Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Clearing Agency Risk Management Framework, 42927-42932 [2020-15207]
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Federal Register / Vol. 85, No. 136 / Wednesday, July 15, 2020 / Notices
management investment company or
series thereof that: (a) Is advised by the
Adviser or any entity controlling,
controlled by, or under common control
with the Adviser (any such entity
included in the term ‘‘Adviser’’); (b)
operates as an ActiveShares ETF as
described in the Reference Order; and
(c) complies with the terms and
conditions of the Order and of the
Reference Order, which is incorporated
by reference into the Order (each such
company or series and the Initial Fund,
a ‘‘Fund’’).4
6. Section 6(c) of the Act provides that
the Commission may exempt any
person, security or transaction, or any
class of persons, securities or
transactions, from any provisions of the
Act, if and to the extent that such
exemption is necessary or appropriate
in the public interest and consistent
with the protection of investors and the
purposes fairly intended by the policy
and provisions of the Act. Section 17(b)
of the Act authorizes the Commission to
exempt a proposed transaction from
section 17(a) of the Act if evidence
establishes that the terms of the
transaction, including the consideration
to be paid or received, are reasonable
and fair and do not involve
overreaching on the part of any person
concerned, and the transaction is
consistent with the policies of the
registered investment company and the
general purposes of the Act. Section
12(d)(1)(J) of the Act provides that the
Commission may exempt any person,
security, or transaction, or any class of
persons, securities or transactions, from
any provision of section 12(d)(1) if the
exemption is consistent with the public
interest and the protection of investors.
Applicants submit that for the reasons
stated in the Reference Order the
requested relief meets the exemptive
standards under sections 6(c), 17(b) and
12(d)(1)(J) of the Act.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–15290 Filed 7–14–20; 8:45 am]
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89270; File No. SR–FICC–
2020–007]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing and Immediate Effectiveness of
a Proposed Rule Change To Amend
the Clearing Agency Risk Management
Framework
July 9, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on July 7,
2020, 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)(6) 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 the Clearing Agency
Risk Management Framework (‘‘Risk
Management Framework’’ or
‘‘Framework’’) of FICC and its affiliates,
National Securities Clearing Corporation
(‘‘NSCC’’) and The Depository Trust
Company (‘‘DTC,’’ and together with
NSCC and FICC, the ‘‘Clearing
Agencies’’). Specifically, the proposed
rule change would (1) include a
description of a set of policies that
addresses the Clearing Agencies’
compliance with Rule 17Ad–22(e)(22) of
the Standards for Covered Clearing
Agencies (‘‘Standards’’), under the Act,5
(2) update the Risk Management
Framework to reflect recent changes to
certain processes and other matters
described in the Framework, and
changes to the status of documents
identified in the Framework; and (3)
clarify the descriptions of certain
matters within the Framework to
improve comprehensiveness and correct
errors, as further described below.
4 All entities that currently intend to rely on the
Order are named as applicants. Any other entity
that relies on the Order in the future will comply
with the terms and conditions of the Order and of
the Reference Order, which is incorporated by
reference into the Order.
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1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
5 17 CFR 240.17Ad–22(e)(22).
2 17
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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 adopted the
Risk Management Framework 6 to
provide an outline for how each of the
Clearing Agencies (i) maintains a wellfounded, clear, transparent and
enforceable legal basis for each aspect of
its activities; (ii) comprehensively
manages legal, credit, liquidity,
operational, general business,
investment, custody, and other risks
that arise in or are borne by it; (iii)
identifies, monitors, and manages risks
related to links it establishes with one
or more clearing agencies, financial
market utilities, or trading markets; and
(iv) meets the requirements of its
participants and the markets it serves
efficiently and effectively. In this way,
the Risk Management Framework
currently supports the Clearing
Agencies’ compliance with Rules 17Ad–
22(e)(1), (3), (20) and (21) of the
Standards,7 as described in the Initial
Filing. In addition to setting forth the
manner in which each of the Clearing
Agencies addresses these requirements,
the Risk Management Framework also
contains a section titled ‘‘Framework
Ownership and Change Management’’
that, among other matters, describes the
Framework ownership and the required
governance process for review and
approval of changes to the Framework.
In connection with the annual review
and approval of the Framework by the
Board of Directors of each of NSCC, DTC
and FICC (each a ‘‘Board’’ and
collectively, the ‘‘Boards’’), the Clearing
Agencies are proposing to make certain
revisions to the Framework.
The proposed changes would add a
new Section 4.4 to describe a policy and
a communication standard document
6 See Securities Exchange Act Release No. 81635
(September 15, 2017), 82 FR 44224 (September 21,
2017) (SR–DTC–2017–013; SR–NSCC–2017–012;
SR–FICC–2017–016) (‘‘Initial Filing’’).
7 17 CFR 240.17Ad–22(e)(1), (3), (20) and (21).
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that support the Clearing Agencies’
compliance with Rule 17Ad–22(e)(22),
which requires the Clearing Agencies to
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to use, or at a
minimum accommodate, relevant
internationally accepted communication
procedures and standards in order to
facilitate efficient payment, clearing,
and settlement.8
The proposed changes would also
update the Risk Management
Framework to reflect (1) a change to the
name of the Vendor Risk Management
group to the Third Party Risk
Management group; (2) a change to the
format of the Balanced Business
Scorecard, which is an internal
performance management tool used to
measure the effectiveness of various
aspects of the operations of The
Depository Trust & Clearing Corporation
(‘‘DTCC’’) and its subsidiaries, including
the Clearing Agencies; and (3) the filing
of certain documents identified in the
Framework, pursuant to Section 19(b)(1)
of the Act,9 and the rules thereunder,
and Section 806(e)(1) of Title VIII of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled the
Payment, Clearing, and Settlement
Supervision Act of 2010,10 and the rules
thereunder (collectively, ‘‘Filing
Requirements’’), as described in greater
detail below.
