Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of No Objection to an Advance Notice, as Modified by Amendment No. 1, To Adopt a Recovery & Wind-Down Plan and Related Rules, 44361-44374 [2018-18868]
Download as PDF
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices
proposal is reasonably designed to (1)
publicly disclose all relevant rules and
material procedures concerning key
aspects of NSCC’s default rules and
procedures, and (2) provide sufficient
information to enable Members to
identify and evaluate the risks by
participating in NSCC.
Therefore, the Commission believes
that NSCC’s proposal is consistent with
Rules 17Ad–22(e)(23)(i) and (ii) under
the Act.48
III. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act,49 that the Commission
does not object to advance notice SR–
NSCC–2017–806, as modified by
Amendment No. 1, and that NSCC is
authorized to implement the proposal as
of the date of this notice or the date of
an order by the Commission approving
proposed rule change SR–NSCC–2017–
018, as modified by Amendment No. 1,
whichever is later.
By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–18866 Filed 8–29–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83954; File No. SR–FICC–
2017–805]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
No Objection to an Advance Notice, as
Modified by Amendment No. 1, To
Adopt a Recovery & Wind-Down Plan
and Related Rules
amozie on DSK3GDR082PROD with NOTICES1
August 27, 2018.
On December 18, 2017, Fixed Income
Clearing Corporation (‘‘FICC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) advance
notice SR–FICC–2017–805 pursuant to
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 (‘‘Clearing
Supervision Act’’) 1 and Rule 19b–
4(n)(1)(i) under the Securities Exchange
Act of 1934 (‘‘Act’’) 2 to adopt a recovery
and wind-down plan (‘‘R&W Plan’’) and
related rules.3 The advance notice was
48 17
CFR 240.17Ad–22(e)(23)(i) and (ii).
U.S.C. 5465(e)(1)(I).
1 12 U.S.C. 5465(e)(1).
2 17 CFR 240.19b–4(n)(1)(i).
3 On December 18, 2017, FICC filed the advance
notice as proposed rule change SR–FICC–2017–021
with the Commission pursuant to Section 19(b)(1)
49 12
VerDate Sep<11>2014
17:25 Aug 29, 2018
Jkt 244001
published for comment in the Federal
Register on January 30, 2018.4 In that
publication, the Commission also
extended the review period of the
advance notice for an additional 60
days, pursuant to Section 806(e)(1)(H) of
the Clearing Supervision Act.5 On April
10, 2018, the Commission required
additional information from FICC
pursuant to Section 806(e)(1)(D) of the
Clearing Supervision Act,6 which tolled
the Commission’s period of review of
the advance notice until 60 days from
the date the information required by the
Commission was received by the
Commission.7 On June 28, 2018, FICC
of the Act and Rule 19b–4 thereunder (‘‘Proposed
Rule Change’’). 15 U.S.C. 78s(b)(1) and 17 CFR
240.19b–4, respectively. The Proposed Rule Change
was published in the Federal Register on January
8, 2018. Securities Exchange Act Release No. 82431
(January 2, 2018), 83 FR 871 (January 8, 2018) (SR–
FICC–2017–021). On February 8, 2018, the
Commission designated a longer period within
which to approve, disapprove, or institute
proceedings to determine whether to approve or
disapprove the Proposed Rule Change. Securities
Exchange Act Release No. 82669 (February 8, 2018),
83 FR 6653 (February 14, 2018) (SR–DTC–2017–
021, SR–FICC–2017–021, SR–NSCC–2017–017). On
March 20, 2018, the Commission instituted
proceedings to determine whether to approve or
disapprove the Proposed Rule Change. Securities
Exchange Act Release No. 82913 (March 20, 2018),
83 FR 12997 (March 26, 2018) (SR–FICC–2017–
021). On June 25, 2018, the Commission designated
a longer period for Commission action on the
proceedings to determine whether to approve or
disapprove the Proposed Rule Change. Securities
Exchange Act Release No. 83509 (June 25, 2018), 83
FR 30785 (June 29, 2018) (SR–DTC–2017–021, SR–
FICC–2017–021, SR–NSCC–2017–017). On June 28,
2018, FICC filed Amendment No. 1 to the Proposed
Rule Change. Securities Exchange Act Release No.
83630 (July 13, 2018), 83 FR 34213 (July 19, 2018)
(SR–FICC–2017–021). FICC submitted a courtesy
copy of Amendment No. 1 to the Proposed Rule
Change through the Commission’s electronic public
comment letter mechanism. Accordingly,
Amendment No. 1 to the Proposed Rule Change has
been publicly available on the Commission’s
website at https://www.sec.gov/rules/sro/ficc.htm
since June 29, 2018. The Commission did not
receive any comments. The proposal, as set forth in
both the advance notice and the Proposed Rule
Change, each as modified by Amendments No. 1,
shall not take effect until all required regulatory
actions are completed.
4 Securities Exchange Act Release No. 82580
(January 24, 2018), 83 FR 4341 (January 30, 2018)
(SR–FICC–2017–805) (‘‘Notice’’).
5 Pursuant to Section 806(e)(1)(H) of the Clearing
Supervision Act, the Commission may extend the
review period of an advance notice for an
additional 60 days, if the changes proposed in the
advance notice raise novel or complex issues,
subject to the Commission providing the clearing
agency with prompt written notice of the extension.
12 U.S.C. 5465(e)(1)(H). The Commission found that
the advance notice raised novel and complex issues
and, accordingly, extended the review period of the
advance notice for an additional 60 days until April
17, 2018. See Notice, supra note 4.
6 12 U.S.C. 5465(e)(1)(D).
7 See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii); see
Memorandum from the Office of Clearance and
Settlement Supervision, Division of Trading and
Markets, titled ‘‘Commission’s Request for
Additional Information,’’ available at https://
www.sec.gov/rules/sro/ficc-an.htm.
PO 00000
Frm 00105
Fmt 4703
Sfmt 4703
44361
filed Amendment No. 1 to the advance
notice to amend and replace in its
entirety the advance notice as originally
filed on December 18, 2017.8 On July 6,
2018, the Commission received a
response to its request for additional
information in consideration of the
advance notice, which, in turn, added a
further 60-days to the review period
pursuant to Section 806(e)(1)(E) and (G)
of the Clearing Supervision Act.9 The
Commission did not receive any
comments. This publication serves as
notice that the Commission does not
object to the proposed changes set forth
in the advance notice, as modified by
Amendment No. 1 (hereinafter,
‘‘Advance Notice’’).
I. Description of the Advance Notice
In the Advance Notice, FICC proposes
to (1) adopt an R&W Plan; (2) amend
FICC’s Government Securities Division
(‘‘GSD’’) Rulebook (‘‘GSD Rules’’) to (a)
adopt Rule 22D (Wind-down of the
Corporation) and Rule 50 (Market
Disruption and Force Majeure), and (b)
make conforming changes to Rule 3A
(Sponsoring Members and Sponsored
Members), Rule 3B (Centrally Cleared
Institutional Triparty Service) and Rule
13 (Funds-Only Settlement) related to
the adoption of these proposed rules to
the GSD Rules; (3) amend FICC’s
Mortgage-Backed Securities Division
(‘‘MBSD,’’ and, together with GSD, the
‘‘Divisions’’) Clearing Rules (‘‘MBSD
Rules’’) in order to (a) adopt Rule 17B
(Wind-down of the Corporation) and
Rule 40 (Market Disruption and Force
Majeure); and (b) make conforming
changes to Rule 3A (Cash Settlement
Bank Members) related to the adoption
of these proposed rules to the MBSD
Rules; and (4) amend Rule 1 of the
Electronic Pool Netting (‘‘EPN’’) Rules
of MBSD (‘‘EPN Rules’’) to provide that
EPN Users, as defined therein, are
bound by proposed Rule 17B (Winddown of the Corporation) and proposed
Rule 40 (Market Disruption and Force
Majeure) to be adopted to the MBSD
Rules.10 Each of the proposed rules is
8 Securities Exchange Act Release No. 83744 (July
31, 2018), 83 FR 38413 (August 6, 2018) (SR–FICC–
2017–805). FICC submitted a courtesy copy of
Amendment No. 1 to the advance notice through
the Commission’s electronic public comment letter
mechanism. Accordingly, Amendment No. 1 to the
advance notice has been publicly available on the
Commission’s website at https://www.sec.gov/rules/
sro/ficc-an.htm since June 29, 2018.
9 12 U.S.C. 5465(e)(1)(E) and (G); see
Memorandum from the Office of Clearance and
Settlement Supervision, Division of Trading and
Markets, titled ‘‘Response to the Commission’s
Request for Additional Information,’’ available at
https://www.sec.gov/rules/sro/ficc-an.htm.
10 The GSD Rules and the MBSD Rules are
referred to collectively herein as the ‘‘Rules.’’
E:\FR\FM\30AUN1.SGM
Continued
30AUN1
44362
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices
referred to herein as a ‘‘Proposed Rule,’’
and are collectively referred to as the
‘‘Proposed Rules.’’
FICC states that the R&W Plan would
be used by the Board of Directors of
FICC (‘‘Board’’) and FICC’s management
in the event FICC encounters scenarios
that could potentially prevent it from
being able to provide its critical services
as a going concern.
FICC states that the Proposed Rules
are designed to (1) facilitate the
implementation of the R&W Plan when
necessary and, in particular, allow FICC
to effectuate its strategy for winding
down and transferring its business; (2)
provide Members and Limited Members
with transparency around critical
provisions of the R&W Plan that relate
to their rights, responsibilities and
obligations; 11 and (3) provide FICC with
the legal basis to implement those
provisions of the R&W Plan when
necessary.
amozie on DSK3GDR082PROD with NOTICES1
A. FICC R&W Plan
The R&W Plan would be structured to
provide a roadmap, define the strategy,
and identify the tools available to FICC
to either (i) recover, in the event it
experiences losses that exceed its
prefunded resources (such strategies
and tools referred to herein as the
‘‘Recovery Plan’’) or (ii) wind-down its
business in a manner designed to permit
the continuation of its critical services
in the event that such recovery efforts
are not successful (such strategies and
tools referred to herein as the ‘‘Winddown Plan’’). The R&W Plan would
identify (i) the recovery tools available
to FICC to address the risks of (a)
uncovered losses or liquidity shortfalls
resulting from the default of one or more
Members, and (b) losses arising from
non-default events, such as damage to
its physical assets, a cyber-attack, or
custody and investment losses, and (ii)
the strategy for implementation of such
tools. The R&W Plan would also
establish the strategy and framework for
the orderly wind-down of FICC and the
transfer of its business in the remote
event the implementation of the
available recovery tools does not
successfully return FICC to financial
viability.
As discussed in greater detail below,
the R&W Plan would provide, among
other matters, (i) an overview of the
Capitalized terms not defined herein are defined in
the Rules.
11 References herein to ‘‘Members’’ refer to GSD
Netting Members and MBSD Clearing Members.
References herein to ‘‘Limited Members’’ refer to
participants of GSD or MBSD other than GSD
Netting Members and MBSD Clearing Members,
including, for example, GSD Comparison-Only
Members, GSD Sponsored Members, GSD CCIT
Members, and MBSD EPN Users.
VerDate Sep<11>2014
17:25 Aug 29, 2018
Jkt 244001
business of FICC and its parent, The
Depository Trust & Clearing Corporation
(‘‘DTCC’’); 12 (ii) an analysis of FICC’s
intercompany arrangements and an
existing link to another financial market
infrastructure (‘‘FMI’’); (iii) a
description of FICC’s services, and the
criteria used to determine which
services are considered critical; (iv) a
description of the FICC and DTCC
governance structure; (v) a description
of the governance around the overall
recovery and wind-down program; (vi) a
discussion of tools available to FICC to
mitigate credit/market 13 risks and
liquidity risks, including recovery
indicators and triggers, and the
governance around management of a
stress event along a Crisis Continuum
timeline; (vii) a discussion of potential
non-default losses and the resources
available to FICC to address such losses,
including recovery triggers and tools to
mitigate such losses; (viii) an analysis of
the recovery tools’ characteristics,
including how they are designed to be
comprehensive, effective, and
transparent, how the tools provide
incentives to Members to, among other
things, control and monitor the risks
they may present to FICC, and how
FICC seeks to minimize the negative
consequences of executing its recovery
tools; and (ix) the framework and
approach for the orderly wind-down
and transfer of FICC’s business,
including an estimate of the time and
costs to effect a recovery or orderly
wind-down of FICC.
Certain recovery tools that would be
identified in the R&W Plan are based in
the Rules (including the Proposed
Rules); therefore, descriptions of those
tools in the R&W Plan would include
descriptions of, and reference to, the
applicable Rules and any related
internal policies and procedures. Other
recovery tools that would be identified
in the R&W Plan are based in
contractual arrangements to which FICC
is a party, including, for example,
existing committed or pre-arranged
liquidity arrangements. Further, the
R&W Plan would state that FICC may
develop further supporting internal
12 DTCC is a user-owned and user-governed
holding company and is the parent company of
FICC and its affiliates, The Depository Trust
Company (‘‘DTC’’) and National Securities Clearing
Corporation (‘‘NSCC’’, and, together with FICC and
DTC, the ‘‘Clearing Agencies’’). The R&W Plan
would describe how corporate support services are
provided to FICC from DTCC and DTCC’s other
subsidiaries through intercompany agreements
under a shared services model.
13 FICC states that it uses the term ‘‘credit/
market’’ risks in the R&W Plan because FICC
monitors its credit exposure to its Members by
managing the market risks of each Member’s
unsettled portfolio through the collection of each
Division’s Clearing Fund. See infra note 23.
PO 00000
Frm 00106
Fmt 4703
Sfmt 4703
guidelines and materials that may
provide operational support for matters
described in the R&W Plan, and that
such documents would be supplemental
and subordinate to the R&W Plan.
FICC states that many of the tools
available to FICC that would be
described in the R&W Plan are FICC’s
existing, business-as-usual risk
management and Member default
management tools, which would
continue to be applied in scenarios of
increasing stress. In addition to these
existing, business-as-usual tools, the
R&W Plan would describe FICC’s other
principal recovery tools, which include,
for example, (i) identifying, monitoring
and managing general business risk and
holding sufficient liquid net assets
funded by equity (‘‘LNA’’) to cover
potential general business losses
pursuant to the Clearing Agency Policy
on Capital Requirements (‘‘Capital
Policy’’),14 (ii) maintaining the Clearing
Agency Capital Replenishment Plan
(‘‘Replenishment Plan’’) as a viable plan
for the replenishment of capital should
FICC’s equity fall close to or below the
amount being held pursuant to the
Capital Policy,15 and (iii) the process for
the allocation of losses among Members,
as provided in GSD Rule 4 (Clearing
Fund and Loss Allocation) and MBSD
Rule 4 (Clearing Fund and Loss
Allocation).16 The R&W Plan would
provide governance around the
selection and implementation of the
recovery tool or tools most relevant to
mitigate a stress scenario and any
applicable loss or liquidity shortfall.
The development of the R&W Plan is
facilitated by the Office of Recovery &
Resolution Planning (‘‘R&R Team’’) of
DTCC.17 The R&R Team reports to the
DTCC Management Committee
(‘‘Management Committee’’) and is
responsible for maintaining the R&W
Plan and for the development and
ongoing maintenance of the overall
recovery and wind-down planning
process. The Board, or such committees
as may be delegated authority by the
Board from time to time pursuant to its
charter, would review and approve the
R&W Plan biennially, and would also
review and approve any changes that
14 See Securities Exchange Act Release No. 81105
(July 7, 2017), 82 FR 32399 (July 13, 2017) (SR–
DTC–2017–003, SR–FICC–2017–007, SR–NSCC–
2017–004).
15 See id.
16 See supra note 10.
17 DTCC operates on a shared services model with
respect to FICC and its other subsidiaries. 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 subsidiary,
including FICC.
E:\FR\FM\30AUN1.SGM
30AUN1
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices
are proposed to the R&W Plan outside
of the biennial review.
As discussed in greater detail below,
the Proposed Rules would define the
procedures that may be employed in the
event of FICC’s wind-down and would
provide for FICC’s authority to take
certain actions on the occurrence of a
Market Disruption Event, as defined
therein. FICC states that the Proposed
Rules are designed to provide Members
and Limited Members with
transparency and certainty with respect
to these matters. FICC also states that
the Proposed Rules are designed to
facilitate the implementation of the
R&W Plan, particularly FICC’s strategy
for winding down and transferring its
business, and are designed to provide
FICC with the legal basis to implement
those aspects of the R&W Plan.
amozie on DSK3GDR082PROD with NOTICES1
1. Business Overview, Critical Services,
and Governance
The introduction to the R&W Plan
would identify the document’s purpose
and its regulatory background, and
would outline a summary of the R&W
Plan. The stated purpose of the R&W
Plan is that it is to be used by the Board
and FICC management in the event FICC
encounters scenarios that could
potentially prevent it from being able to
provide its critical services as a going
concern.
The R&W Plan would describe
DTCC’s business profile, provide a
summary of the services of FICC as
offered by each of the Divisions, and
identify the intercompany arrangements
and links between FICC and other
entities, most notably a link between
GSD and Chicago Mercantile Exchange
Inc. (‘‘CME’’), which is also an FMI.
FICC states that the overview section
would provide a context for the R&W
Plan by describing FICC’s business,
organizational structure and critical
links to other entities. FICC also states
that by providing this context, this
section would facilitate the analysis of
the potential impact of utilizing the
recovery tools set forth in later sections
of the Recovery Plan, and the analysis
of the factors that would be addressed
in implementing the Wind-down Plan.
The R&W Plan would provide a
description of the critical contractual
and operational arrangements between
FICC and other legal entities, including
the cross-margining agreement between
GSD and CME, which is also an FMI.18
FICC states that this section of the R&W
Plan, which identifies and briefly
18 Available
at https://www.dtcc.com/∼/media/
Files/Downloads/legal/rules/ficc_cme_crossmargin_
agreement.pdf. See also GSD Rule 43 (CrossMargining Arrangements), supra note 10.
VerDate Sep<11>2014
17:25 Aug 29, 2018
Jkt 244001
describes FICC’s established links, is
designed to provide a mapping of
critical connections and dependencies
that may need to be relied on or
otherwise addressed in connection with
the implementation of either the
Recovery Plan or the Wind-down Plan.
The R&W Plan would define the
criteria for classifying certain of FICC’s
services as ‘‘critical,’’ and would
identify those critical services and the
rationale for their classification. This
section of the R&W Plan would provide
an analysis of the potential systemic
impact from a service disruption, which
FICC states is important for evaluating
how the recovery tools and the winddown strategy would facilitate and
provide for the continuation of FICC’s
critical services to the markets it serves.
The criteria that would be used to
identify an FICC service or function as
critical would include (1) whether there
is a lack of alternative providers or
products; (2) whether failure of the
service could impact FICC’s ability to
perform its central counterparty services
through either Division; (3) whether
failure of the service could impact
FICC’s ability to perform its multilateral
netting services through either Division
and, therefore, could impact the volume
of transactions; (4) whether failure of
the service could impact FICC’s ability
to perform its book-entry delivery and
settlement services through either
Division and, as such, could impact
transaction costs; (5) whether failure of
the service could impact FICC’s ability
to perform its cash payment processing
services through either Division and, as
such, could impact the flow of liquidity
in the U.S. financial markets; and (6)
whether the service is interconnected
with other participants and processes
within the U.S. financial system, for
example, with other FMIs, settlement
banks, and broker-dealers. The R&W
Plan would then list each of those
services, functions or activities that
FICC has identified as ‘‘critical’’ based
on the applicability of these six criteria.
The R&W Plan would also include a
non-exhaustive list of FICC services that
are not deemed critical.
FICC states that the evaluation of
which services provided by FICC are
deemed critical is important for
purposes of determining how the R&W
Plan would facilitate the continuity of
those services. While FICC’s Winddown Plan would provide for the
transfer of all critical services to a
transferee in the event FICC’s winddown is implemented, it would
anticipate that any non-critical services
that are ancillary and beneficial to a
critical service, or that otherwise have
substantial user demand from the
PO 00000
Frm 00107
Fmt 4703
Sfmt 4703
44363
continuing membership, would also be
transferred.
The R&W Plan would describe the
governance structure of both DTCC and
FICC. This section of the R&W Plan
would identify the ownership and
governance model of these entities at
both the Board and management levels.
The R&W Plan would state that the
stages of escalation required to manage
recovery under the Recovery Plan or to
invoke FICC’s wind-down under the
Wind-down Plan would range from
relevant business line managers up to
the Board through FICC’s governance
structure. The R&W Plan would then
identify the parties responsible for
certain activities under both the
Recovery Plan and the Wind-down Plan,
and would describe their respective
roles. The R&W Plan would identify the
Risk Committee of the Board (‘‘Board
Risk Committee’’) as being responsible
for oversight of risk management
activities at FICC, which include
focusing on both oversight of risk
management systems and processes
designed to identify and manage various
risks faced by FICC as well as oversight
of FICC’s efforts to mitigate systemic
risks that could impact those markets
and the broader financial system.19 The
R&W Plan would identify the DTCC
Management Risk Committee
(‘‘Management Risk Committee’’) as
primarily responsible for general, dayto-day risk management through
delegated authority from the Board Risk
Committee. The R&W Plan would state
that the Management Risk Committee
has delegated specific day-to-day risk
management, including management of
risks addressed through margining
systems and related activities, to the
DTCC Group Chief Risk Office
(‘‘GCRO’’), which works with staff
within the DTCC Financial Risk
Management group. Finally, the R&W
Plan would describe the role of the
Management Committee, which
provides overall direction for all aspects
of FICC’s business, technology, and
operations and the functional areas that
support these activities.
The R&W Plan would describe the
governance of recovery efforts in
response to both default losses and nondefault losses under the Recovery Plan,
identifying the groups responsible for
those recovery efforts. Specifically, the
R&W Plan would state that the
Management Risk Committee provides
oversight of actions relating to the
default of a Member, which would be
19 The DTCC, DTC, NSCC, FICC Risk Committee
Charter is available at https://www.dtcc.com/∼/
media/Files/Downloads/legal/policy-andcompliance/DTCC-BOD-Risk-CommitteeCharter.pdf.
