Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Clearing Agency Policy on Capital Requirements and the Clearing Agency Capital Replenishment Plan, 53131-53134 [2018-22778]

Download as PDF Federal Register / Vol. 83, No. 203 / Friday, October 19, 2018 / Notices investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NSCC–2018–008 on the subject line. Paper Comments amozie on DSK3GDR082PROD with NOTICES1 • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. All submissions should refer to File Number SR–NSCC–2018–008. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of NSCC and on DTCC’s website (https://dtcc.com/legal/sec-rulefilings.aspx). All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NSCC– 2018–008 and should be submitted on or before November 9, 2018. VerDate Sep<11>2014 17:25 Oct 18, 2018 Jkt 247001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.27 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–22780 Filed 10–18–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–84427; File No. SR–FICC– 2018–009] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Clearing Agency Policy on Capital Requirements and the Clearing Agency Capital Replenishment Plan October 15, 2018. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on October 4, 2018, Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the clearing agency. FICC filed the proposed rule change pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(4) thereunder.4 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change consists of amendments to (i) the Clearing Agency Policy on Capital Requirements (‘‘Capital Policy’’ or ‘‘Policy’’) of FICC and its affiliates, The Depository Trust Company (‘‘DTC’’) and National Securities Clearing Corporation (‘‘NSCC,’’ and together with DTC and FICC, the ‘‘Clearing Agencies’’); and (ii) the Clearing Agency Capital Replenishment Plan (‘‘Capital Replenishment Plan’’ or ‘‘Plan’’) of the Clearing Agencies. In particular, the proposed revisions to the Capital Policy and Capital Replenishment Plan would (1) correct typographical errors and make other technical revisions to correct and simplify statements in the Policy and Plan; (2) replace references in the 27 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(4). PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 53131 Policy and Plan to the ‘‘Credit Risk Capital Requirement’’ with the ‘‘Corporate Contribution;’’ and (3) update references in the Policy to the Recovery & Wind-down Plans of each of the Clearing Agencies, which were recently adopted by the Clearing Agencies, as described in greater detail below. II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the clearing agency included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The clearing agency has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Clearing Agencies are proposing to revise the Capital Policy and Capital Replenishment Plan, which were adopted by the Clearing Agencies in July 2017 5 and are maintained by the Clearing Agencies in compliance with Rule 17Ad–22(e)(15) under the Act.6 Overview of the Capital Policy and Capital Replenishment Plan The Capital Policy sets forth the manner in which each Clearing Agency identifies, monitors, and manages its general business risk with respect to the requirement to hold sufficient liquid net assets (‘‘LNA’’) funded by equity to cover potential general business losses so the Clearing Agency can continue operations and services as a going concern if such losses materialize.7 The amount of LNA funded by equity to be held by each of the Clearing Agencies for this purpose is defined in the Policy as the General Business Risk Capital Requirement. The Policy provides that the General Business Risk Requirement is calculated for each Clearing Agency as the greatest of three separate calculations—(1) an amount based on that Clearing Agency’s general business risk profile (‘‘Risk-Based Capital Requirement’’), (2) an amount based on 5 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). 6 17 CFR 240.17Ad–22(e)(15). 7 Id. E:\FR\FM\19OCN1.SGM 19OCN1 53132 Federal Register / Vol. 83, No. 203 / Friday, October 19, 2018 / Notices amozie on DSK3GDR082PROD with NOTICES1 the time estimated to execute a recovery or orderly wind-down of the critical operations of that Clearing Agency (‘‘Recovery/Wind-down Capital Requirement’’), and (3) an amount based on an analysis of that Clearing Agency’s estimated operating expenses for a six month period (‘‘Operating Expense Capital Requirement’’). On an annual basis, each of these three capital requirements are measured, and the General Business Risk Capital Requirement for each Clearing Agency are determined as the greatest of these calculations. Currently, the Capital Policy also addresses how each Clearing Agency maintains a portion of retained earnings as LNA funded by equity as its Credit Risk Capital Requirement, as a part of its management of credit risk 8 and pursuant to their respective rules.9 These resources are maintained to address losses due to a participant default, and are held in addition to the LNA funded by equity held by each of the Clearing Agencies as its General Business Risk Capital Requirement. The Capital Policy describes