Self-Regulatory Organizations; The Depository Trust Company; Fixed Income Clearing Corporation; National Securities Clearing Corporation; Notice of No Objection to Advance Notices To Enhance the Credit Risk Rating Matrix and Make Other Changes, 24174-24177 [2017-10689]
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Federal Register / Vol. 82, No. 100 / Thursday, May 25, 2017 / Notices
proceedings to determine whether to
disapprove, the proposed rule change
(File No. SR–NYSE–2017–11).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–10691 Filed 5–24–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80731; File Nos. SR–DTC–
2017–801; SR–FICC–2017–804; SR–NSCC–
2017–801]
Self-Regulatory Organizations; The
Depository Trust Company; Fixed
Income Clearing Corporation; National
Securities Clearing Corporation;
Notice of No Objection to Advance
Notices To Enhance the Credit Risk
Rating Matrix and Make Other Changes
May 19, 2017.
On March 22, 2017, The Depository
Trust Company (‘‘DTC’’), Fixed Income
Clearing Corporation (‘‘FICC’’), and
National Securities Clearing Corporation
(‘‘NSCC,’’ each a ‘‘Clearing Agency,’’
and collectively, ‘‘Clearing Agencies’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’),
respectively advance notices SR–DTC–
2017–801, SR–FICC–2017–804, and SR–
NSCC–2017–801 (collectively, the
‘‘Advance Notices’’) pursuant to section
806(e)(1) of the Payment, Clearing, and
Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’) 1 and Rule
19b–4(n)(1)(i) 2 under the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’).3 The Advance Notices were
published for comment in the Federal
Register on April 7, 2017.4 The
6 17
CFR 200.30–3(a)(31).
U.S.C. 5465(e)(1). The Financial Stability
Oversight Council designated the Clearing Agencies
systemically important financial market utilities on
July 18, 2012. Financial Stability Oversight Council
2012 Annual Report, Appendix A, https://
www.treasury.gov/initiatives/fsoc/Documents/
2012%20Annual%20Report.pdf. Therefore, the
Clearing Agencies are required to comply with the
Clearing Supervision Act and file advance notices
with the Commission. 12 U.S.C. 5465(e).
2 17 CFR 240.19b–4(n)(1)(i).
3 15 U.S.C. 78s(b)(1).
4 Securities Exchange Act Release Nos. 80395
(April 7, 2017), 82 FR 17921 (April 13, 2017) (SR–
NSCC–2017–801); 80396 (April 7, 2017), 82 FR
17906 (April 13, 2017) (SR–FICC–2017–804); and
80394 (April 7, 2017), 82 FR 17901 (April 13, 2017)
(SR–DTC–2017–801) (‘‘Notices’’). The Clearing
Agencies also filed proposed rule changes with the
Commission pursuant to section 19(b)(1) of the
Exchange Act and Rule 19b–4 thereunder, seeking
approval of changes to their Rules necessary to
implement the proposal. 15 U.S.C. 78s(b)(1) and 17
CFR 240.19b–4, respectively. The proposed rule
1 12
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18:04 May 24, 2017
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Commission received no comments to
the Advance Notices. This publication
serves as notice that the Commission
does not object to the changes set forth
in the Advance Notices.
I. Description of the Advance Notices
The Advance Notices consist of
proposed modifications to the Rules,
By-Laws and Organizational Certificate
of DTC (‘‘DTC Rules’’), the Rulebook of
GSD (‘‘GSD Rules’’), the Clearing Rules
of MBSD (‘‘MBSD Rules’’), and the
Rules & Procedures of NSCC (‘‘NSCC
Rules’’) (collectively, the ‘‘Rules’’).5 The
Advance Notices are proposals by the
Clearing Agencies to amend the Rules
to: (i) Enhance their shared credit risk
rating matrix (‘‘Credit Risk Rating
Matrix’’ or ‘‘CRRM’’), which was
developed by the Clearing Agencies to
evaluate the credit risks posed by
certain Clearing Agency members to the
Clearing Agencies (and by implication
to all of the Clearing Agency members),
as a result of providing services to such
members; and (ii) make other
amendments to the Rules, both related
and unrelated to the CRRM, to provide
more transparency and description
regarding the Clearing Agencies’ current
ongoing membership monitoring
process, as described below.
Currently, the CRRM rates the credit
risk presented by members of the
Clearing Agencies that are U.S. brokerdealers and U.S. banks. The CRRM
assigns a credit rating based on certain
quantitative factors (‘‘Credit Rating’’),
which vary based upon whether the
member is a broker-dealer or bank.6 The
current CRRM also uses a relative
scoring approach (i.e., rating
changes were published for comment in the Federal
Register on April 11, 2017. Securities Exchange Act
Release Nos. 30383 (April 5, 2017), 82 FR 17468
(April 11, 2017) (SR–FICC–2017–006); 80382 (April
5, 2017), 82 FR 17483 (April 11, 2017) (SR–DTC–
2017–002); and 80381 (April 5, 2017), 82 FR 17475
(April 11, 2017) (SR–NSCC–2017–002). The
Commission did not receive any comments on the
proposed rule changes.
5 Available at https://www.dtcc.com/en/legal/
rules-and-procedures. FICC is comprised of two
divisions: The Government Securities Division
(‘‘GSD’’) and the Mortgage-Backed Securities
Division (‘‘MBSD’’). Each division serves as a
central counterparty, becoming the buyer and seller
to each of their respective members’ securities
transactions and guarantying settlement of those
transactions, even if a member defaults. GSD
provides, among other things, clearance and
settlement for trades in U.S. Government debt
issues. MBSD provides, among other things,
clearance and settlement for trades in mortgagebacked securities. GSD and MBSD maintain
separate sets of rules, margin models, and clearing
funds.
6 For U.S. broker-dealers, the Clearing Agencies
consider size (i.e., total excess net capital), capital,
leverage, liquidity, and profitability. For U.S. banks,
the Clearing Agencies consider size, capital, asset
quality, earnings, and liquidity.
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participants on a curve) and relies on
peer grouping of members to calculate
the Credit Rating of a member.