E:\FR\FM\30AUN1.SGM
30AUN1
44364
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices
reported and escalated to it through the
GCRO, and the Management Committee
provides oversight of actions relating to
non-default events that could result in
a loss, which would be reported and
escalated to it from the DTCC Chief
Financial Officer (‘‘CFO’’) and the DTCC
Treasury group that reports to the CFO,
and from other relevant subject matter
experts based on the nature and
circumstances of the non-default
event.20 More generally, the R&W Plan
would state that the type of loss and the
nature and circumstances of the events
that lead to the loss would dictate the
components of governance to address
that loss, including the escalation path
to authorize those actions. Both the
Recovery Plan and the Wind-down Plan
would describe the governance of
escalations, decisions, and actions
under each of those plans.
Finally, the R&W Plan would describe
the role of the R&R Team in managing
the overall recovery and wind-down
program and plans for each of the
Clearing Agencies.
amozie on DSK3GDR082PROD with NOTICES1
2. FICC Recovery Plan
FICC states that the Recovery Plan is
intended to be a roadmap of those
actions that FICC may employ across
both Divisions to monitor and, as
needed, stabilize its financial condition.
FICC also states that as each event that
could lead to a financial loss could be
unique in its circumstances, FICC
proposes that the Recovery Plan would
not be prescriptive and would permit
FICC to maintain flexibility in its use of
identified tools and in the sequence in
which such tools are used, subject to
any conditions in the Rules or the
contractual arrangement on which such
tool is based. FICC’s Recovery Plan
would consist of (1) a description of the
risk management surveillance, tools,
and governance that FICC would
employ across evolving stress scenarios
that it may face as it transitions through
a Crisis Continuum, described below;
(2) a description of FICC’s risk of losses
that may result from non-default events,
and the financial resources and recovery
tools available to FICC to manage those
risks and any resulting losses; and (3) an
evaluation of the characteristics of the
recovery tools that may be used in
response to either default losses or non20 The R&W Plan would state that these groups
would be involved to address how to mitigate the
financial impact of non-default losses, and in
recommending mitigating actions, the Management
Committee would consider information and
recommendations from relevant subject matter
experts based on the nature and circumstances of
the non-default event. Any necessary operational
response to these events, however, would be
managed in accordance with applicable incident
response/business continuity process.
VerDate Sep<11>2014
17:25 Aug 29, 2018
Jkt 244001
default losses. In all cases, FICC states
that it would act in accordance with the
Rules, within the governance structure
described in the R&W Plan, and in
accordance with applicable regulatory
oversight to address each situation to
best protect FICC, the Members, and the
markets in which it operates.
(i) Managing Member Default Losses
and Liquidity Needs Through the Crisis
Continuum
The Recovery Plan would describe the
risk management surveillance, tools,
and governance that FICC may employ
across an increasing stress environment,
which is referred to as the Crisis
Continuum. This description would
identify those tools that can be
employed to mitigate losses, and
mitigate or minimize liquidity needs, as
the market environment becomes
increasingly stressed. The phases of the
Crisis Continuum would include (1) a
stable market phase, (2) a stress market
phase, (3) a phase commencing with
FICC’s decision to cease to act for a
Member or Affiliated Family of
Members 21 (referred to in the R&W Plan
as the ‘‘Member default phase’’), and (4)
a recovery phase. In the R&W Plan, the
term ‘‘cease to act’’ and the actions that
lead to such decision are used within
the context of each Division’s Rules, in
particular Rules 21 and 22 of the GSD
Rules and Rules 14 and 16 of the MBSD
Rules.22 Further, the R&W Plan would,
for purposes of the R&W Plan, use the
following terms: (1) ‘‘Member default’’
to refer to the event or events that
precipitate FICC ceasing to act for a
Member or an Affiliated Family; (2)
‘‘Defaulting Member’’ to refer to a
Member for which FICC has ceased to
act; and (3) ‘‘Member Default Losses’’ to
refer to losses that arise out of or relate
to the Member default (including any
losses that arise from liquidation of that
Member’s portfolio), and to distinguish
such losses from those that arise out of
the business or other events not related
to a Member default, which are
separately addressed in the R&W Plan.
FICC states that the Recovery Plan
would provide context to its roadmap
through this Crisis Continuum by
describing FICC’s ongoing management
of credit, market and liquidity risk
across the Divisions, and its existing
process for measuring and reporting its
risks as they align with established
21 The R&W Plan would define an ‘‘Affiliated
Family’’ of Members as a number of affiliated
entities that are all Members of either GSD or
MBSD.
22 See GSD Rules 21 (Restrictions on Access to
Services) and 22 (Insolvency of a Member), and
MBSD Rules 14 (Restrictions on Access to Services)
and 16 (Insolvency of a Member), supra note 10.
PO 00000
Frm 00108
Fmt 4703
Sfmt 4703
thresholds for its tolerance of those
risks. FICC also states that the Recovery
Plan would discuss the management of
credit/market risk and liquidity
exposures together because the tools
that address these risks can be deployed
either separately or in a coordinated
approach in order to address both
exposures. FICC states that it manages
these risk exposures collectively to limit
their overall impact on FICC and the
memberships of the Divisions. FICC
states that as part of its market risk
management strategy, FICC manages its
credit exposure to Members by
determining the appropriate required
deposits to the GSD and MBSD Clearing
Fund and monitoring its sufficiency, as
provided for in the applicable Rules.23
FICC states that it manages its liquidity
risks with an objective of maintaining
sufficient resources to be able to fulfill
obligations that have been guaranteed
by FICC in the event of a Member
default that presents the largest
aggregate liquidity exposure to FICC
over the settlement cycle.24
The Recovery Plan would outline the
metrics and indicators that FICC has
developed to evaluate a stress situation
against established risk tolerance
thresholds. Each risk mitigation tool
identified in the Recovery Plan would
include a description of the escalation
thresholds that allow for effective and
timely reporting to the appropriate
internal management staff and
committees, or to the Board. FICC states
that the Recovery Plan is designed to
make clear that these tools and
escalation protocols would be calibrated
across each phase of the Crisis
Continuum. The Recovery Plan would
also establish that FICC would retain the
23 See GSD Rule 4 (Clearing Fund and Loss
Allocation) and MBSD Rule 4 (Clearing Fund and
Loss Allocation), supra note 10. FICC states that
because GSD and MBSD do not maintain a guaranty
fund separate and apart from the Clearing Fund
they collect from Members, FICC monitors its credit
exposure to its Members by managing the market
risks of each Member’s unsettled portfolio through
the collection of each Division’s Clearing Fund. The
aggregate of all Members’ Required Clearing Fund
deposits to each of GSD or MBSD comprises that
Division’s Clearing Fund that represents FICC’s
prefunded resources to address uncovered loss
exposures as provided in GSD Rule 4 (Clearing
Fund and Loss Allocation) and MBSD Rule 4
(Clearing Fund and Loss Allocation). Therefore,
FICC states that its market risk management strategy
for both Divisions is designed to comply with Rule
17Ad–22(e)(4) under the Act, where these risks are
referred to as ‘‘credit risks.’’ See 17 CFR 240.17Ad–
22(e)(4).
24 FICC’s liquidity risk management strategy,
including the manner in which FICC utilizes its
liquidity tools, is described in the Clearing Agency
Liquidity Risk Management Framework. See
Securities Exchange Act Release No. 82377
(December 21, 2017), 82 FR 61617 (December 28,
2017) (SR–DTC–2017–004, SR–FICC–2017–008,
SR–NSCC–2017–005).
E:\FR\FM\30AUN1.SGM
30AUN1
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices
amozie on DSK3GDR082PROD with NOTICES1
flexibility to deploy such tools either
separately or in a coordinated approach,
and to use other alternatives to these
actions and tools as necessitated by the
circumstances of a particular Member
default in accordance with the
applicable Rules. Therefore, FICC states
that the Recovery Plan would both
provide FICC with a roadmap to follow
within each phase of the Crisis
Continuum, and would permit it to
adjust its risk management measures to
address the unique circumstances of
each event.
The Recovery Plan would describe the
conditions that mark each phase of the
Crisis Continuum, and would identify
actions that FICC could take as it
transitions through each phase in order
to both prevent losses from
materializing through active risk
management, and to restore the
financial health of FICC during a period
of stress.
The stable market phase of the Crisis
Continuum would describe active risk
management activities in the normal
course of business. These activities
would include (1) routine monitoring of
margin adequacy through daily review
of back testing and stress testing results
that review the adequacy of the margin
calculations for each of GSD and MBSD,
and escalation of those results to
internal and Board committees; 25 and
(2) routine monitoring of liquidity
adequacy through review of daily
liquidity studies that measure
sufficiency of available liquidity
resources to meet cash settlement
obligations of the Member that would
generate the largest aggregate payment
obligation.26
The Recovery Plan would describe
some of the indicators of the stress
market phase of the Crisis Continuum,
which would include, for example,
volatility in market prices of certain
assets where there is increased
uncertainty among market participants
about the fundamental value of those
assets. This phase would involve
general market stresses, when no
Member default would be imminent.
Within the description of this phase, the
Recovery Plan would provide that FICC
may take targeted, routine risk
management measures as necessary and
as permitted by the Rules.
Within the Member default phase of
the Crisis Continuum, the Recovery Plan
25 FICC’s stress testing practices are described in
the Clearing Agency Stress Testing Framework
(Market Risk). See Securities Exchange Act Release
No. 82638 (December 19, 2017), 82 FR 61082
(December 26, 2017) (SR–DTC–2017–005, SR–
FICC–2017–009, SR–NSCC–2017–006).
26 See supra note 24 (concerning FICC’s liquidity
risk management strategy).
VerDate Sep<11>2014
17:25 Aug 29, 2018
Jkt 244001
would provide a roadmap for the
existing procedures that FICC would
follow in the event of a Member default
and any decision by FICC to cease to act
for that Member.27 The Recovery Plan
would provide that the objectives of
FICC’s actions upon a Member or
Affiliated Family default are to (1)
minimize losses and market exposure of
the affected Members and the applicable
Division’s non-Defaulting Members; and
(2), to the extent practicable, minimize
disturbances to the affected markets.
The Recovery Plan would describe
tools, actions, and related governance
for both market risk monitoring and
liquidity risk monitoring through this
phase. Management of liquidity risk
through this phase would involve
ongoing monitoring of the adequacy of
FICC’s liquidity resources, and the
Recovery Plan would identify certain
actions FICC may deploy as it deems
necessary to mitigate a potential
liquidity shortfall. The Recovery Plan
would state that, throughout this phase,
relevant information would be escalated
and reported to both internal
management committees and the Board
Risk Committee.
The Recovery Plan would also
identify financial resources available to
FICC, pursuant to the Rules, to address
losses arising out of a Member default.
Specifically, GSD Rule 4 (Clearing Fund
and Loss Allocation) and MBSD Rule 4
(Clearing Fund and Loss Allocation)
provides that losses remaining after
application of the Defaulting Member’s
resources be satisfied first by applying
a Corporate Contribution, and then, if
necessary, by allocating remaining
losses among the membership in
accordance with GSD Rule 4 (Clearing
Fund and Loss Allocation) and MBSD
Rule 4 (Clearing Fund and Loss
Allocation), as applicable.28
In order to provide for an effective
and timely recovery, the Recovery Plan
would describe the period of time that
would occur near the end of the
27 See GSD Rule 21 (Restrictions on Access to
Services), GSD Rule 22A (Procedures for When the
Corporation Ceases to Act), MBSD Rule 14
(Restrictions on Access to Services), and MBSD
Rule 17 (Procedures for When the Corporation
Ceases to Act), supra note 10.
28 See supra note 10. GSD Rule 4 (Clearing Fund
and Loss Allocation) and MBSD Rule 4 (Clearing
Fund and Loss Allocation) define the amount FICC
would contribute to address a loss resulting from
either a Member default or a non-default event as
the Corporate Contribution. This amount would be
50 percent of the General Business Risk Capital
Requirement, which is calculated pursuant to the
Capital Policy and, which FICC states is an amount
sufficient to cover potential general business losses
so that FICC can continue operations and services
as a going concern if those losses materialize, in an
effort to comply with Rule 17Ad–22(e)(15) under
the Act. See supra note 14 (concerning the Capital
Policy); 17 CFR 240.17Ad–22(e)(15).
PO 00000
Frm 00109
Fmt 4703
Sfmt 4703
44365
Member default phase, during which
FICC may experience stress events or
observe early warning indicators that
allow it to evaluate its options and
prepare for the recovery phase (referred
to in the R&W Plan as the Recovery
Corridor). The Recovery Plan would
then describe the recovery phase of the
Crisis Continuum, which would begin
on the date that FICC issues the first
Loss Allocation Notice of the second
loss allocation round with respect to a
given Event Period.29 The recovery
phase would describe actions that FICC
may take to avoid entering into a winddown of its business.
FICC states that it expects that
significant deterioration of liquidity
resources would cause it to enter the
Recovery Corridor. Therefore, the R&W
Plan would describe the actions FICC
may take at this stage aimed at
replenishing those resources.
Throughout the Recovery Corridor, FICC
would monitor the adequacy of the
Divisions’ respective resources and the
expected timing of replenishment of
those resources, and would do so
through the monitoring of certain
corridor indicator metrics.
FICC states that the majority of the
corridor indicators, as identified in the
Recovery Plan, relate directly to
conditions that may require either
Division to adjust its strategy for
hedging and liquidating a Defaulting
Member’s portfolio, and any such
changes would include an assessment of
the status of the corridor indicators. For
each corridor indicator, the Recovery
Plan would identify (1) measures of the
indicator, (2) evaluations of the status of
the indicator, (3) metrics for
determining the status of the
deterioration or improvement of the
indicator, and (4) ‘‘Corridor Actions,’’
which are steps that may be taken to
29 As provided for in GSD Rule 4 (Clearing Fund
and Loss Allocation) and MBSD Rule 4 (Clearing
Fund and Loss Allocation), the ‘‘Event Period’’ is
ten Business Days beginning on (i) with respect to
a Member default, the day on which FICC notifies
Members that it has ceased to act for a Member
under the Rules, or (ii) with respect to a non-default
loss, the day that FICC notifies Members of the
determination by the Board that there is a nondefault loss event. The proposed GSD Rule 4
(Clearing Fund and Loss Allocation) and MBSD
Rule 4 (Clearing Fund and Loss Allocation) define
a ‘‘round’’ as a series of loss allocations relating to
an Event Period, and provides that the first Loss
Allocation Notice in a first, second, or subsequent
round shall expressly state that such notice reflects
the beginning of a first, second, or subsequent
round. The maximum allocable loss amount of a
round is equal to the sum of the Loss Allocation
Caps of those Members included in the round. See
GSD Rule 4 (Clearing Fund and Loss Allocation)
and MBSD Rule 4 (Clearing Fund and Loss
Allocation), supra note 10.
E:\FR\FM\30AUN1.SGM
30AUN1
44366
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices
amozie on DSK3GDR082PROD with NOTICES1
improve the status of the indicator,30 as
well as management escalations
required to authorize those steps. FICC
states that because FICC has never
experienced the default of multiple
Members, it has not, historically,
measured the deterioration or
improvements metrics of the corridor
indicators. Therefore, FICC states that
these metrics were chosen based on the
business judgment of FICC management.
The Recovery Plan would also
describe the reporting and escalation of
the status of the corridor indicators
throughout the Recovery Corridor.
Significant deterioration of a corridor
indicator, as measured by the metrics
set out in the Recovery Plan, would be
escalated to the Board. FICC
management would review the corridor
indicators and the related metrics at
least annually, and would modify these
metrics as necessary in light of
observations from simulations of
Member defaults and other analyses.
Any proposed modifications would be
reviewed by the Management Risk
Committee and the Board Risk
Committee. The Recovery Plan would
estimate that FICC may remain in the
Recovery Corridor between one day and
two weeks. FICC states that this estimate
is based on historical data observed in
past Member defaults, the results of
simulations of Member defaults, and
periodic liquidity analyses conducted
by FICC. FICC states that the actual
length of a Recovery Corridor would
vary based on actual market conditions
observed at the time, and FICC would
expect the Recovery Corridor to be
shorter in market conditions of
increased stress.
The Recovery Plan would outline
steps by which FICC may allocate its
losses, which would occur when and in
the order provided in GSD Rule 4
(Clearing Fund and Loss Allocation) and
MBSD Rule 4 (Clearing Fund and Loss
Allocation), as applicable.31 The
Recovery Plan would also identify tools
that may be used to address foreseeable
shortfalls of FICC’s liquidity resources
following a Member default, and would
provide that these tools may be used as
appropriate during the Crisis
Continuum to address liquidity
shortfalls if they arise. FICC states that
the goal in managing FICC’s qualified
liquidity resources is to maximize
30 The Corridor Actions that would be identified
in the R&W Plan are designed to be indicative, but
not prescriptive; therefore, if FICC needs to
consider alternative actions due to the applicable
facts and circumstances, the escalation of those
alternative actions would follow the same
escalation protocol identified in the R&W Plan for
the Corridor Indicator to which the action relates.
31 See supra note 10.
VerDate Sep<11>2014
17:25 Aug 29, 2018
Jkt 244001
resource availability in an evolving
stress situation, to maintain flexibility
in the order and use of sources of
liquidity, and to repay any third party
lenders of liquidity in a timely manner.
Additional voluntary or uncommitted
tools to address potential liquidity
shortfalls which may supplement FICC’s
other liquid resources described herein,
would also be identified in the Recovery
Plan. The Recovery Plan would state
that, due to the extreme nature of a
stress event that would cause FICC to
consider the use of these liquidity tools,
the availability and capacity of these
liquidity tools, and the willingness of
counterparties to lend, cannot be
accurately predicted and are dependent
on the circumstances of the applicable
stress period, including market price
volatility, actual or perceived
disruptions in financial markets, the
costs to FICC of utilizing these tools,
and any potential impact on FICC’s
credit rating.
The Recovery Plan would state that
FICC will have entered the recovery
phase on the date that it issues the first
Loss Allocation Notice of the second
loss allocation round with respect to a
given Event Period. The Recovery Plan
would provide that, during the recovery
phase, FICC would continue and, as
needed, enhance, the monitoring and
remedial actions already described in
connection with previous phases of the
Crisis Continuum, and would remain in
the recovery phase until its financial
resources are expected to be or are fully
replenished, or until the Wind-down
Plan is triggered.
The Recovery Plan would describe
governance for the actions and tools that
may be employed within each phase of
the Crisis Continuum, which would be
dictated by the facts and circumstances
applicable to the situation being
addressed. Such facts and
circumstances would be measured by
the various indicators and metrics
applicable to that phase of the Crisis
Continuum, and would follow the
relevant escalation protocols that would
be described in the Recovery Plan. The
Recovery Plan would also describe the
governance procedures around a
decision to cease to act for a Member,
pursuant to the applicable Division’s
Rules, and around the management and
oversight of the subsequent liquidation
of the Defaulting Member’s portfolio.
The Recovery Plan would state that,
overall, FICC would retain flexibility in
accordance with each Division’s Rules,
its governance structure, and its
regulatory oversight, to address a
particular situation in order to best
protect FICC and the Members, and to
meet the primary objectives, throughout
PO 00000
Frm 00110
Fmt 4703
Sfmt 4703
the Crisis Continuum, of minimizing
losses and, where consistent and
practicable, minimizing disturbance to
affected markets.
(ii) Non-Default Losses
The Recovery Plan would outline how
FICC may address losses that result from
events other than a Member default.
While these matters are addressed in
greater detail in other documents, this
section of the R&W Plan would provide
a roadmap to those documents and an
outline for FICC’s approach to
monitoring and managing losses that
could result from a non-default event.
The R&W Plan would first identify some
of the risks FICC faces that could lead
to these losses, which include, for
example, (1) the business and profit/loss
risks of unexpected declines in revenue
or growth of expenses; (2) the
operational risks of disruptions to
systems or processes that could lead to
large losses, including those resulting
from, for example, a cyber-attack; and
(3) custody or investment risks that
could lead to financial losses. The
Recovery Plan would describe FICC’s
overall strategy for the management of
these risks, which includes a ‘‘three
lines of defense’’ approach to risk
management that allows for
comprehensive management of risk
across the organization.32 The Recovery
Plan would also describe FICC’s
approach to financial risk and capital
management. The R&W Plan would
identify key aspects of this approach,
including, for example, an annual
budget process, business line
performance reviews with management,
and regular review of capital
requirements against LNA. These risk
management strategies are collectively
intended to allow FICC to effectively
32 FICC states that the ‘‘three lines of defense’’
approach to risk management includes (1) a first
line of defense comprised of the various business
lines and functional units that support the products
and services offered by FICC; (2) a second line of
defense comprised of control functions that support
FICC, including the risk management, legal and
compliance areas; and (3) a third line of defense,
which is performed by an internal audit group. The
Clearing Agency Risk Management Framework
includes a description of this ‘‘three lines of
defense’’ approach to risk management, and
addresses how FICC comprehensively manages
various risks, including operational, general
business, investment, custody, and other risks that
arise in or are borne by it. Securities Exchange Act
Release No. 81635 (September 15, 2017), 82 FR
44224 (September 21, 2017) (SR–DTC–2017–013,
SR–FICC–2017–016, SR–NSCC–2017–012). The
Clearing Agency Operational Risk Management
Framework describes the manner in which FICC
manages operational risks, as defined therein.
Securities Exchange Act Release No. 81745
(September 28, 2017), 82 FR 46332 (October 4,
2017) (SR–DTC–2017–014, SR–FICC–2017–017,
SR–NSCC–2017–013).
E:\FR\FM\30AUN1.SGM
30AUN1
amozie on DSK3GDR082PROD with NOTICES1
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices
identify, monitor, and manage risks of
non-default losses.
The R&W Plan would identify the two
categories of financial resources FICC
maintains to cover losses and expenses
arising from non-default risks or events
as (1) LNA, maintained, monitored, and
managed pursuant to the Capital Policy,
which include (a) amounts held in
satisfaction of the General Business Risk
Capital Requirement,33 (b) the Corporate
Contribution,34 and (c) other amounts
held in excess of FICC’s capital
requirements pursuant to the Capital
Policy; and (2) resources available
pursuant to the loss allocation
provisions of GSD Rule 4 (Clearing
Fund and Loss Allocation) and MBSD
Rule 4 (Clearing Fund and Loss
Allocation).35
The R&W Plan would address the
process by which the CFO and the
DTCC Treasury group would determine
which available LNA resources are most
appropriate to cover a loss that is caused
by a non-default event. This
determination involves an evaluation of
a number of factors, including the
current and expected size of the loss,
the expected time horizon over when
the loss or additional expenses would
materialize, the current and projected
available LNA, and the likelihood LNA
could be successfully replenished
pursuant to the Replenishment Plan, if
triggered.36 Finally the R&W Plan would
discuss how FICC would apply its
resources to address losses resulting
from a non-default event, including the
order of resources it would apply if the
loss or liability exceeds FICC’s excess
LNA amounts, or is large relative
thereto, and the Board has declared the
event a Declared Non-Default Loss
Event pursuant to GSD Rule 4 (Clearing
Fund and Loss Allocation) and MBSD
Rule 4 (Clearing Fund and Loss
Allocation).37
The R&W Plan would also describe
proposed GSD Rule 50 (Market
Disruption and Force Majeure) and
proposed MBSD Rule 40 (Market
Disruption and Force Majeure), which
FICC is proposing to adopt in the GSD
Rule and MBSD Rules, respectively.