how each Clearing Agency’s General Business Risk Capital Requirement and Credit Risk Capital Requirement fit within the Clearing Agencies’ Capital Framework, where the Total Capital Requirement of each Clearing Agency is calculated as the sum of its General Business Risk Capital Requirement and Credit Risk Capital Requirement. The Policy also provides a plan for the replenishment of capital through the Capital Replenishment Plan. The Capital Replenishment Plan was adopted by the Clearing Agencies as a plan for the replenishment of capital by each Clearing Agency should its equity fall close to or below the amount being held as its Total Capital Requirement pursuant to the Capital Policy. The Capital Replenishment Plan identifies the circumstances that would trigger implementation of the Plan; the roles, responsibilities, and guiding principles for implementation of the Plan; and an 8 LNA funded by equity held as the Clearing Agencies’ Credit Risk Capital Requirement is held in addition to resources held by the Clearing Agencies for credit risk in compliance with Rule 17Ad–22(e)(4) under the Act and in addition to resources held by the Clearing Agencies for liquidity risk in compliance with Rule 17Ad– 22(e)(7). 17 CFR 240.17Ad–22(e)(4), (7). 9 The Rules, By-laws and Organizational Certificate of DTC (‘‘DTC Rules’’), the Rulebook of the Government Securities Division of FICC (‘‘GSD Rules’’), the Clearing Rules of the Mortgage-Backed Securities Division of FICC (‘‘MBSD Rules’’), or the Rules & Procedures of NSCC (‘‘NSCC Rules,’’ together with the DTC Rules, GSD Rules and MBSD Rules, the ‘‘Clearing Agencies’ Rules’’ or ‘‘Rules’’), available at https://dtcc.com/legal/rules-andprocedures. VerDate Sep<11>2014 17:25 Oct 18, 2018 Jkt 247001 overview and description of each of the tools that may be used to replenish capital. Proposed Revisions to the Capital Policy and Capital Replenishment Plan As described in greater detail below, the Clearing Agencies are proposing to make certain revisions to the Capital Policy and Capital Replenishment Plan. First, the proposed revisions would correct typographical errors and make other technical revisions to correct and simplify statements in the Capital Policy and Capital Replenishment Plan. Second, the proposed revisions would replace references to the ‘‘Credit Risk Capital Requirement’’ with ‘‘Corporate Contribution.’’ This proposed change would reflect the implementation of recent revisions to the Clearing Agencies’ Rules regarding allocation of losses.10 Finally, the proposed revisions would update the description of the calculation of the Recovery/Wind-down Capital Requirement in the Capital Policy to clarify that the Recovery & Wind-down Plans of each of the Clearing Agencies have been adopted by the Clearing Agencies.11 These proposed revisions are designed to enhance the clarity of the Policy and Plan and help ensure that they continue to operate as intended. 1. Technical Revisions FICC is proposing technical revisions to the descriptions within the Capital Policy and Capital Replenishment Plan that would correct typographical errors, including, for example, removing a phrase that was incorrectly repeated in the same sentence. These revisions would also correct an error in Section 3 of the Policy, where the document was incorrectly referred to as the Plan. Such revisions would also update the documents. For example, the proposed changes would replace references in the Capital Policy and Capital Replenishment Plan to the Finance/ Capital Committee of the Boards, which was disbanded September 2017, with the Boards, which has taken on the responsibilities of this Committee set forth in the Policy and Plan. These revisions would also include updating the Capital Replenishment Plan to revise the name of the ‘‘Capital Contributions to DTCC Subsidiaries and 10 See Securities Exchange Act Release Nos. 83970 (August 28, 2018), 83 FR 44929 (September 4, 2018) (SR–FICC–2017–022); 83951 (August 27, 2018), 83 FR 44331 (August 30, 2018) (SR–FICC– 2017–806). 11 See Securities Exchange Act Release Nos. 83973 (August 28, 2018), 83 FR 44942 (September 4, 2018) (SR–FICC–2017–021); 83954 (August 27, 2018), 83 FR 44361 (August 30, 2018) (SR–FICC– 2017–805). PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 Joint Ventures Policy’’ to the new name of this document, the ‘‘Capital Contributions Policy.’’ 12 Finally, the proposed revisions would also simplify the descriptions in these documents. For example, these revisions would add a defined term for the Clearing Agencies’ Rules to the Policy in order to simplify references to such rules and procedures in this document. 2. Addition of Corporate Contribution The proposed revisions would also replace references in the Capital Policy and Capital Replenishment Plan to the ‘‘Credit Risk Capital Requirement’’ with the ‘‘Corporate Contribution.’’ Currently, the Capital Policy describes how each Clearing Agency maintains a portion of retained earnings as LNA funded by equity as its Credit Risk Capital Requirement, in accordance with their respective Rules. Recently, the Clearing Agencies implemented revisions to their respective Rules to enhance the process by which they may allocate losses to their participants if the size of the losses exceed their prefunded resources.13 Such revisions included an amendment to the calculation and application of the amount of LNA funded by equity that are currently referred to in the Capital Policy and Capital Replenishment Plan as the Credit Risk Capital Requirement. Specifically, the GSD Rules and MBSD Rules previously provided that FICC would contribute up to 25 percent of its retained earnings (or such higher amount as the FICC Board of Directors shall determine) to a loss or liability as the result of the failure of a defaulting member that is not satisfied by the defaulting member’s Clearing Fund deposit. Pursuant to these recent changes, the GSD Rules and MBSD Rules provide that an amount equal to 50 percent of FICC’s General Business Risk Capital Requirement (as such amount is defined in the Capital Policy), or such greater amount as the FICC Board of Directors may determine, (‘‘Corporate Contribution’’) may be used to address unsatisfied losses or liabilities arising either from a member default or a non-default event. The Corporate Contribution applied to any losses arising from events that may occur during the next 250 business days would be reduced to the remaining 12 This document is an internal policy that governs how The Depository Trust & Clearing Corporation may invest capital in its subsidiaries, including the Clearing Agencies, as well as affiliated joint ventures and non-affiliated companies. 13 Supra note 10. E:\FR\FM\19OCN1.SGM 19OCN1 Federal Register / Vol. 83, No. 203 / Friday, October 19, 2018 / Notices unused portion of Corporate Contribution, if any.14 The amendments to the calculation and application of the resources that are now referred to as the Corporate Contribution did not change how these resources are described within the Policy or the Plan. The Corporate Contribution continues to represent resources maintained by the Clearing Agencies to address losses due to a participant default, as a part of their management of credit risk.15 These resources also are still held in addition to the LNA funded by equity held by each of the Clearing Agencies as its General Business Risk Capital Requirement. Therefore, the Capital Policy and Capital Replenishment Plan would be revised to replace references to the Credit Risk Capital Requirement with references to the Corporate Contribution, and no other changes are needed to the description of this amount. 3. Update References to the Recovery & Wind-Down Plans of the Clearing Agencies amozie on DSK3GDR082PROD with NOTICES1 The proposed revisions would also update the Capital Policy to make clear that the Recovery & Wind-down Plans of the Clearing Agencies have been adopted by the Clearing Agencies.16 Such references are currently made in connection with the description of the calculation of the Recovery/Wind-down Capital Requirement. The Recovery/Wind-down Capital Requirement is an amount based on the time estimated to execute a recovery or orderly wind-down of the critical operations of that Clearing Agency and is used by the Clearing Agencies to determine their General Business Risk Capital Requirement. Each of the Clearing Agencies recently adopted a Recovery & Wind-down Plan, which provide plans for the recovery and orderly wind-down of each of the Clearing Agencies necessitated by credit losses, liquidity shortfalls, losses from general business risk, or any other losses.17 The Recovery & Wind-down Plans each include an analysis of the calculation of the Recovery/Wind-down Capital Requirement, based on the formula that is set forth in the Capital Policy. 14 See supra notes 9 and 10. noted above, unlike the resources referred to in the Policy and Plan as the Credit Risk Capital Requirement, the Corporate Contribution would also be available to the Clearing Agencies to address losses due to events other than a participant default. 16 Supra note 11. 17 Id. 15 As VerDate Sep<11>2014 17:25 Oct 18, 2018 Jkt 247001 The Clearing Agencies are proposing to revise the Capital Policy to make clear that the Recovery & Wind-down Plans have now been adopted by the Clearing Agencies. 2. Statutory Basis The Clearing Agencies believe that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a registered clearing agency. In particular, the Clearing Agencies believe that the Capital Policy and the Capital Replenishment Plan are both consistent with Section 17A(b)(3)(F) of the Act 18 and Rule 17Ad–22(e)(15) under the Act,19 for the reasons described below. Section 17A(b)(3)(F) of the Act requires, in part, that the rules of the Clearing Agencies be designed to promote the prompt and accurate clearance and settlement of securities transactions, and to assure the safeguarding of securities and funds which are in the custody or control of the Clearing Agency or for which it is responsible.20 Together, the Capital Policy and the Capital Replenishment Plan are designed to ensure that each of the Clearing Agencies hold sufficient LNA funded by equity to cover potential general business losses so that it can continue the prompt and accurate clearance and settlement of securities transactions and can continue to assure the safeguarding of securities and funds which are in its custody or