Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Expand the Types of Entities That Are Eligible To Participate in Fixed Income Clearing Corporation as Sponsored Members and Make Other Changes, 14265-14269 [2017-05403]
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Federal Register / Vol. 82, No. 51 / Friday, March 17, 2017 / Notices
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CHX–2017–05 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.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
All submissions should refer to File
Number SR–CHX–2017–05. 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 Web site (https://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 Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
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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 the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–CHX–
2017–05, and should be submitted on or
before April 7, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–05342 Filed 3–16–17; 8:45 am]
BILLING CODE 8011–01–P
19 17
CFR 200.30–3(a)(12).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80236; File No. SR–FICC–
2017–003]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing of Proposed Rule Change, as
Modified by Amendment No. 1 Thereto,
To Expand the Types of Entities That
Are Eligible To Participate in Fixed
Income Clearing Corporation as
Sponsored Members and Make Other
Changes
March 14, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 1,
2017, Fixed Income Clearing
Corporation (‘‘FICC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change. On March 13, 2017, FICC filed
Amendment No. 1 to the proposed rule
change, which amended and replaced
the original filing in its entirety. The
proposed rule change, as modified by
Amendment No. 1, is described in Items
I, II and III below, which Items have
been prepared by the clearing agency.3
The Commission is publishing this
notice to solicit comments on the
proposed rule change, as modified by
Amendment No. 1 thereto, from
interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change consists of
amendments to the Government
Securities Division (‘‘GSD’’) Rulebook
(‘‘Rules’’) 4 that would (i) expand the
types of entities that are eligible to
participate in FICC as Sponsored
Members under Rule 3A (Sponsoring
Members and Sponsored Members) and
(ii) make the following other
amendments and clarifications to the
Rules:
• Clarify that the ‘‘Sponsoring
Member Omnibus Account’’ definition
in Rule 1 (Definitions) refers to an
‘‘Account’’ as defined in Rule 1;
• Amend Section 7 of Rule 3A to
reference the application of fails charges
to a Sponsoring Member Omnibus
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 FICC previously filed SR–FICC–2017–003 on
March 1, 2017, which is being amended and
replaced in its entirety by this proposed rule
change.
4 Capitalized terms not defined herein are defined
in the Rules, available at https://www.dtcc.com/
legal/rules-and-procedures.
2 17
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14265
Account and to correct certain
typographical errors;
• Amend Section 9 of Rule 3A to
correct an out-of-date cross-reference to
Rule 13 (Funds-Only Settlement);
• Amend Section 10 of Rule 3A to
reflect the current Clearing Fund
calculation procedures applicable to a
Sponsoring Member Omnibus Account
and to correct certain out-of-date crossreferences to Rule 4 (Clearing Fund and
Loss Allocation);
• Amend Section 12 of Rule 3A to
reflect the current loss allocation
process applicable to Sponsored
Member Trades in the event that the
Sponsoring Member is insolvent or
otherwise in default to FICC and to
correct certain out-of-date crossreferences to Rule 4 and certain
typographical errors;
• Amend Sections 13 and 14 of Rule
3A to correct certain out-of-date crossreferences to Rule 21 (Restrictions on
Access to Services); and
• Amend Section 15 of Rule 3A to
specify the standard with respect to
which a Sponsoring Member is deemed
by FICC to have knowledge that one of
its Sponsored Members is insolvent or
is otherwise unable to perform on any
of its material contracts, obligations or
agreements for purposes of the
Sponsoring Member’s obligation to
inform FICC of such matter.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
clearing agency has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
This filing constitutes Amendment
No. 1 (‘‘Amendment’’) to Rule Filing
SR–FICC–2017–003 (‘‘Rule Filing’’)
previously filed by FICC on March 1,
2017. This Amendment amends and
replaces the Rule Filing in its entirety.
FICC submits this Amendment in order
to clarify the Sponsored Member
eligibility requirement as proposed
herein.
The proposed rule change would
expand the types of entities that are
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eligible to participate in FICC as
Sponsored Members under Rule 3A
(Sponsoring Members and Sponsored
Members).
This filing also contains proposed
rule changes that are not related to the
proposed expansion of entity types
eligible to be Sponsored Members but
would provide specificity, clarity and
additional transparency to the Rules.
(i) Background on the Proposed
Expansion of Sponsored Member
Eligibility
In 2005, the Commission approved
FICC rule filing SR–FICC–2004–22,5
which established a Sponsoring
Member-Sponsored Member
relationship in the Rules. Under Rule
3A (Sponsoring Members and
Sponsored Members), Bank Netting
Members that are well-capitalized (as
defined under applicable regulations)
and have at least $5 billion in equity
capital are permitted to sponsor certain
institutional firms (Sponsored Members)
into GSD membership.
Under Rule 3A, a Sponsoring Member
is permitted to submit to FICC for
comparison, novation and netting
certain types of eligible transactions
between itself and its Sponsored
Members (Sponsored Member Trades).6
The Sponsoring Member is required to
establish an omnibus account at FICC
for all of its Sponsored Members’ FICCcleared activity (Sponsoring Member
Omnibus Account),7 which is separate
from the Sponsoring Member’s regular
netting account. For operational and
administrative purposes, FICC interacts
solely with the Sponsoring Member as
agent for purposes of the day-to-day
satisfaction of its Sponsored Members’
obligations to FICC, including their
securities and funds-only settlement
obligations.8
Novation of eligible trading activity to
FICC provides Sponsoring Members and
their Sponsored Members the benefits of
FICC’s independent risk management
and guaranty of completion of
settlement of such trading activity. In
addition, Sponsoring Members also may
be able to offset on their balance sheets
their obligations to FICC on Sponsored
Member Trades against their obligations
to FICC on other eligible FICC-cleared
activity, as well as take lesser capital
charges than would be required to the
extent they engaged in the same trading
5 Securities Exchange Act Release No. 51896
(June 21, 2005), 70 FR 36981 (June 27, 2005) (SR–
FICC–2004–22).
6 See Rule 1, definition of ‘‘Sponsored Member
Trades.’’ Rules, supra note 4.
7 See Rule 1, definition of ‘‘Sponsoring Member
Omnibus Account.’’ Id.
8 See Rule 3A, Sections 5, 6, 7, 8 and 9. Id.
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activity with their Sponsored Members
outside of a central counterparty.9 By
potentially alleviating balance sheet and
capital constraints on their Sponsoring
Members, participation in FICC as
Sponsored Members may afford eligible
institutional firms increased lending
capacity and income.
Currently, eligibility to become a
Sponsored Member is limited to an
entity that is a registered Investment
Company under the Investment
Company Act of 1940,10 is a ‘‘qualified
institutional buyer’’ as defined in Rule
144A 11 under the Securities Act of
1933,12 and has at least one Sponsoring
Member willing to sponsor the entity
into GSD membership.13
The proposed rule change would
eliminate the requirement that a
Sponsored Member be a registered
Investment Company under the
Investment Company Act of 1940.