The proposed changes would also
clarify and enhance the descriptions in
the Risk Management Framework to (1)
identify the requirement of Rule 17Ad–
22(e)(3)(i) under the Act that the
Framework be reviewed and approved
by the Boards on an annual basis; 11 (2)
identify the role of the DTCC Legal
Department in supporting the
management of legal risks that arise in
or are borne by the Clearing Agencies;
(3) enhance the description of the DTCC
Risk Department as ‘‘Second Line of
Defense,’’ (4) enhance the description of
the DTCC Internal Audit Department as
‘‘Third Line of Defense;’’ (5) enhance
the description of a policy relating to
the establishment and governance of
internal management committees; (6)
enhance the description of the processes
designed to maintain comprehensive
policies, procedures and other
documents; (7) clarify that certain
activities described in the Framework
that relate to the public disclosure of
material information, including market
data, address the Clearing Agencies’
compliance with Rule 17Ad–22(e)(23)
under the Act; 12 (8) enhance the
description of the management of
systemic risks by describing the role of
the Systemic Risk Council; (9) correct a
sentence by removing an unnecessary
phrase; and (10) enhance the
descriptions of certain actions by
removing the indication that the
Clearing Agencies have discretion in
engaging in those actions.
Finally, the proposed changes would
correct an error in the Risk Management
Framework to identify the Audit
Committees of the Boards as the
committees to which the DTCC Internal
Audit Department has a direct reporting
line. Each of these proposed changes is
described below.
i. Proposed Amendments To Describe
Policies That Address Compliance With
Rule 17Ad–22(e)(22)
First, the proposed changes would
add a new Section 4.4 to the Framework
to describe a policy maintained by the
Clearing Agencies to use and
accommodate relevant internationally
accepted communication procedures
and standards to facilitate efficient
payment, clearing, and settlement, to
support the Clearing Agencies’
compliance with Rule 17Ad–22(e)(22).13
The policy describes how the
communication standards and data
formats that are currently used by the
Clearing Agencies for payment, clearing,
and settlement are regarded as accepted
industry standards for transactions
processed through the Clearing
Agencies. The policy also provides that
the Clearing Agencies would
accommodate new industry standards
that are considered internationally
accepted communication procedures
and standards. The new Section 4.4
would also state that the Clearing
Agencies maintain a communication
standard document that supports this
policy.
The Clearing Agencies are proposing
to amend the Risk Management
Framework to adopt a new Section 4.4
that would describe these documents,
which support the Clearing Agencies’
compliance with Rule 17Ad–22(e)(22).14
ii. Proposed Amendments To Update
the Framework
Second, the proposed changes would
update the Risk Management
Framework to reflect recent
developments with respect to certain
processes and other matters described in
the Framework, and changes to the
8 17
CFR 240.17Ad–22(e)(22).
U.S.C. 78s(b)(1).
10 12 U.S.C. 5465(e)(1).
11 17 CFR 240.17Ad–22(e)(3)(i).
9 15
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12 17
CFR 240.17Ad–22(e)(23).
13 17 CFR 240.17Ad–22(e)(22).
14 Id.
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status of documents described in the
Framework, as described below.
1. Proposed Change To Identify Third
Party Risk Management
Section 4 of the Risk Management
Framework outlines ways in which each
of the Clearing Agencies manages
certain risks that arise in or are borne by
it. Specifically, Section 4.2 describes the
management of risks related to material
interdependencies and external links
that may be established by the Clearing
Agencies. The Clearing Agencies
represent that management of risks
presented by vendors and other material
service providers is guided by a
function within the Operational Risk
Management group within the Group
Chief Risk Office. This function was
previously referred to as ‘‘Vendor Risk
Management.’’ While the role and
responsibilities of this risk management
function have not changed, its name has
recently been changed to ‘‘Third Party
Risk Management’’ to clarify that the
function covers any material third party
service provider that provides a service
to a DTCC entity.
The Clearing Agencies are proposing
to amend Section 4.2.1 of the Risk
Management Framework to reflect this
name change and to clarify that the
function covers any material third party
service provider that provides a service
to a DTCC entity by adding ‘‘Third
Party’’ as a new defined term. The
Clearing Agencies are also proposing to
identify the existing policy and
procedure that is maintained to manage
these risks.
2. Proposed Change to Description of
Balanced Business Scorecard
Section 4.3 of the Risk Management
Framework addresses certain processes
implemented by the Clearing Agencies
in order to be efficient and effective in
meeting the requirements of their
respective participants and the markets
they serve.15 One of the methods the
Clearing Agencies use to meet these
requirements is the periodic creation of
a Balanced Business Scorecard, which
provides insight into the effectiveness of
the Clearing Agencies’ operations,
information technology service levels,
financial performance, human capital,
and their respective participants’
experience.
Previously, a Balanced Business
Scorecard (referred to as the ‘‘Core
Balance Business Scorecard’’) was
created for the Clearing Agencies, and a
separate Balanced Business Scorecard
15 Such processes support the Clearing Agencies’
compliance with the requirements of Rule 17Ad–
22(e)(21) under the Act. 17 CFR 240.17Ad–
22(e)(21).
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was created for the other subsidiaries of
DTCC. Recently, these two tools merged,
and only one Balanced Business
Scorecard (now referred to as the
‘‘DTCC Balanced Business Scorecard’’)
is created, which addresses DTCC and
each of its subsidiaries, including each
of the Clearing Agencies. While the
new, enterprise-wide Balanced Business
Scorecard reports its conclusions on a
less granular, enterprise-wide basis, it is
created using the same set of metrics as
the legacy Clearing Agencies version.
Therefore, the Balanced Business
Scorecard continues to support the
Clearing Agencies’ compliance with the
requirements of Rule 17Ad–22(e)(21)
under the Act.16 The Balanced Business
Scorecard now reports those metrics in
the context of the DTCC enterprise, at a
less granular level.
The Clearing Agencies are proposing
to amend Section 4.3 of the Risk
Management Framework to reflect the
change in format of the Balanced
Business Scorecard described above.
3. Proposed Change to Description of
Certain Documents To Reflect Filing
Pursuant to Filing Requirements
Following the adoption of the Risk
Management Framework, certain
documents that are identified in the
Framework were filed pursuant to the
Filing Requirements. The Clearing
Agencies are proposing to revise the
descriptions of these documents to
reflect this change.
