Self-Regulatory Organizations; The Depository Trust Company; National Securities Clearing Corporation; Fixed Income Clearing Corporation; Order Approving Proposed Rule Changes To Adopt the Clearing Agency Risk Management Framework, 44224-44229 [2017-20089]

Download as PDF 44224 Federal Register / Vol. 82, No. 182 / Thursday, September 21, 2017 / Notices officer or employee of a member organization has exercised discretionary authority, as the Exchange believes this to be important information with respect to a transaction. asabaliauskas on DSKBBXCHB2PROD with NOTICES Rule 1027(e) Discretion as to Time or Price Excepted As discussed above the Exchange proposes to amend Rule 1027(e), which generally excludes price and time discretion from the requirements of Rule 1027, to cover foreign currency options. The Exchange also proposes to correct an internal cross reference to ‘‘this paragraph (d)’’ which should read ‘‘this paragraph (e).’’ III. Discussion and Commission Findings After careful review of the proposed rule change, the Commission finds that the proposal is consistent with the requirements of the Exchange Act and the rules and regulations thereunder that are applicable to a national securities exchange.9 Specifically, the Commission finds that the proposed rule changes are consistent with Section 6(b)(5) of the Exchange Act,10 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices; to promote just and equitable principles of trade; to remove impediments to and perfect the mechanism of a free and open market and a national market system; and, in general, to protect investors and the public interest. Section 6(b)(5) also requires that the rules of an exchange not be designed to permit unfair discrimination among customers, issuers, brokers, or dealers. The proposal is designed to ‘‘remove impediments to and perfect the mechanism of a free and open market and a national market system, by eliminating redundant rule text, clarifying certain rule text, and conforming parts of the rule more closely to CBOE Rule 9.10, Discretionary Accounts.’’ 11 The Commission notes that Phlx believes that harmonizing its rule regarding discretionary accounts with its CBOE counterpart will create ‘‘more efficient regulatory compliance by members of both exchanges due to reduction of differences in wording and consequent potential for inadvertent regulatory noncompliance.’’ 12 The Commission 9 In approving this rule change, the Commission has considered the rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 10 15 U.S.C. 78f(b)(5). 11 Notice, 82 FR at 36471. 12 Id. VerDate Sep<11>2014 17:52 Sep 20, 2017 Jkt 241001 further notes that Phlx believes that harmonizing Rule 1027 with its CBOE counterpart will ‘‘further the goal of harmonized examinations and enforcement of similar rules, thus reducing duplicative regulatory efforts’’ and thus lowering overall regulatory costs imposed on member organizations and, by extension, the general public.13 The Commission notes that the proposal received no comments from the public. Taking into consideration the Exchange’s views about the proposed amendments, the Commission believes that the proposal will promote regulatory efficiency through more streamlined rule text that avoids unnecessary redundancy, clarification of the meaning and scope of the rule, and greater harmonization of regulatory requirements across national securities exchanges, thereby reducing regulatory burdens, without undermining strong regulatory protections for investors. The Commission believes that the approach proposed by the Exchange is appropriate and designed to protect investors and the public interest, consistent with Section 6(b)(5) of the Exchange Act. For these reasons, the Commission finds that the proposed rule change is consistent with the Exchange Act and the rules and regulations thereunder. IV. Conclusion It is therefore ordered pursuant to Section 19(b)(2) 14 of the Exchange Act that the proposal (SR–PHLX–2017–56), be and hereby is approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.15 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–20087 Filed 9–20–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34- 81635; File Nos. SR–DTC– 2017–013; SR–NSCC–2017–012; SR–FICC– 2017–016] Self-Regulatory Organizations; The Depository Trust Company; National Securities Clearing Corporation; Fixed Income Clearing Corporation; Order Approving Proposed Rule Changes To Adopt the Clearing Agency Risk Management Framework September 15, 2017. I. Introduction On July 14, 2017, The Depository Trust Company (‘‘DTC’’), National Securities Clearing Corporation (‘‘NSCC’’), and Fixed Income Clearing Corporation (‘‘FICC,’’ each a ‘‘Clearing Agency,’’ and collectively the ‘‘Clearing Agencies’’), filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule changes SR–DTC–2017– 013, SR–NSCC–2017–012, and SR– FICC–2017–016, respectively, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder.2 The proposed rule changes were published for comment in the Federal Register on August 2, 2017.3 The Commission did not receive any comment letters on the proposed rule changes. For the reasons discussed below, the Commission approves the proposed rule changes. II. Description of the Proposed Rule Changes The proposed rule changes are proposals by the Clearing Agencies to adopt the Clearing Agency Risk Management Framework (‘‘Framework’’) of the Clearing Agencies, as described below. A. Overview of the Framework The Framework would describe how each Clearing Agency (i) comprehensively manages legal, credit, liquidity, operational, general business, investment, custody, and other risks that arise in or are borne by it (‘‘Key Clearing Agency Risks’’); (ii) manages risks posed by its participants; 4 (iii) 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Securities Exchange Act Release No. 81248 (July 28, 2017), 82 FR 36049 (August 2, 2017) (SR–DTC– 2017–013, SR–NSCC–2017–012, SR–FICC–2017– 016) (‘‘Notice’’). 4 FICC and NSCC refer to their participants as ‘‘Members,’’ while DTC refers to its participants as ‘‘Participants.’’ These terms are defined in the Clearing Agencies’ Rules. In this filing, as well as in the Framework, ‘‘participant’’ or ‘‘participants’’ refers to both the Members of FICC and NSCC, and the Participants of DTC. 2 17 13 See id. U.S.C. 78s(b)(2). 15 17 CFR 200.30–3(a)(12). 14 15 PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 E:\FR\FM\21SEN1.SGM 21SEN1 Federal Register / Vol. 82, No. 182 / Thursday, September 21, 2017 / Notices manages risks related to material interdependencies and external links; and (iv) provides services responsive to market needs.5 The Framework would be maintained by the General Counsel’s Office (‘‘GCO’’) of DTCC.6 The Framework would provide that GCO reviews the Framework at least annually, in coordination with all departments responsible for the processes described in the Framework.7 B. Comprehensive Management of Key Clearing Agency Risks The Framework would state that the Boards of Directors of the Clearing Agencies (each a ‘‘Board’’ and together, the ‘‘Boards’’) have delegated to DTCC management, on behalf of the Clearing Agencies, the responsibility for identifying, assessing, measuring, monitoring, mitigating, and reporting Key Clearing Agency Risks through a process of developing individual risk tolerance statements for identified risks.8 The Framework would state that these risk tolerance statements describe the applicable risk controls and other measures used to manage risks.9 If needed, residual risks may be identified for either further management or acceptance, which then follows a defined escalation and approval process.10 The Framework would also state that DTCC management, on behalf of the Clearing Agencies, is responsible for the day-to-day management of those residual risks.11 Finally, the Framework would describe the governance around updating risk tolerance statements, which are reviewed and approved by a management committee, the Risk Committee of the Boards, and the Boards at least annually.12 The Framework would provide that the Clearing Agencies manage Key Clearing Agency Risks through (i) a ‘‘Three Lines of Defense’’ approach, as described below, and (ii) the maintenance of risk management policies, procedures, Clearing Agencies’ Rules, and frameworks, as described below. 5 Notice, 82 FR at 36050. The parent company of the Clearing Agencies is The Depository Trust & Clearing Corporation (‘‘DTCC’’). DTCC operates on a shared services model with respect to the Clearing Agencies. Most corporate functions are established and managed on an enterprise-wide basis pursuant to intercompany agreements under which it is generally DTCC that provides a relevant service to a Clearing Agency. 7 Notice, 82 FR at 36050. 8 Id. 9 Id. 10 Id. 11 Id. 12 Id. asabaliauskas on DSKBBXCHB2PROD with NOTICES 6 Id. VerDate Sep<11>2014 17:52 Sep 20, 2017 Jkt 241001 1. Three Lines of Defense The Framework would provide that the Clearing Agencies employ a ‘‘Three Lines of Defense’’ approach for comprehensively managing Key Clearing Agency Risks.13 The Framework would describe the roles of personnel and business units in this risk management approach, which includes (i) a first line of defense comprised of the various business lines and functional units that support the products and services offered by the Clearing Agencies (collectively, ‘‘Clearing Agency Business/Support Areas’’); (ii) a second line of defense comprised of control functions that support the Clearing Agencies, including the organization’s legal, privacy and compliance areas, as well as the DTCC Risk Department, which is specifically dedicated to risk management concerns (collectively, ‘‘Clearing Agency Control Functions’’); and (iii) a third line of defense, which is performed by DTCC Internal Audit.14 For the first line of defense, the Framework would state that each Clearing Agency Business/Support Area would, for example, identify Key Clearing Agency Risks applicable to its function, determine the best way to mitigate such risks, self-test internal controls, and create and implement actions plans for risk mitigation.15 For the second line of defense, the Framework would state that each Clearing Agency’s Control Functions would, for example, work with the Clearing Agency Business/Support Areas on efforts to mitigate Key Clearing Agency Risks, and provide tools to