Self-Regulatory Organizations; The Depository Trust Company; National Securities Clearing Corporation; Fixed Income Clearing Corporation; Notice of Filings of Proposed Rule Changes To Adopt the Clearing Agency Risk Management Framework, 36049-36054 [2017-16268]
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Federal Register / Vol. 82, No. 147 / Wednesday, August 2, 2017 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has designated this rule
filing as non-controversial under
Section 19(b)(3)(A) 13 of the Act and
Rule 19b–4(f)(6) 14 thereunder. Because
the proposed rule change does not: (i)
Significantly affect the protection of
investors or the public interest; (ii)
impose any significant burden on
competition; and (iii) become operative
for 30 days from the date on which it
was filed, or such shorter time as the
Commission may designate if consistent
with the protection of investors and the
public interest, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act and Rule 19b–4(f)(6) thereunder.15
A proposed rule change filed under
Rule 19b–4(f)(6) 16 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b–4(f)(6)(iii),17 the
Commission may designate a shorter
time if such action is consistent with the
protection of investors and the public
interest. The Exchange has asked the
Commission to waive the 30-day
operative delay because this proposal
permits listing IVV options in a manner
permitted by the Chicago Board Options
Exchange, Incorporated,18 and will
provide investors with an alternative
venue for trading IVV options. The
Commission believes that waiver of the
operative delay is consistent with the
protection of investors and the public
interest. Therefore, the Commission
hereby waives the operative delay and
designates the proposed rule change
operative upon filing.19
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
13 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
15 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
16 17 CFR 240.19b–4(f)(6).
17 17 CFR 240.19b–4(f)(6)(iii).
18 See Securities Exchange Act Release No. 80913
(June 13, 2017), 82 FR 27907 (June 19, 2017) (SR–
CBOE–2017–048).
19 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 20 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
36049
2017–034, and should be submitted on
or before August 23, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Eduardo A. Aleman,
Assistant Secretary.
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
[FR Doc. 2017–16271 Filed 8–1–17; 8:45 am]
Electronic Comments
[Release No. 34–81248; File Nos. SR–DTC–
2017–013; SR–NSCC–2017–012; SR–FICC–
2017–016]
• 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–
BX–2017–034 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BX–2017–034. 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 such
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–BX–
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations; The
Depository Trust Company; National
Securities Clearing Corporation; Fixed
Income Clearing Corporation; Notice of
Filings of Proposed Rule Changes To
Adopt the Clearing Agency Risk
Management Framework
July 28, 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 July 14,
2017, The Depository Trust Company
(‘‘DTC’’), National Securities Clearing
Corporation (‘‘NSCC’’), and Fixed
Income Clearing Corporation (‘‘FICC,’’
and together with DTC and NSCC, the
‘‘Clearing Agencies’’), filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
changes as described in Items I, II and
III below, which Items have been
prepared primarily by the Clearing
Agencies. The Commission is
publishing this notice to solicit
comments on the proposed rule changes
from interested persons.
I. Clearing Agencies’ Statement of the
Terms of Substance of the Proposed
Rule Changes
The proposed rule changes would
adopt the Clearing Agency Risk
Management Framework (‘‘Framework’’)
of the Clearing Agencies, described
below. The Framework would apply to
both of FICC’s divisions, the
Government Securities Division
(‘‘GSD’’) and the Mortgage-Backed
Securities Division (‘‘MBSD’’). The
Framework would be maintained by the
Clearing Agencies to support their
compliance with Rules 17Ad–22(e)(1),
21 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
20 15
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U.S.C. 78s(b)(2)(B).
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(e)(3), (e)(20), and (e)(21) under the Act,
as described below.3
Although the Clearing Agencies
would consider the Framework to be a
rule, the proposed rule changes do not
require any changes to the Rules, Bylaws and Organization Certificate of
DTC (‘‘DTC Rules’’), the Rulebook of
GSD (‘‘GSD Rules’’), the Clearing Rules
of MBSD (‘‘MBSD Rules’’), or the Rules
& Procedures of NSCC (‘‘NSCC Rules’’),
as the Framework would be a
standalone document.4
II. Clearing Agencies’ Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Changes
In their filings with the Commission,
the Clearing Agencies included
statements concerning the purpose of
and basis for the proposed rule changes
and discussed any comments they
received on the proposed rule changes.
The text of these statements may be
examined at the places specified in Item
IV below. The Clearing Agencies have
prepared summaries, set forth in
sections A, B, and C below, of the most
significant aspects of such statements.
(A) Clearing Agencies’ Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Changes
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1. Purpose
The Clearing Agencies are proposing
to adopt the Framework, which would
describe the manner in which each of
the Clearing Agencies (i)
comprehensively manages legal, credit,
liquidity, operational, general business,
investment, custody, and other risks
that arise in or are borne by it (‘‘Key
Clearing Agency Risks’’); (ii) maintains
a well-founded, clear, transparent and
enforceable legal basis for each aspect of
its activities; (iii) identifies, monitors,
and manages risks related to links it
establishes with one or more clearing
agencies, financial market utilities, or
trading markets; and (iv) meets the
requirements of its participants 5 and
the markets it serves efficiently and
effectively. The Framework would be
maintained by the General Counsel’s
Office (‘‘GCO’’) of DTCC.6 The
3 17 CFR 240.17Ad–22(e)(1), (e)(3), (e)(20), and
(e)(21).
4 Capitalized terms not defined herein are defined
in the DTC Rules, GSD Rules, MBSD Rules, or
NSCC Rules, as applicable, available at https://
dtcc.com/legal/rules-and-procedures.
5 FICC and NSCC refer to their participants as
‘‘Members,’’ while DTC refers to its participants as
‘‘Participants.’’ These terms are defined in the
Clearing Agencies’ Rules. In this filing, as well as
in the Framework, ‘‘participant’’ or ‘‘participants’’
refers to both the Members of FICC and NSCC and
the Participants of DTC.
6 The parent company of the Clearing Agencies is
The Depository Trust & Clearing Corporation
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Framework would provide that GCO, in
coordination with all departments
responsible for the processes described
in the Framework, reviews the
Framework at least annually.
The processes described in the
Framework, and any policies,
procedures or other documents created
to support those processes, may be
owned by other departments within
DTCC, on behalf of each Clearing
Agency. These processes, and any
documents created to support those
processes, would support the Clearing
Agencies’ compliance with the
requirements of Rules 17Ad–22(e)(1),
(e)(3), (e)(20), and (e)(21), and the
Clearing Agencies may develop other
processes or adopt other documents that
further support these requirements and
are not described in the Framework.7
Comprehensive Management of Key
Clearing Agency Risks
The Framework would state that the
Boards have delegated to DTCC
management, on behalf of the Clearing
Agencies, the responsibility for
identifying, assessing, measuring,
monitoring, mitigating and reporting
risks through a process of developing
individual risk tolerance statements for
identified risks. The Framework would
describe how these risk tolerance
statements set out applicable risk
controls and other measures used to
manage risks, and how residual risks
may be identified through this process
for either further management or
‘‘acceptance’’ (which follows a defined
escalation and approval process). The
Framework would also state that DTCC
management, on behalf of the Clearing
Agencies, is responsible for the day-today management of those residual risks.