Section 3.3 of the Framework
describes certain frameworks that are
maintained by the Clearing Agencies
and provide an outline for certain
policies and procedures that address, in
whole or in part, the management of
operational, liquidity, credit, market,
collateral, and other risks. This section
identified five such frameworks, the
Clearing Agency Operational Risk
Management Framework, the Clearing
Agency Liquidity Risk Management
Framework, the Clearing Agency
Securities Valuation Framework, the
Clearing Agency Stress Testing
Framework, and the Clearing Agency
Model Risk Management Framework.
Each of these frameworks has been filed
pursuant to the applicable Filing
Requirements and adopted by the
Clearing Agencies.17 The Clearing
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16 Id.
17 See Securities Exchange Act Release Nos.
81745 (September 28, 2017), 82 FR 46332 (October
4, 2017) (SR–DTC–2017–014; SR–NSCC–2017–013;
SR–FICC–2017–017) (Operational Risk Management
Framework); 82377 (December 21, 2017), 82 FR
61617 (December 28, 2017) (SR–DTC–2017–004;
SR–NSCC–2017–005; SR–FICC–2017–008)
(Liquidity Risk Management Framework); 82006
(November 2, 2017), 82 FR 51892 (November 8,
2017) (SR–DTC–2017–016; SR–NSCC–2017–016;
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Agencies are proposing to update
Section 3.3 to reflect this change.
Section 5 of the Risk Management
Framework describes the plans that are
maintained by each of the Clearing
Agencies for their recovery or orderly
wind-down (‘‘R&W Plans’’). The R&W
Plans were still in development when
the Framework was adopted, but have
since been finalized, approved by the
Boards, filed pursuant to the Filing
Requirements, and adopted by the
Clearing Agencies.18 Therefore, the
Clearing Agencies are proposing to
update Section 5 to reflect these
developments, and to describe the
ongoing governance of the R&W Plans.
iii. Proposed Amendments To Clarify,
Enhance, and Correct Descriptions in
the Framework
Finally, the proposed changes would
enhance the descriptions of certain
matters within the Risk Management
Framework to improve its clarity and
comprehensiveness and correct an error,
as described below.
1. Proposed Change To Correct Annual
Approval of Framework by Boards
Section 2 of the Risk Management
Framework addresses the Framework’s
ownership and change management.
This section currently states that the
Framework should be reviewed by the
document owner no less frequently than
annually but does not specifically
identify the requirement that the
Framework also be approved by the
Boards on an annual basis. The Clearing
Agencies are proposing to correct the
Framework to include the requirement
that the Framework be approved by the
Boards, or a duly authorized committee
of the Boards, annually.
Rule 17Ad–22(e)(3) under the Act
requires that the Clearing Agencies
maintain a sound risk management
framework for comprehensively
managing the risks that arise in or are
borne by the Clearing Agencies,
including investment and custody
SR–FICC–2017–020) (Securities Valuation
Framework); 82368 (December 19, 2017), 82 FR
61082 (December 26, 2017) (SR–DTC–2017–005;
SR–FICC–2017–009; SR–NSCC–2017–006) (Stress
Testing Framework); and 81485 (August 25, 2017),
82 FR 41433 (August 31, 2017) (SR–DTC–2017–008;
SR–FICC–2017–014; SR–NSCC–2017–008) (Model
Risk Management Framework).
18 See Securities Exchange Act Release Nos.
83972 (August 28, 2018), 83 FR 44964 (September
4, 2018) (SR–DTC–2017–021); 83953 (August 27,
2018), 83 FR 44381 (August 30, 2018) (SR–DTC–
2017–803); 83974 (August 28, 2018), 83 FR 44988
(September 4, 2018) (SR–NSCC–2017–017); 83955
(August 27, 2018), 83 FR 44340 (August 30, 2018)
(SR–NSCC–2017–805); 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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risks.19 Rule 17Ad–22(e)(3)(i) under the
Act requires that the risk management
policies, procedures, and systems that
are maintained in compliance with Rule
17Ad–22(e)(3) be subject to review on a
specified periodic basis and be
approved by the Boards annually.20 As
stated above, the Framework provides
an outline for how each of the Clearing
Agencies comprehensively manages
legal, credit, liquidity, operational,
general business, investment, custody,
and other risks that arise in or are borne
by it, as required by Rule 17Ad–22(e)(3)
under the Act.21 Therefore, the Risk
Management Framework is reviewed
and approved by the Boards annually,
as required by Rule 17Ad–22(e)(3)(i)
under the Act.22
The Clearing Agencies are proposing
to amend Section 2 of the Framework to
state that the Framework shall be
approved by the Boards, or a duly
authorized committee of the Boards,
annually. The proposed change would
correct the Framework to include this
requirement, which is aligned with the
applicable requirements of Rule 17Ad–
22(e)(3)(i) under the Act.23
2. Proposed Change To Identify DTCC
Legal Department’s Role in Management
of Clearing Agencies’ Legal Risks
Section 3.1 of the Risk Management
Framework describes the ‘‘three lines of
defense’’ approach adopted by each of
the Clearing Agencies for identifying,
assessing, measuring, monitoring,
mitigating, and reporting the risks that
arise in or are borne by it. Currently,
this section outlines the role of each line
of defense, and specifically describes
the roles of the DTCC Risk Department
(‘‘Risk Department’’) and DTCC Internal
Audit Department (‘‘Internal Audit’’)
within this risk management approach.
The DTCC Legal Department (‘‘Legal
Department’’) also plays a particular
role in the three lines of defense
approach by supporting each line of
defense in the management of legal
risks.
While the Legal Department is
currently identified as part of the
control functions that form the second
line of defense in Section 3.1.2, its
particular role is not separately
described. Therefore, the Clearing
Agencies are proposing to update the
introduction of Section 3.1 to state that
the Legal Department supports each line
of defense in the management of legal
risks. This proposed change would more
19 17
CFR 240.17Ad–22(e)(3).
CFR 240.17Ad–22(e)(3)(i).
21 17 CFR 240.17Ad–22(e)(3).
22 17 CFR 240.17Ad–22(e)(3)(i).
23 Id.
20 17
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clearly describe the particular role of the
Legal Department in this risk
management approach.