FICC states that this Proposed Rule is
designed to provide transparency
around how FICC would address
extraordinary events that may occur
outside its control. Specifically, the
Proposed Rule would define a Market
Disruption Event and the governance
33 See
supra note 28.
34 See supra note 28.
35 See supra note 10.
36 See supra note 14 (concerning the Capital
Policy).
37 See supra note 10.
VerDate Sep<11>2014
17:25 Aug 29, 2018
Jkt 244001
around a determination that such an
event has occurred. The Proposed Rule
would also describe FICC’s authority to
take actions during the pendency of a
Market Disruption Event that it deems
appropriate to address such an event
and facilitate the continuation of its
services, if practicable.
The R&W Plan would describe the
interaction between the Proposed Rule
and FICC’s existing processes and
procedures addressing business
continuity management and disaster
recovery (generally, the ‘‘BCM/DR
procedures’’). FICC states that the intent
is to make clear that the Proposed Rule
is designed to support those BCM/DR
procedures and to address
circumstances that may be exogenous to
FICC and not necessarily addressed by
the BCM/DR procedures. Finally, the
R&W Plan would describe that, because
the operation of the Proposed Rule is
specific to each applicable Market
Disruption Event, the Proposed Rule
does not define a time limit on its
application. However, the R&W Plan
would note that actions authorized by
the Proposed Rule would be limited to
the pendency of the applicable Market
Disruption Event, as made clear in the
Proposed Rule. FICC states that, overall,
the Proposed Rule is designed to
mitigate risks caused by Market
Disruption Events and, thereby,
minimize the risk of financial loss that
may result from such events.
(iii) Recovery Tool Characteristics
The Recovery Plan would describe
FICC’s evaluation of the tools identified
within the Recovery Plan, and its
rationale for concluding that such tools
are comprehensive, effective, and
transparent, and that such tools provide
incentives to Members and minimize
negative impact on Members and the
financial system.
3. FICC Wind-Down Plan
The Wind-down Plan would provide
the framework and strategy for the
orderly wind-down of FICC if the use of
the recovery tools described in the
Recovery Plan do not successfully
return FICC to financial viability. FICC
states that while such event is extremely
unlikely, given the comprehensive
nature of the recovery tools, FICC is
proposing a wind-down strategy that
provides for (1) the transfer of FICC’s
business, assets, and memberships of
both Divisions to another legal entity,
(2) such transfer being effected in
connection with proceedings under
Chapter 11 of the U.S. Bankruptcy
Code,38 and (3) after effectuating this
38 11
PO 00000
U.S.C. 101 et seq.
Frm 00111
Fmt 4703
Sfmt 4703
44367
transfer, FICC liquidating any remaining
assets in an orderly manner in
bankruptcy proceedings. FICC states
that the proposed transfer approach to a
wind-down would meet its objectives of
(1) assuring that FICC’s critical services
will be available to the market as long
as there are Members in good standing,
and (2) minimizing disruption to the
operations of Members and financial
markets generally that might be caused
by FICC’s failure.
In describing the transfer approach to
FICC’s Wind-down Plan, the R&W Plan
would identify the factors that FICC
considered in developing this approach,
including the fact that FICC does not
own material assets that are unrelated to
its clearance and settlement activities.
Therefore, FICC states that a business
reorganization or ‘‘bail-in’’ of debt
approach would be unlikely to mitigate
significant losses. Additionally, FICC
states that the proposed approach was
developed in consideration of its critical
and unique position in the U.S. markets,
which precludes any approach that
would cause FICC’s critical services to
no longer be available.
First, the Wind-down Plan would
describe the potential scenarios that
could lead to the wind-down of FICC,
and the likelihood of such scenarios.
The Wind-down Plan would identify
the time period leading up to a decision
to wind-down FICC as the Runway
Period. FICC states that this period
would follow the implementation of any
recovery tools, as it may take a period
of time, depending on the severity of the
market stress at that time, for these tools
to be effective or for FICC to realize a
loss sufficient to cause it to be unable
to effectuate settlements and repay its
obligations.39 The Wind-down Plan
would identify some of the indicators
that it has entered this Runway Period.
The trigger for implementing the
Wind-down Plan would be a
determination by the Board that
recovery efforts have not been, or are
unlikely to be, successful in returning
FICC to viability as a going concern. As
described in the R&W Plan, FICC states
that this is an appropriate trigger
because it is both broad and flexible
enough to cover a variety of scenarios,
and would align incentives of FICC and
the Members to avoid actions that might
undermine FICC’s recovery efforts.
Additionally, FICC states that this
39 The Wind-down Plan would state that, given
FICC’s position as a user-governed financial market
utility, it is possible that Members might
voluntarily elect to provide additional support
during the recovery phase leading up to a potential
trigger of the Wind-down Plan, but would also be
designed to make clear that FICC cannot predict the
willingness of Members to do so.
E:\FR\FM\30AUN1.SGM
30AUN1
amozie on DSK3GDR082PROD with NOTICES1
44368
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices
approach takes into account the
characteristics of FICC’s recovery tools
and enables the Board to consider (1)
the presence of indicators of a
successful or unsuccessful recovery, and
(2) potential for knock-on effects of
continued iterative application of FICC’s
recovery tools.
The Wind-down Plan would describe
the general objectives of the transfer
strategy, and would address
assumptions regarding the transfer of
FICC’s critical services, business, assets,
and membership, and the assignment of
GSD’s link with another FMI, to another
legal entity that is legally, financially,
and operationally able to provide FICC’s
critical services to entities that wish to
continue their membership following
the transfer (‘‘Transferee’’). The Winddown Plan would provide that the
Transferee would be either (1) a third
party legal entity, which may be an
existing or newly established legal
entity or a bridge entity formed to
operate the business on an interim basis
to enable the business to be transferred
subsequently (‘‘Third Party
Transferee’’); or (2) an existing, debt-free
failover legal entity established ex-ante
by DTCC (‘‘Failover Transferee’’) to be
used as an alternative Transferee in the
event that no viable or preferable Third
Party Transferee timely commits to
acquire FICC’s business. FICC would
seek to identify the proposed
Transferee, and negotiate and enter into
transfer arrangements during the
Runway Period and prior to making any
filings under Chapter 11 of the U.S.
Bankruptcy Code.40 The Wind-down
Plan would anticipate that the transfer
to the Transferee be effected in
connection with proceedings under
Chapter 11 of the U.S. Bankruptcy Code,
and pursuant to a bankruptcy court
order under Section 363 of the
Bankruptcy Code, with the intent that
the transfer be free and clear of claims
against, and interests in, FICC, except to
the extent expressly provided in the
court’s order.41
FICC states that in order to effect a
timely transfer of its services and
minimize the market and operational
disruption of such transfer, FICC would
expect to transfer all of its critical
services and any non-critical services
that are ancillary and beneficial to a
critical service, or that otherwise have
substantial user demand from the
continuing membership. Following the
transfer, the Wind-down Plan would
anticipate that the Transferee and its
continuing membership would
determine whether to continue to
40 See
41 See
11 U.S.C. 101 et seq.
11 U.S.C. 363.
VerDate Sep<11>2014
17:25 Aug 29, 2018
Jkt 244001
provide any transferred non-critical
service on an ongoing basis, or
terminate the non-critical service
following some transition period. FICC’s
Wind-down Plan would anticipate that
the Transferee would enter into a
transition services agreement with
DTCC so that DTCC would continue to
provide the shared services it currently
provides to FICC, including staffing,
infrastructure and operational support.
The Wind-down Plan would also
anticipate the assignment of FICC’s link
arrangements, including its
arrangements with clearing banks and
GSD’s cross-margining arrangement
with CME, described above, to the
Transferee.42 The Wind-down Plan
would provide that Members’ open
positions existing prior to the effective
time of the transfer would be addressed
by the provisions of the proposed Winddown Rule, as defined and described
below, and the existing GSD Rule 22B
(Corporation Default) and MBSD Rule
17 (Corporation Default) (collectively,
‘‘Corporation Default Rule’’), as
applicable, and that the Transferee
would not acquire any pending or open
transactions with the transfer of the
business.43 The Wind-down Plan would
anticipate that the Transferee would
accept transactions for processing with
a trade date from and after the effective
time of the transfer.
The Wind-down Plan would provide
that, following the effectiveness of the
transfer to the Transferee, the winddown of FICC would involve addressing
any residual claims against FICC
through the bankruptcy process and
liquidating the legal entity. The Winddown Plan does not contemplate FICC
continuing to provide services in any
capacity following the transfer time, and
any services not transferred would be
terminated.
The Wind-down Plan would also
identify the key dependencies for the
effectiveness of the transfer, which
include regulatory approvals that would
permit the Transferee to be legally
qualified to provide the transferred
services from and after the transfer, and
approval by the applicable bankruptcy
42 The proposed transfer arrangements outlined in
the Wind-down Plan do not contemplate the
transfer of any credit or funding agreements, which
are generally not assignable by FICC. However, to
the extent the Transferee adopts rules substantially
identical to those FICC has in effect prior to the
transfer, FICC states that it would have the benefit
of any rules-based liquidity funding. The Winddown Plan contemplates that neither of the
Divisions’ respective Clearing Funds would be
transferred to the Transferee, as they are not held
in a bankruptcy remote manner and they are the
primary prefunded liquidity resource to be accessed
in the recovery phase.
43 See supra note 10.
PO 00000
Frm 00112
Fmt 4703
Sfmt 4703
court of, among other things, the
proposed sale, assignments, and
transfers to the Transferee.
The Wind-down Plan would address
governance matters related to the
execution of the transfer of FICC’s
business and its wind-down. The Winddown Plan would address the duties of
the Board to execute the wind-down of
FICC in conformity with (1) the Rules,
(2) the Board’s fiduciary duties, which
mandate that it exercise reasonable
business judgment in performing these
duties, and (3) FICC’s regulatory
obligations under the Act as a registered
clearing agency. The Wind-down Plan
would also identify certain factors the
Board may consider in making these
decisions, which would include, for
example, whether FICC could safely
stabilize the business and protect its
value without seeking bankruptcy
protection, and FICC’s ability to
continue to meet its regulatory
requirements.
The Wind-down Plan would describe
(1) actions FICC or DTCC may take to
prepare for wind-down in the period
before FICC experiences any financial
distress, (2) actions FICC would take
both during the recovery phase and the
Runway Period to prepare for the
execution of the Wind-down Plan, and
(3) actions FICC would take upon
commencement of bankruptcy
proceedings to effectuate the Winddown Plan.
Finally, the Wind-down Plan would
include an analysis of the estimated
time and costs to effectuate the R&W
Plan, and would provide that this
estimate be reviewed and approved by
the Board annually. In order to estimate
the length of time it might take to
achieve a recovery or orderly winddown of FICC’s critical operations, as
contemplated by the R&W Plan, the
Wind-down Plan would include an
analysis of the possible sequencing and
length of time it might take to complete
an orderly wind-down and transfer of
critical operations, as described in
earlier sections of the R&W Plan. The
Wind-down Plan would also include in
this analysis consideration of other
factors, including the time it might take
to complete any further attempts at
recovery under the Recovery Plan. The
Wind-down Plan would then multiply
this estimated length of time by FICC’s
average monthly operating expenses,
including adjustments to account for
changes to FICC’s profit and expense
profile during these circumstances, over
the previous twelve months to
determine the amount of LNA that it
should hold to achieve a recovery or
orderly wind-down of FICC’s critical
operations. The estimated wind-down
E:\FR\FM\30AUN1.SGM
30AUN1
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices
costs would constitute the Recovery/
Wind-down Capital Requirement under
the Capital Policy.44 Under that policy,
the General Business Risk Capital
Requirement is calculated as the greatest
of three estimated amounts, one of
which is this Recovery/Wind-down
Capital Requirement.45
FICC states that the R&W Plan is
designed as a roadmap, and the types of
actions that may be taken both leading
up to and in connection with
implementation of the Wind-down Plan
would be primarily addressed in other
supporting documentation referred to
therein.
The Wind-down Plan would address
proposed GSD Rule 22D and MBSD
Rule 17B (Wind-down of the
Corporation), which would be adopted
to facilitate the implementation of the
Wind-down Plan, as discussed below.
amozie on DSK3GDR082PROD with NOTICES1
B. Proposed Rules
In connection with the adoption of
the R&W Plan, FICC proposes to adopt
the Proposed Rules, each of which is
described below. FICC states that the
Proposed Rules are designed to facilitate
the execution of the R&W Plan and are
designed to provide Members and
Limited Members with transparency as
to critical aspects of the R&W Plan,
particularly as they relate to the rights
and responsibilities of both FICC and
Members. FICC also states that the
Proposed Rules are designed to provide
a legal basis to these aspects of the R&W
Plan.
1. GSD Rule 22D and MBSD Rule 17B
(Wind-Down of the Corporation)
FICC states that the proposed GSD
Rule 22D and MBSD Rule 17B
(collectively, ‘‘Wind-down Rule’’) are
designed to facilitate the execution of
the Wind-down Plan. The Wind-down
Rule would include a proposed set of
defined terms that would be applicable
only to the provisions of this Proposed
Rule. FICC states that the Wind-down
Rule is designed to make clear that a
wind-down of FICC’s business would
occur (1) after a decision is made by the
Board, and (2) in connection with the
transfer of FICC’s services to a
Transferee, as described therein.
Because GSD and MBSD are both
divisions of FICC, the individual Winddown Rules are designed to work
together. A decision by the Board to
initiate the Wind-down Plan would be
pursuant to, and trigger the provisions
of, the Wind-down Rule of each
Division simultaneously. FICC states
that, generally, the proposed Wind44 See
45 See
supra note 14.
supra note 14.
VerDate Sep<11>2014
17:25 Aug 29, 2018
Jkt 244001
down Rule is designed to create clear
mechanisms for the transfer of Eligible
Members, Eligible Limited Members,
and Settling Banks (as these terms
would be defined in the Wind-down
Rule), and FICC’s business in order to
provide for continued access to critical
services and to minimize disruption to
the markets in the event the Wind-down
Plan is initiated.
(i) Wind-Down Trigger
First, FICC states that the Proposed
Rule is designed to make clear that the
Board is responsible for initiating the
Wind-down Plan, and would identify
the criteria the Board would consider
when making this determination. As
provided for in the Wind-down Plan
and in the proposed Wind-down Rule,
the Board would initiate the Winddown Plan if, in the exercise of its
business judgment and subject to its
fiduciary duties, it has determined that
the execution of the Recovery Plan has
not or is not likely to restore FICC to
viability as a going concern, and the
implementation of the Wind-down Plan,
including the transfer of FICC’s
business, is in the best interests of FICC,
Members and Limited Members of both
Divisions, its shareholders and
creditors, and the U.S. financial
markets.
(ii) Identification of Critical Services;
Designation of Dates and Times for
Specific Actions
The Proposed Rule would provide
that, upon making a determination to
initiate the Wind-down Plan, the Board
would identify the critical and noncritical services that would be
transferred to the Transferee at the
Transfer Time (as defined below and in
the Proposed Rule), as well as any noncritical services that would not be
transferred to the Transferee. The
proposed Wind-down Rule would
establish that any services transferred to
the Transferee will only be provided by
the Transferee as of the Transfer Time,
and that any non-critical services that
are not transferred to the Transferee
would be terminated at the Transfer
Time. The Proposed Rule would also
provide that the Board would establish
(1) an effective time for the transfer of
FICC’s business to a Transferee
(‘‘Transfer Time’’), (2) the last day that
transactions may be submitted to either
Division for processing (‘‘Last
Transaction Acceptance Date’’), and (3)
the last day that transactions submitted
to either Division will be settled (‘‘Last
Settlement Date’’).
PO 00000
Frm 00113
Fmt 4703
Sfmt 4703
44369
(iii) Treatment of Pending Transactions
The Wind-down Rule would
authorize the Board to provide for the
settlement of pending transactions of
either Division prior to the Transfer
Time, so long as the applicable
Division’s Corporation Default Rule has
not been triggered. The Board would
also have the ability to allow Members
to only submit trades to the applicable
Division that would effectively offset
pending positions or provide that
transactions will be processed in
accordance with special or exception
processing procedures. FICC states that
the Proposed Rule is designed to enable
these actions in order to facilitate
settlement of pending transactions of
the applicable Division and reduce
claims against FICC that would have to
be satisfied after the transfer has been
effected. If none of these actions are
deemed practicable (or if the applicable
Division’s Corporation Default Rule has
been triggered with respect to a
Division), then the provisions of the
proposed Corporation Default Rule
would apply to the treatment of open,
pending transactions of such Division.
FICC states that the Proposed Rule is
designed to make clear, however, that
neither Division would accept any
transactions for processing after the Last
Transaction Acceptance Date or which
are designated to settle after the Last
Settlement Date for such Division. Any
transactions to be processed and/or
settled after the Transfer Time would be
required to be submitted to the
Transferee, and would not be FICC’s
responsibility.
(iv) Notice Provisions
The proposed Wind-down Rule
would provide that, upon a decision to
implement the Wind-down Plan, FICC
would provide its Members and Limited
Members and its regulators with a
notice that includes material
information relating to the Wind-down
Plan and the anticipated transfer of the
membership of both Divisions and
business, including, for example, (1) a
brief statement of the reasons for the
decision to implement the Wind-down
Plan; (2) identification of the Transferee
and information regarding the
transaction by which the transfer of
FICC’s business would be effected; (3)
the Transfer Time, Last Transaction
Acceptance Date, and Last Settlement
Date; and (4) identification of Eligible
Members and Eligible Limited Members,
and the critical and non-critical services
that would be transferred to the
Transferee at the Transfer Time, as well
as those Non-Eligible Members and
Non-Eligible Limited Members (as
E:\FR\FM\30AUN1.SGM
30AUN1
44370
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices
defined in the Proposed Rule), and any
non-critical services that would not be
included in the transfer. FICC would
also make available the rules and
procedures and membership agreements
of the Transferee.
amozie on DSK3GDR082PROD with NOTICES1
(v) Transfer of Membership
The proposed Wind-down Rule
would address the expected transfer of
both Divisions’ membership to the
Transferee, which FICC would seek to
effectuate by entering into an
arrangement with a Failover Transferee,
or by using commercially reasonable
efforts to enter into such an arrangement
with a Third Party Transferee.
Therefore, the Wind-down Rule would
provide Members, Limited Members
and Settling Banks with notice that, in
connection with the implementation of
the Wind-down Plan and with no
further action required by any party, (1)
their membership with the applicable
Division would transfer to the
Transferee, (2) they would become party
to a membership agreement with such
Transferee, and (3) they would have all
of the rights and be subject to all of the
obligations applicable to their
membership status under the rules of
the Transferee. These provisions would
not apply to any Member or Limited
Member that is either in default of an
obligation to FICC or has provided
notice of its election to withdraw its
membership from the applicable
Division. Further, FICC states that the
proposed Wind-down Rule is designed
to make clear that it would not prohibit
(1) Members and Limited Members that
are not transferred by operation of the
Wind-down Rule from applying for
membership with the Transferee, or (2)
Members, Limited Members, and
Settling Banks that would be transferred
to the Transferee from withdrawing
from membership with the Transferee.46
(vi) Comparability Period
FICC states that the proposed
automatic mechanism for the transfer of
both Divisions’ memberships is
intended to provide the membership
with continuous access to critical
services in the event of FICC’s winddown, and to facilitate the continued
prompt and accurate clearance and
settlement of securities transactions.
The proposed Wind-down Rule would
provide that FICC would enter into
arrangements with a Failover
46 The Members and Limited Members whose
membership is transferred to the Transferee
pursuant to the proposed Wind-down Rule would
submit transactions to be processed and settled
subject to the rules and procedures of the
Transferee, including any applicable margin
charges or other financial obligations.
VerDate Sep<11>2014
17:25 Aug 29, 2018
Jkt 244001
Transferee, or would use commercially
reasonable efforts to enter into
arrangements with a Third Party
Transferee, providing that, in either
case, with respect to the critical services
and any non-critical services that are
transferred from FICC to the Transferee,
for at least a period of time to be agreed
upon (‘‘Comparability Period’’), the
business transferred from FICC to the
Transferee would be operated in a
manner that is comparable to the
manner in which the business was
previously operated by FICC.
Specifically, the proposed Wind-down
Rule would provide that: (1) The rules
of the Transferee and terms of
membership agreements would be
comparable in substance and effect to
the analogous Rules and membership
agreements of FICC; (2) the rights and
obligations of any Members, Limited
Members and Settling Banks that are
transferred to the Transferee would be
comparable in substance and effect to
their rights and obligations as to FICC;
and (3) the Transferee would operate the
transferred business and provide any
services that are transferred in a
comparable manner to which such
services were provided by FICC. FICC
states that the purpose of these
provisions and the intended effect of the
proposed Wind-down Rule is to
facilitate a smooth transition of FICC’s
business to a Transferee and to provide
that, for at least the Comparability
Period, the Transferee (1) would operate
the transferred business in a manner
that is comparable in substance and
effect to the manner in which the
business was operated by FICC, and (2)
would not require sudden and
disruptive changes in the systems,
operations and business practices of the
new members of the Transferee.
(vii) Subordination of Claims Provisions
and Miscellaneous Matters
The proposed Wind-down Rule
would include a provision addressing
the subordination of unsecured claims
against FICC of its Members and
Limited Members who fail to participate
in FICC’s recovery efforts (i.e., firms
delinquent in their obligations to FICC
or elect to retire from FICC in order to
minimize their obligations with respect
to the allocation of losses, pursuant to
the Rules). FICC states that this
provision is designed to incentivize
Members to participate in FICC’s
recovery efforts.47
47 Nothing in the proposed Wind-down Rule
would seek to prevent a Member, Limited Member
or Settling Bank that retired its membership at
either of the Divisions from applying for
membership with the Transferee. Once its FICC
membership is terminated, however, such firm
PO 00000
Frm 00114
Fmt 4703
Sfmt 4703
The proposed Wind-down Rule
would address other ex-ante matters,
including provisions providing that its
Members, Limited Members and
Settling Banks (1) will assist and
cooperate with FICC to effectuate the
transfer of FICC’s business to a
Transferee, (2) consent to the provisions
of the rule, and (3) grant FICC power of
attorney to execute and deliver on their
behalf documents and instruments that
may be requested by the Transferee.