Ultimately, the ratings generated are
based on a 7-point rating system, with
‘‘1’’ being the strongest Credit Rating
and ‘‘7’’ being the weakest Credit
Rating. Although the current CRRM
does not directly consider qualitative
factors, the Clearing Agencies’ credit
risk staff may manually downgrade a
particular member’s Credit Rating based
on various qualitative factors.7 Members
that receive a Credit Rating of 5, 6, or
7 are placed on the Clearing Agencies’
‘‘Watch List,’’ as these members present
a greater risk of default.8
To improve the coverage and the
effectiveness of the current CRRM, the
Clearing Agencies are proposing three
enhancements, as discussed below. In
addition to the enhancements, the
Clearing Agencies also propose to make
other changes to their Rules to more
fully describe the Clearing Agencies’
current ongoing membership monitoring
process, both related and unrelated to
the CRRM, also discussed below.9
A. Proposed CRRM Enhancements
Currently, the CRRM is comprised of
two Credit Rating models—one for U.S.
broker-dealers and one for U.S. banks.
The first proposed enhancement would
expand the CRRM by adding a third
model that would enable the CRRM to
generate Credit Ratings for members that
are foreign banks or foreign trust
companies that have audited financial
data that is publicly available. The
Credit Rating for these particular
members would be based on both
quantitative and qualitative factors, as
indicated in the second enhancement,
below. According to the Clearing
Agencies, the expected benefit of this
expansion and enhancement of the
CRRM would be that the Clearing
Agencies could better evaluate the
default risk of their foreign bank or
foreign trust company members.
The second proposed enhancement
would supplement the Clearing
Agencies’ ability to manually
downgrade members by incorporating
7 Quantitative factors currently considered by the
Clearing Agencies include: (a) Available news
reports and/or regulatory observations relating to
the member; (b) member’s liquidity arrangements;
and (c) material changes to the member’s
organizational structure.
8 Members on the Watch List are subject to
enhanced surveillance by the Clearing Agencies and
additional margin charges.
9 Although each of the Clearing Agencies uses the
CRRM uniformly, the description of the respective
Clearing Agencies’ Rules regarding the CRRM are
different. To address this issue, the Clearing
Agencies propose to adopt similar Rules at each
Clearing Agency.
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Federal Register / Vol. 82, No. 100 / Thursday, May 25, 2017 / Notices
new qualitative factors into the two
existing CRRM models, as well as in the
new foreign bank and trust company
model.10 Instead of relying primarily on
quantitative data, as do the current
CRRM models, the proposed
enhancement would modify the CRRM
models to blend qualitative factors with
quantitative factors to produce a Credit
Rating for each applicable member in
relation to the member’s credit risk. For
U.S. banks, foreign banks, and foreign
trust companies, the enhanced CRRM
would use 70/30 weights between
quantitative and qualitative factors to
generate Credit Ratings. For U.S. brokerdealers, the weights between
quantitative and qualitative factors
would be 60/40. According to the
Clearing Agencies, these weights were
chosen by the Clearing Agencies based
on the industry best practice, as well as
research and sensitivity analysis
conducted by the Clearing Agencies.11
The Clearing Agencies would review
and adjust both the weights and the
quantitative and qualitative factors as
needed, based on recalibration of the
CRRM. According to the Clearing
Agencies, this proposed enhancement is
expected to reduce the need and the
frequency for them to manually override
a member’s Credit Rating.
The third enhancement would replace
the current CRRM’s relative scoring
approach (which considers other
members’ Credit Ratings) with a
statistical approach that would estimate
the absolute probability of default of
each member by ranking members based
on their individual probability of
default. According to the Clearing
Agencies, under the current relative
scoring approach, a member’s Credit
Rating can be affected by changes in its
peer group, even if the member’s
financial condition is unchanged. They
believe this issue would be addressed
by the proposed statistical approach
because it would eliminate any
potential distortion of the rating from
10 Quantitative and qualitative factors used for
each of the three models differ. The quantitative
factors for foreign banks and foreign trust
companies would include size, capital, leverage,
liquidity, profitability, and growth. Qualitative
factors would include market position and
sustainability, information reporting and
compliance, management quality, capital
management, and business/product diversity. The
added qualitative factors for U.S. broker-dealers
would include market position and sustainability,
management quality, capital management, liquidity
management, geographic diversification, business/
product diversity, and access to alternative sources
of funding. The added qualitative factors for U.S.
banks would include the current business
environment, regulatory compliance and litigation
risk, management quality, liquidity management,
and parental demands/needs.
11 Notices at 82 FR 17923, 17908, 17903.
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the member’s peer group that can occur
under the relative scoring approach, and
therefore a member’s Credit Rating
would better reflect the absolute
measure of the member’s default risk.
B. Proposed Other Changes Related to
the CRRM
The Advance Notices also contain a
number of other changes to the Clearing
Agencies’ Rules with respect to the
CRRM. Generally, these CRRM-related
changes are intended to make the Rules
more clear, consistent, and current for
members that rely on them. The
proposed CRRM-related changes would
include:
• Adding both the CRRM and the Watch
List to the definitions sections of the Clearing
Agencies’ Rules;
• Providing more description regarding the
Clearing Agencies’ continuing ability to
downgrade a member’s Credit Rating if the
Clearing Agencies believe the factors used as
part of the CRRM may not identify all risks
that a member may present to the Clearing
Agencies, and providing more description
that any such downgrade could result in the
member being placed on the Watch List and/
or being subject to enhanced surveillance;
• Providing more description regarding the
Clearing Agencies’ ability to place non-CRRM
members on the Watch List and/or subject
them to enhanced surveillance, if necessary
under certain specified conditions, such as
news reports and/or regulatory observations
that raise reasonable concerns relating to the
member and material changes to the
member’s organizational structure;
• Providing more description regarding,
with respect to members on the Watch List,
that the Clearing Agencies will (i) collect
additional deposits to the clearing fund; and
(ii) retain deposits in excess of the required
deposits;
• Providing more description regarding the
Clearing Agencies’ ability to continue to
monitor and review all members on an
ongoing and periodic basis, and that such
monitoring may include conducting reviews
of news and market developments relating to
these members, as well as financial reports
and other public information of these
members;
• Providing more description regarding
both members placed on the Watch List and
members subject to enhanced surveillance for
other reasons being subject to more thorough
monitoring of their financial condition and/
or operational capability, and being required
to provide more frequent financial
disclosures;
• Providing more description regarding
thresholds for any margin ‘‘add-on
charges’’ 12 not applying to Watch List
12 Add-on charges are margin requirements that
are in addition to the Clearing Agencies’ primary
value-at-risk margin requirement, such as an
intraday charge to account for market volatility and
a charge for having a concentrated position in a
security. See, e.g., NSCC Procedure XV, section
1.(B), available at https://www.dtcc.com/en/legal/
rules-and-procedures.