control or for which it is responsible if those losses materialize. By correcting errors and updating the Capital Policy and Capital Replenishment Plan to be consistent with recent changes implemented by the Clearing Agencies, the proposed revisions would allow the Clearing Agencies to maintain these documents to operate in the way they were intended. Therefore, such proposed revisions would be consistent with the requirements of Section 17A(b)(3)(F) of the Act.21 Rule 17Ad–22(e)(15) requires the Clearing Agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to identify, monitor, and manage their respective general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that the Clearing Agencies can continue operations and services as a going concern if those losses U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(e)(15). 20 15 U.S.C. 78q–1(b)(3)(F). 21 Id. materialize.22 As originally implemented, the Capital Policy and the Capital Replenishment Plan were designed to meet the requirements of Rule 17Ad–22(e)(15) under the Act.23 As stated above, the proposed revisions would update the Capital Policy and Capital Replenishment Plan to be consistent with recent changes implemented by the Clearing Agencies. In this way, the proposed changes would allow the Clearing Agencies to maintain these documents in a way that to meet these requirements. Therefore, such proposed revisions would be consistent with the requirements of Rule 17Ad–22(e)(15) under the Act.24 (B) Clearing Agency’s Statement on Burden on Competition Each of the Clearing Agencies believes that none of the proposed revisions to the Capital Policy and the Capital Replenishment Plan would have any impact, or impose any burden, on competition. The Policy and the Plan are maintained by the Clearing Agencies in order to satisfy their regulatory requirements and generally reflect internal tools and procedures. Tools and procedures that have a direct impact on the rights, responsibilities or obligations of members or participants of the Clearing Agencies are reflected in the Clearing Agencies’ Rules. Accordingly, the Capital Policy and Capital Replenishment Plan themselves are documents that enhance the Clearing Agencies’ regulatory compliance and internal management and do not have any impact, or impose any burden, on competition. The proposed revisions to correct and update the Capital Policy and Capital Replenishment Plan would not affect any changes on the fundamental purpose or operation of these documents and, as such, would also not have any impact, or impose any burden, on competition. (C) Clearing Agency’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Clearing Agencies have not solicited or received any written comments relating to this proposal. The Clearing Agencies will notify the Commission of any written comments received by the Clearing Agencies. 18 15 19 17 PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 53133 22 17 CFR 240.17Ad–22(e)(15). supra note 5. 24 17 CFR 240.17Ad–22(e)(15). 23 See E:\FR\FM\19OCN1.SGM 19OCN1 53134 Federal Register / Vol. 83, No. 203 / Friday, October 19, 2018 / Notices III. Date of Effectiveness of the Proposed Rule Change, and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 25 and paragraph (f) of Rule 19b–4 thereunder.26 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: amozie on DSK3GDR082PROD with NOTICES1 Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FICC–2018–009 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. All submissions should refer to File Number SR–FICC–2018–009. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for 25 15 26 17 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f). VerDate Sep<11>2014 17:25 Oct 18, 2018 Jkt 247001 inspection and copying at the principal office of FICC and on DTCC’s website (https://dtcc.com/legal/sec-rulefilings.aspx). All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FICC– 2018–009 and should be submitted on or before November 9, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.27 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–22778 Filed 10–18–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–84423; File No. SR–GEMX– 2018–35] Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Delete Current Rules on Arbitration, Under Chapter 18 October 15, 2018. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on October 9, 2018, Nasdaq GEMX, LLC (‘‘GEMX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III, below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to delete the current rules on arbitration (‘‘Current Arbitration Rules’’), under Chapter 18, and incorporate by reference The Nasdaq Stock Market LLC’s (‘‘Nasdaq’’) rules on arbitration at General 6 (‘‘Proposed Arbitration Rules’’), into General 6 of the Exchange’s rulebook’s (‘‘Rulebook’’) shell structure.3 27 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Recently, the Exchange added a shell structure to its Rulebook with the purpose of improving efficiency and readability and to align its rules 1 15 PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 The text of the proposed rule change is available on the Exchange’s website at https://nasdaqgemx.cchwallstreet.com/, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to