Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change To Introduce a Floor to the Calculation of the Fails Charges and Make Other Changes, 29150-29152 [2018-13379]

Download as PDF 29150 Federal Register / Vol. 83, No. 121 / Friday, June 22, 2018 / Notices At any time within 60 days of the filing of such 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 Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B) of the Act 14 to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: daltland on DSKBBV9HB2PROD with NOTICES Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– Phlx–2018–47 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–Phlx–2018–47. 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 website (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 website 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 rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 14 15 U.S.C. 78s(b)(2)(B). VerDate Sep<11>2014 17:16 Jun 21, 2018 Jkt 244001 filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–Phlx–2018–47, and should be submitted on or before July 13, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.15 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–13380 Filed 6–21–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–83457; File No. SR–FICC– 2018–004] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change To Introduce a Floor to the Calculation of the Fails Charges and Make Other Changes June 18, 2018. On May 8, 2018, Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule change SR–FICC–2018–004, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder.2 The proposed rule change was published for comment in the Federal Register on May 17, 2018.3 The Commission did not receive any comment letters on the proposed rule change. For the reasons discussed below, the Commission approves the proposed rule change. I. Description of the Proposed Rule Change The proposed rule change would update FICC’s Government Securities Division (‘‘GSD’’) Rulebook (‘‘GSD Rules’’) and FICC’s Mortgage-Backed Securities Division (‘‘MBSD’’) Clearing Rules (‘‘MBSD Rules’’) 4 to (i) introduce 15 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 83222 (May 11, 2018), 83 FR 23032 (May 17, 2018) (SR– FICC–2018–004) (‘‘Notice’’). 4 The GSD Rules and the MBSD Rules are available at https://www.dtcc.com/legal/rules-andprocedures. 1 15 PO 00000 Frm 00063 Fmt 4703 Sfmt 4703 a floor of one percent to the calculation of the existing fails charge rules, (ii) clarify the target rate that may be used in the fails charge calculations under certain circumstances, and (iii) make certain technical changes to the fails charge provisions to ensure consistent use of defined terms.5 The proposed rule change would also update the MBSD Rules to clarify that a cap applies to the MBSD fails charge.6 Each of these proposed changes are described below. A. Proposed One Percent Floor In a securities transaction, a settlement fail occurs when the seller does not deliver the securities to the buyer on the agreed upon settlement date. FICC states that although settlement fails are generally not treated as contractual default events, provided that the failing seller delivers the securities soon after the settlement date, persistent elevated levels of settlement fails create market inefficiencies and increase credit risk for market participants.7 To help mitigate settlement fails, FICC maintains a fails charge in both the GSD Rules and the MBSD Rules.8 However, FICC states that under the current GSD Rules and MBSD Rules, the respective fails charge calculations could result in a zero charge.9 Specifically, under the GSD version of the current fails charge, if the federal funds target rate would rise to three percent, then the calculation of the charge would result in a zero charge.10 Similarly, under the MBSD version of the current fails charge, if the federal funds target rate would rise to two percent, then the calculation of the charge would result in a zero charge.11 To address this issue, FICC proposes to amend the GSD Rules and the MBSD Rules to add a one percent floor to the respective GSD and MBSD fails charge calculations.12 FICC’s proposal comes in response to a recent announcement by the Treasury Market Practices Group (‘‘TMPG’’),13 in 5 Notice, 83 FR at 23032–34. 6 Id. 7 See Notice, 83 FR at 23033. See also Frequently Asked Questions: TMPG Fails Charges (April 23, 2018) at 1, available at https:// www.newyorkfed.org/medialibrary/microsites/ tmpg/files/TMPG-Fails-Charge-FAQ-04-23-2018.pdf (‘‘FAQ’’). 8 GSD Rule 11; MBSD Rule 12, supra note 4. 