and
responsibilities of relevant business
[[Page 44227]]
units in the development and documentation of the plans and would
outline the general content of the plans.\53\
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\52\ Id.
\53\ Id.
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III. 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.\54\ After carefully considering the proposed rule
changes, the Commission finds that the proposed rule changes are
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to the Clearing Agencies.
Specifically, the Commission finds that the proposed rule changes are
consistent with Section 17A(b)(3)(F) of the Act \55\ and Rules 17Ad-
22(e)(1), (e)(3)(i), (e)(3)(iii), (e)(3)(iv), (e)(20), and (e)(21)
under the Act.\56\
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\54\ 15 U.S.C. 78s(b)(2)(C).
\55\ 15 U.S.C. 78q-1(b)(3)(F).
\56\ 17 CFR 240.17Ad-22(e)(1), (e)(3)(i), (e)(3)(iii),
(e)(3)(iv), (e)(20), and (e)(21).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a registered clearing agency be designed to assure the safeguarding
of securities and funds which are in the custody or control of the
Clearing Agencies or for which they are responsible.\57\
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\57\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above, the Framework would provide some of the ways
the Clearing Agencies comprehensively manage Key Clearing Agency Risks,
which include legal, credit, liquidity, operational, general business,
investment, custody, and other risks that arise in or are borne by the
Clearing Agencies. For example, the Framework would describe how the
Clearing Agencies use the ``Three Lines of Defense'' approach to
assessing, measuring, monitoring, mitigating, and reporting those
risks, and would identify the roles and responsibilities of each line
of defense within that approach. The Framework would also provide other
risk management activities, including the establishment and maintenance
of certain management committees that would perform oversight of the
Clearing Agencies' businesses and related risk management. Furthermore,
the Framework would describe information and incentives offered by the
Clearing Agencies to their participants to manage and contain the
risks. The Framework would also describe some of the ways to manage
risks posed by material interdependency relationships and external
links, and address the market needs efficiently and effectively.
By providing transparency to their risk management practices, the
Framework is designed to help the Clearing Agencies be in a better
position to prevent and manage the risks that arise in or are borne by
the Clearing Agencies. By better managing the risks that arise in or
are borne by the Clearing Agencies, the Framework is designed to help
reduce the possibility that a Clearing Agency fails. By better
positioning the Clearing Agencies to continue their critical operations
and services, and mitigating the risk of financial loss contagion
caused by a Clearing Agency failure, the Framework is designed to help
assure the safeguarding of securities and funds which are in the
custody or control of the Clearing Agencies, or for which they are
responsible. Accordingly, the Commission believes that the proposed
rule changes are consistent with Section 17A(b)(3)(F) of the Act.\58\
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\58\ Id.
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B. Consistency With Rule 17Ad-22(e)(1)
Rule 17Ad-22(e)(1) under the Act requires that each covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to, provide for a well-
founded, clear, transparent and enforceable legal basis for each aspect
of its activities in all relevant jurisdictions.\59\
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\59\ 17 CFR 240.17Ad-22(e)(1).
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As described above, the Framework would describe the policies
maintained by the Clearing Agencies that govern the Filing Requirements
and the Document Standards. In addition, the Framework would describe
how the Clearing Agencies maintain the Clearing Agencies' Rules. The
Clearing Agencies' Rules are the key legal basis for each of the
Clearing Agencies' respective activities described in the Clearing
Agencies' Rules. For example, as part of the membership onboarding
process, all participants must execute membership agreements, which
binds them to the relevant Clearing Agency's Rules and subjects them to
an enforceable contract governing the rights and obligations of the
Clearing Agencies and those participants. The Framework would also
describe how the Clearing Agencies' Rules are published on the DTCC Web
site, and how the Clearing Agencies adhere to the Filing Requirements.
The Framework would also describe how the Clearing Agencies review and
assess risk related to their contractual arrangements with vendors,
service providers, and other external parties with which the Clearing
Agencies may establish links. The Framework would also describe the
process by which the Clearing Agencies review new initiatives prior to
implementation, which include a review of the legal risks that may be
posed by those initiatives.
By organizing and describing in a central location the policies and
procedures that the Clearing Agencies use to manage Key Clearing Agency
Risks, as well as the Clearing Agencies' policies, procedures, Rules,
frameworks, and other documents, the Framework is designed to help the
Clearing Agencies manage, in a more clear and transparent way, the
policies and procedures that define the rights and obligations of the
Clearing Agencies, their participants, and other external parties. In
doing so, the Framework also helps provide for a well-founded and
enforceable legal basis for the activities of the Clearing Agencies.
Therefore, the Commission believes that the Framework is consistent
with the requirements of Rule 17Ad-22(e)(1).\60\
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\60\ Id.
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C. Consistency With Rule 17Ad-22(e)(3)(i), (e)(3)(iii), and (e)(3)(iv)
Rule 17Ad-22(e)(3)(i) under the Act requires, in part, that each
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to 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 the covered clearing agency, which
includes risk management policies, procedures and systems designed to
identify, measure, monitor and manage the range of risks that arise in
or are borne by the covered clearing agency, that are subject to review
on a specified periodic basis and approved by the board of directors
annually.\61\
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\61\ 17 CFR 240.17Ad-22(e)(3)(i).