delete the rules on arbitration, currently under Chapter 18, and incorporate by reference the Nasdaq rules on arbitration at General 6 of Nasdaq’s rulebook into General 6 of the Exchange’s Rulebook. The Exchange adopted the Current Arbitration Rules to ensure a fair and efficient manner in which to handle any dispute, claim or controversy arising out of, or in connection with, the business of any Member of the Exchange. To help administer the process of dispute resolution, the Exchange and FINRA are parties to a Regulatory Contract, pursuant to which FINRA has agreed to perform certain functions and provide access to certain services, including: Member regulation and registration; non-real time market surveillance; examinations and investigations; and dispute resolution. FINRA currently operates the largest securities dispute resolution forum in the United States,4 and has given the Exchange access to these services. Under the Current Arbitration Rules, Members and associated persons of a Member are closer to those of its five sister exchanges, The Nasdaq Stock Market LLC; Nasdaq BX, Inc.; Nasdaq PHLX LLC; Nasdaq ISE, LLC; and Nasdaq MRX, LLC (‘‘Affiliated Exchanges’’). The shell structure currently contains eight (8) Chapters which, once complete, will apply a common set of rules to the Affiliated Exchanges. See Securities Exchange Act Release No. 82171 (November 29, 2017), 82 FR 57516 (December 5, 2017) (SR–GEMX–2017–54). 4 https://www.finra.org/arbitration-and-mediation. E:\FR\FM\19OCN1.SGM 19OCN1

Agencies

[Federal Register Volume 83, Number 203 (Friday, October 19, 2018)]
[Notices]
[Pages 53131-53134]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22778]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84427; File No. SR-FICC-2018-009]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend the Clearing Agency Policy on Capital Requirements and the 
Clearing Agency Capital Replenishment Plan

October 15, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 4, 2018, Fixed Income Clearing Corporation (``FICC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the clearing agency. FICC filed the 
proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and 
Rule 19b-4(f)(4) thereunder.\4\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to (i) the Clearing 
Agency Policy on Capital Requirements (``Capital Policy'' or 
``Policy'') of FICC and its affiliates, The Depository Trust Company 
(``DTC'') and National Securities Clearing Corporation (``NSCC,'' and 
together with DTC and FICC, the ``Clearing Agencies''); and (ii) the 
Clearing Agency Capital Replenishment Plan (``Capital Replenishment 
Plan'' or ``Plan'') of the Clearing Agencies. In particular, the 
proposed revisions to the Capital Policy and Capital Replenishment Plan 
would (1) correct typographical errors and make other technical 
revisions to correct and simplify statements in the Policy and Plan; 
(2) replace references in the Policy and Plan to the ``Credit Risk 
Capital Requirement'' with the ``Corporate Contribution;'' and (3) 
update references in the Policy to the Recovery & Wind-down Plans of 
each of the Clearing Agencies, which were recently adopted by the 
Clearing Agencies, as described in greater detail below.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The Clearing Agencies are proposing to revise the Capital Policy 
and Capital Replenishment Plan, which were adopted by the Clearing 
Agencies in July 2017 \5\ and are maintained by the Clearing Agencies 
in compliance with Rule 17Ad-22(e)(15) under the Act.\6\
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    \5\ 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).
    \6\ 17 CFR 240.17Ad-22(e)(15).
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Overview of the Capital Policy and Capital Replenishment Plan
    The Capital Policy sets forth the manner in which each Clearing 
Agency identifies, monitors, and manages its general business risk with 
respect to the requirement to hold sufficient liquid net assets 
(``LNA'') funded by equity to cover potential general business losses 
so the Clearing Agency can continue operations and services as a going 
concern if such losses materialize.\7\ The amount of LNA funded by 
equity to be held by each of the Clearing Agencies for this purpose is 
defined in the Policy as the General Business Risk Capital Requirement. 
The Policy provides that the General Business Risk Requirement is 
calculated for each Clearing Agency as the greatest of three separate 
calculations--(1) an amount based on that Clearing Agency's general 
business risk profile (``Risk-Based Capital Requirement''), (2) an 
amount based on

[[Page 53132]]

the time estimated to execute a recovery or orderly wind-down of the 
critical operations of that Clearing Agency (``Recovery/Wind-down 
Capital Requirement''), and (3) an amount based on an analysis of that 
Clearing Agency's estimated operating expenses for a six month period 
(``Operating Expense Capital Requirement''). On an annual basis, each 
of these three capital requirements are measured, and the General 
Business Risk Capital Requirement for each Clearing Agency are 
determined as the greatest of these calculations.