those groups to enable them to analyze, monitor and proactively manage those risks.16 Finally, for the third line of defense, the Framework would identify the role of DTCC Internal Audit as including, for example, directing its own resources to review and test key controls that help mitigate significant Key Clearing Agency Risks, then reporting on the results of that testing.17 In connection with a description of the second and the third lines of defense, the Framework would state that personnel within the DTCC Risk Department and the DTCC Internal Audit are provided with sufficient authority, resources, independence from management, and access to the Boards.18 The Framework would provide that the DTCC Risk Department 44225 and the DTCC Internal Audit are functionally independent from all other Clearing Agency Business/Support Areas.19 The Framework would also explain that the personnel within the DTCC Risk Department and the DTCC Internal Audit have a direct reporting line to, and oversight by, the Risk Committee of the Boards and the Audit Committee of the Boards, respectively, which is supported by the charters of these committees.20 The Framework would state that a set of senior management committees provide oversight of the Three Lines of Defense approach to manage Key Clearing Agency Risks as well as other aspects of the Clearing Agencies’ risk management.21 2. Policies, Procedures, Clearing Agencies’ Rules, and Risk Management Frameworks The Framework would provide that the Clearing Agencies maintain a policy to govern the requirements for establishing, managing, and assessing the performance of internal committees and councils.22 The Framework would also describe the process by which the Clearing Agencies maintain risk management policies, procedures, Clearing Agencies’ Rules, frameworks, and other documents designed to identify, measure, monitor, and manage Key Clearing Agency Risks.23 The Framework would describe policies maintained by the Clearing Agencies that (i) govern the steps taken to meet their regulatory requirements related to proposed rule change and advance notice filings pursuant to Section 19(b)(1) of the Act,24 and Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, entitled the Payment, Clearing, and Settlement Supervision Act of 2010,25 and the rules thereunder (collectively, ‘‘Filing Requirements’’); and (ii) establish standards and a holistic approach for creating and managing risk management policies, procedures, Clearing Agencies’ Rules, frameworks, and other documents, including periodic reviews and governance approval of such documents (‘‘Document Standards’’).26 The Framework would provide that, with respect to those documents that address Key Clearing Agency Risks, the 19 Id. 20 Notice, 13 Id. 21 Notice, 14 Id. 22 Id. 15 Id. 23 Id. 16 Id. 24 Id.; 17 Id. 82 FR at 36050–51. 82 FR at 36051. 25 Notice, 15 U.S.C. 78s(b)(1). 82 FR at 36051; 12 U.S.C. 5465(e)(1). 26 Notice, 82 FR at 36051. 18 Id. PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 E:\FR\FM\21SEN1.SGM 21SEN1 44226 Federal Register / Vol. 82, No. 182 / Thursday, September 21, 2017 / Notices Document Standards require annual approval by the Boards.27 The Framework would describe how the Clearing Agencies maintain the Clearing Agencies’ Rules, which support the Clearing Agencies’ ability to provide for a well-founded, clear, transparent and enforceable legal basis for each aspect of their activities in all relevant jurisdictions.28 Maintenance of the Clearing Agencies’ Rules is supported by the policy governing the Filing Requirements and the Document Standards, described above.29 The Framework would state that the Clearing Agencies’ Rules establish the membership onboarding process of the Clearing Agencies.30 The Framework would also state that the Clearing Agencies may adopt and maintain other risk management frameworks, separate from the Framework, that address, in whole or in part, the management of other Key Clearing Agency Risks such as the management of operational, liquidity, and market risks.31 asabaliauskas on DSKBBXCHB2PROD with NOTICES C. Information and Incentives for Management of Risks by Participants The Framework would describe how the Clearing Agencies provide their respective participants with information and incentives to enable them to monitor, manage, and contain the risks they pose (including the risks by their customers) to the respective Clearing Agencies.32 The Framework would identify some of the sources of the information that are made available to the Clearing Agencies’ participants, including, for example, (i) materials on the DTCC Web site, such as the Clearing Agencies’ Rules, user guides, and training courses, and regularly updated disclosures made pursuant to the guidelines published by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions; and (ii) reports regarding the Clearing Agencies’ margin and liquidity requirements and their transaction volumes and values, as applicable.33 The Framework would also describe some of the incentives used by the Clearing Agencies to enable their participants to monitor, manage, and contain risks they pose to the Clearing Agencies, including, for example, (i) daily margin requirements, pursuant to the Clearing Agencies’ Rules, which are calculated in close correlation to the risk each participant poses to the relevant Clearing Agency; and (ii) other tools within the Clearing Agencies’ Rules that enable the Clearing Agencies to enforce their respective Rules against their participants.34 D. Management of Risks Related to Material Interdependencies and External Links The Framework would describe how the Clearing Agencies regularly review the material risks they bear from and pose to other entities as a result of material interdependencies and external links.35 The Framework would identify some of the Clearing Agencies’ material interdependencies between the Clearing Agencies and other entities which may include, for example, Clearing Agencies’ participants, settling banks, investment counterparties, liquidity providers, vendors, and service providers.36 With respect to the links between the Clearing Agencies and material external interdependent entities, the Framework would describe how the Clearing Agencies review and monitor any resulting risks that are driven by the nature of the relationship.37 For example, risks related to the Clearing Agencies’ link to their respective participants and settling banks are addressed through tools found within the Clearing Agencies’ Rules, as these entities are bound by the Rules.38 The Framework would also describe the Clearing Agencies’ management and monitoring of risks that have the potential of creating systemic risks.39 In addition, the Framework would provide how the Clearing Agencies utilize a series of comprehensive reviews that include input from a cross-functional group to identify, monitor, and manage risks related to all external links of the Clearing Agencies.40 The Framework would provide that risks arising from links to vendors are identified, assessed, controlled, and monitored through a comprehensive review and vetting process.41 The Framework would describe how a riskbased approach is employed to assess the need and level of due diligence activities associated with the evaluation of potential vendors and with the reevaluation of existing vendors.42 The Framework would state that this process involves the review of certain information related to a proposed vendor relationship, which should focus on confidentiality, integrity, availability, and recoverability related to that relationship.43 The Framework would also describe how risk related to existing vendor relationships is reviewed periodically, throughout the lifecycle of the relationship.44 E. Scope of Services Responsive to Market Needs The Framework would describe how the Clearing Agencies meet the requirements of their participants and the markets they serve.45 The Framework would describe the Clearing Agencies’ structured approach for the implementation of new initiatives, which includes conducting a comprehensive risk assessment of new initiatives.46 These reviews address, among other matters, compliance with applicable laws, regulations, and standards.47 The Framework would also describe the Clearing Agencies’ role in industrywide strategic initiatives through participation on industry working groups and the development and publication of concept papers.48 The Framework would describe how the Clearing Agencies use periodic surveys and employ product-aligned customer service representatives to ensure clients receive the support they need.49 The Framework would describe the Clearing Agencies’ process for escalating and responding to certain customer complaints.50 The Framework would also describe the Clearing Agencies’ ‘‘Core Balanced Business Scorecard,’’ which is used by the Clearing Agencies to review and track the effectiveness of their operations, information technology service levels, financial performance, human capital, as well as their participants’ experiences.51 F. Recovery and Orderly Wind-Down The Framework would provide that the Clearing Agencies may maintain policies and procedures to govern the development of plans for recovery and orderly wind-down.52 Such documents would define the roles and responsibilities of relevant business 43 Id. 34 Id. 44 Id. 35 Id. 45 Notice, 27 Id. 36 Id. 46 Id. 28 Id. 37 Id. 47 Id. 29 Id. 38 Id. 48 Id. 30 Id. 39 Id. 49 Id. 31 Id. 40 Notice, 50 Id. 82 FR at 36051–52. 41 Notice, 82 FR at 36051. 42 Id. 32 Id. 33 Id. VerDate Sep<11>2014 17:52 Sep 20, 2017 Jkt 241001 PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 82 FR at 36052. 