Nevertheless, in order to ensure that
Sponsored Members are financially
sophisticated, FICC would retain the
current requirement that a Sponsored
Member be a ‘‘qualified institutional
buyer’’ to the extent that its legal entity
type falls under one of the enumerated
categories of Rule 144A’s definition of a
‘‘qualified institutional buyer.’’ For
institutional firms whose entity types do
not clearly fall into one of the
enumerated categories in Rule 144A’s
definition of ‘‘qualified institutional
buyer,’’ FICC would instead require
such Sponsored Members to satisfy the
financial requirements that an entity
specifically listed in paragraph (a)(1)(i)
of Rule 144A must satisfy in order to be
a ‘‘qualified institutional buyer’’ as
specified in that paragraph. Under this
alternative requirement, institutional
firms whose entity types are not
expressly included within the definition
of ‘‘qualified institutional buyer’’ in
Rule 144A (such as non-U.S. sovereign
wealth funds) would be eligible to be
Sponsored Members, provided they
satisfy the financial requirements that
an entity specifically listed in paragraph
(a)(1)(i) of Rule 144A must satisfy in
9 Sponsoring Members interested in such relief
should discuss this matter with their accounting
and regulatory capital experts.
10 15 U.S.C. 80a–1 et seq. The Sponsoring
Member-Sponsored Member relationship has
historically been based on a custodial banking
arrangement in which the Sponsored Member
Trades novated to FICC reflect investments by the
Sponsoring Member of a registered Investment
Company Sponsored Member’s cash through Repo
Transactions. However, a custodial banking
relationship between a Sponsored Member and its
Sponsoring Member(s) is not required under the
Rules.
11 See 17 CFR 230.144A.
12 15 U.S.C. 77a et seq.
13 Currently, GSD has one Sponsoring Member
and 1422 Sponsored Members.
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order to be a ‘‘qualified institutional
buyer’’ as specified in that paragraph.
Because conceptions of financial
sophistication may change with time,
FICC believes it is appropriate to tie this
requirement to the definition of
‘‘qualified institutional buyer’’ in Rule
144A, as such definition may be
amended from time to time.
FICC believes that expanding
eligibility to become a Sponsored
Member beyond registered Investment
Companies under the Investment
Company Act of 1940 is appropriate
because FICC’s risk management of the
Sponsoring Member-Sponsored Member
relationship occurs primarily at the
Sponsoring Member level,14 and the
proposed expansion of the entity types
eligible to participate in FICC as
Sponsored Members (and the
commensurate potential volume
increase in novated activity) would not
require any changes to FICC’s risk
management practices applicable to
Sponsoring Members or to FICC’s
operational practices applicable to the
comparison, novation, netting and
settlement of Sponsored Member
Trades.
FICC also believes that the proposed
expansion of entity types eligible to
participate in FICC as Sponsored
Members would help to safeguard the
U.S. financial market by lowering the
risk of liquidity drain, protecting against
fire sale risk,15 and decreasing
settlement and operational risk.
Expanding the types of institutional
firms that are eligible to participate in
FICC as Sponsored Members and
thereby benefit from FICC’s guaranty of
completion of settlement of their
eligible transactions would mitigate the
risk of a large scale exit by such firms
from the U.S. financial market in a
stress scenario and therefore lower the
risk of a liquidity drain in such a
scenario. Specifically, to the extent
institutional firms would otherwise be
14 For example, a Sponsoring Member is
responsible under Section 10 of Rule 3A for posting
to FICC the Required Fund Deposit for its
Sponsoring Member Omnibus Account, which
includes the sum of the stand-alone VaR Charges for
each of its Sponsored Members’ novated activity
calculated separately. In addition, while Sponsored
Members are principally liable to FICC for their
settlement obligations, a Sponsoring Member is also
required under Section 2 of Rule 3A to provide a
guaranty to FICC for such obligations. This means
that in the event one or more Sponsored Members
does not satisfy its settlement obligations, FICC is
able to invoke the guaranty provided by the
Sponsoring Member.
15 Fire sale risk is the risk of rapid asset sales of
securities held by cash lenders when a dealer
defaults. This rapid sale has the potential to create
a market crisis because cash lenders are likely to
sell large amounts of securities in a short period of
time, which could dramatically reduce the price of
such securities that such lenders are looking to sell.
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engaging in the same type of eligible
trading activity (e.g., repurchase
agreement transactions) outside of a
central counterparty, having such
activity novated to FICC and subject to
FICC’s guaranty of completion of
settlement would reduce the risk that
such institutional firms discontinue
such trading activity in a Netting
Member default situation.
Similarly, broadening the pool of
entities eligible for central clearing at
FICC as Sponsored Members would also
reduce the potential for market
disruption from fire sales. Specifically,
in a Netting Member default situation,
the more institutional firms participate
in FICC as Sponsored Members, the
more trading activity with the defaulted
Netting Member could be centrally
liquidated in an orderly manner by FICC
rather than by individual counterparties
in potential fire sale conditions.
Moreover, to the extent institutional
firms would otherwise be engaging in
eligible trading activity (e.g., repurchase
agreement transactions) outside of a
central counterparty, expanding the
pool of entities eligible to participate in
FICC as Sponsored Members would also
decrease settlement and operational risk
in the U.S. financial market in that such
trading activity would now be eligible to
be netted and subject to guaranteed
settlement, novation and independent
risk management through FICC.
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(ii) Detailed Description of the Proposed
Rule Changes Related to the Expansion
of Sponsored Member Eligibility
A. Proposed Changes to Rule 3A,
Sections 2(d) and 3(a)
Sections 2(d) and 3(a) of Rule 3A
currently require that a Sponsored
Member be a registered Investment
Company under the Investment
Company Act of 1940 and also be a
‘‘qualified institutional buyer’’ as
defined in Rule 144A under the
Securities Act of 1933.
FICC is proposing to amend Sections
2(d) and 3(a) of Rule 3A to eliminate the
requirement that a Sponsored Member
be a registered Investment Company
under the Investment Company Act of
1940.
FICC is also proposing to amend
Sections 2(d) and 3(a) of Rule 3A to
permit institutional firms whose entity
types are not expressly included within
Rule 144A to be Sponsored Members,
provided they satisfy the financial
requirements that an entity specifically
listed in paragraph (a)(1)(i) of Rule 144A
must satisfy in order to be a ‘‘qualified
institutional buyer’’ as specified in that
paragraph.
It should be noted that it is currently
and, in connection with the proposed
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expansion of entity types eligible to
participate in FICC as Sponsored
Members, would continue to be the
responsibility of each Sponsored
Member and its Sponsoring Member(s)
to evaluate whether entering into a
given Sponsored Member Trade is
consistent with a Sponsored Member’s
legal and regulatory requirements, and
that FICC has no responsibility or
liability in the event that a Sponsoring
Member submits data to FICC for a
Sponsored Member Trade that is
inconsistent with those requirements.