---------------------------------------------------------------------------

    \7\ Id.
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    Currently, the Capital Policy also addresses how each Clearing 
Agency maintains a portion of retained earnings as LNA funded by equity 
as its Credit Risk Capital Requirement, as a part of its management of 
credit risk \8\ and pursuant to their respective rules.\9\ These 
resources are maintained to address losses due to a participant 
default, and are held in addition to the LNA funded by equity held by 
each of the Clearing Agencies as its General Business Risk Capital 
Requirement. The Capital Policy describes how each Clearing Agency's 
General Business Risk Capital Requirement and Credit Risk Capital 
Requirement fit within the Clearing Agencies' Capital Framework, where 
the Total Capital Requirement of each Clearing Agency is calculated as 
the sum of its General Business Risk Capital Requirement and Credit 
Risk Capital Requirement.
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    \8\ LNA funded by equity held as the Clearing Agencies' Credit 
Risk Capital Requirement is held in addition to resources held by 
the Clearing Agencies for credit risk in compliance with Rule 17Ad-
22(e)(4) under the Act and in addition to resources held by the 
Clearing Agencies for liquidity risk in compliance with Rule 17Ad-
22(e)(7). 17 CFR 240.17Ad-22(e)(4), (7).
    \9\ The Rules, By-laws and Organizational Certificate of DTC 
(``DTC Rules''), the Rulebook of the Government Securities Division 
of FICC (``GSD Rules''), the Clearing Rules of the Mortgage-Backed 
Securities Division of FICC (``MBSD Rules''), or the Rules & 
Procedures of NSCC (``NSCC Rules,'' together with the DTC Rules, GSD 
Rules and MBSD Rules, the ``Clearing Agencies' Rules'' or 
``Rules''), available at https://dtcc.com/legal/rules-and-procedures.
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    The Policy also provides a plan for the replenishment of capital 
through the Capital Replenishment Plan. The Capital Replenishment Plan 
was adopted by the Clearing Agencies as a plan for the replenishment of 
capital by each Clearing Agency should its equity fall close to or 
below the amount being held as its Total Capital Requirement pursuant 
to the Capital Policy. The Capital Replenishment Plan identifies the 
circumstances that would trigger implementation of the Plan; the roles, 
responsibilities, and guiding principles for implementation of the 
Plan; and an overview and description of each of the tools that may be 
used to replenish capital.
Proposed Revisions to the Capital Policy and Capital Replenishment Plan
    As described in greater detail below, the Clearing Agencies are 
proposing to make certain revisions to the Capital Policy and Capital 
Replenishment Plan.
    First, the proposed revisions would correct typographical errors 
and make other technical revisions to correct and simplify statements 
in the Capital Policy and Capital Replenishment Plan. Second, the 
proposed revisions would replace references to the ``Credit Risk 
Capital Requirement'' with ``Corporate Contribution.'' This proposed 
change would reflect the implementation of recent revisions to the 
Clearing Agencies' Rules regarding allocation of losses.\10\ Finally, 
the proposed revisions would update the description of the calculation 
of the Recovery/Wind-down Capital Requirement in the Capital Policy to 
clarify that the Recovery & Wind-down Plans of each of the Clearing 
Agencies have been adopted by the Clearing Agencies.\11\
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    \10\ See Securities Exchange Act Release Nos. 83970 (August 28, 
2018), 83 FR 44929 (September 4, 2018) (SR-FICC-2017-022); 83951 
(August 27, 2018), 83 FR 44331 (August 30, 2018) (SR-FICC-2017-806).
    \11\ See Securities Exchange Act Release Nos. 83973 (August 28, 
2018), 83 FR 44942 (September 4, 2018) (SR-FICC-2017-021); 83954 
(August 27, 2018), 83 FR 44361 (August 30, 2018) (SR-FICC-2017-805).
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    These proposed revisions are designed to enhance the clarity of the 
Policy and Plan and help ensure that they continue to operate as 
intended.
1. Technical Revisions
    FICC is proposing technical revisions to the descriptions within 
the Capital Policy and Capital Replenishment Plan that would correct 
typographical errors, including, for example, removing a phrase that 
was incorrectly repeated in the same sentence. These revisions would 
also correct an error in Section 3 of the Policy, where the document 
was incorrectly referred to as the Plan.