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members, but applying to non-Watch List
members; and
• Conforming changes to other sections of
the Clearing Agencies’ Rules to use
consistent terminology and to provide
updated cross references.
C. Proposed Other Changes Unrelated to
the CRRM
The Clearing Agencies also propose
changes that would provide more
description regarding the Clearing
Agencies’ explicit authority to review
additional reporting from members
regarding their financial or operational
condition. Such reporting could include
information regarding the businesses
and operations of the member and its
risk management practices with respect
to the Clearing Agencies’ services
utilized by the member for another
person (‘‘Indirect Member’’). According
to the Clearing Agencies, such a review
could result in the member being placed
on the Watch List, and/or becoming
subject to enhanced surveillance. The
Clearing Agencies believe such
authority would enable them to better
determine whether the member and
Indirect Member has sufficient financial
resources and monitor compliance with
the Clearing Agencies’ financial
requirements on an ongoing basis.
II. Discussion of Commission Findings
Although the Clearing Supervision
Act does not specify a standard of
review for an advance notice, its stated
purpose is instructive: To mitigate
systemic risk in the financial system
and promote financial stability by,
among other things, promoting uniform
risk management standards for
systemically important financial market
utilities and strengthening the liquidity
of systemically important financial
market utilities.13 Section 805(a)(2) of
the Clearing Supervision Act authorizes
the Commission to prescribe risk
management standards for the payment,
clearing, and settlement activities of
designated clearing entities and
financial institutions engaged in
designated activities for which it is the
Supervisory Agency or the appropriate
financial regulator.14 Section 805(b) of
the Clearing Supervision Act 15 states
that the objectives and principles for the
risk management standards prescribed
under section 805(a) shall be to:
• Promote robust risk management;
• Promote safety and soundness;
• Reduce systemic risks; and
• Support the stability of the broader
financial system.
13 12
U.S.C. 5461(b).
U.S.C. 5464(a)(2).
15 12 U.S.C. 5464(b).
14 12
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Federal Register / Vol. 82, No. 100 / Thursday, May 25, 2017 / Notices
The Commission has adopted risk
management standards under section
805(a)(2) of the Clearing Supervision
Act 16 and section 17A of the Exchange
Act (‘‘Rule 17Ad–22’’).17 Rule 17Ad–22
requires registered clearing agencies to
establish, implement, maintain, and
enforce written policies and procedures
that are reasonably designed to meet
certain minimum requirements for their
operations and risk management
practices on an ongoing basis.18
Therefore, it is appropriate for the
Commission to review proposed
changes in advance notices against the
objectives and principles of these risk
management standards as described in
section 805(b) of the Clearing
Supervision Act and against Rule 17Ad–
22.19
A. Consistency With Section 805(b) of
the Clearing Supervision Act
As discussed below, the Commission
believes that the changes proposed in
the Advance Notices are consistent with
section 805(b) of the Clearing
Supervision Act because they: (i) Are
designed to reduce systemic risk; (ii) are
designed to support the stability of the
financial system; (iii) are designed to
promote robust risk management; and
(iv) are consistent with promoting safety
and soundness.
When considering the CRRM
enhancements in their entirety, the
Commission believes that the proposal
could help reduce the systemic risk
presented by the Clearing Agencies,
which in turn could help support the
stability of the broader financial system.
The Commission agrees that the
proposed enhancements could enable
the Clearing Agencies to (i) more
effectively evaluate the credit risk
presented by a distinct class of members
by expanding the CRRM to foreign
banks and foreign trust companies; (ii)
more effectively incorporate qualitative
data into the Credit Rating; and (iii)
more accurately measure the absolute
probability of default by rated members.
Taken together, these enhancements
could in turn improve the Clearing
Agencies ability to determine and
evaluate the credit risk presented by the
various types of Clearing Agency
members and ensure that, as applied to
all rated members, the CRRM could be
a more developed and nuanced tool for
evaluating the credit risk any member
presents to the Clearing Agencies.
The Commission further believes that,
by enhancing the Clearing Agencies’
16 12
U.S.C. 5464(a)(2).
17 CFR 240.17Ad–22.
U.S.C. 5464(b).
U.S.C. 5464(b).
22 17 CFR 240.17Ad–22(e)(1); (e)(2); and (e)(3).
23 17 CFR 240.17Ad–22(e)(1).
U.S.C. 5464(b).
18:04 May 24, 2017
Commission believes that these
proposed changes could make the
Clearing Agencies’ Rules more clear and
transparent for members that rely on
them, consistent with Rule 17Ad–
22(e)(1).
The Commission also believes that the
changes proposed in the Advance
Notices are consistent with Rule 17Ad–
22(e)(3)(i) under the Exchange Act,
which requires, in part, that the Clearing
Agencies ‘‘establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
. . . [m]aintain a sound risk
management framework for
comprehensively managing . . . risks
that arise in or are born by [the Clearing
Agencies], which includes . . . systems
designed to identify, measure, monitor
and manage the range of risks that arise
in or are borne by [the Clearing
Agencies].’’ 24 As discussed above, the
CRRM is a risk measurement tool used
by the Clearing Agencies to help assess
the credit risk presented by their various
members. The proposed enhancements
to the CRRM could help the Clearing
Agencies better identify and measure
such risks, which in turn could help
facilitate the Clearing Agencies’
management of credit, market, and
liquidity risk that arises from being a
central counterparty (in the case of
NSCC and FICC) and central securities
depository (in the case of DTC).
Accordingly, the Commission believes
that the proposed enhancements are
designed to help effectively manage the
Clearing Agencies’ risk exposures,
including their credit exposure to
participants, arising from their payment,
clearing, and settlement processes,
consistent with Rule 17Ad–22(e)(3)(i).