Finally, the Framework would describe
the governance around maintenance of
those risk tolerance statements, which
are reviewed and approved by a
management committee and by the Risk
Committee of the Boards at least
annually, and are also provided to the
Boards for their review and approval at
least annually.
The Framework would describe how
the Clearing Agencies employ a ‘‘Three
Lines of Defense’’ approach as a sound
risk management framework for
comprehensively managing Key
Clearing Agency Risks in order to
support their compliance with the
(‘‘DTCC’’). DTCC operates on a shared services
model with respect to the Clearing Agencies. Most
corporate functions are established and managed on
an enterprise-wide basis pursuant to intercompany
agreements under which it is generally DTCC that
provides a relevant service to a Clearing Agency.
7 17 CFR 240.17Ad–22(e)(1), (e)(3), (e)(20), and
(e)(21).
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requirements of Rule 17Ad–22(e)(3).8
The Framework would describe the
roles of personnel and business units in
this risk management approach, which
includes (1) a first line of defense
comprised of the various business lines
and functional units that support the
products and services offered by the
Clearing Agencies (collectively,
‘‘Clearing Agency Business/Support
Areas’’); (2) a second line of defense
comprised of control functions that
support the Clearing Agencies,
including the organization’s legal,
privacy and compliance areas, as well as
the DTCC Risk Department, which is
specifically dedicated to risk
management concerns (collectively,
‘‘Clearing Agency Control Functions’’);
and (3) a third line of defense, which is
performed by DTCC Internal Audit.
The Framework would identify the
roles of each line of defense. The
Framework would state that, as the first
line of defense, each Clearing Agency
Business/Support Area would, for
example, identify Key Clearing Agency
Risks applicable to its function,
determine the best way to mitigate such
risks, self-test internal controls, and
create and implement actions plans for
risk mitigation. The Framework would
state that the role of the second line of
defense includes, for example, working
with the Clearing Agency Business/
Support Areas on efforts to mitigate Key
Clearing Agency Risks and providing
tools to those groups to enable them to
analyze, monitor, and proactively
manage those risks. Finally, the
Framework would identify the role of
DTCC Internal Audit as the third line of
defense as including, for example,
directing its own resources to review
and test key controls that help mitigate
significant Key Clearing Agency Risks,
then reporting on the results of that
testing.
In connection with a description of
the second and third lines of defense,
the Framework would describe how
personnel within the DTCC Risk
Department and DTCC Internal Audit
are provided with sufficient authority,
resources, independence from
management, and access to the Boards.
The Framework would provide that the
DTCC Risk Department and DTCC
Internal Audit are functionally
independent from all other Clearing
Agency Business/Support Areas. The
Framework would also describe how
such personnel have a direct reporting
line to, and oversight by, the Risk
Committee of the Boards and the Audit
Committee of the Boards, respectively,
8 17
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which is supported by the charters of
these committees.
The Framework would provide that
the Clearing Agencies maintain a policy
to govern the requirements for
establishing, managing, and assessing
the performance of internal committees
and councils, including a set of senior
management committees that provide
oversight of the Three Lines of Defense
approach to management of Key
Clearing Agency Risks, as well as other
aspects of the Clearing Agencies’ risk
management. The Framework would
also describe the process by which the
Clearing Agencies maintain risk
management policies, procedures,
Clearing Agencies’ Rules, frameworks
and other documents designed to
identify, measure, monitor and manage
Key Clearing Agency Risks. The
Framework would describe policies
maintained by the Clearing Agencies
that (1) govern the steps taken to meet
their regulatory requirements related to
proposed rule change and advance
notice filings pursuant to Section
19(b)(1) of the Act,9 and the rules
thereunder, and Section 806(e)(1) of
Title VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act,
entitled the Payment, Clearing, and
Settlement Supervision Act of 2010,10
and the rules thereunder (collectively,
‘‘Filing Requirements’’); and (2)
establish a set of standards and holistic
approach for creating and managing risk
management policies, procedures,
Clearing Agencies’ Rules, frameworks
and other documents, which include
required, periodic reviews as well as the
governance for approval of such
documents (‘‘Document Standards’’).
The Framework would provide that,
with respect to those documents that
address Key Clearing Agency Risks, the
Document Standards require annual
approval by the Boards.
The Framework would describe
certain documents that are subject to the
respective policies governing the Filing
Requirements and the Document
Standards, described above. For
example, the Framework would
describe how the Clearing Agencies
maintain the Clearing Agencies’ Rules,
which support the Clearing Agencies’
ability to provide for a well-founded,
clear, transparent, and enforceable legal
basis for each aspect of their activities
in all relevant jurisdictions.
Maintenance of the Clearing Agencies’
Rules is supported by the policy
governing the Filing Requirements and
the Document Standards, described
above. The Framework would state that
9 15
U.S.C. 78s(b)(1).
U.S.C. 5465(e)(1).
10 12
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the Clearing Agencies’ Rules establish
the membership onboarding process of
the Clearing Agencies, which supports
the enforceable legal basis for the
Clearing Agencies’ Rules. The
Framework would also state that the
Clearing Agencies may adopt and
maintain other risk management
frameworks, separate from the
Framework, that address, in whole or in
part, the management of other Key
Clearing Agency Risks, including, for
example, the management of
operational, liquidity and market risks.
Information and Incentives for
Participant Management of Risks
The Framework would describe how
the Clearing Agencies support their
compliance with Rule 17Ad–22(e)(3) by
providing their respective participants
with information and incentives to
enable them, and, through them, their
customers, to monitor, manage and
contain the risks they pose to the
respective Clearing Agencies. The
Framework would identify some of the
sources of the information that is made
available to participants, including, for
example, (1) materials on the DTCC Web
site, such as the Clearing Agencies’
Rules, user guides and training courses,
and regularly updated disclosures made
pursuant to the guidelines published by
the Committee on Payment and
Settlement Systems and the Technical
Committee of the International
Organization of Securities
Commissions; 11 and (2) reports
provided to Clearing Agency
participants regarding their margin and
liquidity requirements and their
transaction volumes and values, as
applicable.
The Framework would also describe
some of the incentives used by the
Clearing Agencies to enable their
participants to monitor, manage and
contain risks they pose to the Clearing
Agencies, including, for example, (1)
daily margin requirements, pursuant to
the Clearing Agencies’ Rules, which are
calculated in close correlation to the
risk each participant poses to the
relevant Clearing Agency; and (2) other
tools within the Clearing Agencies’
Rules that enable the Clearing Agencies
to enforce their and their participants’
respective rights and obligations under
those rules.
11 See Principles for financial market
infrastructures, issued by the Committee on
Payment and Settlement Systems and the Technical
Committee of the International Organization of
Securities Commissions (April 2012), available at
https://www.bis.org/publ/cpss101a.pdf.
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Management of Risks Related to
Material Interdependencies and
External Links
The Framework would describe some
of the ways in which the Clearing
Agencies regularly review the material
risks they bear from and pose to other
entities as a result of external links and
material interdependencies. The
Framework would identify some of the
Clearing Agencies’ external links that
create material interdependencies
between the Clearing Agencies and
other entities party to such link, which
may include, for example, links with
their participants, settling banks,
investment counterparties and liquidity
providers, and links with vendors and
other service providers. With respect to
these links, the Framework would
describe how the Clearing Agencies
review and monitor any resulting risks,
which is driven by the nature of the
relationship.