Finally, the Proposed Rule would
include a limitation of liability for any
actions taken or omitted to be taken by
FICC pursuant to the Proposed Rule.
FICC states that the purpose of the
limitation of liability is to facilitate and
protect FICC’s ability to act
expeditiously in response to
extraordinary events. Such limitation of
liability would be available only
following triggering of the Wind-down
Plan. In addition, and as a separate
matter, FICC states that the limitation of
liability provides Members with
transparency for the unlikely situation
when those extraordinary events could
occur, as well as supporting the legal
framework within which FICC would
take such actions. FICC states that these
provisions, collectively, are designed to
enable FICC to take such acts as the
Board determines necessary to
effectuate an orderly transfer and winddown of its business should recovery
efforts prove unsuccessful.
2. GSD Rule 50 and MBSD Rule 40
(Market Disruption and Force Majeure)
The proposed GSD Rule 50 and MBSD
Rule 40 (Market Disruption and Force
Majeure) (collectively, ‘‘Force Majeure
Rule’’) would address FICC’s authority
to take certain actions upon the
occurrence, and during the pendency, of
a Market Disruption Event, as defined
therein. FICC states that because GSD
and MBSD are both divisions of FICC,
the individual Force Majeure Rules are
designed to work together. A decision
by the Board or management of FICC
that a Market Disruption Event has
occurred in accordance with the Force
Majeure Rule would trigger the
provisions of the Force Majeure Rule of
each Division simultaneously. The
Proposed Rule is designed to clarify
FICC’s ability to take actions to address
extraordinary events outside of the
control of FICC and of the memberships
of the Divisions, and to mitigate the
effect of such events by facilitating the
continuity of services (or, if deemed
would not be able to benefit from the membership
assignment that would be effected by this proposed
Wind-down Rule, and it would have to apply for
membership directly with the Transferee, subject to
its membership application and review process.
E:\FR\FM\30AUN1.SGM
30AUN1
amozie on DSK3GDR082PROD with NOTICES1
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices
necessary, the temporary suspension of
services). To that end, under the
proposed Force Majeure Rule, FICC
would be entitled, during the pendency
of a Market Disruption Event, to (1)
suspend the provision of any or all
services, and (2) take, or refrain from
taking, or require its Members and
Limited Members to take, or refrain
from taking, any actions it considers
appropriate to address, alleviate, or
mitigate the event and facilitate the
continuation of FICC’s services as may
be practicable.
The proposed Force Majeure Rule
would identify the events or
circumstances that would be considered
a Market Disruption Event. The
proposed Force Majeure Rule would
define the governance procedures for
how FICC would determine whether,
and how, to implement the provisions
of the rule. A determination that a
Market Disruption Event has occurred
would generally be made by the Board,
but the Proposed Rule would provide
for limited, interim delegation of
authority to a specified officer or
management committee if the Board
would not be able to take timely action.
In the event such delegated authority is
exercised, the proposed Force Majeure
Rule would require that the Board be
convened as promptly as practicable, no
later than five Business Days after such
determination has been made, to ratify,
modify, or rescind the action. The
proposed Force Majeure Rule would
also provide for prompt notification to
the Commission, and advance
consultation with Commission staff,
when practicable, including notification
when an event is no longer continuing
and the relevant actions are terminated.
The Proposed Rule would require
Members and Limited Members to
notify FICC immediately upon
becoming aware of a Market Disruption
Event, and, likewise, would require
FICC to notify Members and Limited
Members if it has triggered the Proposed
Rule and of actions taken or intended to
be taken thereunder.
Finally, the Proposed Rule would
address other related matters, including
a limitation of liability for any failure or
delay in performance, in whole or in
part, arising out of the Market
Disruption Event. FICC states that the
purpose of the limitation of liability
would be similar to the purpose of the
analogous provision in the proposed
Wind-down Rule, which is to facilitate
and protect FICC’s ability to act
expeditiously in response to
extraordinary events.
VerDate Sep<11>2014
17:25 Aug 29, 2018
Jkt 244001
3. Proposed Changes to GSD Rules,
MBSD Rules, and EPN Rules
In order to incorporate the Proposed
Rules into the Rules and the EPN Rules,
FICC proposes to amend (1) GSD Rule
3A (Sponsoring Members and
Sponsored Members), GSD Rule 3B
(Centrally Cleared Institutional Triparty
Service), and GSD Rule 13 (Funds-Only
Settlement); (2) MBSD Rule 3A (Cash
Settlement Bank Members); and (3) EPN
Rule 1 (Definitions). FICC states that
these proposed changes are designed to
clarify that certain types of Limited
Members, as identified in those rules,
would be subject to the Proposed Rules.
II. Discussion and Commission
Findings
Although the Clearing Supervision
Act does not specify a standard of
review for an advance notice, its stated
purpose is instructive: To mitigate
systemic risk in the financial system
and promote financial stability by,
among other things, promoting uniform
risk management standards for
systemically important financial market
utilities and strengthening the liquidity
of systemically important financial
market utilities.48
Section 805(a)(2) of the Clearing
Supervision Act 49 authorizes the
Commission to prescribe risk
management standards for the payment,
clearing and settlement activities of
designated clearing entities engaged in
designated activities for which the
Commission is the supervisory agency.
Section 805(b) of the Clearing
Supervision Act 50 provides the
following objectives and principles for
the Commission’s risk management
standards prescribed under Section
805(a):
• To promote robust risk
management;
• to promote safety and soundness;
• to reduce systemic risks; and
• to support the stability of the
broader financial system.
The Commission has adopted risk
management standards under Section
805(a)(2) of the Clearing Supervision
Act 51 and Section 17A of the Act 52
(‘‘Rule 17Ad–22’’).53 Rule 17Ad–22
requires registered clearing agencies to
establish, implement, maintain, and
enforce written policies and procedures
that are reasonably designed to meet
certain minimum requirements for their
operations and risk management
48 See
12 U.S.C. 5461(b).
U.S.C. 5464(a)(2).
50 12 U.S.C. 5464(b).
51 12 U.S.C. 5464(a)(2).
52 15 U.S.C. 78q–1.
53 See 17 CFR 240.17Ad–22.
49 12
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
44371
practices on an ongoing basis.54
Therefore, it is appropriate for the
Commission to review proposed
changes in advance notices against the
objectives and principles of these risk
management standards as described in
Section 805(b) of the Clearing
Supervision Act 55 and against Rule
17Ad–22.56
A. Consistency With Section 805(b) of
the Clearing Supervision Act
The Commission believes that the
proposed changes in the Advance
Notice are designed to help FICC
promote robust risk management,
promote safety and soundness, reduce
systemic risks, and support the stability
of the broader financial system. As
described above, the R&W Plan,
generally, would help FICC promote
robust risk management and reduce
systemic risks by providing FICC with a
roadmap for actions it may employ to
monitor and manage its risks, and, as
needed, to stabilize its financial
condition in the event those risks
materialize. Specifically, the Recovery
Plan would provide a roadmap that
would identify a number of triggers for
the potential application of a number of
available recovery tools. Identifying
triggers for the potential application of
recovery tools would help promote
robust risk management and reduce
systemic risks by better enabling FICC to
more promptly determine when and
how it may need to manage a significant
stress event, and, as needed, stabilize its
financial condition.
Similarly, the Force Majeure Rule is
designed to provide a roadmap to
address extraordinary events that may
occur outside of FICC’s control.
Specifically, the Force Majeure Rule
would define a Market Disruption Event
and provide governance around
determining when such an event has
occurred. The Force Majeure Rule also
would describe FICC’s authority to take
actions during the pendency of a Market
Disruption Event that it deems
appropriate to address such an event
and facilitate the continuation of FICC’s
services, if practicable. By defining a
Market Disruption Event and providing
such governance and authority, the
Commission believes that the Force
Majeure Rule also would help promote
robust risk management and reduce
systemic risks by improving FICC’s
ability to identify and manage a force
majeure event, and, as needed, to
stabilize its financial condition so that
FICC can continue to operate and act as
54 Id.
55 12
U.S.C. 5464(b).
17 CFR 240.17Ad–22.
56 See
E:\FR\FM\30AUN1.SGM
30AUN1
amozie on DSK3GDR082PROD with NOTICES1
44372
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices
a source of stability for the financial
markets it serves.
The Commission believes that the
Recovery Plan and the Force Majeure
Rule reflect an approach designed to
allow for a more considered and
comprehensive evaluation by FICC of a
stressed market situation and the ways
in which FICC could apply available
recovery tools in a manner intended to
minimize the potential negative effects
of the stress situation for FICC, its
membership, and the broader financial
system. Therefore, the Commission
believes that the Recovery Plan and the
Force Majeure Rule would help promote
robust risk management at FICC and,
thus, reduce systemic risks by
establishing a means for FICC to best
determine the most appropriate way to
address such stress situations in an
effective manner.
The Commission believes that the
R&W Plan, generally, would help FICC
promote safety and soundness and
support the stability of the broader
financial system by providing a
roadmap to wind–down that is designed
to ensure the availability of FICC’s
critical services to the marketplace,
while reducing disruption to the
operations of membership and financial
markets that might be caused by FICC’s
failure. Specifically, as described above,
the Wind–down Plan, as facilitated by
the Wind–down Rule, would provide
for the wind–down of FICC’s business
and transfer of membership and critical
services if the recovery tools do not
successfully return FICC to financial
viability. Accordingly, critical services,
such as services that lack alternative
providers or products; services that the
failure of which could impact the
volume of transactions, transaction
costs, or the flow of liquidity in the U.S.
financial markets; and services that are
interconnected with other participants
and processes within the U.S. financial
system would be able to continue in an
orderly manner while FICC is seeking to
wind–down its services. By designing
the Wind–down Plan and the Wind–
down Rule to enable the continuity of
FICC’s critical services and membership
in an orderly manner while FICC is
seeking to wind–down its services, the
Commission believes these proposed
changes would help FICC promote
safety and soundness and support
stability in the broader financial system
in the event the Wind–down Plan is
implemented.
As described above, to incorporate the
Proposed Rules into the Rules and the
EPN Rules, FICC proposes to amend (1)
GSD Rule 3A (Sponsoring Members and
Sponsored Members), GSD Rule 3B
(Centrally Cleared Institutional Triparty
VerDate Sep<11>2014
17:25 Aug 29, 2018
Jkt 244001
Service), and GSD Rule 13 (Funds-Only
Settlement); (2) MBSD Rule 3A (Cash
Settlement Bank Members); and (3) EPN
Rule 1 (Definitions). These proposed
changes would clarify that certain types
of Limited Members, as identified in
those rules, would be subject to the
Proposed Rules. These proposed
changes would help these Limited
Members readily understand their rights
and obligations and would help enable
Limited Members that are governed by
the Proposed Rules to have a better
understanding of the Proposed Rules.
Enhanced access to and transparency of
these rules would therefore assist such
parties in understanding, planning for,
and reacting in an orderly manner to,
the implementation by FICC of the R&W
Plan. Therefore, the Commission
believes that these proposed changes to
the Rules and the EPN Rules would help
support the stability of the broader
financial system.
By better enabling FICC to promote
robust risk management, promote safety
and soundness, reduce systemic risks,
and support the stability of the broader
financial system, as described above, the
Commission believes that the proposed
changes in the Advance Notice are
consistent with Section 805(b) of the
Clearing Supervision Act.57
B. Consistency With Rules 17Ad–
22(e)(2)(i), (iii), and (v) Under the Act
Rule 17Ad–22(e)(2)(i) under the Act
requires a covered clearing agency 58 to
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to provide for
governance arrangements that are clear
and transparent.59 Rule 17Ad–
22(e)(2)(iii) under the Act requires a
covered clearing agency to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to provide for
governance arrangements that support
the public interest requirements in
Section 17A of the Act 60 applicable to
clearing agencies, and the objectives of
57 12
U.S.C. 5464(b).
‘‘covered clearing agency’’ means, among
other things, a clearing agency registered with the
Commission under Section 17A of the Exchange
Act (15 U.S.C. 78q–1 et seq.) that is designated
systemically important by the Financial Stability
Oversight Counsel (‘‘FSOC’’) pursuant to the
Clearing Supervision Act (12 U.S.C. 5461 et seq.).
See 17 CFR 240.17Ad–22(a)(5)–(6). On July 18,
2012, FSOC designated FICC as systemically
important. U.S. Department of the Treasury, ‘‘FSOC
Makes First Designations in Effort to Protect Against
Future Financial Crises,’’ available at https://
www.treasury.gov/press-center/press-releases/
Pages/tg1645.aspx. Therefore, FICC is a covered
clearing agency.
59 17 CFR 240.17Ad–22(e)(2)(i).
60 15 U.S.C. 78q–1.
58 A
PO 00000
Frm 00116
Fmt 4703
Sfmt 4703
owners and participants.61 Rule 17Ad–
22(e)(2)(v) under the Act requires a
covered clearing agency to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to provide for
governance arrangements that specify
clear and direct lines of responsibility.62
As described above, the R&W Plan is
designed to identify clear lines of
responsibility concerning the R&W Plan
including (1) the ongoing development
of the R&W Plan; (2) ongoing
maintenance of the R&W Plan; (3)
reviews and approval of the R&W Plan;
and (4) the functioning and
implementation of the R&W Plan. As
described above, the R&R Team, which
reports to the Management Committee,
is responsible for maintaining the R&W
Plan and for the development and
ongoing maintenance of the overall
recovery and wind–down planning
process. Meanwhile, the Board, or such
committees as may be delegated
authority by the Board from time to time
pursuant to its charter, would review
and approve the R&W Plan biennially,
and also would review and approve any
changes that are proposed to the R&W
Plan outside of the biennial review.
Moreover, the R&W Plan would state the
stages of escalation required to manage
recovery under the Recovery Plan or to
invoke FICC’s wind–down under the
Wind–down Plan, which would range
from relevant business line managers up
to the Board. The R&W Plan would
identify the parties responsible for
certain activities under both the
Recovery Plan and the Wind–down
Plan, and would describe their
respective roles. The R&W Plan also
would specify the process FICC would
take to receive input from various
parties at FICC, including management
committees and the Board.
In considering the above, the
Commission believes that the R&W Plan
would help contribute to establishing,
implementing, maintaining, and
enforcing written policies and
procedures reasonably designed to
provide for governance arrangements
that are clear and transparent because it
would specify lines of control. The
Commission also believes that the R&W
Plan would help contribute to
establishing, implementing,
maintaining, and enforcing written
policies and procedures reasonably
designed to provide for governance
arrangements that support the public
interest requirements in Section 17A of
the Act 63 applicable to clearing
61 17
CFR 240.17Ad–22(e)(2)(iii).
CFR 240.17Ad–22(e)(2)(v).
63 15 U.S.C. 78q–1.
62 17
E:\FR\FM\30AUN1.SGM
30AUN1
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices
amozie on DSK3GDR082PROD with NOTICES1
agencies, and the objectives of owners
and participants because the R&W Plan
specifies the process FICC would take to
receive input from various FICC
stakeholders. In addition, the
Commission believes that the R&W Plan
would help contribute to establishing,
implementing, maintaining, and
enforcing written policies and
procedures reasonably designed to
provide for governance arrangements
that specify clear and direct lines of
responsibility because it specifies who
is responsible for the ongoing
development, maintenance, reviews,
approval, functioning, and
implementation of the R&W Plan.
Therefore, the Commission believes
that the R&W Plan is consistent with
Rules 17Ad–22(e)(2)(i), (iii), and (v)
under the Act.64
C. Consistency With Rule 17Ad–
22(e)(3)(ii) Under the Act
Rule 17Ad–22(e)(3)(ii) under the Act
requires a covered clearing agency to
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to maintain a
sound risk management framework for
comprehensively managing legal, credit,
liquidity, operational, general business,
investment, custody, and other risks
that arise in or are borne by the covered
clearing agency, which includes plans
for the recovery and orderly wind–down
of the covered clearing agency
necessitated by credit losses, liquidity
shortfalls, losses from general business
risk, or any other losses.65
As described above, the R&W Plan’s
Recovery Plan provides a plan for
FICC’s recovery necessitated by credit
losses, liquidity shortfalls, losses from
general business risk, or any other losses
by defining the risk management
activities, stress conditions and
indicators, and tools that FICC may use
to address stress scenarios that could
eventually prevent FICC from being able
to provide its critical services as a going
concern. More specifically, through the
framework of the Crisis Continuum,
which identifies tools that can be
employed to mitigate losses and
mitigate or minimize liquidity needs as
the market environment becomes
increasingly stressed, the Recovery Plan
would identify measures that FICC may
take to manage risks of credit losses and
liquidity shortfalls, and other losses that
could arise from a Member default. The
Recovery Plan also would address
FICC’s management of general business
risks and other non-default risks that
could lead to losses by identifying
potential non-default losses and the
resources available to FICC to address
such losses, including recovery triggers
and tools to mitigate such losses.
Therefore, the Commission believes that
the R&W Plan’s Recovery Plan helps
FICC 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 FICC, which
includes a recovery plan necessitated by
credit losses, liquidity shortfalls, losses
from general business risk, or any other
losses.
As described above, the R&W Plan’s
Wind-down Plan provides a plan for
orderly wind-down of FICC, which
would be triggered by a determination
by the Board that recovery efforts have
not been, or are unlikely to be,
successful in returning FICC to viability
as a going concern. Once triggered, the
Wind-down Plan sets forth mechanisms
for the transfer of the membership of
both Divisions and FICC’s business, and
it is designed to maintain continued
access to FICC’s critical services and to
minimize market impact of the transfer
while FICC is seeking to ultimately
wind-down its services. Specifically, the
Wind-down Plan would provide for the
transfer of FICC’s business, assets, and
membership to another legal entity with
such transfer being effected in
connection with proceedings under
Chapter 11 of the U.S. Bankruptcy
Code.66 After effectuating this transfer,
FICC would liquidate any remaining
assets in an orderly manner in
bankruptcy proceedings.
Although the Commission is not
opining on the Wind-down Plan’s
consistency with the U.S. Bankruptcy
Code, in reviewing the proposed
changes, the Commission believes that
FICC’s intent to use bankruptcy
proceedings to achieve an orderly
liquidation of assets after any transfer of
FICC’s business appears reasonable, in
light of the provisions of the Bankruptcy
Code that address the liquidation and
distribution of a debtor’s property
among creditors and interest holders.67
Under many circumstances, Section 363
of the Bankruptcy Code provides for the
sale of property ‘‘free and clear of any
interest in such property of an entity
other than the estate[.]’’ 68 The
Commission believes that FICC’s
analysis regarding the applicability of
66 11
64 17
CFR 240.17Ad–22(e)(2)(i), (iii), and (v).
65 17 CFR 240.17Ad–22(e)(3)(ii).
VerDate Sep<11>2014
17:25 Aug 29, 2018
Jkt 244001
U.S.C. 101 et seq.
e.g., 11 U.S.C. 363, 726, and 1129(a)(7).
68 See 11 U.S.C. 363(f).
67 See,
PO 00000
Frm 00117
Fmt 4703
Sfmt 4703
44373
these provisions, while not free from
doubt, presents a reasonable approach
to liquidation in light of the
circumstances and the available
alternatives.69 Therefore, the
Commission believes that the R&W
Plan’s Wind-down Plan helps FICC
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 FICC, which
includes a wind-down plan necessitated
by credit losses, liquidity shortfalls,
losses from general business risk, or any
other losses.
Therefore, the Commission believes
that the R&W Plan is consistent with
Rule 17Ad–22(e)(3)(ii) under the Act.70
D. Consistency With Rules 17Ad–
22(e)(15)(i)–(ii) Under the Act
Rule 17Ad–22(e)(15)(i) under the Act
requires a covered clearing agency to
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to identify,
monitor, and manage its general
business risk and hold sufficient liquid
net assets funded by equity to cover
potential general business losses so that
the covered clearing agency can
continue operations and services as a
going concern if those losses
materialize, including by determining
the amount of liquid net assets funded
by equity based upon its general
business risk profile and the length of
time required to achieve a recovery or
orderly wind-down, as appropriate, of
its critical operations and services if
such action is taken.71 Rule 17Ad–
22(e)(15)(ii) under the Act requires a
covered clearing agency to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to identify,
monitor, and manage its general
business risk and hold sufficient liquid
net assets funded by equity to cover
potential general business losses so that
the covered clearing agency can
continue operations and services as a
going concern if those losses
materialize, including by holding liquid
net assets funded by equity equal to the
greater of either (x) six months of the
69 The Wind-down Plan would identify certain
factors the Board may consider in evaluating
alternatives, which would include, for example,
whether FICC could safely stabilize the business
and protect its value without seeking bankruptcy
protection, and FICC’s ability to continue to meet
its regulatory requirements.
70 17 CFR 240.17Ad–22(e)(3)(ii).
71 17 CFR 240.17Ad–22(e)(15)(i).
E:\FR\FM\30AUN1.SGM
30AUN1
44374
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices
covered clearing agency’s current
operating expenses, or (y) the amount
determined by the board of directors to
be sufficient to ensure a recovery or
orderly wind-down of critical
operations and services of the covered
clearing agency, as contemplated by the
plans established under Rule 17Ad–
22(e)(3)(ii) under the Act,72 discussed
above.73
As discussed above, FICC’s Capital
Policy is designed to address how FICC
holds LNA in compliance with these
requirements,74 while the Wind-down
Plan would include an analysis to
estimate the amount of time and cost to
achieve a recovery or orderly winddown of FICC’s critical operations and
services, and would provide that the
Board review and approve this analysis
and estimation annually. The Winddown Plan also would provide that the
estimate would be the Recovery/Winddown Capital Requirement under the
Capital Policy. Under that policy, the
General Business Risk Capital
Requirement, which is the amount of
LNA that FICC plans to hold to cover
potential general business losses so that
it can continue operations and services
as a going concern if those losses
materialize, is calculated as the greatest
of three estimated amounts, one of
which is this Recovery/Wind-down
Capital Requirement. Therefore, the
Commission believes that the R&W Plan
is consistent with Rules 17Ad–
22(e)(15)(i) and (ii) under the Act.75
III. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act,76 that the Commission
DOES NOT OBJECT to advance notice
SR–FICC–2017–805, as modified by
Amendment No. 1, and that FICC is
authorized to implement the proposal as
of the date of this notice or the date of
an order by the Commission approving
proposed rule change SR–FICC–2017–
021, as modified by Amendment No. 1,
whichever is later.