Finally, the Commission believes that
the proposal is consistent with Rule
17Ad–22(e)(18) under the Exchange Act,
which requires, in part, that the Clearing
Agencies ‘‘establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
. . . [e]stablish objective, risk-based,
and publicly disclosed criteria for
participation, which . . . require
participants to have sufficient financial
resources and robust operational
capacity to meet obligations arising from
participation in the clearing agency, and
monitor compliance with such
participation requirements on an
ongoing basis.’’ 25 As described above,
the proposal would provide more
description regarding the Clearing
Agencies’ authority to review additional
reporting from members regarding their
financial or operational condition and
21 12
18 Id.
VerDate Sep<11>2014
B. Consistency With Rules 17Ad–
22(e)(1), (e)(3), and (e)(18)
The Commission believes that the
changes proposed in the Advance
Notices are consistent with Rules 17Ad–
22(e)(1), (e)(3)(i), and (e)(18) under the
Exchange Act.22
The Commission believes that the
changes proposed in the Advanced
Notice are consistent with Rule 17Ad–
22(e)(1) under the Exchange Act, which
requires, in part, that the Clearing
Agencies ‘‘establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
. . . [p]rovide for a well-founded, clear,
transparent and enforceable legal basis
for each aspect of its activities.’’ 23 As
described above, the Clearing Agencies
propose a number of other changes to
their Rules that are designed to update
them and to make them more consistent
and provide greater description for
members that rely on them. As such, the
20 12
17 See
19 12
ability to make distinctions across their
various types of members through the
CRRM, the proposed enhancements also
could improve the Clearing Agencies’
ability to use their risk-management
tools in a more targeted way to reduce
the risk and impact of a counterparty
default, which in turn also could help
mitigate the risks and effects on the
broader financial system that could be
associated with the default of a member.
Accordingly, the Commission believes
that the CRRM proposal could help
reduce systemic risks and support the
stability of the financial system,
consistent with section 805(b) of the
Clearing Supervision Act.20
The Commission also believes that the
CRRM proposal is designed to promote
robust risk management and is
consistent with promoting safety and
soundness. The Commission agrees that
the proposed enhancements to the
CRRM could improve the Clearing
Agencies’ ability to identify and
measure the credit risk presented by
their various members, which in turn
could allow the Clearing Agencies to
more effectively target their risk
management tools to manage the credit,
market, and liquidity risk arising from
those members with the highest risk of
default. Accordingly, the Commission
believes that the CRRM proposal is
designed to help promote robust risk
management, and is consistent with
promoting safety and soundness,
consistent with section 805(b) of the
Clearing Supervision Act.21
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24 17
25 17
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CFR 240.17Ad–22(e)(3)(i).
CFR 240.17Ad–22(e)(18).
25MYN1
Federal Register / Vol. 82, No. 100 / Thursday, May 25, 2017 / Notices
the financial information of any Indirect
Member. Because such authority could
enable the Clearing Agencies to better
determine whether the member has
sufficient financial resources and
monitor compliance with the Clearing
Agencies’ financial requirements on an
ongoing basis, the Commission believes
this requirement is consistent with Rule
17Ad–22(e)(18).
III. Conclusion
It is therefore noticed, pursuant to
section 806(e)(1)(I) of the Clearing
Supervision Act,26 that the Commission
does not object to these advance notice
proposals (SR–DTC–2017–801, SR–
FICC–2017–804, and SR–NSCC–2017–
801) and that the Clearing Agencies are
authorized to implement the proposals
as of the date of this notice or the date
of an order by the Commission
approving a proposed rule change that
reflects rule changes that are consistent
with the relevant advance notice
proposal (SR–FICC–2017–006, SR–
DTC–2017–002, SR–NSCC–2017–002),
whichever is later.
By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–10689 Filed 5–24–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80734; File Nos. SR–DTC–
2017–002; SR–FICC–2017–006; SR–NSCC–
2017–002]
Self-Regulatory Organizations; The
Depository Trust Company; Fixed
Income Clearing Corporation; National
Securities Clearing Corporation; Order
Approving Proposed Rule Changes To
Enhance the Credit Risk Rating Matrix
and Make Other Changes
May 19, 2017.
On March 22, 2017, The Depository
Trust Company (‘‘DTC’’), Fixed Income
Clearing Corporation (‘‘FICC’’), and
National Securities Clearing Corporation
(‘‘NSCC,’’ each a ‘‘Clearing Agency,’’
and collectively, ‘‘Clearing Agencies’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) proposed
rule changes SR–DTC–2017–002, SR–
FICC–2017–006, and SR–NSCC–2017–
002 (collectively, the ‘‘Proposed Rule
Changes’’) pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder.2
26 12
U.S.C. 5465(e)(1)(I).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4. The Clearing Agencies also
filed the Proposed Rule Changes as advance notices
1 15
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18:04 May 24, 2017
Jkt 241001
The Proposed Rule Changes were
published for comment in the Federal
Register on April 11, 2017.3 The
Commission received no comments to
the Proposed Rule Changes. This order
approves the Proposed Rule Changes.
I. Description of the Proposed Rule
Changes
The Proposed Rule Changes consist of
proposed modifications to the Rules,
By-Laws and Organizational Certificate
of DTC (‘‘DTC Rules’’), the Rulebook of
GSD (‘‘GSD Rules’’), the Clearing Rules
of MBSD (‘‘MBSD Rules’’), and the
Rules & Procedures of NSCC (‘‘NSCC
Rules’’) (collectively, the ‘‘Rules’’).4 The
Proposed Rule Changes are proposals by
the Clearing Agencies to amend the
Rules to: (i) Enhance their shared credit
risk rating matrix (‘‘Credit Risk Rating
Matrix’’ or ‘‘CRRM’’), which was
developed by the Clearing Agencies to
evaluate the credit risks posed by
certain Clearing Agency members to the
Clearing Agencies (and by implication
to all of the Clearing Agency members),
as a result of providing services to such
members; and (ii) make other
amendments to the Rules, both related
and unrelated to the CRRM, to provide
more transparency and description
regarding the Clearing Agencies’ current
ongoing membership monitoring
process, as described below.
Currently, the CRRM rates the credit
risk presented by members of the
Clearing Agencies that are U.S. brokerdealers and U.S. banks. The CRRM
pursuant to Section 806(e)(1) of the Payment,
Clearing, and Settlement Supervision Act of 2010
and Rule 19b–4(n)(1) under the Act. 15 U.S.C.
5465(e)(1) and 17 CFR 240.19b–4(n)(1). The
advance notices were published for comment in the
Federal Register on April 7, 2017. See Securities
Exchange Act Release Nos. 80395 (April 7, 2017),
82 FR 17921 (April 13, 2017) (SR–NSCC–2017–
801); 80396 (April 7, 2017), 82 FR 17906 (April 13,
2017) (SR–FICC–2017–804); and 80394 (April 7,
2017), 82 FR 17901 (April 13, 2017) (SR–DTC–
2017–801). The Commission did not receive any
comments on the advance notices.