9 Id.; Notice, 83 FR at 23034. 10 Id. 11 Id. 12 Id. 13 The TMPG was formed in 2007, under the sponsorship of the Federal Reserve Bank of New York, to help address settlement fails and other issues affecting the U.S. Government debt and mortgage-backed securities markets. The Treasury Market Practices Group: Creation and Early Initiatives (August 2017) at 3, available at https:// E:\FR\FM\22JNN1.SGM 22JNN1 Federal Register / Vol. 83, No. 121 / Friday, June 22, 2018 / Notices which the TMPG proposed the same change to its recommended best practices to help ensure that there is always a minimum fails charge amount.14 The TMPG states that its recommendation of a one percent floor is driven by the concern that market participants would discontinue their fails charge operational processes in a prolonged zero charge scenario.15 Adding the one percent floor would help maintain a fails charge during elevated federal funds target rate levels, and thereby help ensure that market participants do not discontinue their fails charge operational processes.16 FICC states that as one of the largest participants in U.S. Government securities market, it is imperative that FICC implement the TMPG’s recommendation to help maintain consistency and symmetry within the market.17 daltland on DSKBBV9HB2PROD with NOTICES B. Federal Funds Level Target Range Clarification Pursuant to TMPG guidelines, if the Federal Open Market Committee (‘‘FOMC’’) specifies a target range in lieu of a target level, the lower limit of the target range announced by the FOMC would be used in the calculation of the fails charge.18 Further, if the FOMC were to terminate its policy of specifying or announcing a federal funds rate target level or range, then the rate used to calculate the fails charge would be a successor rate and source recommended by the TMPG.19 While FICC states that it would follow the TMPG guidelines in this regard,20 this practice is currently not stated in the fails charge rule provisions in each of the GSD Rules and the MBSD Rules. Therefore, FICC proposes to update the relevant provisions to reflect that FICC would follow this practice if those circumstances arose.21 Additionally, FICC proposes to add defined terms for www.newyorkfed.org/medialibrary/media/research/ staff_reports/sr822.pdf. The TMPG is a group of market professionals that periodically issues recommended trading practices for market participants. Id. 14 See Press Release, Federal Reserve Bank of New York, Treasury Market Practices Group Seeks Public Comment on Proposed Updates to its Fails Charge Practice Recommendation (February 28, 2018), available at https://www.newyorkfed.org/media library/Microsites/tmpg/files/PressRelease_022818. 15 Id. 16 Id. 17 Notice, 83 FR at 23034. 18 U.S. Treasury Securities: Fails Charge Trading Practice (July 13, 2016) at 3, available at https:// www.newyorkfed.org/medialibrary/microsites/ tmpg/files/Fails-Charge-Trading-Practice-2016-0713.pdf (‘‘Fails Charge Trading Practice’’). 19 Id. 20 Notice, 83 FR at 23034. 21 Id. VerDate Sep<11>2014 17:16 Jun 21, 2018 Jkt 244001 ‘‘FOMC’’ and ‘‘TMPG’’ in each of GSD Rule 1 and MBSD Rule 1.22 C. Technical Changes FICC proposes to make a technical change regarding references to the federal funds rate in the fails charge calculation in both the GSD Rules and the MBSD Rules. Specifically, FICC would replace current term ‘‘Target Fed funds target rate’’ in Section 14 of GSD Rule 11 and the current term ‘‘fed funds target rate’’ in MBSD Rule 12 with the new term ‘‘target level for the federal funds rate,’’ which is the term used by the TMPG in its guidance.23 FICC states that this non-substantive change would enhance clarity across the GSD Rules and MBSD Rules and enhance consistency with the TMPG guidance.24 FICC also proposes to amend certain terms in the fails charge provisions of both the GSD Rules and MBSD Rules in order to use defined terms and to enhance clarity and consistency within the rules. Specifically, in GSD Rule 11, Section 14, and in MBSD Rule 12, FICC would replace the term ‘‘Fedwire’’ with the defined term ‘‘FedWire.’’ 25 In MBSD Rule 12, FICC would replace each reference to the terms ‘‘pool delivery obligation’’ and ‘‘pool deliver obligation’’ with the defined term ‘‘Pool Deliver Obligation.’’ 