For example, risks related to the
Clearing Agencies’ link to their
respective participants and settling
banks, as applicable, are addressed
through tools found within the Clearing
Agencies’ Rules, as these entities are
bound by the Rules.
Additionally, risks arising from links
to vendors are identified, assessed,
controlled, and monitored through a
comprehensive review and vetting
process. The Framework would describe
how a risk-based approach is employed
to assess the need and level of due
diligence activities associated with the
evaluation of new vendors before a
contractual relationship is established
and with the re-evaluation of existing
vendors. The Framework would state
that this process involves the review of
certain information related to a
proposed vendor relationship, which
should focus on confidentiality,
integrity, availability and recoverability
related to that relationship. The
Framework would also describe how
risk related to existing vendor
relationships is reviewed periodically,
throughout the lifecycle of the
relationship. The management of vendor
relationships through the process that
would be described in the Framework
would also support the Clearing
Agencies’ maintenance of clear,
understandable contracts that are
consistent with relevant laws and
regulations.
The Framework would describe the
Clearing Agencies’ management and
monitoring of systemic risks, and how
the Clearing Agencies utilize a series of
comprehensive reviews that include
input from a cross-functional group to
identify, monitor and manage risks
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related to all Clearing Agency external
links, in addition to links that create
material interdependencies.
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Scope of Services Responsive to Market
Needs
The Framework would describe some
of the ways in which the Clearing
Agencies are efficient and effective in
meeting the requirements of their
participants and the markets they serve.
The Framework would describe the
Clearing Agencies’ structured approach
for the implementation of new
initiatives, which includes conducting a
comprehensive risk assessment of new
initiatives that are in scope of this
approach. These reviews address,
among other matters, compliance with
applicable laws, regulations and
standards, and, in this way, support the
Clearing Agencies’ ability to
demonstrate a well-founded legal basis
for the activities to be conducted in
connection with new initiatives.
The Framework would also describe
the Clearing Agencies’ role in industrywide strategic initiatives through
participation on industry working
groups and through the development
and publication of concept papers. The
Framework would describe how the
Clearing Agencies use periodic surveys
and employ product-aligned customer
service representatives to ensure clients
receive the right level of responsiveness
in order to support their needs. The
Framework would describe how the
Clearing Agencies have established a
process for escalating and responding to
certain customer complaints. The
Framework would also describe the
Clearing Agencies’ Core Balanced
Business Scorecard, which is used by
the Clearing Agencies to review and
track the effectiveness of their
operations, information technology
service levels, financial performance,
human capital as well as their
participants’ experience.
Recovery and Orderly Wind-Down
The Framework would provide that
the Clearing Agencies maintain policies
and procedures to govern the
development of plans for recovery or
orderly wind-down. Such documents
would define the roles and
responsibilities of relevant business
units in the development and
documentation of the plans and would
outline the general content of the plans.
2. Statutory Basis
The Clearing Agencies believe that the
proposed rule changes are consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to a registered clearing
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agency. In particular, the Clearing
Agencies believe that the Framework is
consistent with Section 17A(b)(3)(F) of
the Act 12 and the subsections cited
below of Rules 17Ad–22(e)(1), (e)(3),
(e)(20), and (e)(21),13 each promulgated
under the Act, for the reasons described
below.
Section 17A(b)(3)(F) of the Act
requires, in part, that the rules of a
registered clearing agency be designed
to promote the prompt and accurate
clearance and settlement of securities
transactions, and to assure the
safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible.14 As described above, the
Framework would describe some of the
ways the Clearing Agencies
comprehensively manage Key Clearing
Agency Risks, which include legal,
credit, liquidity, operational, general
business, investment, custody, and
other risks that arise in or are borne by
the Clearing Agencies. For example, the
Framework would describe how the
Clearing Agencies utilize a Three Lines
of Defense approach to assessing,
measuring, monitoring, mitigating, and
reporting those risks, and would
identify the roles and responsibilities of
each line of defense within that
approach. The Framework would also
describe other risk management
activities, including, for example the
establishment and maintenance of
certain management committees that
would provide oversight to the Clearing
Agencies’ businesses and related risk
management.
By describing some of the ways the
Clearing Agencies manage their Key
Clearing Agency Risks, the Framework
would serve as a basis for the processes,
policies, procedures and other
documents that the Clearing Agencies
may develop to facilitate those risk
management activities. The activities
that would be described within the
Framework, and the policies,
procedures or other documents that
would be reasonably and fairly implied,
thereby collectively allow the Clearing
Agencies to continue the prompt and
accurate clearance and settlement of
securities and assure the safeguarding of
securities and funds which are in their
custody or control or for which they are
responsible notwithstanding the risks
that arise in or are borne by the Clearing
Agencies. Therefore, the Clearing
Agencies believe the Framework is
12 15
13 17
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(1), (e)(3), (e)(20), and
(e)(21).
14 15 U.S.C. 78q–1(b)(3)(F).
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consistent with the requirements of
Section 17A(b)(3)(F) of the Act.15
Rule 17Ad–22(e)(1) under the Act
requires, in part, that each covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to,
provide for a well-founded, clear,
transparent, and enforceable legal basis
for each aspect of its activities in all
relevant jurisdictions.16 The Framework
would describe how the Clearing
Agencies maintain the Clearing
Agencies’ Rules, which are the key legal
basis for each of the Clearing Agencies’
respective activities described therein.
The Clearing Agencies’ Rules are
incorporated by reference into
participants’ membership agreements,
and, therefore, constitute an enforceable
contract governing the rights and
obligations of the Clearing Agencies and
those participants. The Framework
would describe how the Clearing
Agencies’ Rules are published on the
DTCC Web site, and how the Clearing
Agencies adhere to the Filing
Requirements, which provide a clear,
transparent and enforceable legal
framework under which the Clearing
Agencies’ Rules are adopted and
enforced. Through their compliance
with the Filing Requirements, as would
be described in the Framework, the
Clearing Agencies articulate the legal
basis for proposed changes to their
activities, as described in the Clearing
Agencies’ Rules, in a clear and
understandable way.
The Framework would also describe
how the Clearing Agencies review and
assess risk related to their contractual
arrangements with vendors, service
providers and other external parties
with which the Clearing Agencies may
establish links. The Framework would
also describe the process by which the
Clearing Agencies review new
initiatives prior to implementation,
which include a review of the legal risks
that may be posed by those initiatives.
For these reasons, the processes
described in the Framework allow the
Clearing Agencies to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to provide for a
well-founded, clear, transparent, and
enforceable legal basis for each aspect of
its activities in all relevant jurisdictions.
Therefore, the Clearing Agencies believe
the Framework is consistent with the
requirements of Rule 17Ad–22(e)(1).17
The Clearing Agencies believe that the
Framework is consistent with the
15 Id.
16 17
CFR 240.17Ad–22(e)(1).
17 Id.
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requirements of the following
subsections of Rule 17Ad–22(e)(3), cited
below, for the reasons described
below.18
Rule 17Ad–22(e)(3)(i) under the Act
requires, in part, that each covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
maintain a sound risk management
framework for comprehensively
managing legal, credit, liquidity,
operational, general business,
investment, custody, and other risks
that arise in or are borne by the covered
clearing agency, which includes risk
management policies, procedures, and
systems designed to identify, measure,
monitor, and manage the range of risks
that arise in or are borne by the covered
clearing agency, that are subject to
review on a specified periodic basis and
approved by the board of directors
annually.19 The Framework would
describe how the Clearing Agencies
maintain comprehensive policies,
procedures and other documents,
including, for example, the Framework
and certain other risk management
frameworks, separate and apart from the
Framework, which are designed to
identify, measure, monitor and manage
Key Clearing Agency Risks. The
Framework would state that the
Framework is reviewed least annually.