B. Proposed Changes to Rule 3A,
Sections 3(c) and 4
To account for the fact that, as
proposed, non-U.S. entities that meet
the proposed requirements would be
permitted to be Sponsored Members,
FICC is proposing to amend Section 3(c)
of Rule 3A to provide that Sponsored
Members that are FFI Members 16 would
be required to be FATCA Compliant and
to amend Section 4 of Rule 3A to
provide that Sponsored Members and
their Sponsoring Members would be
required to comply with global
sanctions laws.17
(iii) Other Proposed Rule Changes
This filing also contains proposed
rule changes that are unrelated to the
proposed expansion of entity types
eligible to be Sponsored Members.
These proposed rule changes would
provide specificity, clarity and
additional transparency to the Rules as
described below.
A. Proposed Changes to Rule 1
(Definitions)
FICC is proposing to clarify that the
‘‘Sponsoring Member Omnibus
Account’’ definition in Rule 1
(Definitions) refers to an ‘‘Account’’ as
defined in Rule 1.
B. Proposed Changes to Rule 3A,
Section 7
FICC is proposing to amend Section 7
of Rule 3A to reference the application
of fails charges 18 to a Sponsoring
16 Pursuant to Rule 1, the term ‘‘FFI Member’’
means ‘‘any Person that is treated as a non-U.S.
entity for U.S. federal income tax purposes.’’ For
the avoidance of doubt, the term FFI Member also
includes ‘‘any Member that is a U.S. branch of an
entity that is treated as a non-U.S. entity for U.S.
federal income tax purposes.’’ Rules, supra note 4.
17 Although GSD has Members, including certain
Bank Netting Members, which are non-U.S. entities,
currently, there are no Sponsoring Members that are
non-U.S. entities.
Any future Sponsoring Member or Sponsored
Member that is an FFI Member will be subject to
the same FATCA Compliance screening and global
sanctions screening as any other Member that is a
non-U.S. entity.
18 The term ‘‘fails charge’’ refers to the charge
imposed by FICC on Netting Members for a delivery
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14267
Member Omnibus Account in the same
manner as such charges are applied to
Netting Members pursuant to Rule 11
(Netting System) and to correct certain
typographical errors.
With respect to the application of fails
charges, in 2009, FICC received
Commission approval of a rule filing to
impose fails charges on Netting
Members, which was an action that had
been requested of GSD by the Treasury
Markets Practices Group (‘‘TMPG’’) 19 in
order to encourage market participants
to resolve fails promptly.20 The
approved rule changes were included in
Section 14 of Rule 11 (Netting System)
and were stated to apply to Netting
Members. As an account of a Netting
Member (acting as a Sponsoring
Member), FICC has imposed fails
charges, if applicable, on Sponsoring
Members for their Sponsoring Member
Omnibus Accounts since the
implementation of the charges in 2009.
In reviewing the Rules in connection
with this present filing, FICC believes
that the application of the fails charges
to a Sponsoring Member’s Sponsoring
Member Omnibus Account should be
made clear in Rule 3A for transparency.
C. Proposed Changes to Rule 3A,
Section 9
FICC is proposing to amend Section 9
of Rule 3A to correct an out-of-date
cross-reference to Rule 13 (Funds-Only
Settlement).
D. Proposed Changes to Rule 3A,
Section 10
FICC is proposing to amend Section
10 of Rule 3A to reflect the current
Clearing Fund calculation procedures
applicable to a Sponsoring Member’s
Sponsoring Member Omnibus Account.
Specifically, FICC is proposing to
amend Section 10 of Rule 3A to specify
that a Sponsoring Member’s Sponsoring
Member Omnibus Account Required
Fund Deposit would be equal to the sum
of the following: (I) The sum of the VaR
Charges for all of the Sponsored
Members whose activity is represented
in the Sponsoring Member Omnibus
Account as derived pursuant to Section
1b(a)(i) of Rule 4 (Clearing Fund and
Loss Allocation), and (II) all amounts
derived pursuant to the provisions of
Rule 4 other than pursuant to Section
failure in Treasury Securities or debentures issued
by Fannie Mae, Freddie Mac or the Federal Home
Loan Banks, pursuant to Section 14 of Rule 11.
Rules, supra note 4.
19 The TMPG is a group of market participants
that is active in the Treasury securities market and
is sponsored by The Federal Reserve Bank of New
York.
20 Securities Exchange Act Release No. 59802
(April 20, 2009), 74 FR 19248 (April 28, 2009) (SR–
FICC–2009–03).
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1b(a)(i) of Rule 4 computed at the level
of the Sponsoring Member Omnibus
Account. The proposed rule changes
maintain the substance of the
calculation of the Required Fund
Deposit for a Sponsoring Member’s
Sponsoring Member Omnibus Account
(i.e., the main charges applicable to the
individual Sponsored Members in the
account are summed and then certain
components are applied at the level of
the Sponsoring Member Omnibus
Account) but update the rules
provisions to reflect the current Clearing
Fund calculation terminology and
delete references to terms that are no
longer used in the Rules (such as
‘‘Clearing Fund components related to
Fail Net Settlement Positions and
Funds-Only Settlement amounts’’).
FICC is also proposing to amend
Section 10 of Rule 3A to specify that for
purposes of calculating the Unadjusted
GSD Margin Portfolio Amount
applicable to a Sponsoring Member
Omnibus Account, FICC would apply
the higher of the Required Fund Deposit
calculation as of the beginning of the
current Business Day and intraday on
the current Business Day.
In 2011, FICC received Commission
approval to re-calculate each Business
Day, at times established by FICC for
this purpose, the amount of the VaR
Charge applicable to each Margin
Portfolio of a Member, based upon the
open, intraday positions of such Margin
Portfolio, for purposes of establishing
whether a Member would be required to
make payment of an additional amount
(the Member’s ‘‘Intraday Supplemental
Fund Deposit’’) to its Required Fund
Deposit.21 The approved rule changes
were included in Section 2a of Rule 4
(Clearing Fund and Loss Allocation).
Prior to this approval, Clearing Fund
requirements (including with respect to
a Sponsoring Member’s Sponsoring
Member Omnibus Account) were
calculated once each Business Day.
Since the approval of these rule changes
in 2011, FICC has calculated the
Unadjusted GSD Margin Portfolio
Amount applicable to a Sponsoring
Member Omnibus Account based on the
higher of the Required Fund Deposit
calculation as of the beginning of the
current Business Day and intraday on
the current Business Day. In reviewing
the Rules in connection with this
present filing, FICC believes that this
calculation procedure for the
Unadjusted GSD Margin Portfolio
Amount applicable to a Sponsoring
21 Securities Exchange Act Release No. 63986
(February 28, 2011), 76 FR 12144 (March 4, 2011)
(SR–FICC–2010–09).
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Member Omnibus Account should be
made clear in Rule 3A for transparency.