By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–18868 Filed 8–29–18; 8:45 am]
amozie on DSK3GDR082PROD with NOTICES1
BILLING CODE 8011–01–P
72 17
CFR 240.17Ad–22(e)(3)(ii).
CFR 240.17Ad–22(e)(15)(ii).
74 Supra note 14.
75 17 CFR 240.17Ad–22(e)(15)(i) and (ii).
76 12 U.S.C. 5465(e)(1)(I).
73 17
VerDate Sep<11>2014
17:25 Aug 29, 2018
Jkt 244001
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
33214; File No. 812–14837]
Innovator ETFs Trust, et al.
August 24, 2018.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice.
AGENCY:
Notice of an application for an order
under section 12(d)(1)(J) of the
Investment Company Act of 1940 (the
‘‘Act’’) for an exemption from sections
12(d)(1)(A), (B), and (C) of the Act and
under sections 6(c) and 17(b) of the Act
for an exemption from section 17(a) of
the Act. The requested order would
permit certain registered open-end
investment companies to acquire shares
of certain registered open-end
investment companies, registered
closed-end investment companies,
business development companies, as
defined in section 2(a)(48) of the Act
(‘‘BDCs’’), and registered unit
investment trusts (collectively,
‘‘Underlying Funds’’) that are within
and outside the same group of
investment companies as the acquiring
investment companies, in excess of the
limits in section 12(d)(1) of the Act.
APPLICANTS: Innovator ETFs Trust (the
‘‘Trust’’), a Delaware statutory trust that
is registered under the Act as an openend management investment company
with multiple series, Innovator Capital
Management, LLC (the ‘‘Initial
Adviser’’), a limited liability company
organized under the laws of the state of
Delaware that is registered as an
investment adviser under the
Investment Advisers Act of 1940, and
Foreside Fund Services, LLC (the
‘‘Distributor’’), registered as a brokerdealer under the Securities Exchange
Act of 1934 (the ‘‘1934 Act’’) and a
member of the Financial Industry
Regulatory Authority.
FILING DATES: The application was filed
on October 31, 2017, and amended on
May 1, 2018.
HEARING OR NOTIFICATION OF HEARING: An
order granting the requested relief will
be issued unless the Commission orders
a hearing. Interested persons may
request a hearing by writing to the
Commission’s Secretary and serving
applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on September 18, 2018,
and should be accompanied by proof of
service on the applicants, in the form of
an affidavit, or, for lawyers, a certificate
of service. Pursuant to rule 0–5 under
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
the Act, hearing requests should state
the nature of the writer’s interest, any
facts bearing upon the desirability of a
hearing on the matter, the reason for the
request, and the issues contested.
Persons who wish to be notified of a
hearing may request notification by
writing to the Commission’s Secretary.
ADDRESSES: Secretary, U.S. Securities
and Exchange Commission, 100 F Street
NE, Washington, DC 20549–1090.
Applicants: Innovator ETFs Trust and
Innovator Capital Management, LLC,
120 North Hale Street, Suite 200,
Wheaton, IL 60187; Foreside Fund
Services, LLC, Three Canal Plaza, Suite
100, Portland, ME 04101.
FOR FURTHER INFORMATION CONTACT:
Christine Y. Greenlees, Senior Counsel,
at (202) 551–6879, or Andrea
Ottomanelli Magovern, Branch Chief, at
(202) 551–6821 (Division of Investment
Management, Chief Counsel’s Office).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
website by searching for the file
number, or for an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
Summary of the Application
1. Applicants request an order to
permit (a) each Fund 1 (each a ‘‘Fund of
Funds’’) to acquire shares of Underlying
Funds 2 in excess of the limits in
sections 12(d)(1)(A) and (C) of the Act
and (b) each Underlying Fund that is a
registered open-end management
1 Applicants request that the order apply not only
to the existing series of the Trust (the ‘‘Initial
Funds’’), but that the order also extend to any future
series of the Trust and any other existing or future
registered open-end management investment
companies and any series thereof that are part of the
same ‘‘group of investment companies,’’ as defined
in section 12(d)(1)(G)(ii) of the Act, as the Trust and
are, or may in the future be, advised by the Initial
Adviser or its successor or any other investment
adviser controlling, controlled by, or under
common control with the Initial Adviser or its
successor (together with the Initial Funds, each
series a ‘‘Fund,’’ and collectively, the ‘‘Funds’’).
Applicants further request that the order also apply
to any future principal underwriter and distributor
for a Fund. For purposes of the requested order,
‘‘successor’’ is limited to an entity that results from
a reorganization into another jurisdiction or a
change in the type of business organization. For
purposes of the request for relief, the term ‘‘group
of investment companies’’ means any two or more
registered investment companies, including closedend investment companies, and BDCs, that hold
themselves out to investors as related companies for
purposes of investment and investor services.
2 Certain of the Underlying Funds have obtained
exemptions from the Commission necessary to
permit their shares to be listed and traded on a
national securities exchange at negotiated prices
and, accordingly, to operate as an exchange-traded
fund (‘‘ETF’’).
E:\FR\FM\30AUN1.SGM
30AUN1
Agencies
[Federal Register Volume 83, Number 169 (Thursday, August 30, 2018)]
[Notices]
[Pages 44361-44374]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18868]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83954; File No. SR-FICC-2017-805]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of No Objection to an Advance Notice, as Modified by Amendment
No. 1, To Adopt a Recovery & Wind-Down Plan and Related Rules
August 27, 2018.
On December 18, 2017, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'')
advance notice SR-FICC-2017-805 pursuant to 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
(``Clearing Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the
Securities Exchange Act of 1934 (``Act'') \2\ to adopt a recovery and
wind-down plan (``R&W Plan'') and related rules.\3\ The advance notice
was published for comment in the Federal Register on January 30,
2018.\4\ In that publication, the Commission also extended the review
period of the advance notice for an additional 60 days, pursuant to
Section 806(e)(1)(H) of the Clearing Supervision Act.\5\ On April 10,
2018, the Commission required additional information from FICC pursuant
to Section 806(e)(1)(D) of the Clearing Supervision Act,\6\ which
tolled the Commission's period of review of the advance notice until 60
days from the date the information required by the Commission was
received by the Commission.\7\ On June 28, 2018, FICC filed Amendment
No. 1 to the advance notice to amend and replace in its entirety the
advance notice as originally filed on December 18, 2017.\8\ On July 6,
2018, the Commission received a response to its request for additional
information in consideration of the advance notice, which, in turn,
added a further 60-days to the review period pursuant to Section
806(e)(1)(E) and (G) of the Clearing Supervision Act.\9\ The Commission
did not receive any comments. This publication serves as notice that
the Commission does not object to the proposed changes set forth in the
advance notice, as modified by Amendment No. 1 (hereinafter, ``Advance
Notice'').
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ On December 18, 2017, FICC filed the advance notice as
proposed rule change SR-FICC-2017-021 with the Commission pursuant
to Section 19(b)(1) of the Act and Rule 19b-4 thereunder (``Proposed
Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4,
respectively. The Proposed Rule Change was published in the Federal
Register on January 8, 2018. Securities Exchange Act Release No.
82431 (January 2, 2018), 83 FR 871 (January 8, 2018) (SR-FICC-2017-
021). On February 8, 2018, the Commission designated a longer period
within which to approve, disapprove, or institute proceedings to
determine whether to approve or disapprove the Proposed Rule Change.
Securities Exchange Act Release No. 82669 (February 8, 2018), 83 FR
6653 (February 14, 2018) (SR-DTC-2017-021, SR-FICC-2017-021, SR-
NSCC-2017-017). On March 20, 2018, the Commission instituted
proceedings to determine whether to approve or disapprove the
Proposed Rule Change. Securities Exchange Act Release No. 82913
(March 20, 2018), 83 FR 12997 (March 26, 2018) (SR-FICC-2017-021).
On June 25, 2018, the Commission designated a longer period for
Commission action on the proceedings to determine whether to approve
or disapprove the Proposed Rule Change. Securities Exchange Act
Release No. 83509 (June 25, 2018), 83 FR 30785 (June 29, 2018) (SR-
DTC-2017-021, SR-FICC-2017-021, SR-NSCC-2017-017). On June 28, 2018,
FICC filed Amendment No. 1 to the Proposed Rule Change. Securities
Exchange Act Release No. 83630 (July 13, 2018), 83 FR 34213 (July
19, 2018) (SR-FICC-2017-021). FICC submitted a courtesy copy of
Amendment No. 1 to the Proposed Rule Change through the Commission's
electronic public comment letter mechanism. Accordingly, Amendment
No. 1 to the Proposed Rule Change has been publicly available on the
Commission's website at https://www.sec.gov/rules/sro/ficc.htm since
June 29, 2018. The Commission did not receive any comments. The
proposal, as set forth in both the advance notice and the Proposed
Rule Change, each as modified by Amendments No. 1, shall not take
effect until all required regulatory actions are completed.
\4\ Securities Exchange Act Release No. 82580 (January 24,
2018), 83 FR 4341 (January 30, 2018) (SR-FICC-2017-805)
(``Notice'').
\5\ Pursuant to Section 806(e)(1)(H) of the Clearing Supervision
Act, the Commission may extend the review period of an advance
notice for an additional 60 days, if the changes proposed in the
advance notice raise novel or complex issues, subject to the
Commission providing the clearing agency with prompt written notice
of the extension. 12 U.S.C. 5465(e)(1)(H). The Commission found that
the advance notice raised novel and complex issues and, accordingly,
extended the review period of the advance notice for an additional
60 days until April 17, 2018. See Notice, supra note 4.
\6\ 12 U.S.C. 5465(e)(1)(D).
\7\ See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii); see Memorandum
from the Office of Clearance and Settlement Supervision, Division of
Trading and Markets, titled ``Commission's Request for Additional
Information,'' available at https://www.sec.gov/rules/sro/ficc-an.htm.
\8\ Securities Exchange Act Release No. 83744 (July 31, 2018),
83 FR 38413 (August 6, 2018) (SR-FICC-2017-805). FICC submitted a
courtesy copy of Amendment No. 1 to the advance notice through the
Commission's electronic public comment letter mechanism.
Accordingly, Amendment No. 1 to the advance notice has been publicly
available on the Commission's website at https://www.sec.gov/rules/sro/ficc-an.htm since June 29, 2018.
\9\ 12 U.S.C. 5465(e)(1)(E) and (G); see Memorandum from the
Office of Clearance and Settlement Supervision, Division of Trading
and Markets, titled ``Response to the Commission's Request for
Additional Information,'' available at https://www.sec.gov/rules/sro/ficc-an.htm.
---------------------------------------------------------------------------
I. Description of the Advance Notice
In the Advance Notice, FICC proposes to (1) adopt an R&W Plan; (2)
amend FICC's Government Securities Division (``GSD'') Rulebook (``GSD
Rules'') to (a) adopt Rule 22D (Wind-down of the Corporation) and Rule
50 (Market Disruption and Force Majeure), and (b) make conforming
changes to Rule 3A (Sponsoring Members and Sponsored Members), Rule 3B
(Centrally Cleared Institutional Triparty Service) and Rule 13 (Funds-
Only Settlement) related to the adoption of these proposed rules to the
GSD Rules; (3) amend FICC's Mortgage-Backed Securities Division
(``MBSD,'' and, together with GSD, the ``Divisions'') Clearing Rules
(``MBSD Rules'') in order to (a) adopt Rule 17B (Wind-down of the
Corporation) and Rule 40 (Market Disruption and Force Majeure); and (b)
make conforming changes to Rule 3A (Cash Settlement Bank Members)
related to the adoption of these proposed rules to the MBSD Rules; and
(4) amend Rule 1 of the Electronic Pool Netting (``EPN'') Rules of MBSD
(``EPN Rules'') to provide that EPN Users, as defined therein, are
bound by proposed Rule 17B (Wind-down of the Corporation) and proposed
Rule 40 (Market Disruption and Force Majeure) to be adopted to the MBSD
Rules.\10\ Each of the proposed rules is
[[Page 44362]]
referred to herein as a ``Proposed Rule,'' and are collectively
referred to as the ``Proposed Rules.''
---------------------------------------------------------------------------
\10\ The GSD Rules and the MBSD Rules are referred to
collectively herein as the ``Rules.'' Capitalized terms not defined
herein are defined in the Rules.
---------------------------------------------------------------------------
FICC states that the R&W Plan would be used by the Board of
Directors of FICC (``Board'') and FICC's management in the event FICC
encounters scenarios that could potentially prevent it from being able
to provide its critical services as a going concern.
FICC states that the Proposed Rules are designed to (1) facilitate
the implementation of the R&W Plan when necessary and, in particular,
allow FICC to effectuate its strategy for winding down and transferring
its business; (2) provide Members and Limited Members with transparency
around critical provisions of the R&W Plan that relate to their rights,
responsibilities and obligations; \11\ and (3) provide FICC with the
legal basis to implement those provisions of the R&W Plan when
necessary.
---------------------------------------------------------------------------
\11\ References herein to ``Members'' refer to GSD Netting
Members and MBSD Clearing Members. References herein to ``Limited
Members'' refer to participants of GSD or MBSD other than GSD
Netting Members and MBSD Clearing Members, including, for example,
GSD Comparison-Only Members, GSD Sponsored Members, GSD CCIT
Members, and MBSD EPN Users.
---------------------------------------------------------------------------
A. FICC R&W Plan
The R&W Plan would be structured to provide a roadmap, define the
strategy, and identify the tools available to FICC to either (i)
recover, in the event it experiences losses that exceed its prefunded
resources (such strategies and tools referred to herein as the
``Recovery Plan'') or (ii) wind-down its business in a manner designed
to permit the continuation of its critical services in the event that
such recovery efforts are not successful (such strategies and tools
referred to herein as the ``Wind-down Plan''). The R&W Plan would
identify (i) the recovery tools available to FICC to address the risks
of (a) uncovered losses or liquidity shortfalls resulting from the
default of one or more Members, and (b) losses arising from non-default
events, such as damage to its physical assets, a cyber-attack, or
custody and investment losses, and (ii) the strategy for implementation
of such tools. The R&W Plan would also establish the strategy and
framework for the orderly wind-down of FICC and the transfer of its
business in the remote event the implementation of the available
recovery tools does not successfully return FICC to financial
viability.
As discussed in greater detail below, the R&W Plan would provide,
among other matters, (i) an overview of the business of FICC and its
parent, The Depository Trust & Clearing Corporation (``DTCC''); \12\
(ii) an analysis of FICC's intercompany arrangements and an existing
link to another financial market infrastructure (``FMI''); (iii) a
description of FICC's services, and the criteria used to determine
which services are considered critical; (iv) a description of the FICC
and DTCC governance structure; (v) a description of the governance
around the overall recovery and wind-down program; (vi) a discussion of
tools available to FICC to mitigate credit/market \13\ risks and
liquidity risks, including recovery indicators and triggers, and the
governance around management of a stress event along a Crisis Continuum
timeline; (vii) a discussion of potential non-default losses and the
resources available to FICC to address such losses, including recovery
triggers and tools to mitigate such losses; (viii) an analysis of the
recovery tools' characteristics, including how they are designed to be
comprehensive, effective, and transparent, how the tools provide
incentives to Members to, among other things, control and monitor the
risks they may present to FICC, and how FICC seeks to minimize the
negative consequences of executing its recovery tools; and (ix) the
framework and approach for the orderly wind-down and transfer of FICC's
business, including an estimate of the time and costs to effect a
recovery or orderly wind-down of FICC.
---------------------------------------------------------------------------
\12\ DTCC is a user-owned and user-governed holding company and
is the parent company of FICC and its affiliates, The Depository
Trust Company (``DTC'') and National Securities Clearing Corporation
(``NSCC'', and, together with FICC and DTC, the ``Clearing
Agencies''). The R&W Plan would describe how corporate support
services are provided to FICC from DTCC and DTCC's other
subsidiaries through intercompany agreements under a shared services
model.
\13\ FICC states that it uses the term ``credit/market'' risks
in the R&W Plan because FICC monitors its credit exposure to its
Members by managing the market risks of each Member's unsettled
portfolio through the collection of each Division's Clearing Fund.
See infra note 23.
---------------------------------------------------------------------------
Certain recovery tools that would be identified in the R&W Plan are
based in the Rules (including the Proposed Rules); therefore,
descriptions of those tools in the R&W Plan would include descriptions
of, and reference to, the applicable Rules and any related internal
policies and procedures. Other recovery tools that would be identified
in the R&W Plan are based in contractual arrangements to which FICC is
a party, including, for example, existing committed or pre-arranged
liquidity arrangements. Further, the R&W Plan would state that FICC may
develop further supporting internal guidelines and materials that may
provide operational support for matters described in the R&W Plan, and
that such documents would be supplemental and subordinate to the R&W
Plan.
FICC states that many of the tools available to FICC that would be
described in the R&W Plan are FICC's existing, business-as-usual risk
management and Member default management tools, which would continue to
be applied in scenarios of increasing stress. In addition to these
existing, business-as-usual tools, the R&W Plan would describe FICC's
other principal recovery tools, which include, for example, (i)
identifying, monitoring and managing general business risk and holding
sufficient liquid net assets funded by equity (``LNA'') to cover
potential general business losses pursuant to the Clearing Agency
Policy on Capital Requirements (``Capital Policy''),\14\ (ii)
maintaining the Clearing Agency Capital Replenishment Plan
(``Replenishment Plan'') as a viable plan for the replenishment of
capital should FICC's equity fall close to or below the amount being
held pursuant to the Capital Policy,\15\ and (iii) the process for the
allocation of losses among Members, as provided in GSD Rule 4 (Clearing
Fund and Loss Allocation) and MBSD Rule 4 (Clearing Fund and Loss
Allocation).\16\ The R&W Plan would provide governance around the
selection and implementation of the recovery tool or tools most
relevant to mitigate a stress scenario and any applicable loss or
liquidity shortfall.
---------------------------------------------------------------------------
\14\ See Securities Exchange Act Release No. 81105 (July 7,
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003, SR-FICC-2017-
007, SR-NSCC-2017-004).
\15\ See id.
\16\ See supra note 10.
---------------------------------------------------------------------------
The development of the R&W Plan is facilitated by the Office of
Recovery & Resolution Planning (``R&R Team'') of DTCC.\17\ The R&R Team
reports to the DTCC Management Committee (``Management Committee'') and
is responsible for maintaining the R&W Plan and for the development and
ongoing maintenance of the overall recovery and wind-down planning
process. The Board, or such committees as may be delegated authority by
the Board from time to time pursuant to its charter, would review and
approve the R&W Plan biennially, and would also review and approve any
changes that
[[Page 44363]]
are proposed to the R&W Plan outside of the biennial review.
---------------------------------------------------------------------------
\17\ DTCC operates on a shared services model with respect to
FICC and its other subsidiaries. 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 subsidiary, including FICC.
---------------------------------------------------------------------------
As discussed in greater detail below, the Proposed Rules would
define the procedures that may be employed in the event of FICC's wind-
down and would provide for FICC's authority to take certain actions on
the occurrence of a Market Disruption Event, as defined therein. FICC
states that the Proposed Rules are designed to provide Members and
Limited Members with transparency and certainty with respect to these
matters. FICC also states that the Proposed Rules are designed to
facilitate the implementation of the R&W Plan, particularly FICC's
strategy for winding down and transferring its business, and are
designed to provide FICC with the legal basis to implement those
aspects of the R&W Plan.
1. Business Overview, Critical Services, and Governance
The introduction to the R&W Plan would identify the document's
purpose and its regulatory background, and would outline a summary of
the R&W Plan. The stated purpose of the R&W Plan is that it is to be
used by the Board and FICC management in the event FICC encounters
scenarios that could potentially prevent it from being able to provide
its critical services as a going concern.
The R&W Plan would describe DTCC's business profile, provide a
summary of the services of FICC as offered by each of the Divisions,
and identify the intercompany arrangements and links between FICC and
other entities, most notably a link between GSD and Chicago Mercantile
Exchange Inc. (``CME''), which is also an FMI. FICC states that the
overview section would provide a context for the R&W Plan by describing
FICC's business, organizational structure and critical links to other
entities. FICC also states that by providing this context, this section
would facilitate the analysis of the potential impact of utilizing the
recovery tools set forth in later sections of the Recovery Plan, and
the analysis of the factors that would be addressed in implementing the
Wind-down Plan.
The R&W Plan would provide a description of the critical
contractual and operational arrangements between FICC and other legal
entities, including the cross-margining agreement between GSD and CME,
which is also an FMI.\18\ FICC states that this section of the R&W
Plan, which identifies and briefly describes FICC's established links,
is designed to provide a mapping of critical connections and
dependencies that may need to be relied on or otherwise addressed in
connection with the implementation of either the Recovery Plan or the
Wind-down Plan.
---------------------------------------------------------------------------
\18\ Available at https://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_cme_crossmargin_agreement.pdf. See also GSD Rule 43
(Cross-Margining Arrangements), supra note 10.
---------------------------------------------------------------------------
The R&W Plan would define the criteria for classifying certain of
FICC's services as ``critical,'' and would identify those critical
services and the rationale for their classification. This section of
the R&W Plan would provide an analysis of the potential systemic impact
from a service disruption, which FICC states is important for
evaluating how the recovery tools and the wind-down strategy would
facilitate and provide for the continuation of FICC's critical services
to the markets it serves. The criteria that would be used to identify
an FICC service or function as critical would include (1) whether there
is a lack of alternative providers or products; (2) whether failure of
the service could impact FICC's ability to perform its central
counterparty services through either Division; (3) whether failure of
the service could impact FICC's ability to perform its multilateral
netting services through either Division and, therefore, could impact
the volume of transactions; (4) whether failure of the service could
impact FICC's ability to perform its book-entry delivery and settlement
services through either Division and, as such, could impact transaction
costs; (5) whether failure of the service could impact FICC's ability
to perform its cash payment processing services through either Division
and, as such, could impact the flow of liquidity in the U.S. financial
markets; and (6) whether the service is interconnected with other
participants and processes within the U.S. financial system, for
example, with other FMIs, settlement banks, and broker-dealers. The R&W
Plan would then list each of those services, functions or activities
that FICC has identified as ``critical'' based on the applicability of
these six criteria. The R&W Plan would also include a non-exhaustive
list of FICC services that are not deemed critical.