The Document Standards, which would
be described in the Framework, set a
timeframe for the periodic review of
these documents, and would, with
respect to those documents that address
Key Clearing Agency Risks, require
annual approval by the Boards. By
describing the process for the
establishment, implementation,
maintenance and enforcement of these
risk management documents, the
Clearing Agencies believe the
Framework is consistent with the
requirements of Rule 17Ad–22(e)(3)(i).20
Rule 17Ad–22(e)(3)(ii) under the Act
requires, in part, that each covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
maintain a sound risk management
framework for comprehensively
managing legal, credit, liquidity,
operational, general business,
investment, custody, and other risks
that arise in or are borne by the covered
clearing agency, which includes plans
for the recovery and orderly wind-down
of the covered clearing agency
necessitated by credit losses, liquidity
shortfalls, losses from general business
risk, or any other losses.21 The
Framework would describe how the
Clearing Agencies maintain policies and
procedures that govern the development
of plans for the recovery and orderly
wind-down of the Clearing Agencies,
and would provide that these policies
and procedures would define the roles
and responsibilities of relevant business
units in the development and
documentation of those plans.
Therefore, by describing the policies
and procedures maintained by the
Clearing Agencies in order to prepare
appropriate plans for the recovery and
orderly wind-down of the Clearing
Agencies, the Clearing Agencies believe
the Framework is consistent with the
requirements of Rule 17Ad–
22(e)(3)(ii).22
Rule 17Ad–22(e)(3)(iii) under the Act
requires, in part, that each covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
maintain a sound risk management
framework for comprehensively
managing legal, credit, liquidity,
operational, general business,
investment, custody, and other risks
that arise in or are borne by the covered
clearing agency, which provides risk
management and internal audit
personnel with sufficient authority,
resources, independence from
management, and access to the board of
directors.23 Rule 17Ad–22(e)(3)(iv)
under the Act requires, in part, that each
covered clearing agency establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to maintain a
sound risk management framework for
comprehensively managing legal, credit,
liquidity, operational, general business,
investment, custody, and other risks
that arise in or are borne by the covered
clearing agency, which provides risk
management and internal audit
personnel with a direct reporting line to,
and oversight by, a risk management
committee and an independent audit
committee of the board of directors,
respectively.24
The Framework would describe how
the Clearing Agencies use a Three Lines
of Defense approach to the management
of Key Clearing Agency Risks. In
connection with this approach, the
Framework would describe the roles of
risk management and internal audit
personnel as the second and third lines
of defense. The Framework would
describe how both the DTCC Risk
21 17
18 17
CFR 240.17Ad–22(e)(3).
19 17 CFR 240.17Ad–22(e)(3)(i).
20 Id.
VerDate Sep<11>2014
19:43 Aug 01, 2017
Department and DTCC Internal Audit
are functionally independent from all
other Clearing Agency Business/Support
Areas. The Framework would also
describe how the senior management
within both groups report directly to
appropriate committees of the Boards,
and how, through this reporting line,
the groups have access to the Boards, as
necessary. Therefore, through this
description of the DTCC Risk
Department’s and DTCC Internal Audit’s
roles and functions, in connection with
the Three Lines of Defense approach to
risk management, the Clearing Agencies
believe the Framework is consistent
with the requirements of Rule 17Ad–
22(e)(3)(iii) and (e)(3)(iv).25
Rule 17Ad–22(e)(20) under the Act
requires, in part, that each covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
identify, monitor, and manage risks
related to any link the covered clearing
agency establishes with one or more
other clearing agencies, financial market
utilities, or trading markets.26 The
Framework would describe how the
Clearing Agencies review both proposed
and existing links with other entities,
including those links that may result in
material interdependencies. For
example, the Framework would
describe some of the ways the Clearing
Agencies manage risks related to their
links with, as applicable, participants,
settling banks, investment
counterparties and liquidity providers,
vendors and service providers, and
would also describe how the Clearing
Agencies identify and address risks that
have the potential of creating systemic
impact. With respect to links with
vendors and service providers, the
Framework would describe how the
Clearing Agencies, through the
establishment, implementation,
maintenance and enforcement of written
policies and procedures, apply a
comprehensive vendor review and
vetting process that includes reviews of
credit, operational, legal and other risks
that may arise from that relationship.
Therefore, by describing the various
ways the Clearing Agencies identify and
address risks related to links with other
entities, the Clearing Agencies believe
the Framework is consistent with the
requirements of Rule 17Ad–22(e)(20).27
Rule 17Ad–22(e)(21) under the Act
requires, in part, that each covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
CFR 240.17Ad–22(e)(3)(ii).
22 Id.
25 Id.
23 17
26 17
CFR 240.17Ad–22(e)(3)(iii).
24 17 CFR 240.17Ad–22(e)(3)(iv).
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36053
CFR 240.17Ad–22(e)(20).
27 Id.
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sradovich on DSKBCFCHB2PROD with NOTICES
be efficient and effective in meeting the
requirements of its participants and the
markets it serves, and have the covered
clearing agency’s management regularly
review the efficiency and effectiveness
of its (i) clearing and settlement
arrangements; (ii) operating structure,
including risk management policies,
procedures, and systems; (iii) scope of
products cleared or settled; and (iv) use
of technology and communication
procedures.28 The Framework would
describe some of the ways in which the
Clearing Agencies review the efficiency
and effectiveness of their businesses and
operations. For example, the Framework
would describe how the Clearing
Agencies employ a structured approach
to the pre-implementation reviews of
new initiatives, including initiatives
related to their clearing and settlement
arrangements, scope of products cleared
or settled, and use of technology and
communication procedures. The
Framework would also describe the
Clearing Agencies’ Core Balanced
Business Scorecard, which is used to
review the effectiveness of the Clearing
Agencies’ operations, information
technology services levels, financial
performance and other aspects of their
business, including their respective
participants’ experiences. The
Framework would also describe some of
the steps the Clearing Agencies take in
order to be efficient and effective in
meeting the requirements of their
participants and the markets they serve,
including, for example, through the
establishment, implementation,
maintenance and enforcement of a
written policy to address escalation,
tracking and resolution of certain
customer complaints. Therefore, by
describing some of the ways in which
the Clearing Agencies review the
efficiency and effectiveness of their
businesses and operations, the Clearing
Agencies believe the Framework is
consistent with the requirements of Rule
17Ad–22(e)(21).29
(B) Clearing Agencies’ Statement on
Burden on Competition
None of the Clearing Agencies believe
that the Framework would have any
impact, or impose any burden, on
competition because the proposed rule
changes reflect some of the existing
methods by which the Clearing
Agencies manage Key Clearing Agency
Risks, and would not effectuate any
changes to the Clearing Agencies’
processes described therein as they
currently apply to their respective
participants.
28 17
CFR 240.17Ad–22(e)(21).