FICC is also proposing to amend
Section 10 of Rule 3A to correct certain
out-of-date cross-references to Rule 4
(Clearing Fund and Loss Allocation).
E. Proposed Changes to Rule 3A,
Section 12
FICC is proposing to amend Section
12 of Rule 3A to reflect the current loss
allocation process applicable to
Sponsored Member Trades in the event
that the Sponsoring Member is insolvent
or otherwise in default to FICC.
Specifically, FICC is proposing to
amend Section 12 of Rule 3A to specify
that any Remaining Loss incurred by
FICC would be allocated to the Tier One
Netting Members in accordance with the
principles set forth in Section 7(d) of
Rule 4 (Clearing Fund and Loss
Allocation).
In 2011, FICC received Commission
approval for its current loss allocation
process set forth in Rule 4, which
provides for loss mutualization of any
Remaining Loss among all Tier One
Netting Members.22 FICC proposes to
update references in Section 12 of Rule
3A to reference the current loss
allocation process for Tier One Netting
Members.
FICC also proposes to amend Section
12 of Rule 3A to correct certain out-ofdate cross-references to Rule 4 (Clearing
Fund and Loss Allocation) and to
correct certain typographical errors.
F. Proposed Changes to Rule 3A,
Sections 13 and 14
FICC is proposing to amend Sections
13 and 14 of Rule 3A to correct certain
out-of-date cross-references to Rule 21
(Restrictions on Access to Services).
G. Proposed Changes to Rule 3A,
Section 15
FICC is proposing to amend Section
15 of Rule 3A to specify the standard
with respect to which a Sponsoring
Member is deemed by FICC to have
knowledge that one of its Sponsored
Members is insolvent or is otherwise
unable to perform on any of its material
contracts, obligations or agreements for
purposes of the Sponsoring Member’s
obligation to inform FICC of such
matter. Specifically, FICC is proposing
to specify that if one or more duly
authorized representatives of a
Sponsoring Member, in its capacity as
such, has knowledge that one of its
Sponsored Members is insolvent or
otherwise unable to perform on any of
its material contracts, obligations or
agreements, that such knowledge
triggers the Sponsoring Member’s
obligation to inform FICC of such
matter.
2. Statutory Basis
Section 17A(b)(3)(F) of the Act
requires, in part, that the Rules be
designed to (i) ‘‘promote the prompt and
accurate clearance and settlement of
securities transactions,’’ 23 and (ii)
‘‘remove impediments to and perfect the
mechanism of a national system for the
prompt and accurate clearance and
settlement of securities transactions,
and, in general, to protect investors and
the public interest.’’ 24
By expanding the types of entities that
may participate in FICC as Sponsored
Members, FICC believes that the
proposed rule change would help to
safeguard the U.S. financial market by
lowering the risk of liquidity drain
(through FICC’s guaranty of completion
of settlement for a greater number of
eligible transactions), protecting against
fire sale risk (through FICC’s ability to
centralize and control the liquidation of
a greater portion of a failed
counterparty’s portfolio) and decreasing
settlement and operational risk (by
making a greater number of transactions
eligible to be netted and subject to
guaranteed settlement, novation and
independent risk management through
FICC). By lowering the risk of liquidity
drain in the U.S. financial market and
protecting against fire sale risk, FICC
believes the proposed rule change
would ‘‘protect investors and the public
interest’’ consistent with the
requirements of the Act, cited above. By
decreasing settlement and operational
risk, FICC believes the proposed rule
change would also ‘‘promote the prompt
and accurate clearance and settlement of
securities transactions’’ and ‘‘remove
impediments to and perfect the
mechanism of a national system for the
prompt and accurate clearance and
settlement of securities transactions’’
consistent with the requirements of the
Act, cited above.
By providing specificity, clarity, and
additional transparency to the Rules, the
proposed rule changes to Rule 1
(Definitions) and Rule 3A (Sponsoring
Members and Sponsored Members) that
are unrelated to the proposed expansion
of entity types eligible to be Sponsored
Members would provide Members with
a better understanding of the Rules,
making errors in the performance of
their responsibilities to FICC less likely
to occur and thereby ensuring that
FICC’s clearing and settlement system
works efficiently. Therefore, FICC
23 15
22 Id.
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U.S.C. 78q–1(b)(3)(F).
24 Id.
Fmt 4703
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Federal Register / Vol. 82, No. 51 / Friday, March 17, 2017 / Notices
would not have an impact, nor impose
any burden, on competition because
each of such proposed changes would
simply provide specificity, clarity and
additional transparency within the
Rules.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
believes the proposed rule change
would ‘‘promote the prompt and
accurate clearance and settlement of
securities transactions’’ by FICC and
also ‘‘remove impediments to and
perfect the mechanism of a national
system for the prompt and accurate
clearance and settlement of securities
transactions’’ consistent with the
requirements of the Act, cited above.
(B) Clearing Agency’s Statement on
Burden on Competition
FICC believes that the proposed rule
changes associated with the expansion
of entity types eligible to be Sponsored
Members would promote competition
by increasing the types of entities that
may participate in FICC as Sponsored
Members and therefore permit more
market participants to utilize FICC’s
services.
At the same time, participation in
FICC as a Sponsored Member would
continue to be limited to legal entities
that are either ‘‘qualified institutional
buyers’’ as defined in Rule 144A under
the Securities Act of 1933, or that
otherwise satisfy the financial
requirements that an entity specifically
listed in paragraph (a)(1)(i) of Rule 144A
must satisfy in order to be a ‘‘qualified
institutional buyer’’ as specified in that
paragraph, and that have at least one
Sponsoring Member willing to sponsor
them into GSD membership. These
limitations may impact institutional
firms that are unable to satisfy such
eligibility requirements by excluding
them from being able to novate their
eligible activity to FICC (and avail
themselves of the commensurate
benefits described in Section 3(a)(i)—
Background on the Proposed Expansion
of Sponsored Member Eligibility above).
Nevertheless, FICC believes that any
resulting burden on competition would
be necessary and appropriate in
furtherance of the Act, as permitted by
Section 17A(b)(3)(I) of the Act,25 in light
of the fact that such eligibility
requirements are designed to allow FICC
to ensure the financial sophistication of
Sponsored Members and to prudently
manage the risk associated with
Sponsored Members’ participation in
FICC. Moreover, FICC would not restrict
the ability of institutional firms to enter
into eligible transactions with Netting
Members (including Sponsoring
Members) outside of GSD.
FICC believes that the proposed
changes to Rule 1 (Definitions) and Rule
3A (Sponsoring Members and
Sponsored Members) that are unrelated
to the proposed expansion of entity
types eligible to be Sponsored Members
25 15
U.S.C. 78q–1(b)(3)(I).
VerDate Sep<11>2014
20:02 Mar 16, 2017
Jkt 241001
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants, or Others
Written comments relating to the
proposed rule change have not been
solicited or received. FICC will notify
the Commission of any written
comments received by FICC.