3 Securities Exchange Act Release Nos. 30383
(April 5, 2017), 82 FR 17468 (April 11, 2017) (SR–
FICC–2017–006); 80382 (April 5, 2017), 82 FR
17483 (April 11, 2017) (SR–DTC–2017–002); and
80381 (April 5, 2017), 82 FR 17475 (April 11, 2017)
(SR–NSCC–2017–002) (‘‘Notices’’).
4 Available at https://www.dtcc.com/en/legal/
rules-and-procedures. FICC is comprised of two
divisions: The Government Securities Division
(‘‘GSD’’) and the Mortgage-Backed Securities
Division (‘‘MBSD’’). Each division serves as a
central counterparty, becoming the buyer and seller
to each of their respective members’ securities
transactions and guarantying settlement of those
transactions, even if a member defaults. GSD
provides, among other things, clearance and
settlement for trades in U.S. Government debt
issues. MBSD provides, among other things,
clearance and settlement for trades in mortgagebacked securities. GSD and MBSD maintain
separate sets of rules, margin models, and clearing
funds.
PO 00000
Frm 00083
Fmt 4703
Sfmt 4703
24177
assigns a credit rating based on certain
quantitative factors (‘‘Credit Rating’’),
which vary based upon whether the
member is a broker-dealer or bank.5 The
current CRRM also uses a relative
scoring approach (i.e., rating
participants on a curve) and relies on
peer grouping of members to calculate
the Credit Rating of a member.
Ultimately, the ratings generated are
based on a 7-point rating system, with
‘‘1’’ being the strongest Credit Rating
and ‘‘7’’ being the weakest Credit
Rating. Although the current CRRM
does not directly consider qualitative
factors, the Clearing Agencies’ credit
risk staff may manually downgrade a
particular member’s Credit Rating based
on various qualitative factors.6 Members
that receive a Credit Rating of 5, 6, or
7 are placed on the Clearing Agencies’
‘‘Watch List,’’ as these members present
a greater risk of default.7
To improve the coverage and the
effectiveness of the current CRRM, the
Clearing Agencies are proposing three
enhancements, as discussed below. In
addition to the enhancements, the
Clearing Agencies also propose to make
other changes to their Rules to more
fully describe the Clearing Agencies’
current ongoing membership monitoring
process, both related and unrelated to
the CRRM, also discussed below.8
A. Proposed CRRM Enhancements
Currently, the CRRM is comprised of
two Credit Rating models—one for U.S.
broker-dealers and one for U.S. banks.
The first proposed enhancement would
expand the CRRM by adding a third
model that would enable the CRRM to
generate Credit Ratings for members that
are foreign banks or foreign trust
companies that have audited financial
data that is publicly available. The
Credit Rating for these particular
members would be based on both
quantitative and qualitative factors, as
indicated in the second enhancement,
below. According to the Clearing
5 For U.S. broker-dealers, the Clearing Agencies
consider size (i.e., total excess net capital), capital,
leverage, liquidity, and profitability. For U.S. banks,
the Clearing Agencies consider size, capital, asset
quality, earnings, and liquidity.
6 Quantitative factors currently considered by the
Clearing Agencies include: (a) Available news
reports and/or regulatory observations relating to
the member; (b) member’s liquidity arrangements;
and (c) material changes to the member’s
organizational structure.
7 Members on the Watch List are subject to
enhanced surveillance by the Clearing Agencies and
additional margin charges.
8 Although each of the Clearing Agencies uses the
CRRM uniformly, the description of the respective
Clearing Agencies’ Rules regarding the CRRM are
different. To address this issue, the Clearing
Agencies propose to adopt similar Rules at each
Clearing Agency.
E:\FR\FM\25MYN1.SGM
25MYN1
Agencies
[Federal Register Volume 82, Number 100 (Thursday, May 25, 2017)]
[Notices]
[Pages 24174-24177]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-10689]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80731; File Nos. SR-DTC-2017-801; SR-FICC-2017-804; SR-
NSCC-2017-801]
Self-Regulatory Organizations; The Depository Trust Company;
Fixed Income Clearing Corporation; National Securities Clearing
Corporation; Notice of No Objection to Advance Notices To Enhance the
Credit Risk Rating Matrix and Make Other Changes
May 19, 2017.
On March 22, 2017, The Depository Trust Company (``DTC''), Fixed
Income Clearing Corporation (``FICC''), and National Securities
Clearing Corporation (``NSCC,'' each a ``Clearing Agency,'' and
collectively, ``Clearing Agencies'') filed with the Securities and
Exchange Commission (``Commission''), respectively advance notices SR-
DTC-2017-801, SR-FICC-2017-804, and SR-NSCC-2017-801 (collectively, the
``Advance Notices'') pursuant to section 806(e)(1) of the Payment,
Clearing, and Settlement Supervision Act of 2010 (``Clearing
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities
Exchange Act of 1934 (``Exchange Act'').\3\ The Advance Notices were
published for comment in the Federal Register on April 7, 2017.\4\ The
Commission received no comments to the Advance Notices. This
publication serves as notice that the Commission does not object to the
changes set forth in the Advance Notices.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight
Council designated the Clearing Agencies systemically important
financial market utilities on July 18, 2012. Financial Stability
Oversight Council 2012 Annual Report, Appendix A, https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, the Clearing Agencies are
required to comply with the Clearing Supervision Act and file
advance notices with the Commission. 12 U.S.C. 5465(e).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78s(b)(1).
\4\ Securities Exchange Act Release Nos. 80395 (April 7, 2017),
82 FR 17921 (April 13, 2017) (SR-NSCC-2017-801); 80396 (April 7,
2017), 82 FR 17906 (April 13, 2017) (SR-FICC-2017-804); and 80394
(April 7, 2017), 82 FR 17901 (April 13, 2017) (SR-DTC-2017-801)
(``Notices''). The Clearing Agencies also filed proposed rule
changes with the Commission pursuant to section 19(b)(1) of the
Exchange Act and Rule 19b-4 thereunder, seeking approval of changes
to their Rules necessary to implement the proposal. 15 U.S.C.