51 Id. 52 Id. E:\FR\FM\21SEN1.SGM 21SEN1 Federal Register / Vol. 82, No. 182 / Thursday, September 21, 2017 / Notices units in the development and documentation of the plans and would outline the general content of the plans.53 asabaliauskas on DSKBBXCHB2PROD with NOTICES III. Discussion and Commission Findings Section 19(b)(2)(C) of the Act directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and rules and regulations thereunder applicable to such organization.54 After carefully considering the proposed rule changes, the Commission finds that the proposed rule changes are consistent with the requirements of the Act and the rules and regulations thereunder applicable to the Clearing Agencies. Specifically, the Commission finds that the proposed rule changes are consistent with Section 17A(b)(3)(F) of the Act 55 and Rules 17Ad–22(e)(1), (e)(3)(i), (e)(3)(iii), (e)(3)(iv), (e)(20), and (e)(21) under the Act.56 A. Consistency With Section 17A(b)(3)(F) of the Act Section 17A(b)(3)(F) of the Act requires, in part, that the rules of a registered clearing agency be designed to assure the safeguarding of securities and funds which are in the custody or control of the Clearing Agencies or for which they are responsible.57 As described above, the Framework would provide some of the ways the Clearing Agencies comprehensively manage Key Clearing Agency Risks, which include legal, credit, liquidity, operational, general business, investment, custody, and other risks that arise in or are borne by the Clearing Agencies. For example, the Framework would describe how the Clearing Agencies use the ‘‘Three Lines of Defense’’ approach to assessing, measuring, monitoring, mitigating, and reporting those risks, and would identify the roles and responsibilities of each line of defense within that approach. The Framework would also provide other risk management activities, including the establishment and maintenance of certain management committees that would perform oversight of the Clearing Agencies’ businesses and related risk management. Furthermore, the Framework would describe information and incentives offered by the Clearing 53 Id. 54 15 U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). 56 17 CFR 240.17Ad–22(e)(1), (e)(3)(i), (e)(3)(iii), (e)(3)(iv), (e)(20), and (e)(21). 57 15 U.S.C. 78q–1(b)(3)(F). 55 15 VerDate Sep<11>2014 17:52 Sep 20, 2017 Jkt 241001 Agencies to their participants to manage and contain the risks. The Framework would also describe some of the ways to manage risks posed by material interdependency relationships and external links, and address the market needs efficiently and effectively. By providing transparency to their risk management practices, the Framework is designed to help the Clearing Agencies be in a better position to prevent and manage the risks that arise in or are borne by the Clearing Agencies. By better managing the risks that arise in or are borne by the Clearing Agencies, the Framework is designed to help reduce the possibility that a Clearing Agency fails. By better positioning the Clearing Agencies to continue their critical operations and services, and mitigating the risk of financial loss contagion caused by a Clearing Agency failure, the Framework is designed to help assure the safeguarding of securities and funds which are in the custody or control of the Clearing Agencies, or for which they are responsible. Accordingly, the Commission believes that the proposed rule changes are consistent with Section 17A(b)(3)(F) of the Act.58 B. Consistency With Rule 17Ad–22(e)(1) Rule 17Ad–22(e)(1) under the Act requires that each covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to, provide for a well-founded, clear, transparent and enforceable legal basis for each aspect of its activities in all relevant jurisdictions.59 As described above, the Framework would describe the policies maintained by the Clearing Agencies that govern the Filing Requirements and the Document Standards. In addition, the Framework would describe how the Clearing Agencies maintain the Clearing Agencies’ Rules. The Clearing Agencies’ Rules are the key legal basis for each of the Clearing Agencies’ respective activities described in the Clearing Agencies’ Rules. For example, as part of the membership onboarding process, all participants must execute membership agreements, which binds them to the relevant Clearing Agency’s Rules and subjects them to an enforceable contract governing the rights and obligations of the Clearing Agencies and those participants. The Framework would also describe how the Clearing Agencies’ Rules are published on the DTCC Web site, and how the Clearing Agencies adhere to the Filing Requirements. The 58 Id. 59 17 PO 00000 Framework would also describe how the Clearing Agencies review and assess risk related to their contractual arrangements with vendors, service providers, and other external parties with which the Clearing Agencies may establish links. The Framework would also describe the process by which the Clearing Agencies review new initiatives prior to implementation, which include a review of the legal risks that may be posed by those initiatives. By organizing and describing in a central location the policies and procedures that the Clearing Agencies use to manage Key Clearing Agency Risks, as well as the Clearing Agencies’ policies, procedures, Rules, frameworks, and other documents, the Framework is designed to help the Clearing Agencies manage, in a more clear and transparent way, the policies and procedures that define the rights and obligations of the Clearing Agencies, their participants, and other external parties. In doing so, the Framework also helps provide for a well-founded and enforceable legal basis for the activities of the Clearing Agencies. Therefore, the Commission believes that the Framework is consistent with the requirements of Rule 17Ad–22(e)(1).60 C. Consistency With Rule 17Ad– 22(e)(3)(i), (e)(3)(iii), and (e)(3)(iv) Rule 17Ad–22(e)(3)(i) under the Act requires, in part, that each covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain a sound risk management framework for comprehensively managing legal, credit, liquidity, operational, general business, investment, custody and other risks that arise in or are borne by the covered clearing agency, which includes risk management policies, procedures and systems designed to identify, measure, monitor and manage the range of risks that arise in or are borne by the covered clearing agency, that are subject to review on a specified periodic basis and approved by the board of directors annually.61 As described above, the Framework would describe how the Clearing Agencies maintain comprehensive policies, procedures, and other documents, including the Framework and certain other risk management frameworks, which are designed to help identify, measure, monitor, and manage Key Clearing Agency Risks. The Framework would state that the documents that address Key Clearing 60 Id. CFR 240.17Ad–22(e)(1). Frm 00077 Fmt 4703 Sfmt 4703 44227 61 17 E:\FR\FM\21SEN1.SGM CFR 240.17Ad–22(e)(3)(i). 21SEN1 asabaliauskas on DSKBBXCHB2PROD with NOTICES 44228 Federal Register / Vol. 82, No. 182 / Thursday, September 21, 2017 / Notices Agency Risks are subject to annual approval by each of the Boards pursuant to the Document Standards. Furthermore, the Framework would describe how the Clearing Agencies identify, assess, measure, monitor, mitigate, and report risks through individual risk tolerance statements for identified risks, which are reviewed and approved by the Boards at least annually. Accordingly, the Commission believes that the Framework is consistent with Rule 17Ad–22(e)(3)(i).62 Rule 17Ad–22(e)(3)(iii) under the Act requires, in part, that each covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain a sound risk management framework for comprehensively managing legal, credit, liquidity, operational, general business, investment, custody and other risks that arise in or are borne by the covered clearing agency, which provides risk management and internal audit personnel with sufficient authority, resources, independence from management, and access to the board of directors.63 As described above, in connection with a description of the second and the third lines of defense, the Framework would state that personnel within the DTCC Risk Department and the DTCC Internal Audit are provided with sufficient authority, resources, independence from management, and access to the Boards. In particular, the Framework would describe how both the DTCC Risk Department and the DTCC Internal Audit are functionally independent from all other Clearing Agency Business/Support Areas. The Framework would also indicate how the senior management within both of those groups report directly to appropriate committees of the Boards. Accordingly, the Commission believes that the Framework is consistent with Rule 17Ad–22(e)(3)(iii).64 Rule 17Ad–22(e)(3)(iv) under the Act requires, in part, that each covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain a sound risk management framework for comprehensively managing legal, credit, liquidity, operational, general business, investment, custody and other risks that arise in or are borne by the covered clearing agency, which provides risk management and internal audit personnel with a direct reporting line to, and oversight by, a risk management committee and an independent audit committee of the board of directors, respectively.65 As described above, the Framework would describe, as the third line of defense, how senior management within the DTCC Risk Department and the DTCC Internal Audit have a direct reporting line to, and oversight by, the Risk Committee of the Boards and the Audit Committee of the Boards, respectively, which is supported by the charters of these committees. Accordingly, the Commission believes that the Framework is consistent with Rule 17Ad–22(e)(3)(iv).66 D. Consistency With Rule 17Ad– 22(e)(20) Rule 17Ad–22(e)(20) under the Act requires that each covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to identify, monitor and manage risks related to any link the covered clearing agency establishes with one or more other clearing agencies, financial market utilities, or trading markets.67 As described above, the Framework would describe how the Clearing Agencies review both proposed and existing links with other entities, including those links that may result in material interdependencies. For example, the Framework would describe some of the ways the Clearing Agencies manage risks related to their links with, as applicable, participants, settling banks, investment counterparties, liquidity providers, vendors, and service providers, and would also describe how the Clearing Agencies identify and address risks that have the potential of creating systemic impact. With respect to links with vendors, the Framework would describe how the Clearing Agencies apply a comprehensive vendor review and vetting process. By providing written policies and procedures to identify, monitor, and manage risks related to links that the