29 Id.
VerDate Sep<11>2014
19:43 Aug 01, 2017
Jkt 241001
(C) Clearing Agencies’ Statement on
Comments on the Proposed Rule
Changes Received From Members,
Participants, or Others
The Clearing Agencies have not
solicited or received any written
comments relating to this proposal. The
Clearing Agencies will notify the
Commission of any written comments
received by the Clearing Agencies.
III. Date of Effectiveness of the
Proposed Rule Changes, 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 clearing agency consents, the
Commission will:
(A) By order approve or disapprove
such proposed rule changes, or
(B) institute proceedings to determine
whether the proposed rule changes
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
changes are 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–
DTC–2017–013, SR–NSCC–2017–012, or
SR–FICC–2017–016 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–DTC–2017–013, SR–NSCC–
2017–012, or SR–FICC–2017–016. One
of these file numbers 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
changes that are filed with the
Commission, and all written
PO 00000
Frm 00129
Fmt 4703
Sfmt 4703
communications relating to the
proposed rule changes 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 the Clearing Agencies, 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–DTC–
2017–013, SR–NSCC–2017–012, or SR–
FICC–2017–016, and should be
submitted on or before August 23, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.30
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–16268 Filed 8–1–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81226; File No. SR–NYSE–
2017–08]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing of Amendment No. 1 and Order
Granting Accelerated Approval of
Proposed Rule Change, as Modified by
Amendment No. 1, To Amend Its
Listing Standards for Closed-End
Funds
July 27, 2017.
I. Introduction
On May 24, 2017, New York Stock
Exchange LLC (‘‘NYSE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend its listing standards for closedend funds. The proposed rule change
was published for comment in the
30 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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[Federal Register Volume 82, Number 147 (Wednesday, August 2, 2017)]
[Notices]
[Pages 36049-36054]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16268]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81248; File Nos. SR-DTC-2017-013; SR-NSCC-2017-012; SR-
FICC-2017-016]
Self-Regulatory Organizations; The Depository Trust Company;
National Securities Clearing Corporation; Fixed Income Clearing
Corporation; Notice of Filings of Proposed Rule Changes To Adopt the
Clearing Agency Risk Management Framework
July 28, 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 July 14, 2017, The Depository Trust Company (``DTC''), National
Securities Clearing Corporation (``NSCC''), and Fixed Income Clearing
Corporation (``FICC,'' and together with DTC and NSCC, the ``Clearing
Agencies''), filed with the Securities and Exchange Commission
(``Commission'') the proposed rule changes as described in Items I, II
and III below, which Items have been prepared primarily by the Clearing
Agencies. The Commission is publishing this notice to solicit comments
on the proposed rule changes from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Clearing Agencies' Statement of the Terms of Substance of the
Proposed Rule Changes
The proposed rule changes would adopt the Clearing Agency Risk
Management Framework (``Framework'') of the Clearing Agencies,
described below. The Framework would apply to both of FICC's divisions,
the Government Securities Division (``GSD'') and the Mortgage-Backed
Securities Division (``MBSD''). The Framework would be maintained by
the Clearing Agencies to support their compliance with Rules 17Ad-
22(e)(1),
[[Page 36050]]
(e)(3), (e)(20), and (e)(21) under the Act, as described below.\3\
---------------------------------------------------------------------------
\3\ 17 CFR 240.17Ad-22(e)(1), (e)(3), (e)(20), and (e)(21).
---------------------------------------------------------------------------
Although the Clearing Agencies would consider the Framework to be a
rule, the proposed rule changes do not require any changes to the
Rules, By-laws and Organization Certificate of DTC (``DTC Rules''), the
Rulebook of GSD (``GSD Rules''), the Clearing Rules of MBSD (``MBSD
Rules''), or the Rules & Procedures of NSCC (``NSCC Rules''), as the
Framework would be a standalone document.\4\
---------------------------------------------------------------------------
\4\ Capitalized terms not defined herein are defined in the DTC
Rules, GSD Rules, MBSD Rules, or NSCC Rules, as applicable,
available at https://dtcc.com/legal/rules-and-procedures.
---------------------------------------------------------------------------
II. Clearing Agencies' Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Changes
In their filings with the Commission, the Clearing Agencies
included statements concerning the purpose of and basis for the
proposed rule changes and discussed any comments they received on the
proposed rule changes. The text of these statements may be examined at
the places specified in Item IV below. The Clearing Agencies have
prepared summaries, set forth in sections A, B, and C below, of the
most significant aspects of such statements.
(A) Clearing Agencies' Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Changes
1. Purpose
The Clearing Agencies are proposing to adopt the Framework, which
would describe the manner in which each of the Clearing Agencies (i)
comprehensively manages legal, credit, liquidity, operational, general
business, investment, custody, and other risks that arise in or are
borne by it (``Key Clearing Agency Risks''); (ii) maintains a well-
founded, clear, transparent and enforceable legal basis for each aspect
of its activities; (iii) identifies, monitors, and manages risks
related to links it establishes with one or more clearing agencies,
financial market utilities, or trading markets; and (iv) meets the
requirements of its participants \5\ and the markets it serves
efficiently and effectively. The Framework would be maintained by the
General Counsel's Office (``GCO'') of DTCC.\6\ The Framework would
provide that GCO, in coordination with all departments responsible for
the processes described in the Framework, reviews the Framework at
least annually.
---------------------------------------------------------------------------
\5\ FICC and NSCC refer to their participants as ``Members,''
while DTC refers to its participants as ``Participants.'' These
terms are defined in the Clearing Agencies' Rules. In this filing,
as well as in the Framework, ``participant'' or ``participants''
refers to both the Members of FICC and NSCC and the Participants of
DTC.
\6\ The parent company of the Clearing Agencies is The
Depository Trust & Clearing Corporation (``DTCC''). DTCC operates on
a shared services model with respect to the Clearing Agencies. Most
corporate functions are established and managed on an enterprise-
wide basis pursuant to intercompany agreements under which it is
generally DTCC that provides a relevant service to a Clearing
Agency.
---------------------------------------------------------------------------
The processes described in the Framework, and any policies,
procedures or other documents created to support those processes, may
be owned by other departments within DTCC, on behalf of each Clearing
Agency. These processes, and any documents created to support those
processes, would support the Clearing Agencies' compliance with the
requirements of Rules 17Ad-22(e)(1), (e)(3), (e)(20), and (e)(21), and
the Clearing Agencies may develop other processes or adopt other
documents that further support these requirements and are not described
in the Framework.\7\
---------------------------------------------------------------------------
\7\ 17 CFR 240.17Ad-22(e)(1), (e)(3), (e)(20), and (e)(21).
---------------------------------------------------------------------------
Comprehensive Management of Key Clearing Agency Risks
The Framework would state that the Boards have delegated to DTCC
management, on behalf of the Clearing Agencies, the responsibility for
identifying, assessing, measuring, monitoring, mitigating and reporting
risks through a process of developing individual risk tolerance
statements for identified risks. The Framework would describe how these
risk tolerance statements set out applicable risk controls and other
measures used to manage risks, and how residual risks may be identified
through this process for either further management or ``acceptance''
(which follows a defined escalation and approval process). The
Framework would also state that DTCC management, on behalf of the
Clearing Agencies, is responsible for the day-to-day management of
those residual risks. Finally, the Framework would describe the
governance around maintenance of those risk tolerance statements, which
are reviewed and approved by a management committee and by the Risk
Committee of the Boards at least annually, and are also provided to the
Boards for their review and approval at least annually.