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3. Proposed Change To Enhance
Description of DTCC’s Risk Department
as ‘‘Second Line of Defense’’ in Risk
Management
As stated above, Section 3.1 of the
Risk Management Framework describes
the ‘‘three lines of defense’’ approach to
risk management adopted by the
Clearing Agencies. Section 3.1.2
describes the particular role of the Risk
Department as the second line of
defense within this risk management
approach. The Clearing Agencies are
proposing to amend this Section 3.1.2 to
enhance the description of the Risk
Department’s role, including by
providing details relating to the role of
the Operational Risk Management group
within the Risk Department. The
proposed amendments would describe
how the Operational Risk Management
group addresses and escalates incidents
based on a risk rating of those incidents.
In addition, the proposed change would
clarify the description relating to the
procedures, processes, tools,
mechanisms, analyses, and testing
controls employed by the Risk
Department and indicate that such
procedures, etc. are subject to the
parameters set forth in Section 3.3,
which discusses the Filing
Requirements and document standards
relating to policies, procedures,
frameworks and certain related
documents. In addition, the Clearing
Agencies are proposing to add a defined
term in Section 3.1 to reflect that the
Risk Department refers to the Risk
Department of DTCC. The proposed
changes would more clearly describe
the particular role of the Risk
Department in this risk management
approach.
4. Proposed Change To Enhance
Description of DTCC’s Internal Audit
Department as ‘‘Third Line of Defense’’
in Risk Management
Section 3.1.3 of the Risk Management
Framework describes the particular role
of Internal Audit as the third line of
defense within the risk management
approach. The Clearing Agencies are
proposing to amend this Section 3.1.3 to
enhance the description of Internal
Audit’s role, including by providing a
clearer description of the
responsibilities of Internal Audit,
making grammatical changes to certain
descriptions to improve readability, and
removing references to Internal Audit as
providing an advisory role to the
Clearing Agencies. By removing
references to advisory services, the
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proposed changes would conform the
Risk Management Framework to the
charter of the Audit Committees of the
Boards, where similar changes have
been made to reinforce the group’s role
as the third line of defense in risk
management and its independence and
objectivity in the performance of
assurance services. In addition, the
Clearing Agencies are proposing to add
a defined term in Section 3.1 to clarify
that Internal Audit refers to the Internal
Audit Department of DTCC.
5. Proposed Change To Enhance
Description of Policy Regarding
Management Committees and Oversight
Section 3.2 of the Risk Management
Framework states that a set of senior
management committees provides
oversight of various aspects of the
Clearing Agencies’ activities, including
risk management, and describes the
policy that sets forth the requirements
for establishing and governing these
committees. The Clearing Agencies are
proposing to amend Section 3.2 by
including a reference to the described
document and providing a clearer and
more complete description of the
contents of this policy and the ongoing
governance requirements of senior
management committees. The proposed
changes would not make any
substantive changes to this description.
6. Proposed Change To Enhance
Description of Management of Policies,
Procedures, and Other Documents
Section 3.3.1 of the Risk Management
Framework states that the Clearing
Agencies maintain comprehensive
policies and procedures designed to
identify, measure, monitor and manage
the risks that arise in or are borne by the
Clearing Agencies, and describes a set of
standards the Clearing Agencies have
established for creating and managing
these documents. The Clearing Agencies
are proposing to amend the description
of these standards. The proposed
amendments to Section 3.3.1 would reword the descriptions of these standards
by, for example, more clearly describing
the governance of these documents, how
these standards provide guidance on
reviews of these documents by
document owners, and the role of the
document owners in adhering to these
standards. The proposed changes would
not make any substantive changes to
this description.
7. Proposed Change To Clarify
Regulatory Basis of Certain Public
Disclosures
Section 4.1 of the Risk Management
Framework states that the Clearing
Agencies provide their respective
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participants with information and
incentives to enable them, and, through
them, their customers, to understand,
monitor, manage, and contain the risks
they pose to the respective Clearing
Agencies, and identifies some of the
tools the Clearing Agencies provide to
their participants to facilitate this
understanding. The Clearing Agencies
are proposing to amend Section 4.1 to
make clarifying edits.
First, the proposed amendments
would clarify that the tools and
activities described in Section 4.1
support the Clearing Agencies’
compliance with Rule 17Ad–22(e)(23)
under the Act.24 Rule 17Ad–22(e)(23)
requires, in part, that the Clearing
Agencies establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
provide for publicly disclosing relevant
basic data on transaction volume and
values, and a comprehensive public
disclosure that describes their material
rules, policies, and procedures
regarding their legal, governance, risk
management, and operating framework,
accurate in all material respects at the
time of publication.25 Certain matters
described in Section 4.1 of the
Framework, including the publication of
disclosure frameworks and quantitative
disclosures (described below), support
the Clearing Agencies’ compliance with
the requirements of Rule 17Ad–
22(e)(23).26 Therefore, the Clearing
Agencies would update the introduction
to Section 4.1, and make a conforming
change to Section 1 of the Framework,
to refer to Rule 17Ad–22(e)(23).27
Second, the proposed amendments
would correct a statement in Section 4.1
of the Framework regarding the
disclosure frameworks posted to the
DTCC website for each of the Clearing
Agencies on a biennial basis, which
provide a comprehensive description of
how the businesses and operations of
the Clearing Agencies reflect the
Principles for financial market
infrastructures, issued by the Committee
on Payment and Settlement Systems
(‘‘CPSS’’) and the Technical Committee
of the International Organization of
Securities Commissions (‘‘IOSCO’’).28
These disclosure frameworks also
address how the businesses and
operations of the Clearing Agencies
24 17
CFR 240.17Ad–22(e)(23).
25 Id.
26 Id.
27 Id.
28 CPSS and the Technical Committee of IOSCO,
Principles for financial market infrastructures
(April 16, 2012), available at https://www.bis.org/
cpmi/publ/d101a.pdf. In 2014, CPSS became the
Committee on Payments and Market Infrastructures
(‘‘CPMI’’).
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reflect the Standards. Therefore, the
Clearing Agencies would correct this
statement in Section 4.1 regarding the
scope of the disclosure frameworks by
also referring to the Standards.