III. Date of Effectiveness of the
Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self- regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change, as modified by Amendment No.
1, is consistent with the Act. Comments
may be submitted by any of the
following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FICC–2017–003 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549.
All submissions should refer to File
Number SR–FICC–2017–003. 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 Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
PO 00000
Frm 00072
Fmt 4703
Sfmt 4703
14269
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 Web site 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 Web site
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FICC–
2017–003 and should be submitted on
or before April 7, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017–05403 Filed 3–16–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80222; File No. SR–NYSE–
2017–09]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Amending Its
Price List
March 13, 2017.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on March 1,
2017, New York Stock Exchange LLC
(‘‘NYSE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. The
Commission is publishing this notice to
26 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
E:\FR\FM\17MRN1.SGM
17MRN1
]]>Agencies
[Federal Register Volume 82, Number 51 (Friday, March 17, 2017)]
[Notices]
[Pages 14265-14269]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05403]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80236; File No. SR-FICC-2017-003]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change, as Modified by Amendment No.
1 Thereto, To Expand the Types of Entities That Are Eligible To
Participate in Fixed Income Clearing Corporation as Sponsored Members
and Make Other Changes
March 14, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 1, 2017, Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change. On March 13, 2017, FICC filed Amendment No. 1 to
the proposed rule change, which amended and replaced the original
filing in its entirety. The proposed rule change, as modified by
Amendment No. 1, is described in Items I, II and III below, which Items
have been prepared by the clearing agency.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change,
as modified by Amendment No. 1 thereto, from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ FICC previously filed SR-FICC-2017-003 on March 1, 2017,
which is being amended and replaced in its entirety by this proposed
rule change.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of amendments to the Government
Securities Division (``GSD'') Rulebook (``Rules'') \4\ that would (i)
expand the types of entities that are eligible to participate in FICC
as Sponsored Members under Rule 3A (Sponsoring Members and Sponsored
Members) and (ii) make the following other amendments and
clarifications to the Rules:
---------------------------------------------------------------------------
\4\ Capitalized terms not defined herein are defined in the
Rules, available at https://www.dtcc.com/legal/rules-and-procedures.
---------------------------------------------------------------------------
Clarify that the ``Sponsoring Member Omnibus Account''
definition in Rule 1 (Definitions) refers to an ``Account'' as defined
in Rule 1;
Amend Section 7 of Rule 3A to reference the application of
fails charges to a Sponsoring Member Omnibus Account and to correct
certain typographical errors;
Amend Section 9 of Rule 3A to correct an out-of-date
cross-reference to Rule 13 (Funds-Only Settlement);
Amend Section 10 of Rule 3A to reflect the current
Clearing Fund calculation procedures applicable to a Sponsoring Member
Omnibus Account and to correct certain out-of-date cross-references to
Rule 4 (Clearing Fund and Loss Allocation);
Amend Section 12 of Rule 3A to reflect the current loss
allocation process applicable to Sponsored Member Trades in the event
that the Sponsoring Member is insolvent or otherwise in default to FICC
and to correct certain out-of-date cross-references to Rule 4 and
certain typographical errors;
Amend Sections 13 and 14 of Rule 3A to correct certain
out-of-date cross-references to Rule 21 (Restrictions on Access to
Services); and
Amend Section 15 of Rule 3A to specify the standard with
respect to which a Sponsoring Member is deemed by FICC to have
knowledge that one of its Sponsored Members is insolvent or is
otherwise unable to perform on any of its material contracts,
obligations or agreements for purposes of the Sponsoring Member's
obligation to inform FICC of such matter.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
This filing constitutes Amendment No. 1 (``Amendment'') to Rule
Filing SR-FICC-2017-003 (``Rule Filing'') previously filed by FICC on
March 1, 2017. This Amendment amends and replaces the Rule Filing in
its entirety. FICC submits this Amendment in order to clarify the
Sponsored Member eligibility requirement as proposed herein.
The proposed rule change would expand the types of entities that
are
[[Page 14266]]
eligible to participate in FICC as Sponsored Members under Rule 3A
(Sponsoring Members and Sponsored Members).
This filing also contains proposed rule changes that are not
related to the proposed expansion of entity types eligible to be
Sponsored Members but would provide specificity, clarity and additional
transparency to the Rules.
(i) Background on the Proposed Expansion of Sponsored Member
Eligibility
In 2005, the Commission approved FICC rule filing SR-FICC-2004-
22,\5\ which established a Sponsoring Member-Sponsored Member
relationship in the Rules. Under Rule 3A (Sponsoring Members and
Sponsored Members), Bank Netting Members that are well-capitalized (as
defined under applicable regulations) and have at least $5 billion in
equity capital are permitted to sponsor certain institutional firms
(Sponsored Members) into GSD membership.
---------------------------------------------------------------------------
\5\ Securities Exchange Act Release No. 51896 (June 21, 2005),
70 FR 36981 (June 27, 2005) (SR-FICC-2004-22).
---------------------------------------------------------------------------
Under Rule 3A, a Sponsoring Member is permitted to submit to FICC
for comparison, novation and netting certain types of eligible
transactions between itself and its Sponsored Members (Sponsored Member
Trades).\6\ The Sponsoring Member is required to establish an omnibus
account at FICC for all of its Sponsored Members' FICC-cleared activity
(Sponsoring Member Omnibus Account),\7\ which is separate from the
Sponsoring Member's regular netting account. For operational and
administrative purposes, FICC interacts solely with the Sponsoring
Member as agent for purposes of the day-to-day satisfaction of its
Sponsored Members' obligations to FICC, including their securities and
funds-only settlement obligations.\8\
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\6\ See Rule 1, definition of ``Sponsored Member Trades.''
Rules, supra note 4.
\7\ See Rule 1, definition of ``Sponsoring Member Omnibus
Account.'' Id.
\8\ See Rule 3A, Sections 5, 6, 7, 8 and 9. Id.
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Novation of eligible trading activity to FICC provides Sponsoring
Members and their Sponsored Members the benefits of FICC's independent
risk management and guaranty of completion of settlement of such
trading activity. In addition, Sponsoring Members also may be able to
offset on their balance sheets their obligations to FICC on Sponsored
Member Trades against their obligations to FICC on other eligible FICC-
cleared activity, as well as take lesser capital charges than would be
required to the extent they engaged in the same trading activity with
their Sponsored Members outside of a central counterparty.\9\ By
potentially alleviating balance sheet and capital constraints on their
Sponsoring Members, participation in FICC as Sponsored Members may
afford eligible institutional firms increased lending capacity and
income.
---------------------------------------------------------------------------
\9\ Sponsoring Members interested in such relief should discuss
this matter with their accounting and regulatory capital experts.