78s(b)(1) and 17 CFR 240.19b-4, respectively. The proposed rule
changes were published for comment in the Federal Register on April
11, 2017. Securities Exchange Act Release Nos. 30383 (April 5,
2017), 82 FR 17468 (April 11, 2017) (SR-FICC-2017-006); 80382 (April
5, 2017), 82 FR 17483 (April 11, 2017) (SR-DTC-2017-002); and 80381
(April 5, 2017), 82 FR 17475 (April 11, 2017) (SR-NSCC-2017-002).
The Commission did not receive any comments on the proposed rule
changes.
---------------------------------------------------------------------------
I. Description of the Advance Notices
The Advance Notices consist of proposed modifications to the Rules,
By-Laws and Organizational Certificate of DTC (``DTC Rules''), the
Rulebook of GSD (``GSD Rules''), the Clearing Rules of MBSD (``MBSD
Rules''), and the Rules & Procedures of NSCC (``NSCC Rules'')
(collectively, the ``Rules'').\5\ The Advance Notices are proposals by
the Clearing Agencies to amend the Rules to: (i) Enhance their shared
credit risk rating matrix (``Credit Risk Rating Matrix'' or ``CRRM''),
which was developed by the Clearing Agencies to evaluate the credit
risks posed by certain Clearing Agency members to the Clearing Agencies
(and by implication to all of the Clearing Agency members), as a result
of providing services to such members; and (ii) make other amendments
to the Rules, both related and unrelated to the CRRM, to provide more
transparency and description regarding the Clearing Agencies' current
ongoing membership monitoring process, as described below.
---------------------------------------------------------------------------
\5\ Available at https://www.dtcc.com/en/legal/rules-and-procedures. FICC is comprised of two divisions: The Government
Securities Division (``GSD'') and the Mortgage-Backed Securities
Division (``MBSD''). Each division serves as a central counterparty,
becoming the buyer and seller to each of their respective members'
securities transactions and guarantying settlement of those
transactions, even if a member defaults. GSD provides, among other
things, clearance and settlement for trades in U.S. Government debt
issues. MBSD provides, among other things, clearance and settlement
for trades in mortgage-backed securities. GSD and MBSD maintain
separate sets of rules, margin models, and clearing funds.
---------------------------------------------------------------------------
Currently, the CRRM rates the credit risk presented by members of
the Clearing Agencies that are U.S. broker-dealers and U.S. banks. The
CRRM assigns a credit rating based on certain quantitative factors
(``Credit Rating''), which vary based upon whether the member is a
broker-dealer or bank.\6\ The current CRRM also uses a relative scoring
approach (i.e., rating participants on a curve) and relies on peer
grouping of members to calculate the Credit Rating of a member.
Ultimately, the ratings generated are based on a 7-point rating system,
with ``1'' being the strongest Credit Rating and ``7'' being the
weakest Credit Rating. Although the current CRRM does not directly
consider qualitative factors, the Clearing Agencies' credit risk staff
may manually downgrade a particular member's Credit Rating based on
various qualitative factors.\7\ Members that receive a Credit Rating of
5, 6, or 7 are placed on the Clearing Agencies' ``Watch List,'' as
these members present a greater risk of default.\8\
---------------------------------------------------------------------------
\6\ For U.S. broker-dealers, the Clearing Agencies consider size
(i.e., total excess net capital), capital, leverage, liquidity, and
profitability. For U.S. banks, the Clearing Agencies consider size,
capital, asset quality, earnings, and liquidity.
\7\ Quantitative factors currently considered by the Clearing
Agencies include: (a) Available news reports and/or regulatory
observations relating to the member; (b) member's liquidity
arrangements; and (c) material changes to the member's
organizational structure.
\8\ Members on the Watch List are subject to enhanced
surveillance by the Clearing Agencies and additional margin charges.
---------------------------------------------------------------------------
To improve the coverage and the effectiveness of the current CRRM,
the Clearing Agencies are proposing three enhancements, as discussed
below. In addition to the enhancements, the Clearing Agencies also
propose to make other changes to their Rules to more fully describe the
Clearing Agencies' current ongoing membership monitoring process, both
related and unrelated to the CRRM, also discussed below.\9\
---------------------------------------------------------------------------
\9\ Although each of the Clearing Agencies uses the CRRM
uniformly, the description of the respective Clearing Agencies'
Rules regarding the CRRM are different. To address this issue, the
Clearing Agencies propose to adopt similar Rules at each Clearing
Agency.
---------------------------------------------------------------------------
A. Proposed CRRM Enhancements
Currently, the CRRM is comprised of two Credit Rating models--one
for U.S. broker-dealers and one for U.S. banks. The first proposed
enhancement would expand the CRRM by adding a third model that would
enable the CRRM to generate Credit Ratings for members that are foreign
banks or foreign trust companies that have audited financial data that
is publicly available. The Credit Rating for these particular members
would be based on both quantitative and qualitative factors, as
indicated in the second enhancement, below. According to the Clearing
Agencies, the expected benefit of this expansion and enhancement of the
CRRM would be that the Clearing Agencies could better evaluate the
default risk of their foreign bank or foreign trust company members.
The second proposed enhancement would supplement the Clearing
Agencies' ability to manually downgrade members by incorporating
[[Page 24175]]
new qualitative factors into the two existing CRRM models, as well as
in the new foreign bank and trust company model.\10\ Instead of relying
primarily on quantitative data, as do the current CRRM models, the
proposed enhancement would modify the CRRM models to blend qualitative
factors with quantitative factors to produce a Credit Rating for each
applicable member in relation to the member's credit risk. For U.S.
banks, foreign banks, and foreign trust companies, the enhanced CRRM
would use 70/30 weights between quantitative and qualitative factors to
generate Credit Ratings. For U.S. broker-dealers, the weights between
quantitative and qualitative factors would be 60/40. According to the
Clearing Agencies, these weights were chosen by the Clearing Agencies
based on the industry best practice, as well as research and
sensitivity analysis conducted by the Clearing Agencies.\11\ The
Clearing Agencies would review and adjust both the weights and the
quantitative and qualitative factors as needed, based on recalibration
of the CRRM. According to the Clearing Agencies, this proposed
enhancement is expected to reduce the need and the frequency for them
to manually override a member's Credit Rating.