Finally, the proposed amendments
would correct a statement in Section 4.1
of the Framework regarding the
quantitative disclosures that are posted
to the DTCC website on a quarterly
basis, which disclose certain
quantitative data and other information
as set out in the Public quantitative
disclosure standards for central
counterparties published by CPMI and
IOSCO.29 Currently, Section 4.1 states
that these disclosures relate to the
Clearing Agencies. However, these
disclosures are only required for central
counterparties and, as such, only relate
to NSCC and FICC, and not DTC. The
Clearing Agencies would correct this
error by replacing ‘‘Clearing Agencies’’
with ‘‘NSCC and FICC, as central
counterparties’’ in Section 4.1 of the
Framework.
8. Proposed Change To Enhance
Description of Governance of Systemic
Risk Management
The proposed change would enhance
the description of the governance of
systemic risk management in Section
4.2.1 by including a description of the
Systemic Risk Council, the frequency of
this Council’s meetings, and stating that
matters discussed at these meetings may
be escalated to the Management Risk
Committee or the Board Risk Committee
when appropriate. The proposed
changes would improve the descriptions
in the Framework by providing
additional details regarding the
governance of systemic risk
management.
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9. Proposed Change To Enhance
Description of Management of Risk
Related to Other External Links
The proposed change would enhance
the description of the management of
risks related to external links in Section
4.2.2 by identifying a policy and a
procedure that are maintained by the
Clearing Agencies to govern this
process. The proposed change would
improve the disclosures in the
Framework by providing a clear
reference to these documents.
10. Proposed Change To Remove
Unnecessary Phrase
The proposed change would remove
an unnecessary phrase ‘‘, is set forth in’’
29 CPMI and the Board of IOSCO, Public
quantitative disclosure standards for central
counterparties (February 26, 2015), available at
https://www.iosco.org/library/pubdocs/pdf/
IOSCOPD475.pdf.
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that is incorrectly at the end of a
sentence in Section 1 of the Framework.
11. Proposed Change To Rephrase
Sentences That Incorrectly Indicate
Discretion in Taking Certain Actions
The proposed change would rephrase
four sentences in the Framework that
currently indicate the action described
is discretionary. First, the proposed
change would rephrase a statement in
Section 4.2.1 to remove the indication
that the Clearing Agencies have
discretion to not manage risks related to
participants and settlement banks.
Second, the proposed change would
rephrase a statement in Section 4.2.1 to
remove the indication that the Clearing
Agencies have discretion to not
maintain policies, procedures or
templates relating to the management of
third-party risks. Third, the proposed
change would rephrase a statement in
Section 4.2.2 to remove the indication
that the General Counsel’s Office has
discretion in reviewing certain key link
arrangements. Finally, the proposed
change would rephrase a statement in
Section 5 to remove the indication that
the Clearing Agencies have discretion to
not maintain policies and procedures
governing the development and
maintenance of R&W Plans.
12. Proposed Change To Correct Error
Regarding Reporting Line of DTCC
Internal Audit Department
The Clearing Agencies are proposing
a change to the Framework to correct an
error in Section 3.1.3, which currently
states Internal Audit has a direct
reporting line to the Risk Committees of
the Boards. This statement is incorrect,
as Internal Audit has a direct reporting
line to the Audit Committees of the
Boards. The Clearing Agencies would
correct this error by making a minor
revision to Section 3.1.3 of the
Framework. In addition, the Clearing
Agencies are proposing to change
references of ‘‘Audit Committee’’ to
‘‘Audit Committees’’ to reflect that each
of the Boards has an audit committee.
2. Statutory Basis
The Clearing Agencies believe that the
proposed changes are consistent with
Section 17A(b)(3)(F) of the Act 30 and
Rules 17Ad–22(e)(22) and (e)(23)
promulgated under the Act,31 for the
reasons described below.
Section 17A(b)(3)(F) of the Act
requires, in part, that the rules of a
registered clearing agency be designed
to promote the prompt and accurate
clearance and settlement of securities
transactions, and to assure the
safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible.32 The proposed changes
would (1) add a description of how the
Clearing Agencies address compliance
with Rule 17Ad–22(e)(22), (2) update
the descriptions of certain matters in the
Risk Management Framework, and (3)
clarify and correct other statements
within the Framework, as described
above. By addressing the Clearing
Agencies’ compliance with Rule 17Ad–
22(e)(22), creating clearer, updated
descriptions and correcting errors, the
Clearing Agencies believe that the
proposed changes would make the Risk
Management Framework more effective
in providing an overview of the
important risk management activities of
the Clearing Agencies, as described
therein.
As described in the Initial Filing, the
risk management functions described in
the Risk Management Framework allow
the Clearing Agencies to continue to
promote the prompt and accurate
clearance and settlement of securities
transactions, and continue to assure the
safeguarding of securities and funds
which are in their custody or control or
for which they are responsible
notwithstanding the default of a
member of an affiliated family. The
proposed changes to describe policies
that address to the Clearing Agencies’
communication standards and improve
the clarity and accuracy of the
descriptions of risk management
functions within the Framework would
assist the Clearing Agencies in carrying
out these risk management functions.
Therefore, the Clearing Agencies believe
these proposed changes are consistent
with the requirements of Section
17A(b)(3)(F) of the Act.33
Rule 17Ad–22(e)(22) under the Act
requires that each covered clearing
agency establish, implement, maintain
and enforce written policies and
procedures reasonably designed to use,
or at a minimum accommodate, relevant
internationally accepted communication
procedures and standards in order to
facilitate efficient payment, clearing,
and settlement.34 The Framework
would describe a policy maintained by
the Clearing Agencies that (1) identifies
the communication standards and data
forms used by the Clearing Agencies for
payment, clearing and settlement that
are regarded as accepted industry
standards for transactions processed
through the Clearing Agencies, and (2)
32 15
30 15
U.S.C. 78q–1(b)(3)(F).
31 17 CFR 240.17Ad–22(e)(22) and (e)(23).
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U.S.C. 78q–1(b)(3)(F).