Clearing Agencies’ establish, the Commission believes that the Framework is consistent with Rule 17Ad–22(e)(20).68 E. Consistency With Rule 17Ad– 22(e)(21) Rule 17Ad–22(e)(21) under the Act requires that each covered clearing agency establish, implement, maintain 65 17 62 Id. 63 17 CFR 240.17Ad–22(e)(3)(iv). and enforce written policies and procedures reasonably designed to be efficient and effective in meeting the requirements of its participants and the markets it serves, and have the covered clearing agency’s management regularly review the efficiency and effectiveness of its (i) clearing and settlement arrangements; (ii) operating structure, including risk management policies, procedures, and systems; (iii) scope of products cleared or settled; and (iv) use of technology and communication procedures.69 As described above, the Framework would describe some of the ways in which the Clearing Agencies review the efficiency and effectiveness of their businesses and operations. For example, the Framework would describe how the Clearing Agencies employ a structured approach to the pre-implementation reviews of new initiatives (including initiatives related to their clearing and settlement arrangements, scope of products cleared or settled, and use of technology and communication procedures). The Framework would also describe the Clearing Agencies’ Core Balanced Business Scorecard, which is used to review the effectiveness of the Clearing Agencies’ operations, information technology services levels, financial performance, and other aspects of their business, including their respective participants’ experiences. The Framework would also describe some of the steps the Clearing Agencies take in order to be efficient and effective in reviewing and meeting the requirements of their participants and the markets they serve, including the maintenance of a policy to address escalation, tracking, and resolution of certain customer complaints. By establishing a framework that would (i) help support bring initiatives to market in a more timely and efficient manner through the pre-implementation reviews; (ii) help provide the Clearing Agencies insight into the efficiency and effectiveness of their businesses and operations through the Core Balanced Business Scorecard; and (iii) help manage the Clearing Agencies’ participants’ complaints through a specific policy, the Commission believes that the Framework is consistent with Rule 17Ad–22(e)(21).70 IV. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule changes are consistent with the requirements of the Act and in particular with the requirements of 66 Id. CFR 240.17Ad–22(e)(3)(iii). 67 17 64 Id. VerDate Sep<11>2014 CFR 240.17Ad–22(e)(20). 68 Id. 17:52 Sep 20, 2017 Jkt 241001 PO 00000 Frm 00078 69 17 CFR 240.17Ad–22(e)(21). 70 Id. Fmt 4703 Sfmt 4703 E:\FR\FM\21SEN1.SGM 21SEN1 Federal Register / Vol. 82, No. 182 / Thursday, September 21, 2017 / Notices Section 17A of the Act 71 and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that proposed rule changes SR–DTC–2017– 013, SR–NSCC–2017–012, and SR– FICC–2017–016 be, and hereby are, approved.72 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.73 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–20089 Filed 9–20–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81640; File No. SR–NYSE– 2017–30] Self-Regulatory Organizations; New York Stock Exchange LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 2, To Amend Section 102.01B of the NYSE Listed Company Manual To Provide for the Listing of Companies That List Without a Prior Exchange Act Registration and That Are Not Listing in Connection With an Underwritten Initial Public Offering and Related Changes to Rules 15, 104, and 123D asabaliauskas on DSKBBXCHB2PROD with NOTICES September 15, 2017. I. Introduction On June 13, 2017, New York Stock Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’), pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’) 2 and Rule 19b–4 thereunder,3 a proposed rule change to amend (i) Footnote (E) to Section 102.01B of the NYSE Listed Company Manual (the ‘‘Manual’’) to modify the provisions relating to the qualification of companies listing without a prior Exchange Act registration; (ii) Rule 15 to add a Reference Price for when a security is listed under Footnote (E) to Section 102.01B; (iii) Rule 104 to specify DMM requirements when a security is listed under Footnote (E) to Section 102.10B and there has been no 71 15 U.S.C. 78q–1. approving the Proposed Rule Changes, the Commission considered the proposals’ impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). 73 17 CFR 200.30–3(a)(12). 1 15 U.S.C.78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 72 In VerDate Sep<11>2014 17:52 Sep 20, 2017 Jkt 241001 trading in the private market for such security; and (iv) Rule 123D to specify that the Exchange may declare a regulatory halt in a security that is the subject of an initial listing on the Exchange. The proposed rule change was published for comment in the Federal Register on June 20, 2017.4 The Exchange filed Amendment No. 1 to the proposed rule change on July 28, 2017 which, as noted below, was later withdrawn. On August 3, 2017, the Commission extended the time period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change, to September 18, 2017.5 On August 16, 2017, the Exchange withdrew Amendment No. 1 and filed Amendment No. 2 to the proposed rule change, which amended and replaced the proposed rule change as originally filed.6 Amendment No. 2 was published for comment in the Federal Register on August 24, 2017.7 The Commission received one comment on the proposal.8 This order institutes proceedings under Section 19(b)(2)(B) of the Exchange Act to determine whether to approve or disapprove the proposal. II. Description of the Amended Proposal 1. Listing Standards Generally, Section 102 of the Manual sets forth the minimum numerical standards for domestic companies, or foreign private issuers that choose to follow the domestic standards, to list equity securities on the Exchange. Section 102.01B of the Manual requires a listed company to demonstrate at the time of listing an aggregate market value of publicly-held shares of either $40 million or $100 million, depending on the type of listing.9 Section 102.01B also 4 See Securities Exchange Act Release No. 80933 (June 15, 2017), 82 FR 28200 (June 20, 2017). 5 See Securities Exchange Act Release No. 81309 (August 3, 2017), 82 FR 37244 (August 9, 2017). 6 See Notice, infra note 7, at n. 8, which describes the changes proposed in Amendment No. 2 from the original proposal. Amendment No. 2 replaced the original proposal in its entirety so the description below describes the proposal, as modified by Amendment No. 2. 7 See Securities Exchange Act Release No. 81440 (August 18, 2017), 82 FR 40183 (August 24, 2017) (‘‘Notice’’). 8 See Letter from James J. Angel, Associate Professor of Finance, Georgetown University, to SEC (July 28, 2017). 9 Section 102.01B of the Manual states that a company must demonstrate ‘‘. . . an aggregate market value of publicly-held shares of $40 million for companies that list either at the time of their IPO (C) or as a result of a spin-off or under the Affiliated Company standard or, for companies that list at the PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 44229 states that, in these cases, the Exchange relies on written representations from the underwriter, investment banker or other financial advisor, as applicable, with respect to this valuation.10 While Footnote (E) to Section 102.01B states that the Exchange generally expects to list companies in connection with a firm commitment underwritten initial public offering (‘‘IPO’’), upon transfer from another market, or pursuant to a spinoff, Section 102.01B of the Manual also contemplates that companies that have not previously had their common equity securities registered under the Exchange Act, but which have sold common equity securities in a private placement, may wish to list their common equity securities on the Exchange at the time of effectiveness of a registration statement 11 filed solely for the purpose of allowing existing shareholders to sell their shares.12 Specifically, Footnote (E) to Section 102.01B of the Manual permits the Exchange, on a case by case basis, to exercise discretion to list such companies and provides that the Exchange will determine that such a company has met the $100 million aggregate market value of publicly-held shares requirement based on a combination of both (i) an independent third-party valuation (a ‘‘Valuation’’) 13 of the company and (ii) the most recent trading price for the company’s common stock in a trading system for unregistered securities operated by a national securities exchange or a registered broker-dealer (a ‘‘Private Placement Market’’).14 Under the time of their Initial Firm Commitment Underwritten Public Offering (C), and $100,000,000 for other companies (D)(E).’’ Section 102.01B also requires a company to have a closing price, or if listing in connection with an IPO or Initial Firm Commitment Underwritten Public Offering, a price per share of at least $4.00 at the time of initial listing. 10 See Section 102.01B, Footnote (C) of the Manual which states that for companies listing at the time of their IPO or Initial Firm Commitment Underwritten Public Offering, the Exchange will rely on a written commitment from the underwriter to represent the anticipated value of the company’s offering. For spin-offs, the Exchange will rely on a representation from the parent company’s investment banker (or other financial advisor) in order to estimate the market value based upon the distribution ratio. 11 The reference to a registration statement refers to a registration statement effective under the Securities Act of 1933 (‘‘Securities Act’’). 12 See Section 102.01B, Footnote (E) of the Manual. 13 See Section 102.01B, Footnote (E) of the Manual which sets forth specific requirements for the Valuation. Among other factors, any Valuation used for purposes of Footnote (E) must be provided by an entity that has significant experience and demonstrable competence in the provision of such valuations. 14 Section 102.01B, Footnote (E) also sets forth specific factors for relying on a Private Placement Market Price including that such price must be a E:\FR\FM\21SEN1.SGM Continued 21SEN1