---------------------------------------------------------------------------
Currently, eligibility to become a Sponsored Member is limited to
an entity that is a registered Investment Company under the Investment
Company Act of 1940,\10\ is a ``qualified institutional buyer'' as
defined in Rule 144A \11\ under the Securities Act of 1933,\12\ and has
at least one Sponsoring Member willing to sponsor the entity into GSD
membership.\13\
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\10\ 15 U.S.C. 80a-1 et seq. The Sponsoring Member-Sponsored
Member relationship has historically been based on a custodial
banking arrangement in which the Sponsored Member Trades novated to
FICC reflect investments by the Sponsoring Member of a registered
Investment Company Sponsored Member's cash through Repo
Transactions. However, a custodial banking relationship between a
Sponsored Member and its Sponsoring Member(s) is not required under
the Rules.
\11\ See 17 CFR 230.144A.
\12\ 15 U.S.C. 77a et seq.
\13\ Currently, GSD has one Sponsoring Member and 1422 Sponsored
Members.
---------------------------------------------------------------------------
The proposed rule change would eliminate the requirement that a
Sponsored Member be a registered Investment Company under the
Investment Company Act of 1940. Nevertheless, in order to ensure that
Sponsored Members are financially sophisticated, FICC would retain the
current requirement that a Sponsored Member be a ``qualified
institutional buyer'' to the extent that its legal entity type falls
under one of the enumerated categories of Rule 144A's definition of a
``qualified institutional buyer.'' For institutional firms whose entity
types do not clearly fall into one of the enumerated categories in Rule
144A's definition of ``qualified institutional buyer,'' FICC would
instead require such Sponsored Members to satisfy the financial
requirements that an entity specifically listed in paragraph (a)(1)(i)
of Rule 144A must satisfy in order to be a ``qualified institutional
buyer'' as specified in that paragraph. Under this alternative
requirement, institutional firms whose entity types are not expressly
included within the definition of ``qualified institutional buyer'' in
Rule 144A (such as non-U.S. sovereign wealth funds) would be eligible
to be Sponsored Members, provided they satisfy the financial
requirements that an entity specifically listed in paragraph (a)(1)(i)
of Rule 144A must satisfy in order to be a ``qualified institutional
buyer'' as specified in that paragraph. Because conceptions of
financial sophistication may change with time, FICC believes it is
appropriate to tie this requirement to the definition of ``qualified
institutional buyer'' in Rule 144A, as such definition may be amended
from time to time.
FICC believes that expanding eligibility to become a Sponsored
Member beyond registered Investment Companies under the Investment
Company Act of 1940 is appropriate because FICC's risk management of
the Sponsoring Member-Sponsored Member relationship occurs primarily at
the Sponsoring Member level,\14\ and the proposed expansion of the
entity types eligible to participate in FICC as Sponsored Members (and
the commensurate potential volume increase in novated activity) would
not require any changes to FICC's risk management practices applicable
to Sponsoring Members or to FICC's operational practices applicable to
the comparison, novation, netting and settlement of Sponsored Member
Trades.
---------------------------------------------------------------------------
\14\ For example, a Sponsoring Member is responsible under
Section 10 of Rule 3A for posting to FICC the Required Fund Deposit
for its Sponsoring Member Omnibus Account, which includes the sum of
the stand-alone VaR Charges for each of its Sponsored Members'
novated activity calculated separately. In addition, while Sponsored
Members are principally liable to FICC for their settlement
obligations, a Sponsoring Member is also required under Section 2 of
Rule 3A to provide a guaranty to FICC for such obligations. This
means that in the event one or more Sponsored Members does not
satisfy its settlement obligations, FICC is able to invoke the
guaranty provided by the Sponsoring Member.
---------------------------------------------------------------------------
FICC also believes that the proposed expansion of entity types
eligible to participate in FICC as Sponsored Members would help to
safeguard the U.S. financial market by lowering the risk of liquidity
drain, protecting against fire sale risk,\15\ and decreasing settlement
and operational risk.
---------------------------------------------------------------------------
\15\ Fire sale risk is the risk of rapid asset sales of
securities held by cash lenders when a dealer defaults. This rapid
sale has the potential to create a market crisis because cash
lenders are likely to sell large amounts of securities in a short
period of time, which could dramatically reduce the price of such
securities that such lenders are looking to sell.
---------------------------------------------------------------------------
Expanding the types of institutional firms that are eligible to
participate in FICC as Sponsored Members and thereby benefit from
FICC's guaranty of completion of settlement of their eligible
transactions would mitigate the risk of a large scale exit by such
firms from the U.S. financial market in a stress scenario and therefore
lower the risk of a liquidity drain in such a scenario. Specifically,
to the extent institutional firms would otherwise be
[[Page 14267]]
engaging in the same type of eligible trading activity (e.g.,
repurchase agreement transactions) outside of a central counterparty,
having such activity novated to FICC and subject to FICC's guaranty of
completion of settlement would reduce the risk that such institutional
firms discontinue such trading activity in a Netting Member default
situation.
Similarly, broadening the pool of entities eligible for central
clearing at FICC as Sponsored Members would also reduce the potential
for market disruption from fire sales. Specifically, in a Netting
Member default situation, the more institutional firms participate in
FICC as Sponsored Members, the more trading activity with the defaulted
Netting Member could be centrally liquidated in an orderly manner by
FICC rather than by individual counterparties in potential fire sale
conditions.
Moreover, to the extent institutional firms would otherwise be
engaging in eligible trading activity (e.g., repurchase agreement
transactions) outside of a central counterparty, expanding the pool of
entities eligible to participate in FICC as Sponsored Members would
also decrease settlement and operational risk in the U.S. financial
market in that such trading activity would now be eligible to be netted
and subject to guaranteed settlement, novation and independent risk
management through FICC.
(ii) Detailed Description of the Proposed Rule Changes Related to the
Expansion of Sponsored Member Eligibility
A. Proposed Changes to Rule 3A, Sections 2(d) and 3(a)
Sections 2(d) and 3(a) of Rule 3A currently require that a
Sponsored Member be a registered Investment Company under the
Investment Company Act of 1940 and also be a ``qualified institutional
buyer'' as defined in Rule 144A under the Securities Act of 1933.
FICC is proposing to amend Sections 2(d) and 3(a) of Rule 3A to
eliminate the requirement that a Sponsored Member be a registered
Investment Company under the Investment Company Act of 1940.
FICC is also proposing to amend Sections 2(d) and 3(a) of Rule 3A
to permit institutional firms whose entity types are not expressly
included within Rule 144A to be Sponsored Members, provided they
satisfy the financial requirements that an entity specifically listed
in paragraph (a)(1)(i) of Rule 144A must satisfy in order to be a
``qualified institutional buyer'' as specified in that paragraph.
It should be noted that it is currently and, in connection with the
proposed expansion of entity types eligible to participate in FICC as
Sponsored Members, would continue to be the responsibility of each
Sponsored Member and its Sponsoring Member(s) to evaluate whether
entering into a given Sponsored Member Trade is consistent with a
Sponsored Member's legal and regulatory requirements, and that FICC has
no responsibility or liability in the event that a Sponsoring Member
submits data to FICC for a Sponsored Member Trade that is inconsistent
with those requirements.