26 In MBSD Rule 12, FICC would capitalize the word ‘‘contractual’’ in the term ‘‘contractual Settlement Date.’’ 27 Finally, FICC would replace the term ‘‘business day’’ with the capitalized and defined term ‘‘Business Day.’’ 28 D. MBSD Fails Charge Cap Clarification While the GSD Rules expressly set forth the fails charge cap (i.e., three percent per annum), the MBSD Rules currently do not.29 The MBSD fails charge cap follows the same convention as the GSD fails charge cap, which is the percentage that is applied to the target federal funds rate.30 For MBSD, this cap is two percent per annum.31 FICC proposes to clarify the MBSD fails charge provision by adding language regarding the two percent per annum cap on the fails charge.32 22 Id. 23 Id. 24 Id. 25 Id. E. Implementation Timeframe FICC proposes to implement the proposed changes on July 2, 2018.33 FICC states that it would announce such implementation date by Important Notice.34 II. 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.35 The Commission believes the proposal is consistent with Act, specifically Section 17A(b)(3)(F) of the Act 36 and Rule 17Ad–22(e)(23)(ii) 37 under the Act. A. Section 17A(b)(3)(F) of the Act Section 17A(b)(3)(F) of the Act requires, in part, that the rules of a clearing agency, such as FICC, be designed to promote the prompt and accurate clearance and settlement of securities transactions.38 As discussed above, the proposed rule change would update both the GSD Rules and the MBSD Rules of FICC to add a one percent floor to the respective GSD and MBSD fails charge calculations. In the absence of such a floor, during periods of elevated target levels for the federal funds rate, the current GSD and MBSD fails charge calculations could result in a zero charge to a seller that fails to deliver securities to a buyer promptly. As discussed above, persistent elevated levels of settlement fails can create market inefficiencies and increase credit risk for market participants, which could negatively affect the prompt and accurate clearance and settlement of securities transactions. Fails charges are designed to address such negative effects by encouraging market participants to complete their securities settlement obligations promptly. FICC’s proposal to implement a one percent floor to the fails charge calculations would advance FICC’s efforts to discourage settlement fails by ensuring that the fails charge calculation would not produce a zero charge, particularly during periods of elevated target levels for the federal funds rate. In turn, ensuring that the respective 26 Id. 27 Id. 33 Id. 28 Id. 29 GSD 34 Id. Rule 11; MBSD Rule 12, supra note 4. 30 Id. 31 MBSD PO 00000 35 15 U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). 37 17 CFR 240.17Ad–22(e)(23)(ii). 38 15 U.S.C. 78q–1(b)(3)(F). 36 15 Rule 12, supra note 4. 83 FR at 23034. 32 Notice, Frm 00064 Fmt 4703 Sfmt 4703 29151 E:\FR\FM\22JNN1.SGM 22JNN1 29152 Federal Register / Vol. 83, No. 121 / Friday, June 22, 2018 / Notices GSD and MBSD fails charge calculations do not produce a zero charge would encourage market participants to maintain their fails charge operational processes. Accordingly, the Commission finds that the proposed rule change is designed to help ensure that settlement in the applicable markets covered by FICC’s processes occurs on a timely basis, and thereby promotes the prompt and accurate clearance and settlement of securities transactions, consistent with Section 17A(b)(3)(F) of the Act.39 B. Rule 17Ad–22(e)(23)(ii) Under the Act Rule 17Ad–22(e)(23)(ii) under the Act requires each covered clearing agency 40 to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they incur by participating in the covered clearing agency.41 As discussed above, the proposed rule change would update both the GSD Rules and the MBSD Rules to clarify the target rate that may be used in the fails charge calculations under certain circumstances and make certain technical changes to the fails charge provisions to ensure consistent use of defined terms. The proposed rule change also would update the MBSD Rules to clarify that a cap applies to the MBSD fails charge. These clarifications are designed help ensure that the GSD and MBSD fails charges are transparent and clear to market participants. Increasing transparency and clarity around these charges would help market participants better understand the operation of the fails charges, and thereby provide market participants with increased predictability and certainty regarding their obligations to FICC. Accordingly, the Commission finds that the proposed rule change would help establish, implement, and maintain FICC’s rules in a manner reasonably designed to provide sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they incur by participating in FICC, daltland on DSKBBV9HB2PROD with NOTICES 39 Id. 40 A ‘‘covered clearing agency’’ means, among other things, a clearing agency registered with the Commission under Section 17A of the Act (15 U.S.C. 78q–1 et seq.) that is designated systemically important by the Financial Stability Oversight Committee (‘‘FSOC’’) pursuant to the Payment, Clearing, and Settlement Supervision Act of 2010 (12 U.S.C. 5461 et seq.). See 17 CFR 240.17Ad– 22(a)(5)–(6). Because FICC is a registered clearing agency with the Commission that has been designated systemically important by FSOC, FICC is a covered clearing agency. 