Agencies

[Federal Register Volume 82, Number 182 (Thursday, September 21, 2017)]
[Notices]
[Pages 44224-44229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-20089]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34- 81635; File Nos. SR-DTC-2017-013; SR-NSCC-2017-012; 
SR-FICC-2017-016]


Self-Regulatory Organizations; The Depository Trust Company; 
National Securities Clearing Corporation; Fixed Income Clearing 
Corporation; Order Approving Proposed Rule Changes To Adopt the 
Clearing Agency Risk Management Framework

September 15, 2017.

I. Introduction

    On July 14, 2017, The Depository Trust Company (``DTC''), National 
Securities Clearing Corporation (``NSCC''), and Fixed Income Clearing 
Corporation (``FICC,'' each a ``Clearing Agency,'' and collectively the 
``Clearing Agencies''), filed with the Securities and Exchange 
Commission (``Commission'') proposed rule changes SR-DTC-2017-013, SR-
NSCC-2017-012, and SR-FICC-2017-016, respectively, pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder.\2\ The proposed rule changes were published for 
comment in the Federal Register on August 2, 2017.\3\ The Commission 
did not receive any comment letters on the proposed rule changes. For 
the reasons discussed below, the Commission approves the proposed rule 
changes.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 81248 (July 28, 2017), 
82 FR 36049 (August 2, 2017) (SR-DTC-2017-013, SR-NSCC-2017-012, SR-
FICC-2017-016) (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Changes

    The proposed rule changes are proposals by the Clearing Agencies to 
adopt the Clearing Agency Risk Management Framework (``Framework'') of 
the Clearing Agencies, as described below.

A. Overview of the Framework

    The Framework would describe how each Clearing Agency (i) 
comprehensively manages legal, credit, liquidity, operational, general 
business, investment, custody, and other risks that arise in or are 
borne by it (``Key Clearing Agency Risks''); (ii) manages risks posed 
by its participants; \4\ (iii)

[[Page 44225]]

manages risks related to material interdependencies and external links; 
and (iv) provides services responsive to market needs.\5\ The Framework 
would be maintained by the General Counsel's Office (``GCO'') of 
DTCC.\6\ The Framework would provide that GCO reviews the Framework at 
least annually, in coordination with all departments responsible for 
the processes described in the Framework.\7\
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    \4\ FICC and NSCC refer to their participants as ``Members,'' 
while DTC refers to its participants as ``Participants.'' These 
terms are defined in the Clearing Agencies' Rules. In this filing, 
as well as in the Framework, ``participant'' or ``participants'' 
refers to both the Members of FICC and NSCC, and the Participants of 
DTC.
    \5\ Notice, 82 FR at 36050.
    \6\ Id. The parent company of the Clearing Agencies is The 
Depository Trust & Clearing Corporation (``DTCC''). DTCC operates on 
a shared services model with respect to the Clearing Agencies. Most 
corporate functions are established and managed on an enterprise-
wide basis pursuant to intercompany agreements under which it is 
generally DTCC that provides a relevant service to a Clearing 
Agency.
    \7\ Notice, 82 FR at 36050.
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B. Comprehensive Management of Key Clearing Agency Risks

    The Framework would state that the Boards of Directors of the 
Clearing Agencies (each a ``Board'' and together, the ``Boards'') have 
delegated to DTCC management, on behalf of the Clearing Agencies, the 
responsibility for identifying, assessing, measuring, monitoring, 
mitigating, and reporting Key Clearing Agency Risks through a process 
of developing individual risk tolerance statements for identified 
risks.\8\ The Framework would state that these risk tolerance 
statements describe the applicable risk controls and other measures 
used to manage risks.\9\ If needed, residual risks may be identified 
for either further management or acceptance, which then follows a 
defined escalation and approval process.\10\ The Framework would also 
state that DTCC management, on behalf of the Clearing Agencies, is 
responsible for the day-to-day management of those residual risks.\11\ 
Finally, the Framework would describe the governance around updating 
risk tolerance statements, which are reviewed and approved by a 
management committee, the Risk Committee of the Boards, and the Boards 
at least annually.\12\ The Framework would provide that the Clearing 
Agencies manage Key Clearing Agency Risks through (i) a ``Three Lines 
of Defense'' approach, as described below, and (ii) the maintenance of 
risk management policies, procedures, Clearing Agencies' Rules, and 
frameworks, as described below.
---------------------------------------------------------------------------