FICC states that the evaluation of which services provided by FICC
are deemed critical is important for purposes of determining how the
R&W Plan would facilitate the continuity of those services. While
FICC's Wind-down Plan would provide for the transfer of all critical
services to a transferee in the event FICC's wind-down is implemented,
it would anticipate that any non-critical services that are ancillary
and beneficial to a critical service, or that otherwise have
substantial user demand from the continuing membership, would also be
transferred.
The R&W Plan would describe the governance structure of both DTCC
and FICC. This section of the R&W Plan would identify the ownership and
governance model of these entities at both the Board and management
levels. The R&W Plan would state that the stages of escalation required
to manage recovery under the Recovery Plan or to invoke FICC's wind-
down under the Wind-down Plan would range from relevant business line
managers up to the Board through FICC's governance structure. The R&W
Plan would then identify the parties responsible for certain activities
under both the Recovery Plan and the Wind-down Plan, and would describe
their respective roles. The R&W Plan would identify the Risk Committee
of the Board (``Board Risk Committee'') as being responsible for
oversight of risk management activities at FICC, which include focusing
on both oversight of risk management systems and processes designed to
identify and manage various risks faced by FICC as well as oversight of
FICC's efforts to mitigate systemic risks that could impact those
markets and the broader financial system.\19\ The R&W Plan would
identify the DTCC Management Risk Committee (``Management Risk
Committee'') as primarily responsible for general, day-to-day risk
management through delegated authority from the Board Risk Committee.
The R&W Plan would state that the Management Risk Committee has
delegated specific day-to-day risk management, including management of
risks addressed through margining systems and related activities, to
the DTCC Group Chief Risk Office (``GCRO''), which works with staff
within the DTCC Financial Risk Management group. Finally, the R&W Plan
would describe the role of the Management Committee, which provides
overall direction for all aspects of FICC's business, technology, and
operations and the functional areas that support these activities.
---------------------------------------------------------------------------
\19\ The DTCC, DTC, NSCC, FICC Risk Committee Charter is
available at https://www.dtcc.com/~/media/Files/Downloads/legal/
policy-and-compliance/DTCC-BOD-Risk-Committee-Charter.pdf.
---------------------------------------------------------------------------
The R&W Plan would describe the governance of recovery efforts in
response to both default losses and non-default losses under the
Recovery Plan, identifying the groups responsible for those recovery
efforts. Specifically, the R&W Plan would state that the Management
Risk Committee provides oversight of actions relating to the default of
a Member, which would be
[[Page 44364]]
reported and escalated to it through the GCRO, and the Management
Committee provides oversight of actions relating to non-default events
that could result in a loss, which would be reported and escalated to
it from the DTCC Chief Financial Officer (``CFO'') and the DTCC
Treasury group that reports to the CFO, and from other relevant subject
matter experts based on the nature and circumstances of the non-default
event.\20\ More generally, the R&W Plan would state that the type of
loss and the nature and circumstances of the events that lead to the
loss would dictate the components of governance to address that loss,
including the escalation path to authorize those actions. Both the
Recovery Plan and the Wind-down Plan would describe the governance of
escalations, decisions, and actions under each of those plans.
---------------------------------------------------------------------------
\20\ The R&W Plan would state that these groups would be
involved to address how to mitigate the financial impact of non-
default losses, and in recommending mitigating actions, the
Management Committee would consider information and recommendations
from relevant subject matter experts based on the nature and
circumstances of the non-default event. Any necessary operational
response to these events, however, would be managed in accordance
with applicable incident response/business continuity process.
---------------------------------------------------------------------------
Finally, the R&W Plan would describe the role of the R&R Team in
managing the overall recovery and wind-down program and plans for each
of the Clearing Agencies.
2. FICC Recovery Plan
FICC states that the Recovery Plan is intended to be a roadmap of
those actions that FICC may employ across both Divisions to monitor
and, as needed, stabilize its financial condition. FICC also states
that as each event that could lead to a financial loss could be unique
in its circumstances, FICC proposes that the Recovery Plan would not be
prescriptive and would permit FICC to maintain flexibility in its use
of identified tools and in the sequence in which such tools are used,
subject to any conditions in the Rules or the contractual arrangement
on which such tool is based. FICC's Recovery Plan would consist of (1)
a description of the risk management surveillance, tools, and
governance that FICC would employ across evolving stress scenarios that
it may face as it transitions through a Crisis Continuum, described
below; (2) a description of FICC's risk of losses that may result from
non-default events, and the financial resources and recovery tools
available to FICC to manage those risks and any resulting losses; and
(3) an evaluation of the characteristics of the recovery tools that may
be used in response to either default losses or non-default losses. In
all cases, FICC states that it would act in accordance with the Rules,
within the governance structure described in the R&W Plan, and in
accordance with applicable regulatory oversight to address each
situation to best protect FICC, the Members, and the markets in which
it operates.
(i) Managing Member Default Losses and Liquidity Needs Through the
Crisis Continuum
The Recovery Plan would describe the risk management surveillance,
tools, and governance that FICC may employ across an increasing stress
environment, which is referred to as the Crisis Continuum. This
description would identify those tools that can be employed to mitigate
losses, and mitigate or minimize liquidity needs, as the market
environment becomes increasingly stressed. The phases of the Crisis
Continuum would include (1) a stable market phase, (2) a stress market
phase, (3) a phase commencing with FICC's decision to cease to act for
a Member or Affiliated Family of Members \21\ (referred to in the R&W
Plan as the ``Member default phase''), and (4) a recovery phase. In the
R&W Plan, the term ``cease to act'' and the actions that lead to such
decision are used within the context of each Division's Rules, in
particular Rules 21 and 22 of the GSD Rules and Rules 14 and 16 of the
MBSD Rules.\22\ Further, the R&W Plan would, for purposes of the R&W
Plan, use the following terms: (1) ``Member default'' to refer to the
event or events that precipitate FICC ceasing to act for a Member or an
Affiliated Family; (2) ``Defaulting Member'' to refer to a Member for
which FICC has ceased to act; and (3) ``Member Default Losses'' to
refer to losses that arise out of or relate to the Member default
(including any losses that arise from liquidation of that Member's
portfolio), and to distinguish such losses from those that arise out of
the business or other events not related to a Member default, which are
separately addressed in the R&W Plan.
---------------------------------------------------------------------------
\21\ The R&W Plan would define an ``Affiliated Family'' of
Members as a number of affiliated entities that are all Members of
either GSD or MBSD.
\22\ See GSD Rules 21 (Restrictions on Access to Services) and
22 (Insolvency of a Member), and MBSD Rules 14 (Restrictions on
Access to Services) and 16 (Insolvency of a Member), supra note 10.
---------------------------------------------------------------------------
FICC states that the Recovery Plan would provide context to its
roadmap through this Crisis Continuum by describing FICC's ongoing
management of credit, market and liquidity risk across the Divisions,
and its existing process for measuring and reporting its risks as they
align with established thresholds for its tolerance of those risks.
FICC also states that the Recovery Plan would discuss the management of
credit/market risk and liquidity exposures together because the tools
that address these risks can be deployed either separately or in a
coordinated approach in order to address both exposures. FICC states
that it manages these risk exposures collectively to limit their
overall impact on FICC and the memberships of the Divisions. FICC
states that as part of its market risk management strategy, FICC
manages its credit exposure to Members by determining the appropriate
required deposits to the GSD and MBSD Clearing Fund and monitoring its
sufficiency, as provided for in the applicable Rules.\23\ FICC states
that it manages its liquidity risks with an objective of maintaining
sufficient resources to be able to fulfill obligations that have been
guaranteed by FICC in the event of a Member default that presents the
largest aggregate liquidity exposure to FICC over the settlement
cycle.\24\
---------------------------------------------------------------------------
\23\ See GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD
Rule 4 (Clearing Fund and Loss Allocation), supra note 10. FICC
states that because GSD and MBSD do not maintain a guaranty fund
separate and apart from the Clearing Fund they collect from Members,
FICC monitors its credit exposure to its Members by managing the
market risks of each Member's unsettled portfolio through the
collection of each Division's Clearing Fund. The aggregate of all
Members' Required Clearing Fund deposits to each of GSD or MBSD
comprises that Division's Clearing Fund that represents FICC's
prefunded resources to address uncovered loss exposures as provided
in GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD Rule 4
(Clearing Fund and Loss Allocation). Therefore, FICC states that its
market risk management strategy for both Divisions is designed to
comply with Rule 17Ad-22(e)(4) under the Act, where these risks are
referred to as ``credit risks.'' See 17 CFR 240.17Ad-22(e)(4).
\24\ FICC's liquidity risk management strategy, including the
manner in which FICC utilizes its liquidity tools, is described in
the Clearing Agency Liquidity Risk Management Framework. See
Securities Exchange Act Release No. 82377 (December 21, 2017), 82 FR
61617 (December 28, 2017) (SR-DTC-2017-004, SR-FICC-2017-008, SR-
NSCC-2017-005).
---------------------------------------------------------------------------
The Recovery Plan would outline the metrics and indicators that
FICC has developed to evaluate a stress situation against established
risk tolerance thresholds. Each risk mitigation tool identified in the
Recovery Plan would include a description of the escalation thresholds
that allow for effective and timely reporting to the appropriate
internal management staff and committees, or to the Board. FICC states
that the Recovery Plan is designed to make clear that these tools and
escalation protocols would be calibrated across each phase of the
Crisis Continuum. The Recovery Plan would also establish that FICC
would retain the
[[Page 44365]]
flexibility to deploy such tools either separately or in a coordinated
approach, and to use other alternatives to these actions and tools as
necessitated by the circumstances of a particular Member default in
accordance with the applicable Rules. Therefore, FICC states that the
Recovery Plan would both provide FICC with a roadmap to follow within
each phase of the Crisis Continuum, and would permit it to adjust its
risk management measures to address the unique circumstances of each
event.
The Recovery Plan would describe the conditions that mark each
phase of the Crisis Continuum, and would identify actions that FICC
could take as it transitions through each phase in order to both
prevent losses from materializing through active risk management, and
to restore the financial health of FICC during a period of stress.
The stable market phase of the Crisis Continuum would describe
active risk management activities in the normal course of business.
These activities would include (1) routine monitoring of margin
adequacy through daily review of back testing and stress testing
results that review the adequacy of the margin calculations for each of
GSD and MBSD, and escalation of those results to internal and Board
committees; \25\ and (2) routine monitoring of liquidity adequacy
through review of daily liquidity studies that measure sufficiency of
available liquidity resources to meet cash settlement obligations of
the Member that would generate the largest aggregate payment
obligation.\26\
---------------------------------------------------------------------------
\25\ FICC's stress testing practices are described in the
Clearing Agency Stress Testing Framework (Market Risk). See
Securities Exchange Act Release No. 82638 (December 19, 2017), 82 FR
61082 (December 26, 2017) (SR-DTC-2017-005, SR-FICC-2017-009, SR-
NSCC-2017-006).
\26\ See supra note 24 (concerning FICC's liquidity risk
management strategy).
---------------------------------------------------------------------------
The Recovery Plan would describe some of the indicators of the
stress market phase of the Crisis Continuum, which would include, for
example, volatility in market prices of certain assets where there is
increased uncertainty among market participants about the fundamental
value of those assets. This phase would involve general market
stresses, when no Member default would be imminent. Within the
description of this phase, the Recovery Plan would provide that FICC
may take targeted, routine risk management measures as necessary and as
permitted by the Rules.
Within the Member default phase of the Crisis Continuum, the
Recovery Plan would provide a roadmap for the existing procedures that
FICC would follow in the event of a Member default and any decision by
FICC to cease to act for that Member.\27\ The Recovery Plan would
provide that the objectives of FICC's actions upon a Member or
Affiliated Family default are to (1) minimize losses and market
exposure of the affected Members and the applicable Division's non-
Defaulting Members; and (2), to the extent practicable, minimize
disturbances to the affected markets. The Recovery Plan would describe
tools, actions, and related governance for both market risk monitoring
and liquidity risk monitoring through this phase. Management of
liquidity risk through this phase would involve ongoing monitoring of
the adequacy of FICC's liquidity resources, and the Recovery Plan would
identify certain actions FICC may deploy as it deems necessary to
mitigate a potential liquidity shortfall. The Recovery Plan would state
that, throughout this phase, relevant information would be escalated
and reported to both internal management committees and the Board Risk
Committee.
---------------------------------------------------------------------------
\27\ See GSD Rule 21 (Restrictions on Access to Services), GSD
Rule 22A (Procedures for When the Corporation Ceases to Act), MBSD
Rule 14 (Restrictions on Access to Services), and MBSD Rule 17
(Procedures for When the Corporation Ceases to Act), supra note 10.
---------------------------------------------------------------------------
The Recovery Plan would also identify financial resources available
to FICC, pursuant to the Rules, to address losses arising out of a
Member default. Specifically, GSD Rule 4 (Clearing Fund and Loss
Allocation) and MBSD Rule 4 (Clearing Fund and Loss Allocation)
provides that losses remaining after application of the Defaulting
Member's resources be satisfied first by applying a Corporate
Contribution, and then, if necessary, by allocating remaining losses
among the membership in accordance with GSD Rule 4 (Clearing Fund and
Loss Allocation) and MBSD Rule 4 (Clearing Fund and Loss Allocation),
as applicable.\28\
---------------------------------------------------------------------------
\28\ See supra note 10. GSD Rule 4 (Clearing Fund and Loss
Allocation) and MBSD Rule 4 (Clearing Fund and Loss Allocation)
define the amount FICC would contribute to address a loss resulting
from either a Member default or a non-default event as the Corporate
Contribution. This amount would be 50 percent of the General
Business Risk Capital Requirement, which is calculated pursuant to
the Capital Policy and, which FICC states is an amount sufficient to
cover potential general business losses so that FICC can continue
operations and services as a going concern if those losses
materialize, in an effort to comply with Rule 17Ad-22(e)(15) under
the Act. See supra note 14 (concerning the Capital Policy); 17 CFR
240.17Ad-22(e)(15).
---------------------------------------------------------------------------
In order to provide for an effective and timely recovery, the
Recovery Plan would describe the period of time that would occur near
the end of the Member default phase, during which FICC may experience
stress events or observe early warning indicators that allow it to
evaluate its options and prepare for the recovery phase (referred to in
the R&W Plan as the Recovery Corridor). The Recovery Plan would then
describe the recovery phase of the Crisis Continuum, which would begin
on the date that FICC issues the first Loss Allocation Notice of the
second loss allocation round with respect to a given Event Period.\29\
The recovery phase would describe actions that FICC may take to avoid
entering into a wind-down of its business.
---------------------------------------------------------------------------
\29\ As provided for in GSD Rule 4 (Clearing Fund and Loss
Allocation) and MBSD Rule 4 (Clearing Fund and Loss Allocation), the
``Event Period'' is ten Business Days beginning on (i) with respect
to a Member default, the day on which FICC notifies Members that it
has ceased to act for a Member under the Rules, or (ii) with respect
to a non-default loss, the day that FICC notifies Members of the
determination by the Board that there is a non-default loss event.
The proposed GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD
Rule 4 (Clearing Fund and Loss Allocation) define a ``round'' as a
series of loss allocations relating to an Event Period, and provides
that the first Loss Allocation Notice in a first, second, or
subsequent round shall expressly state that such notice reflects the
beginning of a first, second, or subsequent round. The maximum
allocable loss amount of a round is equal to the sum of the Loss
Allocation Caps of those Members included in the round. See GSD Rule
4 (Clearing Fund and Loss Allocation) and MBSD Rule 4 (Clearing Fund
and Loss Allocation), supra note 10.
---------------------------------------------------------------------------
FICC states that it expects that significant deterioration of
liquidity resources would cause it to enter the Recovery Corridor.
Therefore, the R&W Plan would describe the actions FICC may take at
this stage aimed at replenishing those resources. Throughout the
Recovery Corridor, FICC would monitor the adequacy of the Divisions'
respective resources and the expected timing of replenishment of those
resources, and would do so through the monitoring of certain corridor
indicator metrics.
FICC states that the majority of the corridor indicators, as
identified in the Recovery Plan, relate directly to conditions that may
require either Division to adjust its strategy for hedging and
liquidating a Defaulting Member's portfolio, and any such changes would
include an assessment of the status of the corridor indicators. For
each corridor indicator, the Recovery Plan would identify (1) measures
of the indicator, (2) evaluations of the status of the indicator, (3)
metrics for determining the status of the deterioration or improvement
of the indicator, and (4) ``Corridor Actions,'' which are steps that
may be taken to
[[Page 44366]]
improve the status of the indicator,\30\ as well as management
escalations required to authorize those steps. FICC states that because
FICC has never experienced the default of multiple Members, it has not,
historically, measured the deterioration or improvements metrics of the
corridor indicators. Therefore, FICC states that these metrics were
chosen based on the business judgment of FICC management.
---------------------------------------------------------------------------
\30\ The Corridor Actions that would be identified in the R&W
Plan are designed to be indicative, but not prescriptive; therefore,
if FICC needs to consider alternative actions due to the applicable
facts and circumstances, the escalation of those alternative actions
would follow the same escalation protocol identified in the R&W Plan
for the Corridor Indicator to which the action relates.
---------------------------------------------------------------------------
The Recovery Plan would also describe the reporting and escalation
of the status of the corridor indicators throughout the Recovery
Corridor. Significant deterioration of a corridor indicator, as
measured by the metrics set out in the Recovery Plan, would be
escalated to the Board. FICC management would review the corridor
indicators and the related metrics at least annually, and would modify
these metrics as necessary in light of observations from simulations of
Member defaults and other analyses. Any proposed modifications would be
reviewed by the Management Risk Committee and the Board Risk Committee.
The Recovery Plan would estimate that FICC may remain in the Recovery
Corridor between one day and two weeks. FICC states that this estimate
is based on historical data observed in past Member defaults, the
results of simulations of Member defaults, and periodic liquidity
analyses conducted by FICC. FICC states that the actual length of a
Recovery Corridor would vary based on actual market conditions observed
at the time, and FICC would expect the Recovery Corridor to be shorter
in market conditions of increased stress.
The Recovery Plan would outline steps by which FICC may allocate
its losses, which would occur when and in the order provided in GSD
Rule 4 (Clearing Fund and Loss Allocation) and MBSD Rule 4 (Clearing
Fund and Loss Allocation), as applicable.\31\ The Recovery Plan would
also identify tools that may be used to address foreseeable shortfalls
of FICC's liquidity resources following a Member default, and would
provide that these tools may be used as appropriate during the Crisis
Continuum to address liquidity shortfalls if they arise. FICC states
that the goal in managing FICC's qualified liquidity resources is to
maximize resource availability in an evolving stress situation, to
maintain flexibility in the order and use of sources of liquidity, and
to repay any third party lenders of liquidity in a timely manner.
Additional voluntary or uncommitted tools to address potential
liquidity shortfalls which may supplement FICC's other liquid resources
described herein, would also be identified in the Recovery Plan. The
Recovery Plan would state that, due to the extreme nature of a stress
event that would cause FICC to consider the use of these liquidity
tools, the availability and capacity of these liquidity tools, and the
willingness of counterparties to lend, cannot be accurately predicted
and are dependent on the circumstances of the applicable stress period,
including market price volatility, actual or perceived disruptions in
financial markets, the costs to FICC of utilizing these tools, and any
potential impact on FICC's credit rating.
---------------------------------------------------------------------------
\31\ See supra note 10.
---------------------------------------------------------------------------
The Recovery Plan would state that FICC will have entered the
recovery phase on the date that it issues the first Loss Allocation
Notice of the second loss allocation round with respect to a given
Event Period. The Recovery Plan would provide that, during the recovery
phase, FICC would continue and, as needed, enhance, the monitoring and
remedial actions already described in connection with previous phases
of the Crisis Continuum, and would remain in the recovery phase until
its financial resources are expected to be or are fully replenished, or
until the Wind-down Plan is triggered.
The Recovery Plan would describe governance for the actions and
tools that may be employed within each phase of the Crisis Continuum,
which would be dictated by the facts and circumstances applicable to
the situation being addressed. Such facts and circumstances would be
measured by the various indicators and metrics applicable to that phase
of the Crisis Continuum, and would follow the relevant escalation
protocols that would be described in the Recovery Plan. The Recovery
Plan would also describe the governance procedures around a decision to
cease to act for a Member, pursuant to the applicable Division's Rules,
and around the management and oversight of the subsequent liquidation
of the Defaulting Member's portfolio. The Recovery Plan would state
that, overall, FICC would retain flexibility in accordance with each
Division's Rules, its governance structure, and its regulatory
oversight, to address a particular situation in order to best protect
FICC and the Members, and to meet the primary objectives, throughout
the Crisis Continuum, of minimizing losses and, where consistent and
practicable, minimizing disturbance to affected markets.
(ii) Non-Default Losses
The Recovery Plan would outline how FICC may address losses that
result from events other than a Member default. While these matters are
addressed in greater detail in other documents, this section of the R&W
Plan would provide a roadmap to those documents and an outline for
FICC's approach to monitoring and managing losses that could result
from a non-default event. The R&W Plan would first identify some of the
risks FICC faces that could lead to these losses, which include, for
example, (1) the business and profit/loss risks of unexpected declines
in revenue or growth of expenses; (2) the operational risks of
disruptions to systems or processes that could lead to large losses,
including those resulting from, for example, a cyber-attack; and (3)
custody or investment risks that could lead to financial losses. The
Recovery Plan would describe FICC's overall strategy for the management
of these risks, which includes a ``three lines of defense'' approach to
risk management that allows for comprehensive management of risk across
the organization.\32\ The Recovery Plan would also describe FICC's
approach to financial risk and capital management. The R&W Plan would
identify key aspects of this approach, including, for example, an
annual budget process, business line performance reviews with
management, and regular review of capital requirements against LNA.
These risk management strategies are collectively intended to allow
FICC to effectively
[[Page 44367]]
identify, monitor, and manage risks of non-default losses.