41 17 CFR 240.17Ad–22(e)(23)(ii). VerDate Sep<11>2014 17:16 Jun 21, 2018 Jkt 244001 consistent with Rule 17Ad–22(e)(23)(ii) under the Act.42 III. Conclusion On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act, in particular the requirements of Section 17A of the Act 43 and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that proposed rule change SR–FICC–2018– 004 be, and hereby is, approved.44 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.45 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–13379 Filed 6–21–18; 8:45 am] BILLING CODE 8011–01–P DEPARTMENT OF TRANSPORTATION Pipeline and Hazardous Materials Safety Administration [Docket No. PHMSA–2016–0128] Pipeline Safety: Meeting of the Voluntary Information-Sharing System Working Group Pipeline and Hazardous Materials Safety Administration (PHMSA), DOT. ACTION: Notice. AGENCY: This notice announces a public meeting of the Voluntary Information-sharing System (VIS) Working Group. The VIS Working Group will convene to discuss and identify recommendations to establish a voluntary information-sharing system. DATES: The public meeting will be held on August 23, 2018, from 8:30 a.m. to 5:00 p.m. ET. Members of the public who wish to attend in person should register no later than August 16, 2018. Individuals requiring accommodations, such as sign language interpretation or other ancillary aids, may notify PHMSA by August 16, 2018. For additional information, see the ADDRESSES section. ADDRESSES: The meeting will be held at the U.S. Department of Transportation, 1200 New Jersey Ave. SE, Washington, DC 20590. The meeting agenda and additional information will be published on the following VIS Working SUMMARY: 42 Id. 43 15 U.S.C. 78q–1. approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 45 17 CFR 200.30–3(a)(12). 44 In PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 Group registration page at: https:// primis.phmsa.dot.gov/meetings/ MtgHome.mtg?mtg=135. The meetings will not be webcast; however, presentations will be available on the meeting website and posted on the E-Gov website, https:// www.regulations.gov/, under docket number PHMSA–2016–0128 within 30 days following the meeting. Public Participation: This meeting will be open to the public. Members of the public who attend in person will also be provided an opportunity to make a statement during the meetings. Written comments: Persons who wish to submit written comments on the meetings may submit them to the docket in the following ways: E-Gov website: https:// www.regulations.gov. This site allows the public to enter comments on any Federal Register notice issued by any agency. Fax: 1–202–493–2251. Mail: Docket Management Facility; U.S. Department of Transportation (DOT), 1200 New Jersey Avenue SE, West Building, Room W12–140, Washington, DC 20590–0001. Hand Delivery: Room W12–140 on the ground level of the DOT West Building, 1200 New Jersey Avenue SE, Washington, DC, between 9:00 a.m. and 5:00 p.m., Monday through Friday, except on Federal holidays. Instructions: Identify the docket number PHMSA–2016–0128 at the beginning of your comments. Note that all comments received will be posted without change to https:// www.regulations.gov, including any personal information provided. Anyone can search the electronic form of all comments received into any of our dockets by the name of the individual submitting the comment (or signing the comment, if submitted on behalf of an association, business, labor union, etc.). Therefore, consider reviewing DOT’s complete Privacy Act Statement in the Federal Register published on April 11, 2000, (65 FR 19477), or view the Privacy Notice at https://www.regulations.gov before submitting comments. Docket: For docket access or to read background documents or comments, go to https://www.regulations.gov at any time or to Room W12–140 on the ground level of the DOT West Building, 1200 New Jersey Avenue SE, Washington, DC, between 9:00 a.m. and 5:00 p.m., Monday through Friday, except Federal holidays. If you wish to receive confirmation of receipt of your written comments, please include a self-addressed, stamped postcard with the following E:\FR\FM\22JNN1.SGM 22JNN1