    \8\ Id.
    \9\ Id.
    \10\ Id.
    \11\ Id.
    \12\ Id.
---------------------------------------------------------------------------

1. Three Lines of Defense
    The Framework would provide that the Clearing Agencies employ a 
``Three Lines of Defense'' approach for comprehensively managing Key 
Clearing Agency Risks.\13\ The Framework would describe the roles of 
personnel and business units in this risk management approach, which 
includes (i) a first line of defense comprised of the various business 
lines and functional units that support the products and services 
offered by the Clearing Agencies (collectively, ``Clearing Agency 
Business/Support Areas''); (ii) a second line of defense comprised of 
control functions that support the Clearing Agencies, including the 
organization's legal, privacy and compliance areas, as well as the DTCC 
Risk Department, which is specifically dedicated to risk management 
concerns (collectively, ``Clearing Agency Control Functions''); and 
(iii) a third line of defense, which is performed by DTCC Internal 
Audit.\14\
---------------------------------------------------------------------------

    \13\ Id.
    \14\ Id.
---------------------------------------------------------------------------

    For the first line of defense, the Framework would state that each 
Clearing Agency Business/Support Area would, for example, identify Key 
Clearing Agency Risks applicable to its function, determine the best 
way to mitigate such risks, self-test internal controls, and create and 
implement actions plans for risk mitigation.\15\ For the second line of 
defense, the Framework would state that each Clearing Agency's Control 
Functions would, for example, work with the Clearing Agency Business/
Support Areas on efforts to mitigate Key Clearing Agency Risks, and 
provide tools to those groups to enable them to analyze, monitor and 
proactively manage those risks.\16\ Finally, for the third line of 
defense, the Framework would identify the role of DTCC Internal Audit 
as including, for example, directing its own resources to review and 
test key controls that help mitigate significant Key Clearing Agency 
Risks, then reporting on the results of that testing.\17\
---------------------------------------------------------------------------

    \15\ Id.
    \16\ Id.
    \17\ Id.
---------------------------------------------------------------------------

    In connection with a description of the second and the third lines 
of defense, the Framework would state that personnel within the DTCC 
Risk Department and the DTCC Internal Audit are provided with 
sufficient authority, resources, independence from management, and 
access to the Boards.\18\ The Framework would provide that the DTCC 
Risk Department and the DTCC Internal Audit are functionally 
independent from all other Clearing Agency Business/Support Areas.\19\ 
The Framework would also explain that the personnel within the DTCC 
Risk Department and the DTCC Internal Audit have a direct reporting 
line to, and oversight by, the Risk Committee of the Boards and the 
Audit Committee of the Boards, respectively, which is supported by the 
charters of these committees.\20\ The Framework would state that a set 
of senior management committees provide oversight of the Three Lines of 
Defense approach to manage Key Clearing Agency Risks as well as other 
aspects of the Clearing Agencies' risk management.\21\
---------------------------------------------------------------------------

    \18\ Id.
    \19\ Id.
    \20\ Notice, 82 FR at 36050-51.
    \21\ Notice, 82 FR at 36051.
---------------------------------------------------------------------------

2. Policies, Procedures, Clearing Agencies' Rules, and Risk Management 
Frameworks
    The Framework would provide that the Clearing Agencies maintain a 
policy to govern the requirements for establishing, managing, and 
assessing the performance of internal committees and councils.\22\ The 
Framework would also describe the process by which the Clearing 
Agencies maintain risk management policies, procedures, Clearing 
Agencies' Rules, frameworks, and other documents designed to identify, 
measure, monitor, and manage Key Clearing Agency Risks.\23\
---------------------------------------------------------------------------

    \22\ Id.
    \23\ Id.
---------------------------------------------------------------------------

    The Framework would describe policies maintained by the Clearing 
Agencies that (i) govern the steps taken to meet their regulatory 
requirements related to proposed rule change and advance notice filings 
pursuant to Section 19(b)(1) of the Act,\24\ and Section 806(e)(1) of 
Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, entitled the Payment, Clearing, and Settlement Supervision Act of 
2010,\25\ and the rules thereunder (collectively, ``Filing 
Requirements''); and (ii) establish standards and a holistic approach 
for creating and managing risk management policies, procedures, 
Clearing Agencies' Rules, frameworks, and other documents, including 
periodic reviews and governance approval of such documents (``Document 
Standards'').\26\ The Framework would provide that, with respect to 
those documents that address Key Clearing Agency Risks, the

[[Page 44226]]

Document Standards require annual approval by the Boards.\27\
---------------------------------------------------------------------------

    \24\ Id.; 15 U.S.C. 78s(b)(1).
    \25\ Notice, 82 FR at 36051; 12 U.S.C. 5465(e)(1).
    \26\ Notice, 82 FR at 36051.
    \27\ Id.
---------------------------------------------------------------------------

    The Framework would describe how the Clearing Agencies maintain the 
Clearing Agencies' Rules, which support the Clearing Agencies' ability 
to provide for a well-founded, clear, transparent and enforceable legal 
basis for each aspect of their activities in all relevant 
jurisdictions.\28\ Maintenance of the Clearing Agencies' Rules is 
supported by the policy governing the Filing Requirements and the 
Document Standards, described above.\29\ The Framework would state that 
the Clearing Agencies' Rules establish the membership onboarding 
process of the Clearing Agencies.\30\ The Framework would also state 
that the Clearing Agencies may adopt and maintain other risk management 
frameworks, separate from the Framework, that address, in whole or in 
part, the management of other Key Clearing Agency Risks such as the 
management of operational, liquidity, and market risks.\31\
---------------------------------------------------------------------------

    \28\ Id.
    \29\ Id.
    \30\ Id.
    \31\ Id.
---------------------------------------------------------------------------

C. Information and Incentives for Management of Risks by Participants

    The Framework would describe how the Clearing Agencies provide 
their respective participants with information and incentives to enable 
them to monitor, manage, and contain the risks they pose (including the 
risks by their customers) to the respective Clearing Agencies.\32\ The 
Framework would identify some of the sources of the information that 
are made available to the Clearing Agencies' participants, including, 
for example, (i) materials on the DTCC Web site, such as the Clearing 
Agencies' Rules, user guides, and training courses, and regularly 
updated disclosures made pursuant to the guidelines published by the 
Committee on Payment and Settlement Systems and the Technical Committee 
of the International Organization of Securities Commissions; and (ii) 
reports regarding the Clearing Agencies' margin and liquidity 
requirements and their transaction volumes and values, as 
applicable.\33\
---------------------------------------------------------------------------

    \32\ Id.
    \33\ Id.
---------------------------------------------------------------------------

    The Framework would also describe some of the incentives used by 
the Clearing Agencies to enable their participants to monitor, manage, 
and contain risks they pose to the Clearing Agencies, including, for 
example, (i) daily margin requirements, pursuant to the Clearing 
Agencies' Rules, which are calculated in close correlation to the risk 
each participant poses to the relevant Clearing Agency; and (ii) other 
tools within the Clearing Agencies' Rules that enable the Clearing 
Agencies to enforce their respective Rules against their 
participants.\34\
---------------------------------------------------------------------------

    \34\ Id.
---------------------------------------------------------------------------