---------------------------------------------------------------------------
\32\ FICC states that the ``three lines of defense'' approach to
risk management includes (1) a first line of defense comprised of
the various business lines and functional units that support the
products and services offered by FICC; (2) a second line of defense
comprised of control functions that support FICC, including the risk
management, legal and compliance areas; and (3) a third line of
defense, which is performed by an internal audit group. The Clearing
Agency Risk Management Framework includes a description of this
``three lines of defense'' approach to risk management, and
addresses how FICC comprehensively manages various risks, including
operational, general business, investment, custody, and other risks
that arise in or are borne by it. Securities Exchange Act Release
No. 81635 (September 15, 2017), 82 FR 44224 (September 21, 2017)
(SR-DTC-2017-013, SR-FICC-2017-016, SR-NSCC-2017-012). The Clearing
Agency Operational Risk Management Framework describes the manner in
which FICC manages operational risks, as defined therein. Securities
Exchange Act Release No. 81745 (September 28, 2017), 82 FR 46332
(October 4, 2017) (SR-DTC-2017-014, SR-FICC-2017-017, SR-NSCC-2017-
013).
---------------------------------------------------------------------------
The R&W Plan would identify the two categories of financial
resources FICC maintains to cover losses and expenses arising from non-
default risks or events as (1) LNA, maintained, monitored, and managed
pursuant to the Capital Policy, which include (a) amounts held in
satisfaction of the General Business Risk Capital Requirement,\33\ (b)
the Corporate Contribution,\34\ and (c) other amounts held in excess of
FICC's capital requirements pursuant to the Capital Policy; and (2)
resources available pursuant to the loss allocation provisions of GSD
Rule 4 (Clearing Fund and Loss Allocation) and MBSD Rule 4 (Clearing
Fund and Loss Allocation).\35\
---------------------------------------------------------------------------
\33\ See supra note 28.
\34\ See supra note 28.
\35\ See supra note 10.
---------------------------------------------------------------------------
The R&W Plan would address the process by which the CFO and the
DTCC Treasury group would determine which available LNA resources are
most appropriate to cover a loss that is caused by a non-default event.
This determination involves an evaluation of a number of factors,
including the current and expected size of the loss, the expected time
horizon over when the loss or additional expenses would materialize,
the current and projected available LNA, and the likelihood LNA could
be successfully replenished pursuant to the Replenishment Plan, if
triggered.\36\ Finally the R&W Plan would discuss how FICC would apply
its resources to address losses resulting from a non-default event,
including the order of resources it would apply if the loss or
liability exceeds FICC's excess LNA amounts, or is large relative
thereto, and the Board has declared the event a Declared Non-Default
Loss Event pursuant to GSD Rule 4 (Clearing Fund and Loss Allocation)
and MBSD Rule 4 (Clearing Fund and Loss Allocation).\37\
---------------------------------------------------------------------------
\36\ See supra note 14 (concerning the Capital Policy).
\37\ See supra note 10.
---------------------------------------------------------------------------
The R&W Plan would also describe proposed GSD Rule 50 (Market
Disruption and Force Majeure) and proposed MBSD Rule 40 (Market
Disruption and Force Majeure), which FICC is proposing to adopt in the
GSD Rule and MBSD Rules, respectively. FICC states that this Proposed
Rule is designed to provide transparency around how FICC would address
extraordinary events that may occur outside its control. Specifically,
the Proposed Rule would define a Market Disruption Event and the
governance around a determination that such an event has occurred. The
Proposed Rule would also describe FICC's authority to take actions
during the pendency of a Market Disruption Event that it deems
appropriate to address such an event and facilitate the continuation of
its services, if practicable.
The R&W Plan would describe the interaction between the Proposed
Rule and FICC's existing processes and procedures addressing business
continuity management and disaster recovery (generally, the ``BCM/DR
procedures''). FICC states that the intent is to make clear that the
Proposed Rule is designed to support those BCM/DR procedures and to
address circumstances that may be exogenous to FICC and not necessarily
addressed by the BCM/DR procedures. Finally, the R&W Plan would
describe that, because the operation of the Proposed Rule is specific
to each applicable Market Disruption Event, the Proposed Rule does not
define a time limit on its application. However, the R&W Plan would
note that actions authorized by the Proposed Rule would be limited to
the pendency of the applicable Market Disruption Event, as made clear
in the Proposed Rule. FICC states that, overall, the Proposed Rule is
designed to mitigate risks caused by Market Disruption Events and,
thereby, minimize the risk of financial loss that may result from such
events.
(iii) Recovery Tool Characteristics
The Recovery Plan would describe FICC's evaluation of the tools
identified within the Recovery Plan, and its rationale for concluding
that such tools are comprehensive, effective, and transparent, and that
such tools provide incentives to Members and minimize negative impact
on Members and the financial system.
3. FICC Wind-Down Plan
The Wind-down Plan would provide the framework and strategy for the
orderly wind-down of FICC if the use of the recovery tools described in
the Recovery Plan do not successfully return FICC to financial
viability. FICC states that while such event is extremely unlikely,
given the comprehensive nature of the recovery tools, FICC is proposing
a wind-down strategy that provides for (1) the transfer of FICC's
business, assets, and memberships of both Divisions to another legal
entity, (2) such transfer being effected in connection with proceedings
under Chapter 11 of the U.S. Bankruptcy Code,\38\ and (3) after
effectuating this transfer, FICC liquidating any remaining assets in an
orderly manner in bankruptcy proceedings. FICC states that the proposed
transfer approach to a wind-down would meet its objectives of (1)
assuring that FICC's critical services will be available to the market
as long as there are Members in good standing, and (2) minimizing
disruption to the operations of Members and financial markets generally
that might be caused by FICC's failure.
---------------------------------------------------------------------------
\38\ 11 U.S.C. 101 et seq.
---------------------------------------------------------------------------
In describing the transfer approach to FICC's Wind-down Plan, the
R&W Plan would identify the factors that FICC considered in developing
this approach, including the fact that FICC does not own material
assets that are unrelated to its clearance and settlement activities.
Therefore, FICC states that a business reorganization or ``bail-in'' of
debt approach would be unlikely to mitigate significant losses.
Additionally, FICC states that the proposed approach was developed in
consideration of its critical and unique position in the U.S. markets,
which precludes any approach that would cause FICC's critical services
to no longer be available.
First, the Wind-down Plan would describe the potential scenarios
that could lead to the wind-down of FICC, and the likelihood of such
scenarios. The Wind-down Plan would identify the time period leading up
to a decision to wind-down FICC as the Runway Period. FICC states that
this period would follow the implementation of any recovery tools, as
it may take a period of time, depending on the severity of the market
stress at that time, for these tools to be effective or for FICC to
realize a loss sufficient to cause it to be unable to effectuate
settlements and repay its obligations.\39\ The Wind-down Plan would
identify some of the indicators that it has entered this Runway Period.
---------------------------------------------------------------------------
\39\ The Wind-down Plan would state that, given FICC's position
as a user-governed financial market utility, it is possible that
Members might voluntarily elect to provide additional support during
the recovery phase leading up to a potential trigger of the Wind-
down Plan, but would also be designed to make clear that FICC cannot
predict the willingness of Members to do so.
---------------------------------------------------------------------------
The trigger for implementing the Wind-down Plan would be a
determination by the Board that recovery efforts have not been, or are
unlikely to be, successful in returning FICC to viability as a going
concern. As described in the R&W Plan, FICC states that this is an
appropriate trigger because it is both broad and flexible enough to
cover a variety of scenarios, and would align incentives of FICC and
the Members to avoid actions that might undermine FICC's recovery
efforts. Additionally, FICC states that this
[[Page 44368]]
approach takes into account the characteristics of FICC's recovery
tools and enables the Board to consider (1) the presence of indicators
of a successful or unsuccessful recovery, and (2) potential for knock-
on effects of continued iterative application of FICC's recovery tools.
The Wind-down Plan would describe the general objectives of the
transfer strategy, and would address assumptions regarding the transfer
of FICC's critical services, business, assets, and membership, and the
assignment of GSD's link with another FMI, to another legal entity that
is legally, financially, and operationally able to provide FICC's
critical services to entities that wish to continue their membership
following the transfer (``Transferee''). The Wind-down Plan would
provide that the Transferee would be either (1) a third party legal
entity, which may be an existing or newly established legal entity or a
bridge entity formed to operate the business on an interim basis to
enable the business to be transferred subsequently (``Third Party
Transferee''); or (2) an existing, debt-free failover legal entity
established ex-ante by DTCC (``Failover Transferee'') to be used as an
alternative Transferee in the event that no viable or preferable Third
Party Transferee timely commits to acquire FICC's business. FICC would
seek to identify the proposed Transferee, and negotiate and enter into
transfer arrangements during the Runway Period and prior to making any
filings under Chapter 11 of the U.S. Bankruptcy Code.\40\ The Wind-down
Plan would anticipate that the transfer to the Transferee be effected
in connection with proceedings under Chapter 11 of the U.S. Bankruptcy
Code, and pursuant to a bankruptcy court order under Section 363 of the
Bankruptcy Code, with the intent that the transfer be free and clear of
claims against, and interests in, FICC, except to the extent expressly
provided in the court's order.\41\
---------------------------------------------------------------------------
\40\ See 11 U.S.C. 101 et seq.
\41\ See 11 U.S.C. 363.
---------------------------------------------------------------------------
FICC states that in order to effect a timely transfer of its
services and minimize the market and operational disruption of such
transfer, FICC would expect to transfer all of its critical services
and any non-critical services that are ancillary and beneficial to a
critical service, or that otherwise have substantial user demand from
the continuing membership. Following the transfer, the Wind-down Plan
would anticipate that the Transferee and its continuing membership
would determine whether to continue to provide any transferred non-
critical service on an ongoing basis, or terminate the non-critical
service following some transition period. FICC's Wind-down Plan would
anticipate that the Transferee would enter into a transition services
agreement with DTCC so that DTCC would continue to provide the shared
services it currently provides to FICC, including staffing,
infrastructure and operational support. The Wind-down Plan would also
anticipate the assignment of FICC's link arrangements, including its
arrangements with clearing banks and GSD's cross-margining arrangement
with CME, described above, to the Transferee.\42\ The Wind-down Plan
would provide that Members' open positions existing prior to the
effective time of the transfer would be addressed by the provisions of
the proposed Wind-down Rule, as defined and described below, and the
existing GSD Rule 22B (Corporation Default) and MBSD Rule 17
(Corporation Default) (collectively, ``Corporation Default Rule''), as
applicable, and that the Transferee would not acquire any pending or
open transactions with the transfer of the business.\43\ The Wind-down
Plan would anticipate that the Transferee would accept transactions for
processing with a trade date from and after the effective time of the
transfer.
---------------------------------------------------------------------------
\42\ The proposed transfer arrangements outlined in the Wind-
down Plan do not contemplate the transfer of any credit or funding
agreements, which are generally not assignable by FICC. However, to
the extent the Transferee adopts rules substantially identical to
those FICC has in effect prior to the transfer, FICC states that it
would have the benefit of any rules-based liquidity funding. The
Wind-down Plan contemplates that neither of the Divisions'
respective Clearing Funds would be transferred to the Transferee, as
they are not held in a bankruptcy remote manner and they are the
primary prefunded liquidity resource to be accessed in the recovery
phase.
\43\ See supra note 10.
---------------------------------------------------------------------------
The Wind-down Plan would provide that, following the effectiveness
of the transfer to the Transferee, the wind-down of FICC would involve
addressing any residual claims against FICC through the bankruptcy
process and liquidating the legal entity. The Wind-down Plan does not
contemplate FICC continuing to provide services in any capacity
following the transfer time, and any services not transferred would be
terminated.
The Wind-down Plan would also identify the key dependencies for the
effectiveness of the transfer, which include regulatory approvals that
would permit the Transferee to be legally qualified to provide the
transferred services from and after the transfer, and approval by the
applicable bankruptcy court of, among other things, the proposed sale,
assignments, and transfers to the Transferee.
The Wind-down Plan would address governance matters related to the
execution of the transfer of FICC's business and its wind-down. The
Wind-down Plan would address the duties of the Board to execute the
wind-down of FICC in conformity with (1) the Rules, (2) the Board's
fiduciary duties, which mandate that it exercise reasonable business
judgment in performing these duties, and (3) FICC's regulatory
obligations under the Act as a registered clearing agency. The Wind-
down Plan would also identify certain factors the Board may consider in
making these decisions, which would include, for example, whether FICC
could safely stabilize the business and protect its value without
seeking bankruptcy protection, and FICC's ability to continue to meet
its regulatory requirements.
The Wind-down Plan would describe (1) actions FICC or DTCC may take
to prepare for wind-down in the period before FICC experiences any
financial distress, (2) actions FICC would take both during the
recovery phase and the Runway Period to prepare for the execution of
the Wind-down Plan, and (3) actions FICC would take upon commencement
of bankruptcy proceedings to effectuate the Wind-down Plan.
Finally, the Wind-down Plan would include an analysis of the
estimated time and costs to effectuate the R&W Plan, and would provide
that this estimate be reviewed and approved by the Board annually. In
order to estimate the length of time it might take to achieve a
recovery or orderly wind-down of FICC's critical operations, as
contemplated by the R&W Plan, the Wind-down Plan would include an
analysis of the possible sequencing and length of time it might take to
complete an orderly wind-down and transfer of critical operations, as
described in earlier sections of the R&W Plan. The Wind-down Plan would
also include in this analysis consideration of other factors, including
the time it might take to complete any further attempts at recovery
under the Recovery Plan. The Wind-down Plan would then multiply this
estimated length of time by FICC's average monthly operating expenses,
including adjustments to account for changes to FICC's profit and
expense profile during these circumstances, over the previous twelve
months to determine the amount of LNA that it should hold to achieve a
recovery or orderly wind-down of FICC's critical operations. The
estimated wind-down
[[Page 44369]]
costs would constitute the Recovery/Wind-down Capital Requirement under
the Capital Policy.\44\ Under that policy, the General Business Risk
Capital Requirement is calculated as the greatest of three estimated
amounts, one of which is this Recovery/Wind-down Capital
Requirement.\45\
---------------------------------------------------------------------------
\44\ See supra note 14.
\45\ See supra note 14.
---------------------------------------------------------------------------
FICC states that the R&W Plan is designed as a roadmap, and the
types of actions that may be taken both leading up to and in connection
with implementation of the Wind-down Plan would be primarily addressed
in other supporting documentation referred to therein.
The Wind-down Plan would address proposed GSD Rule 22D and MBSD
Rule 17B (Wind-down of the Corporation), which would be adopted to
facilitate the implementation of the Wind-down Plan, as discussed
below.
B. Proposed Rules
In connection with the adoption of the R&W Plan, FICC proposes to
adopt the Proposed Rules, each of which is described below. FICC states
that the Proposed Rules are designed to facilitate the execution of the
R&W Plan and are designed to provide Members and Limited Members with
transparency as to critical aspects of the R&W Plan, particularly as
they relate to the rights and responsibilities of both FICC and
Members. FICC also states that the Proposed Rules are designed to
provide a legal basis to these aspects of the R&W Plan.
1. GSD Rule 22D and MBSD Rule 17B (Wind-Down of the Corporation)
FICC states that the proposed GSD Rule 22D and MBSD Rule 17B
(collectively, ``Wind-down Rule'') are designed to facilitate the
execution of the Wind-down Plan. The Wind-down Rule would include a
proposed set of defined terms that would be applicable only to the
provisions of this Proposed Rule. FICC states that the Wind-down Rule
is designed to make clear that a wind-down of FICC's business would
occur (1) after a decision is made by the Board, and (2) in connection
with the transfer of FICC's services to a Transferee, as described
therein. Because GSD and MBSD are both divisions of FICC, the
individual Wind-down Rules are designed to work together. A decision by
the Board to initiate the Wind-down Plan would be pursuant to, and
trigger the provisions of, the Wind-down Rule of each Division
simultaneously. FICC states that, generally, the proposed Wind-down
Rule is designed to create clear mechanisms for the transfer of
Eligible Members, Eligible Limited Members, and Settling Banks (as
these terms would be defined in the Wind-down Rule), and FICC's
business in order to provide for continued access to critical services
and to minimize disruption to the markets in the event the Wind-down
Plan is initiated.
(i) Wind-Down Trigger
First, FICC states that the Proposed Rule is designed to make clear
that the Board is responsible for initiating the Wind-down Plan, and
would identify the criteria the Board would consider when making this
determination. As provided for in the Wind-down Plan and in the
proposed Wind-down Rule, the Board would initiate the Wind-down Plan
if, in the exercise of its business judgment and subject to its
fiduciary duties, it has determined that the execution of the Recovery
Plan has not or is not likely to restore FICC to viability as a going
concern, and the implementation of the Wind-down Plan, including the
transfer of FICC's business, is in the best interests of FICC, Members
and Limited Members of both Divisions, its shareholders and creditors,
and the U.S. financial markets.
(ii) Identification of Critical Services; Designation of Dates and
Times for Specific Actions
The Proposed Rule would provide that, upon making a determination
to initiate the Wind-down Plan, the Board would identify the critical
and non-critical services that would be transferred to the Transferee
at the Transfer Time (as defined below and in the Proposed Rule), as
well as any non-critical services that would not be transferred to the
Transferee. The proposed Wind-down Rule would establish that any
services transferred to the Transferee will only be provided by the
Transferee as of the Transfer Time, and that any non-critical services
that are not transferred to the Transferee would be terminated at the
Transfer Time. The Proposed Rule would also provide that the Board
would establish (1) an effective time for the transfer of FICC's
business to a Transferee (``Transfer Time''), (2) the last day that
transactions may be submitted to either Division for processing (``Last
Transaction Acceptance Date''), and (3) the last day that transactions
submitted to either Division will be settled (``Last Settlement
Date'').
(iii) Treatment of Pending Transactions
The Wind-down Rule would authorize the Board to provide for the
settlement of pending transactions of either Division prior to the
Transfer Time, so long as the applicable Division's Corporation Default
Rule has not been triggered. The Board would also have the ability to
allow Members to only submit trades to the applicable Division that
would effectively offset pending positions or provide that transactions
will be processed in accordance with special or exception processing
procedures. FICC states that the Proposed Rule is designed to enable
these actions in order to facilitate settlement of pending transactions
of the applicable Division and reduce claims against FICC that would
have to be satisfied after the transfer has been effected. If none of
these actions are deemed practicable (or if the applicable Division's
Corporation Default Rule has been triggered with respect to a
Division), then the provisions of the proposed Corporation Default Rule
would apply to the treatment of open, pending transactions of such
Division.
FICC states that the Proposed Rule is designed to make clear,
however, that neither Division would accept any transactions for
processing after the Last Transaction Acceptance Date or which are
designated to settle after the Last Settlement Date for such Division.
Any transactions to be processed and/or settled after the Transfer Time
would be required to be submitted to the Transferee, and would not be
FICC's responsibility.
(iv) Notice Provisions
The proposed Wind-down Rule would provide that, upon a decision to
implement the Wind-down Plan, FICC would provide its Members and
Limited Members and its regulators with a notice that includes material
information relating to the Wind-down Plan and the anticipated transfer
of the membership of both Divisions and business, including, for
example, (1) a brief statement of the reasons for the decision to
implement the Wind-down Plan; (2) identification of the Transferee and
information regarding the transaction by which the transfer of FICC's
business would be effected; (3) the Transfer Time, Last Transaction
Acceptance Date, and Last Settlement Date; and (4) identification of
Eligible Members and Eligible Limited Members, and the critical and
non-critical services that would be transferred to the Transferee at
the Transfer Time, as well as those Non-Eligible Members and Non-
Eligible Limited Members (as
[[Page 44370]]
defined in the Proposed Rule), and any non-critical services that would
not be included in the transfer. FICC would also make available the
rules and procedures and membership agreements of the Transferee.
(v) Transfer of Membership
The proposed Wind-down Rule would address the expected transfer of
both Divisions' membership to the Transferee, which FICC would seek to
effectuate by entering into an arrangement with a Failover Transferee,
or by using commercially reasonable efforts to enter into such an
arrangement with a Third Party Transferee. Therefore, the Wind-down
Rule would provide Members, Limited Members and Settling Banks with
notice that, in connection with the implementation of the Wind-down
Plan and with no further action required by any party, (1) their
membership with the applicable Division would transfer to the
Transferee, (2) they would become party to a membership agreement with
such Transferee, and (3) they would have all of the rights and be
subject to all of the obligations applicable to their membership status
under the rules of the Transferee. These provisions would not apply to
any Member or Limited Member that is either in default of an obligation
to FICC or has provided notice of its election to withdraw its
membership from the applicable Division. Further, FICC states that the
proposed Wind-down Rule is designed to make clear that it would not
prohibit (1) Members and Limited Members that are not transferred by
operation of the Wind-down Rule from applying for membership with the
Transferee, or (2) Members, Limited Members, and Settling Banks that
would be transferred to the Transferee from withdrawing from membership
with the Transferee.\46\
---------------------------------------------------------------------------
\46\ The Members and Limited Members whose membership is
transferred to the Transferee pursuant to the proposed Wind-down
Rule would submit transactions to be processed and settled subject
to the rules and procedures of the Transferee, including any
applicable margin charges or other financial obligations.
---------------------------------------------------------------------------
(vi) Comparability Period
FICC states that the proposed automatic mechanism for the transfer
of both Divisions' memberships is intended to provide the membership
with continuous access to critical services in the event of FICC's
wind-down, and to facilitate the continued prompt and accurate
clearance and settlement of securities transactions. The proposed Wind-
down Rule would provide that FICC would enter into arrangements with a
Failover Transferee, or would use commercially reasonable efforts to
enter into arrangements with a Third Party Transferee, providing that,
in either case, with respect to the critical services and any non-
critical services that are transferred from FICC to the Transferee, for
at least a period of time to be agreed upon (``Comparability Period''),
the business transferred from FICC to the Transferee would be operated
in a manner that is comparable to the manner in which the business was
previously operated by FICC. Specifically, the proposed Wind-down Rule
would provide that: (1) The rules of the Transferee and terms of
membership agreements would be comparable in substance and effect to
the analogous Rules and membership agreements of FICC; (2) the rights
and obligations of any Members, Limited Members and Settling Banks that
are transferred to the Transferee would be comparable in substance and
effect to their rights and obligations as to FICC; and (3) the
Transferee would operate the transferred business and provide any
services that are transferred in a comparable manner to which such
services were provided by FICC. FICC states that the purpose of these
provisions and the intended effect of the proposed Wind-down Rule is to
facilitate a smooth transition of FICC's business to a Transferee and
to provide that, for at least the Comparability Period, the Transferee
(1) would operate the transferred business in a manner that is
comparable in substance and effect to the manner in which the business
was operated by FICC, and (2) would not require sudden and disruptive
changes in the systems, operations and business practices of the new
members of the Transferee.