The Framework would describe how the Clearing Agencies employ a
``Three Lines of Defense'' approach as a sound risk management
framework for comprehensively managing Key Clearing Agency Risks in
order to support their compliance with the requirements of Rule 17Ad-
22(e)(3).\8\ The Framework would describe the roles of personnel and
business units in this risk management approach, which includes (1) a
first line of defense comprised of the various business lines and
functional units that support the products and services offered by the
Clearing Agencies (collectively, ``Clearing Agency Business/Support
Areas''); (2) a second line of defense comprised of control functions
that support the Clearing Agencies, including the organization's legal,
privacy and compliance areas, as well as the DTCC Risk Department,
which is specifically dedicated to risk management concerns
(collectively, ``Clearing Agency Control Functions''); and (3) a third
line of defense, which is performed by DTCC Internal Audit.
---------------------------------------------------------------------------
\8\ 17 CFR 240.17Ad-22(e)(3).
---------------------------------------------------------------------------
The Framework would identify the roles of each line of defense. The
Framework would state that, as the first line of defense, each Clearing
Agency Business/Support Area would, for example, identify Key Clearing
Agency Risks applicable to its function, determine the best way to
mitigate such risks, self-test internal controls, and create and
implement actions plans for risk mitigation. The Framework would state
that the role of the second line of defense includes, for example,
working with the Clearing Agency Business/Support Areas on efforts to
mitigate Key Clearing Agency Risks and providing tools to those groups
to enable them to analyze, monitor, and proactively manage those risks.
Finally, the Framework would identify the role of DTCC Internal Audit
as the third line of defense as including, for example, directing its
own resources to review and test key controls that help mitigate
significant Key Clearing Agency Risks, then reporting on the results of
that testing.
In connection with a description of the second and third lines of
defense, the Framework would describe how personnel within the DTCC
Risk Department and DTCC Internal Audit are provided with sufficient
authority, resources, independence from management, and access to the
Boards. The Framework would provide that the DTCC Risk Department and
DTCC Internal Audit are functionally independent from all other
Clearing Agency Business/Support Areas. The Framework would also
describe how such personnel have a direct reporting line to, and
oversight by, the Risk Committee of the Boards and the Audit Committee
of the Boards, respectively,
[[Page 36051]]
which is supported by the charters of these committees.
The Framework would provide that the Clearing Agencies maintain a
policy to govern the requirements for establishing, managing, and
assessing the performance of internal committees and councils,
including a set of senior management committees that provide oversight
of the Three Lines of Defense approach to management of Key Clearing
Agency Risks, as well as other aspects of the Clearing Agencies' risk
management. The Framework would also describe the process by which the
Clearing Agencies maintain risk management policies, procedures,
Clearing Agencies' Rules, frameworks and other documents designed to
identify, measure, monitor and manage Key Clearing Agency Risks. The
Framework would describe policies maintained by the Clearing Agencies
that (1) govern the steps taken to meet their regulatory requirements
related to proposed rule change and advance notice filings pursuant to
Section 19(b)(1) of the Act,\9\ and the rules thereunder, and Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled the Payment, Clearing, and Settlement
Supervision Act of 2010,\10\ and the rules thereunder (collectively,
``Filing Requirements''); and (2) establish a set of standards and
holistic approach for creating and managing risk management policies,
procedures, Clearing Agencies' Rules, frameworks and other documents,
which include required, periodic reviews as well as the governance for
approval of such documents (``Document Standards''). The Framework
would provide that, with respect to those documents that address Key
Clearing Agency Risks, the Document Standards require annual approval
by the Boards.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78s(b)(1).
\10\ 12 U.S.C. 5465(e)(1).
---------------------------------------------------------------------------
The Framework would describe certain documents that are subject to
the respective policies governing the Filing Requirements and the
Document Standards, described above. For example, the Framework would
describe how the Clearing Agencies maintain the Clearing Agencies'
Rules, which support the Clearing Agencies' ability to provide for a
well-founded, clear, transparent, and enforceable legal basis for each
aspect of their activities in all relevant jurisdictions. Maintenance
of the Clearing Agencies' Rules is supported by the policy governing
the Filing Requirements and the Document Standards, described above.
The Framework would state that the Clearing Agencies' Rules establish
the membership onboarding process of the Clearing Agencies, which
supports the enforceable legal basis for the Clearing Agencies' Rules.
The Framework would also state that the Clearing Agencies may adopt and
maintain other risk management frameworks, separate from the Framework,
that address, in whole or in part, the management of other Key Clearing
Agency Risks, including, for example, the management of operational,
liquidity and market risks.
Information and Incentives for Participant Management of Risks
The Framework would describe how the Clearing Agencies support
their compliance with Rule 17Ad-22(e)(3) by providing their respective
participants with information and incentives to enable them, and,
through them, their customers, to monitor, manage and contain the risks
they pose to the respective Clearing Agencies. The Framework would
identify some of the sources of the information that is made available
to participants, including, for example, (1) materials on the DTCC Web
site, such as the Clearing Agencies' Rules, user guides and training
courses, and regularly updated disclosures made pursuant to the
guidelines published by the Committee on Payment and Settlement Systems
and the Technical Committee of the International Organization of
Securities Commissions; \11\ and (2) reports provided to Clearing
Agency participants regarding their margin and liquidity requirements
and their transaction volumes and values, as applicable.
---------------------------------------------------------------------------
\11\ See Principles for financial market infrastructures, issued
by the Committee on Payment and Settlement Systems and the Technical
Committee of the International Organization of Securities
Commissions (April 2012), available at https://www.bis.org/publ/cpss101a.pdf.
---------------------------------------------------------------------------
The Framework would also describe some of the incentives used by
the Clearing Agencies to enable their participants to monitor, manage
and contain risks they pose to the Clearing Agencies, including, for
example, (1) daily margin requirements, pursuant to the Clearing
Agencies' Rules, which are calculated in close correlation to the risk
each participant poses to the relevant Clearing Agency; and (2) other
tools within the Clearing Agencies' Rules that enable the Clearing
Agencies to enforce their and their participants' respective rights and
obligations under those rules.
Management of Risks Related to Material Interdependencies and External
Links
The Framework would describe some of the ways in which the Clearing
Agencies regularly review the material risks they bear from and pose to
other entities as a result of external links and material
interdependencies. The Framework would identify some of the Clearing
Agencies' external links that create material interdependencies between
the Clearing Agencies and other entities party to such link, which may
include, for example, links with their participants, settling banks,
investment counterparties and liquidity providers, and links with
vendors and other service providers. With respect to these links, the
Framework would describe how the Clearing Agencies review and monitor
any resulting risks, which is driven by the nature of the relationship.
For example, risks related to the Clearing Agencies' link to their
respective participants and settling banks, as applicable, are
addressed through tools found within the Clearing Agencies' Rules, as
these entities are bound by the Rules.