D. Management of Risks Related to Material Interdependencies and 
External Links

    The Framework would describe how the Clearing Agencies regularly 
review the material risks they bear from and pose to other entities as 
a result of material interdependencies and external links.\35\ The 
Framework would identify some of the Clearing Agencies' material 
interdependencies between the Clearing Agencies and other entities 
which may include, for example, Clearing Agencies' participants, 
settling banks, investment counterparties, liquidity providers, 
vendors, and service providers.\36\ With respect to the links between 
the Clearing Agencies and material external interdependent entities, 
the Framework would describe how the Clearing Agencies review and 
monitor any resulting risks that are driven by the nature of the 
relationship.\37\ For example, risks related to the Clearing Agencies' 
link to their respective participants and settling banks are addressed 
through tools found within the Clearing Agencies' Rules, as these 
entities are bound by the Rules.\38\ The Framework would also describe 
the Clearing Agencies' management and monitoring of risks that have the 
potential of creating systemic risks.\39\ In addition, the Framework 
would provide how the Clearing Agencies utilize a series of 
comprehensive reviews that include input from a cross-functional group 
to identify, monitor, and manage risks related to all external links of 
the Clearing Agencies.\40\
---------------------------------------------------------------------------

    \35\ Id.
    \36\ Id.
    \37\ Id.
    \38\ Id.
    \39\ Id.
    \40\ Notice, 82 FR at 36051-52.
---------------------------------------------------------------------------

    The Framework would provide that risks arising from links to 
vendors are identified, assessed, controlled, and monitored through a 
comprehensive review and vetting process.\41\ The Framework would 
describe how a risk-based approach is employed to assess the need and 
level of due diligence activities associated with the evaluation of 
potential vendors and with the re-evaluation of existing vendors.\42\ 
The Framework would state that this process involves the review of 
certain information related to a proposed vendor relationship, which 
should focus on confidentiality, integrity, availability, and 
recoverability related to that relationship.\43\ The Framework would 
also describe how risk related to existing vendor relationships is 
reviewed periodically, throughout the lifecycle of the 
relationship.\44\
---------------------------------------------------------------------------

    \41\ Notice, 82 FR at 36051.
    \42\ Id.
    \43\ Id.
    \44\ Id.
---------------------------------------------------------------------------

E. Scope of Services Responsive to Market Needs

    The Framework would describe how the Clearing Agencies meet the 
requirements of their participants and the markets they serve.\45\ The 
Framework would describe the Clearing Agencies' structured approach for 
the implementation of new initiatives, which includes conducting a 
comprehensive risk assessment of new initiatives.\46\ These reviews 
address, among other matters, compliance with applicable laws, 
regulations, and standards.\47\
---------------------------------------------------------------------------

    \45\ Notice, 82 FR at 36052.
    \46\ Id.
    \47\ Id.
---------------------------------------------------------------------------

    The Framework would also describe the Clearing Agencies' role in 
industry-wide strategic initiatives through participation on industry 
working groups and the development and publication of concept 
papers.\48\ The Framework would describe how the Clearing Agencies use 
periodic surveys and employ product-aligned customer service 
representatives to ensure clients receive the support they need.\49\ 
The Framework would describe the Clearing Agencies' process for 
escalating and responding to certain customer complaints.\50\ The 
Framework would also describe the Clearing Agencies' ``Core Balanced 
Business Scorecard,'' which is used by the Clearing Agencies to review 
and track the effectiveness of their operations, information technology 
service levels, financial performance, human capital, as well as their 
participants' experiences.\51\
---------------------------------------------------------------------------

    \48\ Id.
    \49\ Id.
    \50\ Id.
    \51\ Id.
---------------------------------------------------------------------------

F. Recovery and Orderly Wind-Down

    The Framework would provide that the Clearing Agencies may maintain 
policies and procedures to govern the development of plans for recovery 
and orderly wind-down.\52\ Such documents would define the roles and 
responsibilities of relevant business

[[Page 44227]]

units in the development and documentation of the plans and would 
outline the general content of the plans.\53\
---------------------------------------------------------------------------

    \52\ Id.
    \53\ Id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and rules and regulations thereunder applicable to such 
organization.\54\ After carefully considering the proposed rule 
changes, the Commission finds that the proposed rule changes are 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to the Clearing Agencies. 
Specifically, the Commission finds that the proposed rule changes are 
consistent with Section 17A(b)(3)(F) of the Act \55\ and Rules 17Ad-
22(e)(1), (e)(3)(i), (e)(3)(iii), (e)(3)(iv), (e)(20), and (e)(21) 
under the Act.\56\
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78s(b)(2)(C).
    \55\ 15 U.S.C. 78q-1(b)(3)(F).
    \56\ 17 CFR 240.17Ad-22(e)(1), (e)(3)(i), (e)(3)(iii), 
(e)(3)(iv), (e)(20), and (e)(21).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a registered clearing agency be designed to assure the safeguarding 
of securities and funds which are in the custody or control of the 
Clearing Agencies or for which they are responsible.\57\
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described above, the Framework would provide some of the ways 
the Clearing Agencies comprehensively manage Key Clearing Agency Risks, 
which include legal, credit, liquidity, operational, general business, 
investment, custody, and other risks that arise in or are borne by the 
Clearing Agencies. For example, the Framework would describe how the 
Clearing Agencies use the ``Three Lines of Defense'' approach to 
assessing, measuring, monitoring, mitigating, and reporting those 
risks, and would identify the roles and responsibilities of each line 
of defense within that approach. The Framework would also provide other 
risk management activities, including the establishment and maintenance 
of certain management committees that would perform oversight of the 
Clearing Agencies' businesses and related risk management. Furthermore, 
the Framework would describe information and incentives offered by the 
Clearing Agencies to their participants to manage and contain the 
risks. The Framework would also describe some of the ways to manage 
risks posed by material interdependency relationships and external 
links, and address the market needs efficiently and effectively.
    By providing transparency to their risk management practices, the 
Framework is designed to help the Clearing Agencies be in a better 
position to prevent and manage the risks that arise in or are borne by 
the Clearing Agencies. By better managing the risks that arise in or 
are borne by the Clearing Agencies, the Framework is designed to help 
reduce the possibility that a Clearing Agency fails. By better 
positioning the Clearing Agencies to continue their critical operations 
and services, and mitigating the risk of financial loss contagion 
caused by a Clearing Agency failure, the Framework is designed to help 
assure the safeguarding of securities and funds which are in the 
custody or control of the Clearing Agencies, or for which they are 
responsible. Accordingly, the Commission believes that the proposed 
rule changes are consistent with Section 17A(b)(3)(F) of the Act.\58\
---------------------------------------------------------------------------

    \58\ Id.
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(1)

    Rule 17Ad-22(e)(1) under the Act requires that each covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to, provide for a well-
founded, clear, transparent and enforceable legal basis for each aspect 
of its activities in all relevant jurisdictions.\59\
---------------------------------------------------------------------------

    \59\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

    As described above, the Framework would describe the policies 
maintained by the Clearing Agencies that govern the Filing Requirements 
and the Document Standards. In addition, the Framework would describe 
how the Clearing Agencies maintain the Clearing Agencies' Rules. The 
Clearing Agencies' Rules are the key legal basis for each of the 
Clearing Agencies' respective activities described in the Clearing 
Agencies' Rules. For example, as part of the membership onboarding 
process, all participants must execute membership agreements, which 
binds them to the relevant Clearing Agency's Rules and subjects them to 
an enforceable contract governing the rights and obligations of the 
Clearing Agencies and those participants. The Framework would also 
describe how the Clearing Agencies' Rules are published on the DTCC Web 
site, and how the Clearing Agencies adhere to the Filing Requirements. 
The Framework would also describe how the Clearing Agencies review and 
assess risk related to their contractual arrangements with vendors, 
service providers, and other external parties with which the Clearing 
Agencies may establish links. The Framework would also describe the 
process by which the Clearing Agencies review new initiatives prior to 
implementation, which include a review of the legal risks that may be 
posed by those initiatives.
    By organizing and describing in a central location the policies and 
procedures that the Clearing Agencies use to manage Key Clearing Agency 
Risks, as well as the Clearing Agencies' policies, procedures, Rules, 
frameworks, and other documents, the Framework is designed to help the 
Clearing Agencies manage, in a more clear and transparent way, the 
policies and procedures that define the rights and obligations of the 
Clearing Agencies, their participants, and other external parties. In 
doing so, the Framework also helps provide for a well-founded and 
enforceable legal basis for the activities of the Clearing Agencies. 
Therefore, the Commission believes that the Framework is consistent 
with the requirements of Rule 17Ad-22(e)(1).\60\
---------------------------------------------------------------------------