(vii) Subordination of Claims Provisions and Miscellaneous Matters
The proposed Wind-down Rule would include a provision addressing
the subordination of unsecured claims against FICC of its Members and
Limited Members who fail to participate in FICC's recovery efforts
(i.e., firms delinquent in their obligations to FICC or elect to retire
from FICC in order to minimize their obligations with respect to the
allocation of losses, pursuant to the Rules). FICC states that this
provision is designed to incentivize Members to participate in FICC's
recovery efforts.\47\
---------------------------------------------------------------------------
\47\ Nothing in the proposed Wind-down Rule would seek to
prevent a Member, Limited Member or Settling Bank that retired its
membership at either of the Divisions from applying for membership
with the Transferee. Once its FICC membership is terminated,
however, such firm would not be able to benefit from the membership
assignment that would be effected by this proposed Wind-down Rule,
and it would have to apply for membership directly with the
Transferee, subject to its membership application and review
process.
---------------------------------------------------------------------------
The proposed Wind-down Rule would address other ex-ante matters,
including provisions providing that its Members, Limited Members and
Settling Banks (1) will assist and cooperate with FICC to effectuate
the transfer of FICC's business to a Transferee, (2) consent to the
provisions of the rule, and (3) grant FICC power of attorney to execute
and deliver on their behalf documents and instruments that may be
requested by the Transferee. Finally, the Proposed Rule would include a
limitation of liability for any actions taken or omitted to be taken by
FICC pursuant to the Proposed Rule.
FICC states that the purpose of the limitation of liability is to
facilitate and protect FICC's ability to act expeditiously in response
to extraordinary events. Such limitation of liability would be
available only following triggering of the Wind-down Plan. In addition,
and as a separate matter, FICC states that the limitation of liability
provides Members with transparency for the unlikely situation when
those extraordinary events could occur, as well as supporting the legal
framework within which FICC would take such actions. FICC states that
these provisions, collectively, are designed to enable FICC to take
such acts as the Board determines necessary to effectuate an orderly
transfer and wind-down of its business should recovery efforts prove
unsuccessful.
2. GSD Rule 50 and MBSD Rule 40 (Market Disruption and Force Majeure)
The proposed GSD Rule 50 and MBSD Rule 40 (Market Disruption and
Force Majeure) (collectively, ``Force Majeure Rule'') would address
FICC's authority to take certain actions upon the occurrence, and
during the pendency, of a Market Disruption Event, as defined therein.
FICC states that because GSD and MBSD are both divisions of FICC, the
individual Force Majeure Rules are designed to work together. A
decision by the Board or management of FICC that a Market Disruption
Event has occurred in accordance with the Force Majeure Rule would
trigger the provisions of the Force Majeure Rule of each Division
simultaneously. The Proposed Rule is designed to clarify FICC's ability
to take actions to address extraordinary events outside of the control
of FICC and of the memberships of the Divisions, and to mitigate the
effect of such events by facilitating the continuity of services (or,
if deemed
[[Page 44371]]
necessary, the temporary suspension of services). To that end, under
the proposed Force Majeure Rule, FICC would be entitled, during the
pendency of a Market Disruption Event, to (1) suspend the provision of
any or all services, and (2) take, or refrain from taking, or require
its Members and Limited Members to take, or refrain from taking, any
actions it considers appropriate to address, alleviate, or mitigate the
event and facilitate the continuation of FICC's services as may be
practicable.
The proposed Force Majeure Rule would identify the events or
circumstances that would be considered a Market Disruption Event. The
proposed Force Majeure Rule would define the governance procedures for
how FICC would determine whether, and how, to implement the provisions
of the rule. A determination that a Market Disruption Event has
occurred would generally be made by the Board, but the Proposed Rule
would provide for limited, interim delegation of authority to a
specified officer or management committee if the Board would not be
able to take timely action. In the event such delegated authority is
exercised, the proposed Force Majeure Rule would require that the Board
be convened as promptly as practicable, no later than five Business
Days after such determination has been made, to ratify, modify, or
rescind the action. The proposed Force Majeure Rule would also provide
for prompt notification to the Commission, and advance consultation
with Commission staff, when practicable, including notification when an
event is no longer continuing and the relevant actions are terminated.
The Proposed Rule would require Members and Limited Members to notify
FICC immediately upon becoming aware of a Market Disruption Event, and,
likewise, would require FICC to notify Members and Limited Members if
it has triggered the Proposed Rule and of actions taken or intended to
be taken thereunder.
Finally, the Proposed Rule would address other related matters,
including a limitation of liability for any failure or delay in
performance, in whole or in part, arising out of the Market Disruption
Event. FICC states that the purpose of the limitation of liability
would be similar to the purpose of the analogous provision in the
proposed Wind-down Rule, which is to facilitate and protect FICC's
ability to act expeditiously in response to extraordinary events.
3. Proposed Changes to GSD Rules, MBSD Rules, and EPN Rules
In order to incorporate the Proposed Rules into the Rules and the
EPN Rules, FICC proposes to amend (1) GSD Rule 3A (Sponsoring Members
and Sponsored Members), GSD Rule 3B (Centrally Cleared Institutional
Triparty Service), and GSD Rule 13 (Funds-Only Settlement); (2) MBSD
Rule 3A (Cash Settlement Bank Members); and (3) EPN Rule 1
(Definitions). FICC states that these proposed changes are designed to
clarify that certain types of Limited Members, as identified in those
rules, would be subject to the Proposed Rules.
II. Discussion and Commission Findings
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, its stated purpose is instructive: To
mitigate systemic risk in the financial system and promote financial
stability by, among other things, promoting uniform risk management
standards for systemically important financial market utilities and
strengthening the liquidity of systemically important financial market
utilities.\48\
---------------------------------------------------------------------------
\48\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------
Section 805(a)(2) of the Clearing Supervision Act \49\ authorizes
the Commission to prescribe risk management standards for the payment,
clearing and settlement activities of designated clearing entities
engaged in designated activities for which the Commission is the
supervisory agency. Section 805(b) of the Clearing Supervision Act \50\
provides the following objectives and principles for the Commission's
risk management standards prescribed under Section 805(a):
---------------------------------------------------------------------------
\49\ 12 U.S.C. 5464(a)(2).
\50\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
To promote robust risk management;
to promote safety and soundness;
to reduce systemic risks; and
to support the stability of the broader financial system.
The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act \51\ and Section 17A of the
Act \52\ (``Rule 17Ad-22'').\53\ Rule 17Ad-22 requires registered
clearing agencies to establish, implement, maintain, and enforce
written policies and procedures that are reasonably designed to meet
certain minimum requirements for their operations and risk management
practices on an ongoing basis.\54\ Therefore, it is appropriate for the
Commission to review proposed changes in advance notices against the
objectives and principles of these risk management standards as
described in Section 805(b) of the Clearing Supervision Act \55\ and
against Rule 17Ad-22.\56\
---------------------------------------------------------------------------
\51\ 12 U.S.C. 5464(a)(2).
\52\ 15 U.S.C. 78q-1.
\53\ See 17 CFR 240.17Ad-22.
\54\ Id.
\55\ 12 U.S.C. 5464(b).
\56\ See 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------
A. Consistency With Section 805(b) of the Clearing Supervision Act
The Commission believes that the proposed changes in the Advance
Notice are designed to help FICC promote robust risk management,
promote safety and soundness, reduce systemic risks, and support the
stability of the broader financial system. As described above, the R&W
Plan, generally, would help FICC promote robust risk management and
reduce systemic risks by providing FICC with a roadmap for actions it
may employ to monitor and manage its risks, and, as needed, to
stabilize its financial condition in the event those risks materialize.
Specifically, the Recovery Plan would provide a roadmap that would
identify a number of triggers for the potential application of a number
of available recovery tools. Identifying triggers for the potential
application of recovery tools would help promote robust risk management
and reduce systemic risks by better enabling FICC to more promptly
determine when and how it may need to manage a significant stress
event, and, as needed, stabilize its financial condition.
Similarly, the Force Majeure Rule is designed to provide a roadmap
to address extraordinary events that may occur outside of FICC's
control. Specifically, the Force Majeure Rule would define a Market
Disruption Event and provide governance around determining when such an
event has occurred. The Force Majeure Rule also would describe FICC's
authority to take actions during the pendency of a Market Disruption
Event that it deems appropriate to address such an event and facilitate
the continuation of FICC's services, if practicable. By defining a
Market Disruption Event and providing such governance and authority,
the Commission believes that the Force Majeure Rule also would help
promote robust risk management and reduce systemic risks by improving
FICC's ability to identify and manage a force majeure event, and, as
needed, to stabilize its financial condition so that FICC can continue
to operate and act as
[[Page 44372]]
a source of stability for the financial markets it serves.
The Commission believes that the Recovery Plan and the Force
Majeure Rule reflect an approach designed to allow for a more
considered and comprehensive evaluation by FICC of a stressed market
situation and the ways in which FICC could apply available recovery
tools in a manner intended to minimize the potential negative effects
of the stress situation for FICC, its membership, and the broader
financial system. Therefore, the Commission believes that the Recovery
Plan and the Force Majeure Rule would help promote robust risk
management at FICC and, thus, reduce systemic risks by establishing a
means for FICC to best determine the most appropriate way to address
such stress situations in an effective manner.
The Commission believes that the R&W Plan, generally, would help
FICC promote safety and soundness and support the stability of the
broader financial system by providing a roadmap to wind-down that is
designed to ensure the availability of FICC's critical services to the
marketplace, while reducing disruption to the operations of membership
and financial markets that might be caused by FICC's failure.
Specifically, as described above, the Wind-down Plan, as facilitated by
the Wind-down Rule, would provide for the wind-down of FICC's business
and transfer of membership and critical services if the recovery tools
do not successfully return FICC to financial viability. Accordingly,
critical services, such as services that lack alternative providers or
products; services that the failure of which could impact the volume of
transactions, transaction costs, or the flow of liquidity in the U.S.
financial markets; and services that are interconnected with other
participants and processes within the U.S. financial system would be
able to continue in an orderly manner while FICC is seeking to wind-
down its services. By designing the Wind-down Plan and the Wind-down
Rule to enable the continuity of FICC's critical services and
membership in an orderly manner while FICC is seeking to wind-down its
services, the Commission believes these proposed changes would help
FICC promote safety and soundness and support stability in the broader
financial system in the event the Wind-down Plan is implemented.
As described above, to incorporate the Proposed Rules into the
Rules and the EPN Rules, FICC proposes to amend (1) GSD Rule 3A
(Sponsoring Members and Sponsored Members), GSD Rule 3B (Centrally
Cleared Institutional Triparty Service), and GSD Rule 13 (Funds-Only
Settlement); (2) MBSD Rule 3A (Cash Settlement Bank Members); and (3)
EPN Rule 1 (Definitions). These proposed changes would clarify that
certain types of Limited Members, as identified in those rules, would
be subject to the Proposed Rules. These proposed changes would help
these Limited Members readily understand their rights and obligations
and would help enable Limited Members that are governed by the Proposed
Rules to have a better understanding of the Proposed Rules. Enhanced
access to and transparency of these rules would therefore assist such
parties in understanding, planning for, and reacting in an orderly
manner to, the implementation by FICC of the R&W Plan. Therefore, the
Commission believes that these proposed changes to the Rules and the
EPN Rules would help support the stability of the broader financial
system.
By better enabling FICC to promote robust risk management, promote
safety and soundness, reduce systemic risks, and support the stability
of the broader financial system, as described above, the Commission
believes that the proposed changes in the Advance Notice are consistent
with Section 805(b) of the Clearing Supervision Act.\57\
---------------------------------------------------------------------------
\57\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
B. Consistency With Rules 17Ad-22(e)(2)(i), (iii), and (v) Under the
Act
Rule 17Ad-22(e)(2)(i) under the Act requires a covered clearing
agency \58\ to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to provide for governance
arrangements that are clear and transparent.\59\ Rule 17Ad-
22(e)(2)(iii) under the Act requires a covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to provide for governance arrangements
that support the public interest requirements in Section 17A of the Act
\60\ applicable to clearing agencies, and the objectives of owners and
participants.\61\ Rule 17Ad-22(e)(2)(v) under the Act requires a
covered clearing agency to establish, implement, maintain, and enforce
written policies and procedures reasonably designed to provide for
governance arrangements that specify clear and direct lines of
responsibility.\62\
---------------------------------------------------------------------------
\58\ A ``covered clearing agency'' means, among other things, a
clearing agency registered with the Commission under Section 17A of
the Exchange Act (15 U.S.C. 78q-1 et seq.) that is designated
systemically important by the Financial Stability Oversight Counsel
(``FSOC'') pursuant to the Clearing Supervision Act (12 U.S.C. 5461
et seq.). See 17 CFR 240.17Ad-22(a)(5)-(6). On July 18, 2012, FSOC
designated FICC as systemically important. U.S. Department of the
Treasury, ``FSOC Makes First Designations in Effort to Protect
Against Future Financial Crises,'' available at https://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx.
Therefore, FICC is a covered clearing agency.
\59\ 17 CFR 240.17Ad-22(e)(2)(i).
\60\ 15 U.S.C. 78q-1.
\61\ 17 CFR 240.17Ad-22(e)(2)(iii).
\62\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------
As described above, the R&W Plan is designed to identify clear
lines of responsibility concerning the R&W Plan including (1) the
ongoing development of the R&W Plan; (2) ongoing maintenance of the R&W
Plan; (3) reviews and approval of the R&W Plan; and (4) the functioning
and implementation of the R&W Plan. As described above, the R&R Team,
which reports to the Management Committee, is responsible for
maintaining the R&W Plan and for the development and ongoing
maintenance of the overall recovery and wind-down planning process.
Meanwhile, the Board, or such committees as may be delegated authority
by the Board from time to time pursuant to its charter, would review
and approve the R&W Plan biennially, and also would review and approve
any changes that are proposed to the R&W Plan outside of the biennial
review. Moreover, the R&W Plan would state the stages of escalation
required to manage recovery under the Recovery Plan or to invoke FICC's
wind-down under the Wind-down Plan, which would range from relevant
business line managers up to the Board. The R&W Plan would identify the
parties responsible for certain activities under both the Recovery Plan
and the Wind-down Plan, and would describe their respective roles. The
R&W Plan also would specify the process FICC would take to receive
input from various parties at FICC, including management committees and
the Board.
In considering the above, the Commission believes that the R&W Plan
would help contribute to establishing, implementing, maintaining, and
enforcing written policies and procedures reasonably designed to
provide for governance arrangements that are clear and transparent
because it would specify lines of control. The Commission also believes
that the R&W Plan would help contribute to establishing, implementing,
maintaining, and enforcing written policies and procedures reasonably
designed to provide for governance arrangements that support the public
interest requirements in Section 17A of the Act \63\ applicable to
clearing
[[Page 44373]]
agencies, and the objectives of owners and participants because the R&W
Plan specifies the process FICC would take to receive input from
various FICC stakeholders. In addition, the Commission believes that
the R&W Plan would help contribute to establishing, implementing,
maintaining, and enforcing written policies and procedures reasonably
designed to provide for governance arrangements that specify clear and
direct lines of responsibility because it specifies who is responsible
for the ongoing development, maintenance, reviews, approval,
functioning, and implementation of the R&W Plan.
---------------------------------------------------------------------------
\63\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
Therefore, the Commission believes that the R&W Plan is consistent
with Rules 17Ad-22(e)(2)(i), (iii), and (v) under the Act.\64\
---------------------------------------------------------------------------
\64\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(e)(3)(ii) Under the Act
Rule 17Ad-22(e)(3)(ii) under the Act requires a covered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to maintain a sound risk management
framework for comprehensively managing legal, credit, liquidity,
operational, general business, investment, custody, and other risks
that arise in or are borne by the covered clearing agency, which
includes plans for the recovery and orderly wind-down of the covered
clearing agency necessitated by credit losses, liquidity shortfalls,
losses from general business risk, or any other losses.\65\
---------------------------------------------------------------------------
\65\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------
As described above, the R&W Plan's Recovery Plan provides a plan
for FICC's recovery necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses by
defining the risk management activities, stress conditions and
indicators, and tools that FICC may use to address stress scenarios
that could eventually prevent FICC from being able to provide its
critical services as a going concern. More specifically, through the
framework of the Crisis Continuum, which identifies tools that can be
employed to mitigate losses and mitigate or minimize liquidity needs as
the market environment becomes increasingly stressed, the Recovery Plan
would identify measures that FICC may take to manage risks of credit
losses and liquidity shortfalls, and other losses that could arise from
a Member default. The Recovery Plan also would address FICC's
management of general business risks and other non-default risks that
could lead to losses by identifying potential non-default losses and
the resources available to FICC to address such losses, including
recovery triggers and tools to mitigate such losses. Therefore, the
Commission believes that the R&W Plan's Recovery Plan helps FICC
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 FICC, which includes a recovery plan
necessitated by credit losses, liquidity shortfalls, losses from
general business risk, or any other losses.
As described above, the R&W Plan's Wind-down Plan provides a plan
for orderly wind-down of FICC, which would be triggered by a
determination by the Board that recovery efforts have not been, or are
unlikely to be, successful in returning FICC to viability as a going
concern. Once triggered, the Wind-down Plan sets forth mechanisms for
the transfer of the membership of both Divisions and FICC's business,
and it is designed to maintain continued access to FICC's critical
services and to minimize market impact of the transfer while FICC is
seeking to ultimately wind-down its services. Specifically, the Wind-
down Plan would provide for the transfer of FICC's business, assets,
and membership to another legal entity with such transfer being
effected in connection with proceedings under Chapter 11 of the U.S.
Bankruptcy Code.\66\ After effectuating this transfer, FICC would
liquidate any remaining assets in an orderly manner in bankruptcy
proceedings.
---------------------------------------------------------------------------
\66\ 11 U.S.C. 101 et seq.
---------------------------------------------------------------------------
Although the Commission is not opining on the Wind-down Plan's
consistency with the U.S. Bankruptcy Code, in reviewing the proposed
changes, the Commission believes that FICC's intent to use bankruptcy
proceedings to achieve an orderly liquidation of assets after any
transfer of FICC's business appears reasonable, in light of the
provisions of the Bankruptcy Code that address the liquidation and
distribution of a debtor's property among creditors and interest
holders.\67\ Under many circumstances, Section 363 of the Bankruptcy
Code provides for the sale of property ``free and clear of any interest
in such property of an entity other than the estate[.]'' \68\ The
Commission believes that FICC's analysis regarding the applicability of
these provisions, while not free from doubt, presents a reasonable
approach to liquidation in light of the circumstances and the available
alternatives.\69\ Therefore, the Commission believes that the R&W
Plan's Wind-down Plan helps FICC 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 FICC, which includes a
wind-down plan necessitated by credit losses, liquidity shortfalls,
losses from general business risk, or any other losses.
---------------------------------------------------------------------------
\67\ See, e.g., 11 U.S.C. 363, 726, and 1129(a)(7).
\68\ See 11 U.S.C. 363(f).
\69\ The Wind-down Plan would identify certain factors the Board
may consider in evaluating alternatives, which would include, for
example, whether FICC could safely stabilize the business and
protect its value without seeking bankruptcy protection, and FICC's
ability to continue to meet its regulatory requirements.
---------------------------------------------------------------------------
Therefore, the Commission believes that the R&W Plan is consistent
with Rule 17Ad-22(e)(3)(ii) under the Act.\70\
---------------------------------------------------------------------------
\70\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------
D. Consistency With Rules 17Ad-22(e)(15)(i)-(ii) Under the Act
Rule 17Ad-22(e)(15)(i) under the Act requires a covered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to identify, monitor, and manage its
general business risk and hold sufficient liquid net assets funded by
equity to cover potential general business losses so that the covered
clearing agency can continue operations and services as a going concern
if those losses materialize, including by determining the amount of
liquid net assets funded by equity based upon its general business risk
profile and the length of time required to achieve a recovery or
orderly wind-down, as appropriate, of its critical operations and
services if such action is taken.\71\ Rule 17Ad-22(e)(15)(ii) under the
Act requires a covered clearing agency to establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to identify, monitor, and manage its general business risk and
hold sufficient liquid net assets funded by equity to cover potential
general business losses so that the covered clearing agency can
continue operations and services as a going concern if those losses
materialize, including by holding liquid net assets funded by equity
equal to the greater of either (x) six months of the
[[Page 44374]]
covered clearing agency's current operating expenses, or (y) the amount
determined by the board of directors to be sufficient to ensure a
recovery or orderly wind-down of critical operations and services of
the covered clearing agency, as contemplated by the plans established
under Rule 17Ad-22(e)(3)(ii) under the Act,\72\ discussed above.\73\
---------------------------------------------------------------------------
\71\ 17 CFR 240.17Ad-22(e)(15)(i).
\72\ 17 CFR 240.17Ad-22(e)(3)(ii).
\73\ 17 CFR 240.17Ad-22(e)(15)(ii).
---------------------------------------------------------------------------
As discussed above, FICC's Capital Policy is designed to address
how FICC holds LNA in compliance with these requirements,\74\ while the
Wind-down Plan would include an analysis to estimate the amount of time
and cost to achieve a recovery or orderly wind-down of FICC's critical
operations and services, and would provide that the Board review and
approve this analysis and estimation annually. The Wind-down Plan also
would provide that the estimate would be the Recovery/Wind-down Capital
Requirement under the Capital Policy. Under that policy, the General
Business Risk Capital Requirement, which is the amount of LNA that FICC
plans to hold to cover potential general business losses so that it can
continue operations and services as a going concern if those losses
materialize, is calculated as the greatest of three estimated amounts,
one of which is this Recovery/Wind-down Capital Requirement. Therefore,
the Commission believes that the R&W Plan is consistent with Rules
17Ad-22(e)(15)(i) and (ii) under the Act.\75\
---------------------------------------------------------------------------
\74\ Supra note 14.
\75\ 17 CFR 240.17Ad-22(e)(15)(i) and (ii).
---------------------------------------------------------------------------
III. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act,\76\ that the Commission DOES NOT OBJECT to
advance notice SR-FICC-2017-805, as modified by Amendment No. 1, and
that FICC is authorized to implement the proposal as of the date of
this notice or the date of an order by the Commission approving
proposed rule change SR-FICC-2017-021, as modified by Amendment No. 1,
whichever is later.
---------------------------------------------------------------------------
\76\ 12 U.S.C. 5465(e)(1)(I).
By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18868 Filed 8-29-18; 8:45 am]
BILLING CODE 8011-01-P