    Such revisions would also update the documents. For example, the 
proposed changes would replace references in the Capital Policy and 
Capital Replenishment Plan to the Finance/Capital Committee of the 
Boards, which was disbanded September 2017, with the Boards, which has 
taken on the responsibilities of this Committee set forth in the Policy 
and Plan. These revisions would also include updating the Capital 
Replenishment Plan to revise the name of the ``Capital Contributions to 
DTCC Subsidiaries and Joint Ventures Policy'' to the new name of this 
document, the ``Capital Contributions Policy.'' \12\
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    \12\ This document is an internal policy that governs how The 
Depository Trust & Clearing Corporation may invest capital in its 
subsidiaries, including the Clearing Agencies, as well as affiliated 
joint ventures and non-affiliated companies.
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    Finally, the proposed revisions would also simplify the 
descriptions in these documents. For example, these revisions would add 
a defined term for the Clearing Agencies' Rules to the Policy in order 
to simplify references to such rules and procedures in this document.
2. Addition of Corporate Contribution
    The proposed revisions would also replace references in the Capital 
Policy and Capital Replenishment Plan to the ``Credit Risk Capital 
Requirement'' with the ``Corporate Contribution.'' Currently, the 
Capital Policy describes how each Clearing Agency maintains a portion 
of retained earnings as LNA funded by equity as its Credit Risk Capital 
Requirement, in accordance with their respective Rules. Recently, the 
Clearing Agencies implemented revisions to their respective Rules to 
enhance the process by which they may allocate losses to their 
participants if the size of the losses exceed their prefunded 
resources.\13\ Such revisions included an amendment to the calculation 
and application of the amount of LNA funded by equity that are 
currently referred to in the Capital Policy and Capital Replenishment 
Plan as the Credit Risk Capital Requirement.
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    \13\ Supra note 10.
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    Specifically, the GSD Rules and MBSD Rules previously provided that 
FICC would contribute up to 25 percent of its retained earnings (or 
such higher amount as the FICC Board of Directors shall determine) to a 
loss or liability as the result of the failure of a defaulting member 
that is not satisfied by the defaulting member's Clearing Fund deposit. 
Pursuant to these recent changes, the GSD Rules and MBSD Rules provide 
that an amount equal to 50 percent of FICC's General Business Risk 
Capital Requirement (as such amount is defined in the Capital Policy), 
or such greater amount as the FICC Board of Directors may determine, 
(``Corporate Contribution'') may be used to address unsatisfied losses 
or liabilities arising either from a member default or a non-default 
event. The Corporate Contribution applied to any losses arising from 
events that may occur during the next 250 business days would be 
reduced to the remaining

[[Page 53133]]

unused portion of Corporate Contribution, if any.\14\
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    \14\ See supra notes 9 and 10.
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    The amendments to the calculation and application of the resources 
that are now referred to as the Corporate Contribution did not change 
how these resources are described within the Policy or the Plan. The 
Corporate Contribution continues to represent resources maintained by 
the Clearing Agencies to address losses due to a participant default, 
as a part of their management of credit risk.\15\ These resources also 
are still held in addition to the LNA funded by equity held by each of 
the Clearing Agencies as its General Business Risk Capital Requirement.
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    \15\ As noted above, unlike the resources referred to in the 
Policy and Plan as the Credit Risk Capital Requirement, the 
Corporate Contribution would also be available to the Clearing 
Agencies to address losses due to events other than a participant 
default.
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    Therefore, the Capital Policy and Capital Replenishment Plan would 
be revised to replace references to the Credit Risk Capital Requirement 
with references to the Corporate Contribution, and no other changes are 
needed to the description of this amount.
3. Update References to the Recovery & Wind-Down Plans of the Clearing 
Agencies
    The proposed revisions would also update the Capital Policy to make 
clear that the Recovery & Wind-down Plans of the Clearing Agencies have 
been adopted by the Clearing Agencies.\16\ Such references are 
currently made in connection with the description of the calculation of 
the Recovery/Wind-down Capital Requirement.
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    \16\ Supra note 11.
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    The Recovery/Wind-down Capital Requirement is an amount based on 
the time estimated to execute a recovery or orderly wind-down of the 
critical operations of that Clearing Agency and is used by the Clearing 
Agencies to determine their General Business Risk Capital Requirement. 
Each of the Clearing Agencies recently adopted a Recovery & Wind-down 
Plan, which provide plans for the recovery and orderly wind-down of 
each of the Clearing Agencies necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses.\17\ 
The Recovery & Wind-down Plans each include an analysis of the 
calculation of the Recovery/Wind-down Capital Requirement, based on the 
formula that is set forth in the Capital Policy.