    \60\ Id.
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(3)(i), (e)(3)(iii), and (e)(3)(iv)

    Rule 17Ad-22(e)(3)(i) under the Act requires, in part, that each 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to maintain a sound 
risk management framework for comprehensively managing legal, credit, 
liquidity, operational, general business, investment, custody and other 
risks that arise in or are borne by the covered clearing agency, which 
includes risk management policies, procedures and systems designed to 
identify, measure, monitor and manage the range of risks that arise in 
or are borne by the covered clearing agency, that are subject to review 
on a specified periodic basis and approved by the board of directors 
annually.\61\
---------------------------------------------------------------------------

    \61\ 17 CFR 240.17Ad-22(e)(3)(i).
---------------------------------------------------------------------------

    As described above, the Framework would describe how the Clearing 
Agencies maintain comprehensive policies, procedures, and other 
documents, including the Framework and certain other risk management 
frameworks, which are designed to help identify, measure, monitor, and 
manage Key Clearing Agency Risks. The Framework would state that the 
documents that address Key Clearing

[[Page 44228]]

Agency Risks are subject to annual approval by each of the Boards 
pursuant to the Document Standards. Furthermore, the Framework would 
describe how the Clearing Agencies identify, assess, measure, monitor, 
mitigate, and report risks through individual risk tolerance statements 
for identified risks, which are reviewed and approved by the Boards at 
least annually. Accordingly, the Commission believes that the Framework 
is consistent with Rule 17Ad-22(e)(3)(i).\62\
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    \62\ Id.
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    Rule 17Ad-22(e)(3)(iii) under the Act requires, in part, that each 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to maintain a sound 
risk management framework for comprehensively managing legal, credit, 
liquidity, operational, general business, investment, custody and other 
risks that arise in or are borne by the covered clearing agency, which 
provides risk management and internal audit personnel with sufficient 
authority, resources, independence from management, and access to the 
board of directors.\63\
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    \63\ 17 CFR 240.17Ad-22(e)(3)(iii).
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    As described above, in connection with a description of the second 
and the third lines of defense, the Framework would state that 
personnel within the DTCC Risk Department and the DTCC Internal Audit 
are provided with sufficient authority, resources, independence from 
management, and access to the Boards. In particular, the Framework 
would describe how both the DTCC Risk Department and the DTCC Internal 
Audit are functionally independent from all other Clearing Agency 
Business/Support Areas. The Framework would also indicate how the 
senior management within both of those groups report directly to 
appropriate committees of the Boards. Accordingly, the Commission 
believes that the Framework is consistent with Rule 17Ad-
22(e)(3)(iii).\64\
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    \64\ Id.
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    Rule 17Ad-22(e)(3)(iv) under the Act requires, in part, that each 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to maintain a sound 
risk management framework for comprehensively managing legal, credit, 
liquidity, operational, general business, investment, custody and other 
risks that arise in or are borne by the covered clearing agency, which 
provides risk management and internal audit personnel with a direct 
reporting line to, and oversight by, a risk management committee and an 
independent audit committee of the board of directors, 
respectively.\65\
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    \65\ 17 CFR 240.17Ad-22(e)(3)(iv).
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    As described above, the Framework would describe, as the third line 
of defense, how senior management within the DTCC Risk Department and 
the DTCC Internal Audit have a direct reporting line to, and oversight 
by, the Risk Committee of the Boards and the Audit Committee of the 
Boards, respectively, which is supported by the charters of these 
committees. Accordingly, the Commission believes that the Framework is 
consistent with Rule 17Ad-22(e)(3)(iv).\66\
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    \66\ Id.
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D. Consistency With Rule 17Ad-22(e)(20)

    Rule 17Ad-22(e)(20) under the Act requires that each covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to identify, monitor and 
manage risks related to any link the covered clearing agency 
establishes with one or more other clearing agencies, financial market 
utilities, or trading markets.\67\
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    \67\ 17 CFR 240.17Ad-22(e)(20).
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    As described above, the Framework would describe how the Clearing 
Agencies review both proposed and existing links with other entities, 
including those links that may result in material interdependencies. 
For example, the Framework would describe some of the ways the Clearing 
Agencies manage risks related to their links with, as applicable, 
participants, settling banks, investment counterparties, liquidity 
providers, vendors, and service providers, and would also describe how 
the Clearing Agencies identify and address risks that have the 
potential of creating systemic impact. With respect to links with 
vendors, the Framework would describe how the Clearing Agencies apply a 
comprehensive vendor review and vetting process.
    By providing written policies and procedures to identify, monitor, 
and manage risks related to links that the Clearing Agencies' 
establish, the Commission believes that the Framework is consistent 
with Rule 17Ad-22(e)(20).\68\
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    \68\ Id.
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E. Consistency With Rule 17Ad-22(e)(21)

    Rule 17Ad-22(e)(21) under the Act requires that each covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to be efficient and 
effective in meeting the requirements of its participants and the 
markets it serves, and have the covered clearing agency's management 
regularly review the efficiency and effectiveness of its (i) clearing 
and settlement arrangements; (ii) operating structure, including risk 
management policies, procedures, and systems; (iii) scope of products 
cleared or settled; and (iv) use of technology and communication 
procedures.\69\
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    \69\ 17 CFR 240.17Ad-22(e)(21).
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    As described above, the Framework would describe some of the ways 
in which the Clearing Agencies review the efficiency and effectiveness 
of their businesses and operations. For example, the Framework would 
describe how the Clearing Agencies employ a structured approach to the 
pre-implementation reviews of new initiatives (including initiatives 
related to their clearing and settlement arrangements, scope of 
products cleared or settled, and use of technology and communication 
procedures). The Framework would also describe the Clearing Agencies' 
Core Balanced Business Scorecard, which is used to review the 
effectiveness of the Clearing Agencies' operations, information 
technology services levels, financial performance, and other aspects of 
their business, including their respective participants' experiences. 
The Framework would also describe some of the steps the Clearing 
Agencies take in order to be efficient and effective in reviewing and 
meeting the requirements of their participants and the markets they 
serve, including the maintenance of a policy to address escalation, 
tracking, and resolution of certain customer complaints.
    By establishing a framework that would (i) help support bring 
initiatives to market in a more timely and efficient manner through the 
pre-implementation reviews; (ii) help provide the Clearing Agencies 
insight into the efficiency and effectiveness of their businesses and 
operations through the Core Balanced Business Scorecard; and (iii) help 
manage the Clearing Agencies' participants' complaints through a 
specific policy, the Commission believes that the Framework is 
consistent with Rule 17Ad-22(e)(21).\70\
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    \70\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes are consistent with the requirements of the Act 
and in particular with the requirements of

[[Page 44229]]

Section 17A of the Act \71\ and the rules and regulations thereunder.
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    \71\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that proposed rule changes SR-DTC-2017-013, SR-NSCC-2017-012, and SR-
FICC-2017-016 be, and hereby are, approved.\72\
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    \72\ In approving the Proposed Rule Changes, the Commission 
considered the proposals' impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\73\
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    \73\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-20089 Filed 9-20-17; 8:45 am]
 BILLING CODE 8011-01-P