33 Id.
34 17
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provides that the Clearing Agencies
would accommodate relevant
internationally accepted communication
procedures and standards when new
industry standards are introduced. By
describing the Clearing Agencies’ use of
accepted industry communication
standards and their policy of supporting
new industry standards when
introduced, this policy, and a
supporting communication standards
document, both support the Clearing
Agencies’ compliance with Rule 17Ad–
22(e)(22).35 Therefore, the Clearing
Agencies believe that the proposed rule
change to include this policy in the Risk
Management Framework is consistent
with Rule 17Ad–22(e)(22).36
Rule 17Ad–22(e)(23) under the Act
requires, in part, that the Clearing
Agencies establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
provide for publicly disclosing relevant
basic data on transaction volume and
values, and a comprehensive public
disclosure that describes their material
rules, policies, and procedures
regarding their legal, governance, risk
management, and operating framework,
accurate in all material respects at the
time of publication.37 Section 4.1 of the
Framework currently describes how the
Clearing Agencies provide their
respective participants with information
and incentives to enable them, and,
through them, their customers, to
understand, monitor, manage and
contain the risks they pose to the
respective Clearing Agencies, and
identifies some of the tools the Clearing
Agencies provide to their participants to
facilitate this understanding. The
proposed rule change would revise
Section 4.1 of the Framework to state
that those tools and activities support
the Clearing Agencies’ compliance with
Rule 17Ad–22(e)(23) under the Act.38
By describing these actions, including
the publication of disclosure
frameworks and quantitative
disclosures, the Clearing Agencies
believe that the proposed change to the
Risk Management Framework is
consistent with Rule 17Ad–22(e)(23).39
(B) Clearing Agency’s Statement on
Burden on Competition
The Clearing Agencies do not believe
that the proposed changes to the
Framework described above would have
any impact, or impose any burden, on
competition. As described above, the
35 Id.
36 Id.
37 17
proposed rule changes would improve
the comprehensiveness of the
Framework by including a description
of the Clearing Agencies’ compliance
with Rule 17Ad–22(e)(22) under the Act
and would also improve the clarity and
accuracy of the descriptions of certain
matters within the Framework.
Therefore, the proposed changes are
technical and non-material in nature,
relating mostly to the operation of the
Framework rather than the risk
management functions described
therein. As such, the Clearing Agencies
do not believe that the proposed rule
changes would have any impact 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.
III. Date of Effectiveness of the
Proposed Rule Change, and Timing for
Commission Action
Because the foregoing proposed rule
change does not:
(i) Significantly affect the protection
of investors or the public interest;
(ii) impose any significant burden on
competition; and
(iii) become operative for 30 days
from the date on which it was filed, or
such shorter time as the Commission
may designate, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act 40 and Rule 19b–4(f)(6)
thereunder.41
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:
• 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–2020–007 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–2020–007. 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-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–
2020–007 and should be submitted on
or before August 5, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.42
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–15207 Filed 7–14–20; 8:45 am]
BILLING CODE 8011–01–P
CFR 240.17Ad–22(e)(23).
38 Id.
40 15
U.S.C. 78s(b)(3)(A).
41 17 CFR 240.19b–4(f)(6).
39 Id.
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]]>Agencies
[Federal Register Volume 85, Number 136 (Wednesday, July 15, 2020)]
[Notices]
[Pages 42927-42932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15207]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89270; File No. SR-FICC-2020-007]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Amend the Clearing Agency Risk Management Framework
July 9, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 7, 2020, 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)(6) thereunder.\4\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\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)(6).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of amendments to the Clearing
Agency Risk Management Framework (``Risk Management Framework'' or
``Framework'') of FICC and its affiliates, National Securities Clearing
Corporation (``NSCC'') and The Depository Trust Company (``DTC,'' and
together with NSCC and FICC, the ``Clearing Agencies''). Specifically,
the proposed rule change would (1) include a description of a set of
policies that addresses the Clearing Agencies' compliance with Rule
17Ad-22(e)(22) of the Standards for Covered Clearing Agencies
(``Standards''), under the Act,\5\ (2) update the Risk Management
Framework to reflect recent changes to certain processes and other
matters described in the Framework, and changes to the status of
documents identified in the Framework; and (3) clarify the descriptions
of certain matters within the Framework to improve comprehensiveness
and correct errors, as further described below.
---------------------------------------------------------------------------
\5\ 17 CFR 240.17Ad-22(e)(22).
---------------------------------------------------------------------------
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 adopted the Risk Management Framework \6\ to
provide an outline for how each of the Clearing Agencies (i) maintains
a well-founded, clear, transparent and enforceable legal basis for each
aspect of its activities; (ii) comprehensively manages legal, credit,
liquidity, operational, general business, investment, custody, and
other risks that arise in or are borne by it; (iii) identifies,
monitors, and manages risks related to links it establishes with one or
more clearing agencies, financial market utilities, or trading markets;
and (iv) meets the requirements of its participants and the markets it
serves efficiently and effectively. In this way, the Risk Management
Framework currently supports the Clearing Agencies' compliance with
Rules 17Ad-22(e)(1), (3), (20) and (21) of the Standards,\7\ as
described in the Initial Filing. In addition to setting forth the
manner in which each of the Clearing Agencies addresses these
requirements, the Risk Management Framework also contains a section
titled ``Framework Ownership and Change Management'' that, among other
matters, describes the Framework ownership and the required governance
process for review and approval of changes to the Framework. In
connection with the annual review and approval of the Framework by the
Board of Directors of each of NSCC, DTC and FICC (each a ``Board'' and
collectively, the ``Boards''), the Clearing Agencies are proposing to
make certain revisions to the Framework.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 81635 (September 15,
2017), 82 FR 44224 (September 21, 2017) (SR-DTC-2017-013; SR-NSCC-
2017-012; SR-FICC-2017-016) (``Initial Filing'').
\7\ 17 CFR 240.17Ad-22(e)(1), (3), (20) and (21).
---------------------------------------------------------------------------
The proposed changes would add a new Section 4.4 to describe a
policy and a communication standard document
[[Page 42928]]
that support the Clearing Agencies' compliance with Rule 17Ad-
22(e)(22), which requires the Clearing Agencies to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to use, or at a minimum accommodate, relevant
internationally accepted communication procedures and standards in
order to facilitate efficient payment, clearing, and settlement.\8\
---------------------------------------------------------------------------
\8\ 17 CFR 240.17Ad-22(e)(22).