B. Proposed Changes to Rule 3A, Sections 3(c) and 4
To account for the fact that, as proposed, non-U.S. entities that
meet the proposed requirements would be permitted to be Sponsored
Members, FICC is proposing to amend Section 3(c) of Rule 3A to provide
that Sponsored Members that are FFI Members \16\ would be required to
be FATCA Compliant and to amend Section 4 of Rule 3A to provide that
Sponsored Members and their Sponsoring Members would be required to
comply with global sanctions laws.\17\
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\16\ Pursuant to Rule 1, the term ``FFI Member'' means ``any
Person that is treated as a non-U.S. entity for U.S. federal income
tax purposes.'' For the avoidance of doubt, the term FFI Member also
includes ``any Member that is a U.S. branch of an entity that is
treated as a non-U.S. entity for U.S. federal income tax purposes.''
Rules, supra note 4.
\17\ Although GSD has Members, including certain Bank Netting
Members, which are non-U.S. entities, currently, there are no
Sponsoring Members that are non-U.S. entities.
Any future Sponsoring Member or Sponsored Member that is an FFI
Member will be subject to the same FATCA Compliance screening and
global sanctions screening as any other Member that is a non-U.S.
entity.
---------------------------------------------------------------------------
(iii) Other Proposed Rule Changes
This filing also contains proposed rule changes that are unrelated
to the proposed expansion of entity types eligible to be Sponsored
Members. These proposed rule changes would provide specificity, clarity
and additional transparency to the Rules as described below.
A. Proposed Changes to Rule 1 (Definitions)
FICC is proposing to clarify that the ``Sponsoring Member Omnibus
Account'' definition in Rule 1 (Definitions) refers to an ``Account''
as defined in Rule 1.
B. Proposed Changes to Rule 3A, Section 7
FICC is proposing to amend Section 7 of Rule 3A to reference the
application of fails charges \18\ to a Sponsoring Member Omnibus
Account in the same manner as such charges are applied to Netting
Members pursuant to Rule 11 (Netting System) and to correct certain
typographical errors.
---------------------------------------------------------------------------
\18\ The term ``fails charge'' refers to the charge imposed by
FICC on Netting Members for a delivery failure in Treasury
Securities or debentures issued by Fannie Mae, Freddie Mac or the
Federal Home Loan Banks, pursuant to Section 14 of Rule 11. Rules,
supra note 4.
---------------------------------------------------------------------------
With respect to the application of fails charges, in 2009, FICC
received Commission approval of a rule filing to impose fails charges
on Netting Members, which was an action that had been requested of GSD
by the Treasury Markets Practices Group (``TMPG'') \19\ in order to
encourage market participants to resolve fails promptly.\20\ The
approved rule changes were included in Section 14 of Rule 11 (Netting
System) and were stated to apply to Netting Members. As an account of a
Netting Member (acting as a Sponsoring Member), FICC has imposed fails
charges, if applicable, on Sponsoring Members for their Sponsoring
Member Omnibus Accounts since the implementation of the charges in
2009. In reviewing the Rules in connection with this present filing,
FICC believes that the application of the fails charges to a Sponsoring
Member's Sponsoring Member Omnibus Account should be made clear in Rule
3A for transparency.
---------------------------------------------------------------------------
\19\ The TMPG is a group of market participants that is active
in the Treasury securities market and is sponsored by The Federal
Reserve Bank of New York.
\20\ Securities Exchange Act Release No. 59802 (April 20, 2009),
74 FR 19248 (April 28, 2009) (SR-FICC-2009-03).
---------------------------------------------------------------------------
C. Proposed Changes to Rule 3A, Section 9
FICC is proposing to amend Section 9 of Rule 3A to correct an out-
of-date cross-reference to Rule 13 (Funds-Only Settlement).
D. Proposed Changes to Rule 3A, Section 10
FICC is proposing to amend Section 10 of Rule 3A to reflect the
current Clearing Fund calculation procedures applicable to a Sponsoring
Member's Sponsoring Member Omnibus Account. Specifically, FICC is
proposing to amend Section 10 of Rule 3A to specify that a Sponsoring
Member's Sponsoring Member Omnibus Account Required Fund Deposit would
be equal to the sum of the following: (I) The sum of the VaR Charges
for all of the Sponsored Members whose activity is represented in the
Sponsoring Member Omnibus Account as derived pursuant to Section
1b(a)(i) of Rule 4 (Clearing Fund and Loss Allocation), and (II) all
amounts derived pursuant to the provisions of Rule 4 other than
pursuant to Section
[[Page 14268]]
1b(a)(i) of Rule 4 computed at the level of the Sponsoring Member
Omnibus Account. The proposed rule changes maintain the substance of
the calculation of the Required Fund Deposit for a Sponsoring Member's
Sponsoring Member Omnibus Account (i.e., the main charges applicable to
the individual Sponsored Members in the account are summed and then
certain components are applied at the level of the Sponsoring Member
Omnibus Account) but update the rules provisions to reflect the current
Clearing Fund calculation terminology and delete references to terms
that are no longer used in the Rules (such as ``Clearing Fund
components related to Fail Net Settlement Positions and Funds-Only
Settlement amounts'').
FICC is also proposing to amend Section 10 of Rule 3A to specify
that for purposes of calculating the Unadjusted GSD Margin Portfolio
Amount applicable to a Sponsoring Member Omnibus Account, FICC would
apply the higher of the Required Fund Deposit calculation as of the
beginning of the current Business Day and intraday on the current
Business Day.
In 2011, FICC received Commission approval to re-calculate each
Business Day, at times established by FICC for this purpose, the amount
of the VaR Charge applicable to each Margin Portfolio of a Member,
based upon the open, intraday positions of such Margin Portfolio, for
purposes of establishing whether a Member would be required to make
payment of an additional amount (the Member's ``Intraday Supplemental
Fund Deposit'') to its Required Fund Deposit.\21\ The approved rule
changes were included in Section 2a of Rule 4 (Clearing Fund and Loss
Allocation). Prior to this approval, Clearing Fund requirements
(including with respect to a Sponsoring Member's Sponsoring Member
Omnibus Account) were calculated once each Business Day. Since the
approval of these rule changes in 2011, FICC has calculated the
Unadjusted GSD Margin Portfolio Amount applicable to a Sponsoring
Member Omnibus Account based on the higher of the Required Fund Deposit
calculation as of the beginning of the current Business Day and
intraday on the current Business Day. In reviewing the Rules in
connection with this present filing, FICC believes that this
calculation procedure for the Unadjusted GSD Margin Portfolio Amount
applicable to a Sponsoring Member Omnibus Account should be made clear
in Rule 3A for transparency.