Additionally, risks arising from links to vendors are identified,
assessed, controlled, and monitored through a comprehensive review and
vetting process. The Framework would describe how a risk-based approach
is employed to assess the need and level of due diligence activities
associated with the evaluation of new vendors before a contractual
relationship is established and with the re-evaluation of existing
vendors. The Framework would state that this process involves the
review of certain information related to a proposed vendor
relationship, which should focus on confidentiality, integrity,
availability and recoverability related to that relationship. The
Framework would also describe how risk related to existing vendor
relationships is reviewed periodically, throughout the lifecycle of the
relationship. The management of vendor relationships through the
process that would be described in the Framework would also support the
Clearing Agencies' maintenance of clear, understandable contracts that
are consistent with relevant laws and regulations.
The Framework would describe the Clearing Agencies' management and
monitoring of systemic risks, and how the Clearing Agencies utilize a
series of comprehensive reviews that include input from a cross-
functional group to identify, monitor and manage risks
[[Page 36052]]
related to all Clearing Agency external links, in addition to links
that create material interdependencies.
Scope of Services Responsive to Market Needs
The Framework would describe some of the ways in which the Clearing
Agencies are efficient and effective in meeting the requirements of
their participants and the markets they serve. The Framework would
describe the Clearing Agencies' structured approach for the
implementation of new initiatives, which includes conducting a
comprehensive risk assessment of new initiatives that are in scope of
this approach. These reviews address, among other matters, compliance
with applicable laws, regulations and standards, and, in this way,
support the Clearing Agencies' ability to demonstrate a well-founded
legal basis for the activities to be conducted in connection with new
initiatives.
The Framework would also describe the Clearing Agencies' role in
industry-wide strategic initiatives through participation on industry
working groups and through the development and publication of concept
papers. The Framework would describe how the Clearing Agencies use
periodic surveys and employ product-aligned customer service
representatives to ensure clients receive the right level of
responsiveness in order to support their needs. The Framework would
describe how the Clearing Agencies have established a process for
escalating and responding to certain customer complaints. The Framework
would also describe the Clearing Agencies' Core Balanced Business
Scorecard, which is used by the Clearing Agencies to review and track
the effectiveness of their operations, information technology service
levels, financial performance, human capital as well as their
participants' experience.
Recovery and Orderly Wind-Down
The Framework would provide that the Clearing Agencies maintain
policies and procedures to govern the development of plans for recovery
or orderly wind-down. Such documents would define the roles and
responsibilities of relevant business units in the development and
documentation of the plans and would outline the general content of the
plans.
2. Statutory Basis
The Clearing Agencies believe that the proposed rule changes are
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a registered clearing agency. In
particular, the Clearing Agencies believe that the Framework is
consistent with Section 17A(b)(3)(F) of the Act \12\ and the
subsections cited below of Rules 17Ad-22(e)(1), (e)(3), (e)(20), and
(e)(21),\13\ each promulgated under the Act, for the reasons described
below.
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\12\ 15 U.S.C. 78q-1(b)(3)(F).
\13\ 17 CFR 240.17Ad-22(e)(1), (e)(3), (e)(20), and (e)(21).
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Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a registered clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions, and to
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible.\14\ As described above, the Framework would describe some
of the ways the Clearing Agencies comprehensively manage Key Clearing
Agency Risks, which include legal, credit, liquidity, operational,
general business, investment, custody, and other risks that arise in or
are borne by the Clearing Agencies. For example, the Framework would
describe how the Clearing Agencies utilize a Three Lines of Defense
approach to assessing, measuring, monitoring, mitigating, and reporting
those risks, and would identify the roles and responsibilities of each
line of defense within that approach. The Framework would also describe
other risk management activities, including, for example the
establishment and maintenance of certain management committees that
would provide oversight to the Clearing Agencies' businesses and
related risk management.
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\14\ 15 U.S.C. 78q-1(b)(3)(F).
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By describing some of the ways the Clearing Agencies manage their
Key Clearing Agency Risks, the Framework would serve as a basis for the
processes, policies, procedures and other documents that the Clearing
Agencies may develop to facilitate those risk management activities.
The activities that would be described within the Framework, and the
policies, procedures or other documents that would be reasonably and
fairly implied, thereby collectively allow the Clearing Agencies to
continue the prompt and accurate clearance and settlement of securities
and assure the safeguarding of securities and funds which are in their
custody or control or for which they are responsible notwithstanding
the risks that arise in or are borne by the Clearing Agencies.
Therefore, the Clearing Agencies believe the Framework is consistent
with the requirements of Section 17A(b)(3)(F) of the Act.\15\
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\15\ Id.
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Rule 17Ad-22(e)(1) under the Act requires, in part, that each
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to, provide for a
well-founded, clear, transparent, and enforceable legal basis for each
aspect of its activities in all relevant jurisdictions.\16\ The
Framework would describe how the Clearing Agencies maintain the
Clearing Agencies' Rules, which are the key legal basis for each of the
Clearing Agencies' respective activities described therein. The
Clearing Agencies' Rules are incorporated by reference into
participants' membership agreements, and, therefore, constitute an
enforceable contract governing the rights and obligations of the
Clearing Agencies and those participants. The Framework would describe
how the Clearing Agencies' Rules are published on the DTCC Web site,
and how the Clearing Agencies adhere to the Filing Requirements, which
provide a clear, transparent and enforceable legal framework under
which the Clearing Agencies' Rules are adopted and enforced. Through
their compliance with the Filing Requirements, as would be described in
the Framework, the Clearing Agencies articulate the legal basis for
proposed changes to their activities, as described in the Clearing
Agencies' Rules, in a clear and understandable way.
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\16\ 17 CFR 240.17Ad-22(e)(1).
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The Framework would also describe how the Clearing Agencies review
and assess risk related to their contractual arrangements with vendors,
service providers and other external parties with which the Clearing
Agencies may establish links. The Framework would also describe the
process by which the Clearing Agencies review new initiatives prior to
implementation, which include a review of the legal risks that may be
posed by those initiatives. For these reasons, the processes described
in the Framework allow the Clearing Agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to provide for a well-founded, clear, transparent, and
enforceable legal basis for each aspect of its activities in all
relevant jurisdictions. Therefore, the Clearing Agencies believe the
Framework is consistent with the requirements of Rule 17Ad-
22(e)(1).\17\
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\17\ Id.
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The Clearing Agencies believe that the Framework is consistent with
the
[[Page 36053]]
requirements of the following subsections of Rule 17Ad-22(e)(3), cited
below, for the reasons described below.\18\
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\18\ 17 CFR 240.17Ad-22(e)(3).
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Rule 17Ad-22(e)(3)(i) under the Act requires, in part, that each
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to maintain a sound
risk management framework for comprehensively managing legal, credit,
liquidity, operational, general business, investment, custody, and
other risks that arise in or are borne by the covered clearing agency,
which includes risk management policies, procedures, and systems
designed to identify, measure, monitor, and manage the range of risks
that arise in or are borne by the covered clearing agency, that are
subject to review on a specified periodic basis and approved by the
board of directors annually.\19\ The Framework would describe how the
Clearing Agencies maintain comprehensive policies, procedures and other
documents, including, for example, the Framework and certain other risk
management frameworks, separate and apart from the Framework, which are
designed to identify, measure, monitor and manage Key Clearing Agency
Risks. The Framework would state that the Framework is reviewed least
annually. The Document Standards, which would be described in the
Framework, set a timeframe for the periodic review of these documents,
and would, with respect to those documents that address Key Clearing
Agency Risks, require annual approval by the Boards. By describing the
process for the establishment, implementation, maintenance and
enforcement of these risk management documents, the Clearing Agencies
believe the Framework is consistent with the requirements of Rule 17Ad-
22(e)(3)(i).\20\
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\19\ 17 CFR 240.17Ad-22(e)(3)(i).