Agencies

[Federal Register Volume 83, Number 121 (Friday, June 22, 2018)]
[Notices]
[Pages 29150-29152]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-13379]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83457; File No. SR-FICC-2018-004]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Introduce a Floor to the 
Calculation of the Fails Charges and Make Other Changes

June 18, 2018.
    On May 8, 2018, Fixed Income Clearing Corporation (``FICC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-FICC-2018-004, pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on May 17, 2018.\3\ The Commission did not receive 
any comment letters on the proposed rule change. For the reasons 
discussed below, the Commission approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 83222 (May 11, 
2018), 83 FR 23032 (May 17, 2018) (SR-FICC-2018-004) (``Notice'').
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I. Description of the Proposed Rule Change

    The proposed rule change would update FICC's Government Securities 
Division (``GSD'') Rulebook (``GSD Rules'') and FICC's Mortgage-Backed 
Securities Division (``MBSD'') Clearing Rules (``MBSD Rules'') \4\ to 
(i) introduce a floor of one percent to the calculation of the existing 
fails charge rules, (ii) clarify the target rate that may be used in 
the fails charge calculations under certain circumstances, and (iii) 
make certain technical changes to the fails charge provisions to ensure 
consistent use of defined terms.\5\ The proposed rule change would also 
update the MBSD Rules to clarify that a cap applies to the MBSD fails 
charge.\6\ Each of these proposed changes are described below.
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    \4\ The GSD Rules and the MBSD Rules are available at https://www.dtcc.com/legal/rules-and-procedures.
    \5\ Notice, 83 FR at 23032-34.
    \6\ Id.
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A. Proposed One Percent Floor

    In a securities transaction, a settlement fail occurs when the 
seller does not deliver the securities to the buyer on the agreed upon 
settlement date. FICC states that although settlement fails are 
generally not treated as contractual default events, provided that the 
failing seller delivers the securities soon after the settlement date, 
persistent elevated levels of settlement fails create market 
inefficiencies and increase credit risk for market participants.\7\
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    \7\ See Notice, 83 FR at 23033. See also Frequently Asked 
Questions: TMPG Fails Charges (April 23, 2018) at 1, available at 
https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/TMPG-Fails-Charge-FAQ-04-23-2018.pdf (``FAQ'').
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    To help mitigate settlement fails, FICC maintains a fails charge in 
both the GSD Rules and the MBSD Rules.\8\ However, FICC states that 
under the current GSD Rules and MBSD Rules, the respective fails charge 
calculations could result in a zero charge.\9\ Specifically, under the 
GSD version of the current fails charge, if the federal funds target 
rate would rise to three percent, then the calculation of the charge 
would result in a zero charge.\10\ Similarly, under the MBSD version of 
the current fails charge, if the federal funds target rate would rise 
to two percent, then the calculation of the charge would result in a 
zero charge.\11\ To address this issue, FICC proposes to amend the GSD 
Rules and the MBSD Rules to add a one percent floor to the respective 
GSD and MBSD fails charge calculations.\12\
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    \8\ GSD Rule 11; MBSD Rule 12, supra note 4.
    \9\ Id.; Notice, 83 FR at 23034.
    \10\ Id.
    \11\ Id.
    \12\ Id.
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    FICC's proposal comes in response to a recent announcement by the 
Treasury Market Practices Group (``TMPG''),\13\ in

[[Page 29151]]

which the TMPG proposed the same change to its recommended best 
practices to help ensure that there is always a minimum fails charge 
amount.\14\ The TMPG states that its recommendation of a one percent 
floor is driven by the concern that market participants would 
discontinue their fails charge operational processes in a prolonged 
zero charge scenario.\15\ Adding the one percent floor would help 
maintain a fails charge during elevated federal funds target rate 
levels, and thereby help ensure that market participants do not 
discontinue their fails charge operational processes.\16\
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    \13\ The TMPG was formed in 2007, under the sponsorship of the 
Federal Reserve Bank of New York, to help address settlement fails 
and other issues affecting the U.S. Government debt and mortgage-
backed securities markets. The Treasury Market Practices Group: 
Creation and Early Initiatives (August 2017) at 3, available at 
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr822.pdf. The TMPG is a group of market professionals 
that periodically issues recommended trading practices for market 
participants. Id.
    \14\ See Press Release, Federal Reserve Bank of New York, 
Treasury Market Practices Group Seeks Public Comment on Proposed 
Updates to its Fails Charge Practice Recommendation (February 28, 
2018), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/PressRelease_022818.
    \15\ Id.
    \16\ Id.
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    FICC states that as one of the largest participants in U.S. 
Government securities market, it is imperative that FICC implement the 
TMPG's recommendation to help maintain consistency and symmetry within 
the market.\17\
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    \17\ Notice, 83 FR at 23034.
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B. Federal Funds Level Target Range Clarification