---------------------------------------------------------------------------
\21\ Securities Exchange Act Release No. 63986 (February 28,
2011), 76 FR 12144 (March 4, 2011) (SR-FICC-2010-09).
---------------------------------------------------------------------------
FICC is also proposing to amend Section 10 of Rule 3A to correct
certain out-of-date cross-references to Rule 4 (Clearing Fund and Loss
Allocation).
E. Proposed Changes to Rule 3A, Section 12
FICC is proposing to amend Section 12 of Rule 3A to reflect the
current loss allocation process applicable to Sponsored Member Trades
in the event that the Sponsoring Member is insolvent or otherwise in
default to FICC. Specifically, FICC is proposing to amend Section 12 of
Rule 3A to specify that any Remaining Loss incurred by FICC would be
allocated to the Tier One Netting Members in accordance with the
principles set forth in Section 7(d) of Rule 4 (Clearing Fund and Loss
Allocation).
In 2011, FICC received Commission approval for its current loss
allocation process set forth in Rule 4, which provides for loss
mutualization of any Remaining Loss among all Tier One Netting
Members.\22\ FICC proposes to update references in Section 12 of Rule
3A to reference the current loss allocation process for Tier One
Netting Members.
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\22\ Id.
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FICC also proposes to amend Section 12 of Rule 3A to correct
certain out-of-date cross-references to Rule 4 (Clearing Fund and Loss
Allocation) and to correct certain typographical errors.
F. Proposed Changes to Rule 3A, Sections 13 and 14
FICC is proposing to amend Sections 13 and 14 of Rule 3A to correct
certain out-of-date cross-references to Rule 21 (Restrictions on Access
to Services).
G. Proposed Changes to Rule 3A, Section 15
FICC is proposing to amend Section 15 of Rule 3A to specify the
standard with respect to which a Sponsoring Member is deemed by FICC to
have knowledge that one of its Sponsored Members is insolvent or is
otherwise unable to perform on any of its material contracts,
obligations or agreements for purposes of the Sponsoring Member's
obligation to inform FICC of such matter. Specifically, FICC is
proposing to specify that if one or more duly authorized
representatives of a Sponsoring Member, in its capacity as such, has
knowledge that one of its Sponsored Members is insolvent or otherwise
unable to perform on any of its material contracts, obligations or
agreements, that such knowledge triggers the Sponsoring Member's
obligation to inform FICC of such matter.
2. Statutory Basis
Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to (i) ``promote the prompt and accurate clearance and
settlement of securities transactions,'' \23\ and (ii) ``remove
impediments to and perfect the mechanism of a national system for the
prompt and accurate clearance and settlement of securities
transactions, and, in general, to protect investors and the public
interest.'' \24\
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\23\ 15 U.S.C. 78q-1(b)(3)(F).
\24\ Id.
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By expanding the types of entities that may participate in FICC as
Sponsored Members, FICC believes that the proposed rule change would
help to safeguard the U.S. financial market by lowering the risk of
liquidity drain (through FICC's guaranty of completion of settlement
for a greater number of eligible transactions), protecting against fire
sale risk (through FICC's ability to centralize and control the
liquidation of a greater portion of a failed counterparty's portfolio)
and decreasing settlement and operational risk (by making a greater
number of transactions eligible to be netted and subject to guaranteed
settlement, novation and independent risk management through FICC). By
lowering the risk of liquidity drain in the U.S. financial market and
protecting against fire sale risk, FICC believes the proposed rule
change would ``protect investors and the public interest'' consistent
with the requirements of the Act, cited above. By decreasing settlement
and operational risk, FICC believes the proposed rule change would also
``promote the prompt and accurate clearance and settlement of
securities transactions'' and ``remove impediments to and perfect the
mechanism of a national system for the prompt and accurate clearance
and settlement of securities transactions'' consistent with the
requirements of the Act, cited above.
By providing specificity, clarity, and additional transparency to
the Rules, the proposed rule changes to Rule 1 (Definitions) and Rule
3A (Sponsoring Members and Sponsored Members) that are unrelated to the
proposed expansion of entity types eligible to be Sponsored Members
would provide Members with a better understanding of the Rules, making
errors in the performance of their responsibilities to FICC less likely
to occur and thereby ensuring that FICC's clearing and settlement
system works efficiently. Therefore, FICC
[[Page 14269]]
believes the proposed rule change would ``promote the prompt and
accurate clearance and settlement of securities transactions'' by FICC
and also ``remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions'' consistent with the requirements of the Act,
cited above.
(B) Clearing Agency's Statement on Burden on Competition
FICC believes that the proposed rule changes associated with the
expansion of entity types eligible to be Sponsored Members would
promote competition by increasing the types of entities that may
participate in FICC as Sponsored Members and therefore permit more
market participants to utilize FICC's services.
At the same time, participation in FICC as a Sponsored Member would
continue to be limited to legal entities that are either ``qualified
institutional buyers'' as defined in Rule 144A under the Securities Act
of 1933, or that otherwise satisfy the financial requirements that an
entity specifically listed in paragraph (a)(1)(i) of Rule 144A must
satisfy in order to be a ``qualified institutional buyer'' as specified
in that paragraph, and that have at least one Sponsoring Member willing
to sponsor them into GSD membership. These limitations may impact
institutional firms that are unable to satisfy such eligibility
requirements by excluding them from being able to novate their eligible
activity to FICC (and avail themselves of the commensurate benefits
described in Section 3(a)(i)--Background on the Proposed Expansion of
Sponsored Member Eligibility above). Nevertheless, FICC believes that
any resulting burden on competition would be necessary and appropriate
in furtherance of the Act, as permitted by Section 17A(b)(3)(I) of the
Act,\25\ in light of the fact that such eligibility requirements are
designed to allow FICC to ensure the financial sophistication of
Sponsored Members and to prudently manage the risk associated with
Sponsored Members' participation in FICC. Moreover, FICC would not
restrict the ability of institutional firms to enter into eligible
transactions with Netting Members (including Sponsoring Members)
outside of GSD.
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\25\ 15 U.S.C. 78q-1(b)(3)(I).
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FICC believes that the proposed changes to Rule 1 (Definitions) and
Rule 3A (Sponsoring Members and Sponsored Members) that are unrelated
to the proposed expansion of entity types eligible to be Sponsored
Members would not have an impact, nor impose any burden, on competition
because each of such proposed changes would simply provide specificity,
clarity and additional transparency within the Rules.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
Written comments relating to the proposed rule change have not been
solicited or received. FICC will notify the Commission of any written
comments received by FICC.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self- regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as modified by Amendment No. 1, is consistent with the Act.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-FICC-2017-003 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549.
All submissions should refer to File Number SR-FICC-2017-003. 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 Web site (https://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 Web site 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 Web site (https://dtcc.com/legal/sec-rule-filings.aspx). All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-FICC-2017-003 and should be
submitted on or before April 7, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-05403 Filed 3-16-17; 8:45 am]
BILLING CODE 8011-01-P