---------------------------------------------------------------------------

    \17\ Id.
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    The Clearing Agencies are proposing to revise the Capital Policy to 
make clear that the Recovery & Wind-down Plans have now been adopted by 
the Clearing Agencies.
2. Statutory Basis
    The Clearing Agencies believe that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a registered clearing agency. In 
particular, the Clearing Agencies believe that the Capital Policy and 
the Capital Replenishment Plan are both consistent with Section 
17A(b)(3)(F) of the Act \18\ and Rule 17Ad-22(e)(15) under the Act,\19\ 
for the reasons described below.
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    \18\ 15 U.S.C. 78q-1(b)(3)(F).
    \19\ 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of the Clearing Agencies be designed to promote the prompt and accurate 
clearance and settlement of securities transactions, and to assure the 
safeguarding of securities and funds which are in the custody or 
control of the Clearing Agency or for which it is responsible.\20\ 
Together, the Capital Policy and the Capital Replenishment Plan are 
designed to ensure that each of the Clearing Agencies hold sufficient 
LNA funded by equity to cover potential general business losses so that 
it can continue the prompt and accurate clearance and settlement of 
securities transactions and can continue to assure the safeguarding of 
securities and funds which are in its custody or control or for which 
it is responsible if those losses materialize. By correcting errors and 
updating the Capital Policy and Capital Replenishment Plan to be 
consistent with recent changes implemented by the Clearing Agencies, 
the proposed revisions would allow the Clearing Agencies to maintain 
these documents to operate in the way they were intended. Therefore, 
such proposed revisions would be consistent with the requirements of 
Section 17A(b)(3)(F) of the Act.\21\
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    \20\ 15 U.S.C. 78q-1(b)(3)(F).
    \21\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(15) requires the Clearing Agencies to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to identify, monitor, and manage their respective 
general business risk and hold sufficient liquid net assets funded by 
equity to cover potential general business losses so that the Clearing 
Agencies can continue operations and services as a going concern if 
those losses materialize.\22\ As originally implemented, the Capital 
Policy and the Capital Replenishment Plan were designed to meet the 
requirements of Rule 17Ad-22(e)(15) under the Act.\23\ As stated above, 
the proposed revisions would update the Capital Policy and Capital 
Replenishment Plan to be consistent with recent changes implemented by 
the Clearing Agencies. In this way, the proposed changes would allow 
the Clearing Agencies to maintain these documents in a way that to meet 
these requirements. Therefore, such proposed revisions would be 
consistent with the requirements of Rule 17Ad-22(e)(15) under the 
Act.\24\
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    \22\ 17 CFR 240.17Ad-22(e)(15).
    \23\ See supra note 5.
    \24\ 17 CFR 240.17Ad-22(e)(15).
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(B) Clearing Agency's Statement on Burden on Competition

    Each of the Clearing Agencies believes that none of the proposed 
revisions to the Capital Policy and the Capital Replenishment Plan 
would have any impact, or impose any burden, on competition. The Policy 
and the Plan are maintained by the Clearing Agencies in order to 
satisfy their regulatory requirements and generally reflect internal 
tools and procedures. Tools and procedures that have a direct impact on 
the rights, responsibilities or obligations of members or participants 
of the Clearing Agencies are reflected in the Clearing Agencies' Rules. 
Accordingly, the Capital Policy and Capital Replenishment Plan 
themselves are documents that enhance the Clearing Agencies' regulatory 
compliance and internal management and do not have any impact, or 
impose any burden, on competition.
    The proposed revisions to correct and update the Capital Policy and 
Capital Replenishment Plan would not affect any changes on the 
fundamental purpose or operation of these documents and, as such, would 
also not have any impact, or impose any burden, on competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    The Clearing Agencies have not solicited or received any written 
comments relating to this proposal. The Clearing Agencies will notify 
the Commission of any written comments received by the Clearing 
Agencies.

[[Page 53134]]

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \25\ and paragraph (f) of Rule 19b-4 
thereunder.\26\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.
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    \25\ 15 U.S.C. 78s(b)(3)(A).
    \26\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FICC-2018-009 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to File Number SR-FICC-2018-009. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of FICC and on DTCC's website 
(https://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FICC-2018-009 and should be submitted on 
or before November 9, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
Eduardo A. Aleman,
Assistant Secretary.
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    \27\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-22778 Filed 10-18-18; 8:45 am]
 BILLING CODE 8011-01-P
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