    Pursuant to TMPG guidelines, if the Federal Open Market Committee 
(``FOMC'') specifies a target range in lieu of a target level, the 
lower limit of the target range announced by the FOMC would be used in 
the calculation of the fails charge.\18\ Further, if the FOMC were to 
terminate its policy of specifying or announcing a federal funds rate 
target level or range, then the rate used to calculate the fails charge 
would be a successor rate and source recommended by the TMPG.\19\
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    \18\ U.S. Treasury Securities: Fails Charge Trading Practice 
(July 13, 2016) at 3, available at https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/Fails-Charge-Trading-Practice-2016-07-13.pdf (``Fails Charge Trading Practice'').
    \19\ Id.
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    While FICC states that it would follow the TMPG guidelines in this 
regard,\20\ this practice is currently not stated in the fails charge 
rule provisions in each of the GSD Rules and the MBSD Rules. Therefore, 
FICC proposes to update the relevant provisions to reflect that FICC 
would follow this practice if those circumstances arose.\21\ 
Additionally, FICC proposes to add defined terms for ``FOMC'' and 
``TMPG'' in each of GSD Rule 1 and MBSD Rule 1.\22\
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    \20\ Notice, 83 FR at 23034.
    \21\ Id.
    \22\ Id.
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C. Technical Changes

    FICC proposes to make a technical change regarding references to 
the federal funds rate in the fails charge calculation in both the GSD 
Rules and the MBSD Rules. Specifically, FICC would replace current term 
``Target Fed funds target rate'' in Section 14 of GSD Rule 11 and the 
current term ``fed funds target rate'' in MBSD Rule 12 with the new 
term ``target level for the federal funds rate,'' which is the term 
used by the TMPG in its guidance.\23\ FICC states that this non-
substantive change would enhance clarity across the GSD Rules and MBSD 
Rules and enhance consistency with the TMPG guidance.\24\
---------------------------------------------------------------------------

    \23\ Id.
    \24\ Id.
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    FICC also proposes to amend certain terms in the fails charge 
provisions of both the GSD Rules and MBSD Rules in order to use defined 
terms and to enhance clarity and consistency within the rules. 
Specifically, in GSD Rule 11, Section 14, and in MBSD Rule 12, FICC 
would replace the term ``Fedwire'' with the defined term ``FedWire.'' 
\25\ In MBSD Rule 12, FICC would replace each reference to the terms 
``pool delivery obligation'' and ``pool deliver obligation'' with the 
defined term ``Pool Deliver Obligation.'' \26\ In MBSD Rule 12, FICC 
would capitalize the word ``contractual'' in the term ``contractual 
Settlement Date.'' \27\ Finally, FICC would replace the term ``business 
day'' with the capitalized and defined term ``Business Day.'' \28\
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    \25\ Id.
    \26\ Id.
    \27\ Id.
    \28\ Id.
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D. MBSD Fails Charge Cap Clarification

    While the GSD Rules expressly set forth the fails charge cap (i.e., 
three percent per annum), the MBSD Rules currently do not.\29\ The MBSD 
fails charge cap follows the same convention as the GSD fails charge 
cap, which is the percentage that is applied to the target federal 
funds rate.\30\ For MBSD, this cap is two percent per annum.\31\ FICC 
proposes to clarify the MBSD fails charge provision by adding language 
regarding the two percent per annum cap on the fails charge.\32\
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    \29\ GSD Rule 11; MBSD Rule 12, supra note 4.
    \30\ Id.
    \31\ MBSD Rule 12, supra note 4.
    \32\ Notice, 83 FR at 23034.
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E. Implementation Timeframe

    FICC proposes to implement the proposed changes on July 2, 
2018.\33\ FICC states that it would announce such implementation date 
by Important Notice.\34\
---------------------------------------------------------------------------