\20\ Id.
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Rule 17Ad-22(e)(3)(ii) under the Act requires, in part, that each
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to maintain a sound
risk management framework for comprehensively managing legal, credit,
liquidity, operational, general business, investment, custody, and
other risks that arise in or are borne by the covered clearing agency,
which includes plans for the recovery and orderly wind-down of the
covered clearing agency necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses.\21\
The Framework would describe how the Clearing Agencies maintain
policies and procedures that govern the development of plans for the
recovery and orderly wind-down of the Clearing Agencies, and would
provide that these policies and procedures would define the roles and
responsibilities of relevant business units in the development and
documentation of those plans. Therefore, by describing the policies and
procedures maintained by the Clearing Agencies in order to prepare
appropriate plans for the recovery and orderly wind-down of the
Clearing Agencies, the Clearing Agencies believe the Framework is
consistent with the requirements of Rule 17Ad-22(e)(3)(ii).\22\
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\21\ 17 CFR 240.17Ad-22(e)(3)(ii).
\22\ Id.
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Rule 17Ad-22(e)(3)(iii) under the Act requires, in part, that each
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to maintain a sound
risk management framework for comprehensively managing legal, credit,
liquidity, operational, general business, investment, custody, and
other risks that arise in or are borne by the covered clearing agency,
which provides risk management and internal audit personnel with
sufficient authority, resources, independence from management, and
access to the board of directors.\23\ Rule 17Ad-22(e)(3)(iv) under the
Act requires, in part, that each covered clearing agency establish,
implement, maintain and enforce written policies and procedures
reasonably designed to maintain a sound risk management framework for
comprehensively managing legal, credit, liquidity, operational, general
business, investment, custody, and other risks that arise in or are
borne by the covered clearing agency, which provides risk management
and internal audit personnel with a direct reporting line to, and
oversight by, a risk management committee and an independent audit
committee of the board of directors, respectively.\24\
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\23\ 17 CFR 240.17Ad-22(e)(3)(iii).
\24\ 17 CFR 240.17Ad-22(e)(3)(iv).
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The Framework would describe how the Clearing Agencies use a Three
Lines of Defense approach to the management of Key Clearing Agency
Risks. In connection with this approach, the Framework would describe
the roles of risk management and internal audit personnel as the second
and third lines of defense. The Framework would describe how both the
DTCC Risk Department and DTCC Internal Audit are functionally
independent from all other Clearing Agency Business/Support Areas. The
Framework would also describe how the senior management within both
groups report directly to appropriate committees of the Boards, and
how, through this reporting line, the groups have access to the Boards,
as necessary. Therefore, through this description of the DTCC Risk
Department's and DTCC Internal Audit's roles and functions, in
connection with the Three Lines of Defense approach to risk management,
the Clearing Agencies believe the Framework is consistent with the
requirements of Rule 17Ad-22(e)(3)(iii) and (e)(3)(iv).\25\
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\25\ Id.
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Rule 17Ad-22(e)(20) under the Act requires, in part, that each
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to identify,
monitor, and manage risks related to any link the covered clearing
agency establishes with one or more other clearing agencies, financial
market utilities, or trading markets.\26\ The Framework would describe
how the Clearing Agencies review both proposed and existing links with
other entities, including those links that may result in material
interdependencies. For example, the Framework would describe some of
the ways the Clearing Agencies manage risks related to their links
with, as applicable, participants, settling banks, investment
counterparties and liquidity providers, vendors and service providers,
and would also describe how the Clearing Agencies identify and address
risks that have the potential of creating systemic impact. With respect
to links with vendors and service providers, the Framework would
describe how the Clearing Agencies, through the establishment,
implementation, maintenance and enforcement of written policies and
procedures, apply a comprehensive vendor review and vetting process
that includes reviews of credit, operational, legal and other risks
that may arise from that relationship. Therefore, by describing the
various ways the Clearing Agencies identify and address risks related
to links with other entities, the Clearing Agencies believe the
Framework is consistent with the requirements of Rule 17Ad-
22(e)(20).\27\
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\26\ 17 CFR 240.17Ad-22(e)(20).
\27\ Id.
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Rule 17Ad-22(e)(21) under the Act requires, in part, that each
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to
[[Page 36054]]
be efficient and effective in meeting the requirements of its
participants and the markets it serves, and have the covered clearing
agency's management regularly review the efficiency and effectiveness
of its (i) clearing and settlement arrangements; (ii) operating
structure, including risk management policies, procedures, and systems;
(iii) scope of products cleared or settled; and (iv) use of technology
and communication procedures.\28\ The Framework would describe some of
the ways in which the Clearing Agencies review the efficiency and
effectiveness of their businesses and operations. For example, the
Framework would describe how the Clearing Agencies employ a structured
approach to the pre-implementation reviews of new initiatives,
including initiatives related to their clearing and settlement
arrangements, scope of products cleared or settled, and use of
technology and communication procedures. The Framework would also
describe the Clearing Agencies' Core Balanced Business Scorecard, which
is used to review the effectiveness of the Clearing Agencies'
operations, information technology services levels, financial
performance and other aspects of their business, including their
respective participants' experiences. The Framework would also describe
some of the steps the Clearing Agencies take in order to be efficient
and effective in meeting the requirements of their participants and the
markets they serve, including, for example, through the establishment,
implementation, maintenance and enforcement of a written policy to
address escalation, tracking and resolution of certain customer
complaints. Therefore, by describing some of the ways in which the
Clearing Agencies review the efficiency and effectiveness of their
businesses and operations, the Clearing Agencies believe the Framework
is consistent with the requirements of Rule 17Ad-22(e)(21).\29\
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\28\ 17 CFR 240.17Ad-22(e)(21).
\29\ Id.
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(B) Clearing Agencies' Statement on Burden on Competition
None of the Clearing Agencies believe that the Framework would have
any impact, or impose any burden, on competition because the proposed
rule changes reflect some of the existing methods by which the Clearing
Agencies manage Key Clearing Agency Risks, and would not effectuate any
changes to the Clearing Agencies' processes described therein as they
currently apply to their respective participants.
(C) Clearing Agencies' Statement on Comments on the Proposed Rule
Changes Received From Members, Participants, or Others
The Clearing Agencies have not solicited or received any written
comments relating to this proposal. The Clearing Agencies will notify
the Commission of any written comments received by the Clearing
Agencies.
III. Date of Effectiveness of the Proposed Rule Changes, 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 clearing agency consents, the Commission will:
(A) By order approve or disapprove such proposed rule changes, or
(B) institute proceedings to determine whether the proposed rule
changes 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
changes are 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-DTC-2017-013, SR-NSCC-2017-012, or SR-FICC-2017-016 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-DTC-2017-013, SR-NSCC-
2017-012, or SR-FICC-2017-016. One of these file numbers 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 changes that are filed with the
Commission, and all written communications relating to the proposed
rule changes 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 the Clearing Agencies, 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-DTC-2017-013, SR-NSCC-2017-
012, or SR-FICC-2017-016, and should be submitted on or before August
23, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-16268 Filed 8-1-17; 8:45 am]
BILLING CODE 8011-01-P