---------------------------------------------------------------------------
\10\ Quantitative and qualitative factors used for each of the
three models differ. The quantitative factors for foreign banks and
foreign trust companies would include size, capital, leverage,
liquidity, profitability, and growth. Qualitative factors would
include market position and sustainability, information reporting
and compliance, management quality, capital management, and
business/product diversity. The added qualitative factors for U.S.
broker-dealers would include market position and sustainability,
management quality, capital management, liquidity management,
geographic diversification, business/product diversity, and access
to alternative sources of funding. The added qualitative factors for
U.S. banks would include the current business environment,
regulatory compliance and litigation risk, management quality,
liquidity management, and parental demands/needs.
\11\ Notices at 82 FR 17923, 17908, 17903.
---------------------------------------------------------------------------
The third enhancement would replace the current CRRM's relative
scoring approach (which considers other members' Credit Ratings) with a
statistical approach that would estimate the absolute probability of
default of each member by ranking members based on their individual
probability of default. According to the Clearing Agencies, under the
current relative scoring approach, a member's Credit Rating can be
affected by changes in its peer group, even if the member's financial
condition is unchanged. They believe this issue would be addressed by
the proposed statistical approach because it would eliminate any
potential distortion of the rating from the member's peer group that
can occur under the relative scoring approach, and therefore a member's
Credit Rating would better reflect the absolute measure of the member's
default risk.
B. Proposed Other Changes Related to the CRRM
The Advance Notices also contain a number of other changes to the
Clearing Agencies' Rules with respect to the CRRM. Generally, these
CRRM-related changes are intended to make the Rules more clear,
consistent, and current for members that rely on them. The proposed
CRRM-related changes would include:
Adding both the CRRM and the Watch List to the
definitions sections of the Clearing Agencies' Rules;
Providing more description regarding the Clearing
Agencies' continuing ability to downgrade a member's Credit Rating
if the Clearing Agencies believe the factors used as part of the
CRRM may not identify all risks that a member may present to the
Clearing Agencies, and providing more description that any such
downgrade could result in the member being placed on the Watch List
and/or being subject to enhanced surveillance;
Providing more description regarding the Clearing
Agencies' ability to place non-CRRM members on the Watch List and/or
subject them to enhanced surveillance, if necessary under certain
specified conditions, such as news reports and/or regulatory
observations that raise reasonable concerns relating to the member
and material changes to the member's organizational structure;
Providing more description regarding, with respect to
members on the Watch List, that the Clearing Agencies will (i)
collect additional deposits to the clearing fund; and (ii) retain
deposits in excess of the required deposits;
Providing more description regarding the Clearing
Agencies' ability to continue to monitor and review all members on
an ongoing and periodic basis, and that such monitoring may include
conducting reviews of news and market developments relating to these
members, as well as financial reports and other public information
of these members;
Providing more description regarding both members
placed on the Watch List and members subject to enhanced
surveillance for other reasons being subject to more thorough
monitoring of their financial condition and/or operational
capability, and being required to provide more frequent financial
disclosures;
Providing more description regarding thresholds for any
margin ``add-on charges'' \12\ not applying to Watch List members,
but applying to non-Watch List members; and
---------------------------------------------------------------------------
\12\ Add-on charges are margin requirements that are in addition
to the Clearing Agencies' primary value-at-risk margin requirement,
such as an intraday charge to account for market volatility and a
charge for having a concentrated position in a security. See, e.g.,
NSCC Procedure XV, section 1.(B), available at https://www.dtcc.com/en/legal/rules-and-procedures.
---------------------------------------------------------------------------
Conforming changes to other sections of the Clearing
Agencies' Rules to use consistent terminology and to provide updated
cross references.
C. Proposed Other Changes Unrelated to the CRRM
The Clearing Agencies also propose changes that would provide more
description regarding the Clearing Agencies' explicit authority to
review additional reporting from members regarding their financial or
operational condition. Such reporting could include information
regarding the businesses and operations of the member and its risk
management practices with respect to the Clearing Agencies' services
utilized by the member for another person (``Indirect Member'').
According to the Clearing Agencies, such a review could result in the
member being placed on the Watch List, and/or becoming subject to
enhanced surveillance. The Clearing Agencies believe such authority
would enable them to better determine whether the member and Indirect
Member has sufficient financial resources and monitor compliance with
the Clearing Agencies' financial requirements on an ongoing basis.
II. Discussion of Commission Findings
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, its stated purpose is instructive: To
mitigate systemic risk in the financial system and promote financial
stability by, among other things, promoting uniform risk management
standards for systemically important financial market utilities and
strengthening the liquidity of systemically important financial market
utilities.\13\ Section 805(a)(2) of the Clearing Supervision Act
authorizes the Commission to prescribe risk management standards for
the payment, clearing, and settlement activities of designated clearing
entities and financial institutions engaged in designated activities
for which it is the Supervisory Agency or the appropriate financial
regulator.\14\ Section 805(b) of the Clearing Supervision Act \15\
states that the objectives and principles for the risk management
standards prescribed under section 805(a) shall be to:
---------------------------------------------------------------------------
\13\ 12 U.S.C. 5461(b).
\14\ 12 U.S.C. 5464(a)(2).
\15\ 12 U.S.C. 5464(b).
Promote robust risk management;
Promote safety and soundness;
Reduce systemic risks; and
Support the stability of the broader financial system.
[[Page 24176]]
The Commission has adopted risk management standards under section
805(a)(2) of the Clearing Supervision Act \16\ and section 17A of the
Exchange Act (``Rule 17Ad-22'').\17\ Rule 17Ad-22 requires registered
clearing agencies to establish, implement, maintain, and enforce
written policies and procedures that are reasonably designed to meet
certain minimum requirements for their operations and risk management
practices on an ongoing basis.\18\ Therefore, it is appropriate for the
Commission to review proposed changes in advance notices against the
objectives and principles of these risk management standards as
described in section 805(b) of the Clearing Supervision Act and against
Rule 17Ad-22.\19\
---------------------------------------------------------------------------
\16\ 12 U.S.C. 5464(a)(2).
\17\ See 17 CFR 240.17Ad-22.
\18\ Id.
\19\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
A. Consistency With Section 805(b) of the Clearing Supervision Act
As discussed below, the Commission believes that the changes
proposed in the Advance Notices are consistent with section 805(b) of
the Clearing Supervision Act because they: (i) Are designed to reduce
systemic risk; (ii) are designed to support the stability of the
financial system; (iii) are designed to promote robust risk management;
and (iv) are consistent with promoting safety and soundness.