    \33\ Id.
    \34\ Id.
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II. 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.\35\ The Commission believes the proposal is consistent 
with Act, specifically Section 17A(b)(3)(F) of the Act \36\ and Rule 
17Ad-22(e)(23)(ii) \37\ under the Act.
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    \35\ 15 U.S.C. 78s(b)(2)(C).
    \36\ 15 U.S.C. 78q-1(b)(3)(F).
    \37\ 17 CFR 240.17Ad-22(e)(23)(ii).
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A. Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency, such as FICC, be designed to promote the prompt 
and accurate clearance and settlement of securities transactions.\38\
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    \38\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As discussed above, the proposed rule change would update both the 
GSD Rules and the MBSD Rules of FICC to add a one percent floor to the 
respective GSD and MBSD fails charge calculations. In the absence of 
such a floor, during periods of elevated target levels for the federal 
funds rate, the current GSD and MBSD fails charge calculations could 
result in a zero charge to a seller that fails to deliver securities to 
a buyer promptly.
    As discussed above, persistent elevated levels of settlement fails 
can create market inefficiencies and increase credit risk for market 
participants, which could negatively affect the prompt and accurate 
clearance and settlement of securities transactions. Fails charges are 
designed to address such negative effects by encouraging market 
participants to complete their securities settlement obligations 
promptly.
    FICC's proposal to implement a one percent floor to the fails 
charge calculations would advance FICC's efforts to discourage 
settlement fails by ensuring that the fails charge calculation would 
not produce a zero charge, particularly during periods of elevated 
target levels for the federal funds rate. In turn, ensuring that the 
respective

[[Page 29152]]

GSD and MBSD fails charge calculations do not produce a zero charge 
would encourage market participants to maintain their fails charge 
operational processes. Accordingly, the Commission finds that the 
proposed rule change is designed to help ensure that settlement in the 
applicable markets covered by FICC's processes occurs on a timely 
basis, and thereby promotes the prompt and accurate clearance and 
settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.\39\
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    \39\ Id.
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B. Rule 17Ad-22(e)(23)(ii) Under the Act

    Rule 17Ad-22(e)(23)(ii) under the Act requires each covered 
clearing agency \40\ to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide 
sufficient information to enable participants to identify and evaluate 
the risks, fees, and other material costs they incur by participating 
in the covered clearing agency.\41\
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    \40\ A ``covered clearing agency'' means, among other things, a 
clearing agency registered with the Commission under Section 17A of 
the Act (15 U.S.C. 78q-1 et seq.) that is designated systemically 
important by the Financial Stability Oversight Committee (``FSOC'') 
pursuant to the Payment, Clearing, and Settlement Supervision Act of 
2010 (12 U.S.C. 5461 et seq.). See 17 CFR 240.17Ad-22(a)(5)-(6). 
Because FICC is a registered clearing agency with the Commission 
that has been designated systemically important by FSOC, FICC is a 
covered clearing agency.
    \41\ 17 CFR 240.17Ad-22(e)(23)(ii).
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    As discussed above, the proposed rule change would update both the 
GSD Rules and the MBSD Rules to clarify the target rate that may be 
used in the fails charge calculations under certain circumstances and 
make certain technical changes to the fails charge provisions to ensure 
consistent use of defined terms. The proposed rule change also would 
update the MBSD Rules to clarify that a cap applies to the MBSD fails 
charge.
    These clarifications are designed help ensure that the GSD and MBSD 
fails charges are transparent and clear to market participants. 
Increasing transparency and clarity around these charges would help 
market participants better understand the operation of the fails 
charges, and thereby provide market participants with increased 
predictability and certainty regarding their obligations to FICC. 
Accordingly, the Commission finds that the proposed rule change would 
help establish, implement, and maintain FICC's rules in a manner 
reasonably designed to provide sufficient information to enable 
participants to identify and evaluate the risks, fees, and other 
material costs they incur by participating in FICC, consistent with 
Rule 17Ad-22(e)(23)(ii) under the Act.\42\
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    \42\ Id.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act, in particular 
the requirements of Section 17A of the Act \43\ and the rules and 
regulations thereunder.
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    \43\ 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 change SR-FICC-2018-004 be, and hereby is, 
approved.\44\
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    \44\ In approving the proposed rule change, the Commission 
considered the proposal's 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.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-13379 Filed 6-21-18; 8:45 am]
BILLING CODE 8011-01-P
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