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As described above, the Framework would describe how the Clearing
Agencies maintain comprehensive policies, procedures, and other
documents, including the Framework and certain other risk management
frameworks, which are designed to help identify, measure, monitor, and
manage Key Clearing Agency Risks. The Framework would state that the
documents that address Key Clearing
[[Page 44228]]
Agency Risks are subject to annual approval by each of the Boards
pursuant to the Document Standards. Furthermore, the Framework would
describe how the Clearing Agencies identify, assess, measure, monitor,
mitigate, and report risks through individual risk tolerance statements
for identified risks, which are reviewed and approved by the Boards at
least annually. Accordingly, the Commission believes that the Framework
is consistent with Rule 17Ad-22(e)(3)(i).\62\
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\62\ Id.
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Rule 17Ad-22(e)(3)(iii) under the Act requires, in part, that each
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to 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 the covered clearing agency, which
provides risk management and internal audit personnel with sufficient
authority, resources, independence from management, and access to the
board of directors.\63\
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\63\ 17 CFR 240.17Ad-22(e)(3)(iii).
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As described above, in connection with a description of the second
and the third lines of defense, the Framework would state that
personnel within the DTCC Risk Department and the DTCC Internal Audit
are provided with sufficient authority, resources, independence from
management, and access to the Boards. In particular, the Framework
would describe how both the DTCC Risk Department and the DTCC Internal
Audit are functionally independent from all other Clearing Agency
Business/Support Areas. The Framework would also indicate how the
senior management within both of those groups report directly to
appropriate committees of the Boards. Accordingly, the Commission
believes that the Framework is consistent with Rule 17Ad-
22(e)(3)(iii).\64\
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\64\ Id.
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Rule 17Ad-22(e)(3)(iv) under the Act requires, in part, that each
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to 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 the covered clearing agency, which
provides risk management and internal audit personnel with a direct
reporting line to, and oversight by, a risk management committee and an
independent audit committee of the board of directors,
respectively.\65\
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\65\ 17 CFR 240.17Ad-22(e)(3)(iv).
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As described above, the Framework would describe, as the third line
of defense, how senior management within the DTCC Risk Department and
the DTCC Internal Audit have a direct reporting line to, and oversight
by, the Risk Committee of the Boards and the Audit Committee of the
Boards, respectively, which is supported by the charters of these
committees. Accordingly, the Commission believes that the Framework is
consistent with Rule 17Ad-22(e)(3)(iv).\66\
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\66\ Id.
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D. Consistency With Rule 17Ad-22(e)(20)
Rule 17Ad-22(e)(20) under the Act requires that each covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to identify, monitor and
manage risks related to any link the covered clearing agency
establishes with one or more other clearing agencies, financial market
utilities, or trading markets.\67\
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\67\ 17 CFR 240.17Ad-22(e)(20).
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As described above, the Framework would describe how the Clearing
Agencies review both proposed and existing links with other entities,
including those links that may result in material interdependencies.
For example, the Framework would describe some of the ways the Clearing
Agencies manage risks related to their links with, as applicable,
participants, settling banks, investment counterparties, liquidity
providers, vendors, and service providers, and would also describe how
the Clearing Agencies identify and address risks that have the
potential of creating systemic impact. With respect to links with
vendors, the Framework would describe how the Clearing Agencies apply a
comprehensive vendor review and vetting process.
By providing written policies and procedures to identify, monitor,
and manage risks related to links that the Clearing Agencies'
establish, the Commission believes that the Framework is consistent
with Rule 17Ad-22(e)(20).\68\
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\68\ Id.
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E. Consistency With Rule 17Ad-22(e)(21)
Rule 17Ad-22(e)(21) under the Act requires that each covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to be efficient and
effective in meeting the requirements of its participants and the
markets it serves, and have the covered clearing agency's management
regularly review the efficiency and effectiveness of its (i) clearing
and settlement arrangements; (ii) operating structure, including risk
management policies, procedures, and systems; (iii) scope of products
cleared or settled; and (iv) use of technology and communication
procedures.\69\
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\69\ 17 CFR 240.17Ad-22(e)(21).
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As described above, the Framework would describe some of the ways
in which the Clearing Agencies review the efficiency and effectiveness
of their businesses and operations. For example, the Framework would
describe how the Clearing Agencies employ a structured approach to the
pre-implementation reviews of new initiatives (including initiatives
related to their clearing and settlement arrangements, scope of
products cleared or settled, and use of technology and communication
procedures). The Framework would also describe the Clearing Agencies'
Core Balanced Business Scorecard, which is used to review the
effectiveness of the Clearing Agencies' operations, information
technology services levels, financial performance, and other aspects of
their business, including their respective participants' experiences.
The Framework would also describe some of the steps the Clearing
Agencies take in order to be efficient and effective in reviewing and
meeting the requirements of their participants and the markets they
serve, including the maintenance of a policy to address escalation,
tracking, and resolution of certain customer complaints.
By establishing a framework that would (i) help support bring
initiatives to market in a more timely and efficient manner through the
pre-implementation reviews; (ii) help provide the Clearing Agencies
insight into the efficiency and effectiveness of their businesses and
operations through the Core Balanced Business Scorecard; and (iii) help
manage the Clearing Agencies' participants' complaints through a
specific policy, the Commission believes that the Framework is
consistent with Rule 17Ad-22(e)(21).\70\
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\70\ Id.
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule changes are consistent with the requirements of the Act
and in particular with the requirements of
[[Page 44229]]
Section 17A of the Act \71\ and the rules and regulations thereunder.
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\71\ 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 changes SR-DTC-2017-013, SR-NSCC-2017-012, and SR-
FICC-2017-016 be, and hereby are, approved.\72\
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\72\ In approving the Proposed Rule Changes, 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.\73\
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\73\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-20089 Filed 9-20-17; 8:45 am]
BILLING CODE 8011-01-P