---------------------------------------------------------------------------
The proposed changes would also update the Risk Management
Framework to reflect (1) a change to the name of the Vendor Risk
Management group to the Third Party Risk Management group; (2) a change
to the format of the Balanced Business Scorecard, which is an internal
performance management tool used to measure the effectiveness of
various aspects of the operations of The Depository Trust & Clearing
Corporation (``DTCC'') and its subsidiaries, including the Clearing
Agencies; and (3) the filing of certain documents identified in the
Framework, pursuant to Section 19(b)(1) of the Act,\9\ and the rules
thereunder, and Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled the Payment,
Clearing, and Settlement Supervision Act of 2010,\10\ and the rules
thereunder (collectively, ``Filing Requirements''), as described in
greater detail below.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78s(b)(1).
\10\ 12 U.S.C. 5465(e)(1).
---------------------------------------------------------------------------
The proposed changes would also clarify and enhance the
descriptions in the Risk Management Framework to (1) identify the
requirement of Rule 17Ad-22(e)(3)(i) under the Act that the Framework
be reviewed and approved by the Boards on an annual basis; \11\ (2)
identify the role of the DTCC Legal Department in supporting the
management of legal risks that arise in or are borne by the Clearing
Agencies; (3) enhance the description of the DTCC Risk Department as
``Second Line of Defense,'' (4) enhance the description of the DTCC
Internal Audit Department as ``Third Line of Defense;'' (5) enhance the
description of a policy relating to the establishment and governance of
internal management committees; (6) enhance the description of the
processes designed to maintain comprehensive policies, procedures and
other documents; (7) clarify that certain activities described in the
Framework that relate to the public disclosure of material information,
including market data, address the Clearing Agencies' compliance with
Rule 17Ad-22(e)(23) under the Act; \12\ (8) enhance the description of
the management of systemic risks by describing the role of the Systemic
Risk Council; (9) correct a sentence by removing an unnecessary phrase;
and (10) enhance the descriptions of certain actions by removing the
indication that the Clearing Agencies have discretion in engaging in
those actions.
---------------------------------------------------------------------------
\11\ 17 CFR 240.17Ad-22(e)(3)(i).
\12\ 17 CFR 240.17Ad-22(e)(23).
---------------------------------------------------------------------------
Finally, the proposed changes would correct an error in the Risk
Management Framework to identify the Audit Committees of the Boards as
the committees to which the DTCC Internal Audit Department has a direct
reporting line. Each of these proposed changes is described below.
i. Proposed Amendments To Describe Policies That Address Compliance
With Rule 17Ad-22(e)(22)
First, the proposed changes would add a new Section 4.4 to the
Framework to describe a policy maintained by the Clearing Agencies to
use and accommodate relevant internationally accepted communication
procedures and standards to facilitate efficient payment, clearing, and
settlement, to support the Clearing Agencies' compliance with Rule
17Ad-22(e)(22).\13\
---------------------------------------------------------------------------
\13\ 17 CFR 240.17Ad-22(e)(22).
---------------------------------------------------------------------------
The policy describes how the communication standards and data
formats that are currently used by the Clearing Agencies for payment,
clearing, and settlement are regarded as accepted industry standards
for transactions processed through the Clearing Agencies. The policy
also provides that the Clearing Agencies would accommodate new industry
standards that are considered internationally accepted communication
procedures and standards. The new Section 4.4 would also state that the
Clearing Agencies maintain a communication standard document that
supports this policy.
The Clearing Agencies are proposing to amend the Risk Management
Framework to adopt a new Section 4.4 that would describe these
documents, which support the Clearing Agencies' compliance with Rule
17Ad-22(e)(22).\14\
---------------------------------------------------------------------------
\14\ Id.
---------------------------------------------------------------------------
ii. Proposed Amendments To Update the Framework
Second, the proposed changes would update the Risk Management
Framework to reflect recent developments with respect to certain
processes and other matters described in the Framework, and changes to
the status of documents described in the Framework, as described below.
1. Proposed Change To Identify Third Party Risk Management
Section 4 of the Risk Management Framework outlines ways in which
each of the Clearing Agencies manages certain risks that arise in or
are borne by it. Specifically, Section 4.2 describes the management of
risks related to material interdependencies and external links that may
be established by the Clearing Agencies. The Clearing Agencies
represent that management of risks presented by vendors and other
material service providers is guided by a function within the
Operational Risk Management group within the Group Chief Risk Office.
This function was previously referred to as ``Vendor Risk Management.''
While the role and responsibilities of this risk management function
have not changed, its name has recently been changed to ``Third Party
Risk Management'' to clarify that the function covers any material
third party service provider that provides a service to a DTCC entity.
The Clearing Agencies are proposing to amend Section 4.2.1 of the
Risk Management Framework to reflect this name change and to clarify
that the function covers any material third party service provider that
provides a service to a DTCC entity by adding ``Third Party'' as a new
defined term. The Clearing Agencies are also proposing to identify the
existing policy and procedure that is maintained to manage these risks.
2. Proposed Change to Description of Balanced Business Scorecard
Section 4.3 of the Risk Management Framework addresses certain
processes implemented by the Clearing Agencies in order to be efficient
and effective in meeting the requirements of their respective
participants and the markets they serve.\15\ One of the methods the
Clearing Agencies use to meet these requirements is the periodic
creation of a Balanced Business Scorecard, which provides insight into
the effectiveness of the Clearing Agencies' operations, information
technology service levels, financial performance, human capital, and
their respective participants' experience.
---------------------------------------------------------------------------
\15\ Such processes support the Clearing Agencies' compliance
with the requirements of Rule 17Ad-22(e)(21) under the Act. 17 CFR
240.17Ad-22(e)(21).
---------------------------------------------------------------------------
Previously, a Balanced Business Scorecard (referred to as the
``Core Balance Business Scorecard'') was created for the Clearing
Agencies, and a separate Balanced Business Scorecard
[[Page 42929]]
was created for the other subsidiaries of DTCC. Recently, these two
tools merged, and only one Balanced Business Scorecard (now referred to
as the ``DTCC Balanced Business Scorecard'') is created, which
addresses DTCC and each of its subsidiaries, including each of the
Clearing Agencies. While the new, enterprise-wide Balanced Business
Scorecard reports its conclusions on a less granular, enterprise-wide
basis, it is created using the same set of metrics as the legacy
Clearing Agencies version. Therefore, the Balanced Business Scorecard
continues to support the Clearing Agencies' compliance with the
requirements of Rule 17Ad-22(e)(21) under the Act.\16\ The Balanced
Business Scorecard now reports those metrics in the context of the DTCC
enterprise, at a less granular level.