When considering the CRRM enhancements in their entirety, the
Commission believes that the proposal could help reduce the systemic
risk presented by the Clearing Agencies, which in turn could help
support the stability of the broader financial system. The Commission
agrees that the proposed enhancements could enable the Clearing
Agencies to (i) more effectively evaluate the credit risk presented by
a distinct class of members by expanding the CRRM to foreign banks and
foreign trust companies; (ii) more effectively incorporate qualitative
data into the Credit Rating; and (iii) more accurately measure the
absolute probability of default by rated members. Taken together, these
enhancements could in turn improve the Clearing Agencies ability to
determine and evaluate the credit risk presented by the various types
of Clearing Agency members and ensure that, as applied to all rated
members, the CRRM could be a more developed and nuanced tool for
evaluating the credit risk any member presents to the Clearing
Agencies.
The Commission further believes that, by enhancing the Clearing
Agencies' ability to make distinctions across their various types of
members through the CRRM, the proposed enhancements also could improve
the Clearing Agencies' ability to use their risk-management tools in a
more targeted way to reduce the risk and impact of a counterparty
default, which in turn also could help mitigate the risks and effects
on the broader financial system that could be associated with the
default of a member. Accordingly, the Commission believes that the CRRM
proposal could help reduce systemic risks and support the stability of
the financial system, consistent with section 805(b) of the Clearing
Supervision Act.\20\
---------------------------------------------------------------------------
\20\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
The Commission also believes that the CRRM proposal is designed to
promote robust risk management and is consistent with promoting safety
and soundness. The Commission agrees that the proposed enhancements to
the CRRM could improve the Clearing Agencies' ability to identify and
measure the credit risk presented by their various members, which in
turn could allow the Clearing Agencies to more effectively target their
risk management tools to manage the credit, market, and liquidity risk
arising from those members with the highest risk of default.
Accordingly, the Commission believes that the CRRM proposal is designed
to help promote robust risk management, and is consistent with
promoting safety and soundness, consistent with section 805(b) of the
Clearing Supervision Act.\21\
---------------------------------------------------------------------------
\21\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
B. Consistency With Rules 17Ad-22(e)(1), (e)(3), and (e)(18)
The Commission believes that the changes proposed in the Advance
Notices are consistent with Rules 17Ad-22(e)(1), (e)(3)(i), and (e)(18)
under the Exchange Act.\22\
---------------------------------------------------------------------------
\22\ 17 CFR 240.17Ad-22(e)(1); (e)(2); and (e)(3).
---------------------------------------------------------------------------
The Commission believes that the changes proposed in the Advanced
Notice are consistent with Rule 17Ad-22(e)(1) under the Exchange Act,
which requires, in part, that the Clearing Agencies ``establish,
implement, maintain and enforce written policies and procedures
reasonably designed to . . . [p]rovide for a well-founded, clear,
transparent and enforceable legal basis for each aspect of its
activities.'' \23\ As described above, the Clearing Agencies propose a
number of other changes to their Rules that are designed to update them
and to make them more consistent and provide greater description for
members that rely on them. As such, the Commission believes that these
proposed changes could make the Clearing Agencies' Rules more clear and
transparent for members that rely on them, consistent with Rule 17Ad-
22(e)(1).
---------------------------------------------------------------------------
\23\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------
The Commission also believes that the changes proposed in the
Advance Notices are consistent with Rule 17Ad-22(e)(3)(i) under the
Exchange Act, which requires, in part, that the Clearing Agencies
``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . [m]aintain a sound risk
management framework for comprehensively managing . . . risks that
arise in or are born by [the Clearing Agencies], which includes . . .
systems designed to identify, measure, monitor and manage the range of
risks that arise in or are borne by [the Clearing Agencies].'' \24\ As
discussed above, the CRRM is a risk measurement tool used by the
Clearing Agencies to help assess the credit risk presented by their
various members. The proposed enhancements to the CRRM could help the
Clearing Agencies better identify and measure such risks, which in turn
could help facilitate the Clearing Agencies' management of credit,
market, and liquidity risk that arises from being a central
counterparty (in the case of NSCC and FICC) and central securities
depository (in the case of DTC). Accordingly, the Commission believes
that the proposed enhancements are designed to help effectively manage
the Clearing Agencies' risk exposures, including their credit exposure
to participants, arising from their payment, clearing, and settlement
processes, consistent with Rule 17Ad-22(e)(3)(i).
---------------------------------------------------------------------------
\24\ 17 CFR 240.17Ad-22(e)(3)(i).
---------------------------------------------------------------------------
Finally, the Commission believes that the proposal is consistent
with Rule 17Ad-22(e)(18) under the Exchange Act, which requires, in
part, that the Clearing Agencies ``establish, implement, maintain and
enforce written policies and procedures reasonably designed to . . .
[e]stablish objective, risk-based, and publicly disclosed criteria for
participation, which . . . require participants to have sufficient
financial resources and robust operational capacity to meet obligations
arising from participation in the clearing agency, and monitor
compliance with such participation requirements on an ongoing basis.''
\25\ As described above, the proposal would provide more description
regarding the Clearing Agencies' authority to review additional
reporting from members regarding their financial or operational
condition and
[[Page 24177]]
the financial information of any Indirect Member. Because such
authority could enable the Clearing Agencies to better determine
whether the member has sufficient financial resources and monitor
compliance with the Clearing Agencies' financial requirements on an
ongoing basis, the Commission believes this requirement is consistent
with Rule 17Ad-22(e)(18).
---------------------------------------------------------------------------
\25\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------
III. Conclusion
It is therefore noticed, pursuant to section 806(e)(1)(I) of the
Clearing Supervision Act,\26\ that the Commission does not object to
these advance notice proposals (SR-DTC-2017-801, SR-FICC-2017-804, and
SR-NSCC-2017-801) and that the Clearing Agencies are authorized to
implement the proposals as of the date of this notice or the date of an
order by the Commission approving a proposed rule change that reflects
rule changes that are consistent with the relevant advance notice
proposal (SR-FICC-2017-006, SR-DTC-2017-002, SR-NSCC-2017-002),
whichever is later.
---------------------------------------------------------------------------
\26\ 12 U.S.C. 5465(e)(1)(I).
By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-10689 Filed 5-24-17; 8:45 am]
BILLING CODE 8011-01-P