---------------------------------------------------------------------------
\16\ Id.
---------------------------------------------------------------------------
The Clearing Agencies are proposing to amend Section 4.3 of the
Risk Management Framework to reflect the change in format of the
Balanced Business Scorecard described above.
3. Proposed Change to Description of Certain Documents To Reflect
Filing Pursuant to Filing Requirements
Following the adoption of the Risk Management Framework, certain
documents that are identified in the Framework were filed pursuant to
the Filing Requirements. The Clearing Agencies are proposing to revise
the descriptions of these documents to reflect this change.
Section 3.3 of the Framework describes certain frameworks that are
maintained by the Clearing Agencies and provide an outline for certain
policies and procedures that address, in whole or in part, the
management of operational, liquidity, credit, market, collateral, and
other risks. This section identified five such frameworks, the Clearing
Agency Operational Risk Management Framework, the Clearing Agency
Liquidity Risk Management Framework, the Clearing Agency Securities
Valuation Framework, the Clearing Agency Stress Testing Framework, and
the Clearing Agency Model Risk Management Framework. Each of these
frameworks has been filed pursuant to the applicable Filing
Requirements and adopted by the Clearing Agencies.\17\ The Clearing
Agencies are proposing to update Section 3.3 to reflect this change.
---------------------------------------------------------------------------
\17\ See Securities Exchange Act Release Nos. 81745 (September
28, 2017), 82 FR 46332 (October 4, 2017) (SR-DTC-2017-014; SR-NSCC-
2017-013; SR-FICC-2017-017) (Operational Risk Management Framework);
82377 (December 21, 2017), 82 FR 61617 (December 28, 2017) (SR-DTC-
2017-004; SR-NSCC-2017-005; SR-FICC-2017-008) (Liquidity Risk
Management Framework); 82006 (November 2, 2017), 82 FR 51892
(November 8, 2017) (SR-DTC-2017-016; SR-NSCC-2017-016; SR-FICC-2017-
020) (Securities Valuation Framework); 82368 (December 19, 2017), 82
FR 61082 (December 26, 2017) (SR-DTC-2017-005; SR-FICC-2017-009; SR-
NSCC-2017-006) (Stress Testing Framework); and 81485 (August 25,
2017), 82 FR 41433 (August 31, 2017) (SR-DTC-2017-008; SR-FICC-2017-
014; SR-NSCC-2017-008) (Model Risk Management Framework).
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Section 5 of the Risk Management Framework describes the plans that
are maintained by each of the Clearing Agencies for their recovery or
orderly wind-down (``R&W Plans''). The R&W Plans were still in
development when the Framework was adopted, but have since been
finalized, approved by the Boards, filed pursuant to the Filing
Requirements, and adopted by the Clearing Agencies.\18\ Therefore, the
Clearing Agencies are proposing to update Section 5 to reflect these
developments, and to describe the ongoing governance of the R&W Plans.
---------------------------------------------------------------------------
\18\ See Securities Exchange Act Release Nos. 83972 (August 28,
2018), 83 FR 44964 (September 4, 2018) (SR-DTC-2017-021); 83953
(August 27, 2018), 83 FR 44381 (August 30, 2018) (SR-DTC-2017-803);
83974 (August 28, 2018), 83 FR 44988 (September 4, 2018) (SR-NSCC-
2017-017); 83955 (August 27, 2018), 83 FR 44340 (August 30, 2018)
(SR-NSCC-2017-805); 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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iii. Proposed Amendments To Clarify, Enhance, and Correct Descriptions
in the Framework
Finally, the proposed changes would enhance the descriptions of
certain matters within the Risk Management Framework to improve its
clarity and comprehensiveness and correct an error, as described below.
1. Proposed Change To Correct Annual Approval of Framework by Boards
Section 2 of the Risk Management Framework addresses the
Framework's ownership and change management. This section currently
states that the Framework should be reviewed by the document owner no
less frequently than annually but does not specifically identify the
requirement that the Framework also be approved by the Boards on an
annual basis. The Clearing Agencies are proposing to correct the
Framework to include the requirement that the Framework be approved by
the Boards, or a duly authorized committee of the Boards, annually.
Rule 17Ad-22(e)(3) under the Act requires that the Clearing
Agencies maintain a sound risk management framework for comprehensively
managing the risks that arise in or are borne by the Clearing Agencies,
including investment and custody risks.\19\ Rule 17Ad-22(e)(3)(i) under
the Act requires that the risk management policies, procedures, and
systems that are maintained in compliance with Rule 17Ad-22(e)(3) be
subject to review on a specified periodic basis and be approved by the
Boards annually.\20\ As stated above, the Framework provides an outline
for how each of the Clearing Agencies comprehensively manages legal,
credit, liquidity, operational, general business, investment, custody,
and other risks that arise in or are borne by it, as required by Rule
17Ad-22(e)(3) under the Act.\21\ Therefore, the Risk Management
Framework is reviewed and approved by the Boards annually, as required
by Rule 17Ad-22(e)(3)(i) under the Act.\22\
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\19\ 17 CFR 240.17Ad-22(e)(3).
\20\ 17 CFR 240.17Ad-22(e)(3)(i).
\21\ 17 CFR 240.17Ad-22(e)(3).
\22\ 17 CFR 240.17Ad-22(e)(3)(i).
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The Clearing Agencies are proposing to amend Section 2 of the
Framework to state that the Framework shall be approved by the Boards,
or a duly authorized committee of the Boards, annually. The proposed
change would correct the Framework to include this requirement, which
is aligned with the applicable requirements of Rule 17Ad-22(e)(3)(i)
under the Act.\23\
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\23\ Id.
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2. Proposed Change To Identify DTCC Legal Department's Role in
Management of Clearing Agencies' Legal Risks
Section 3.1 of the Risk Management Framework describes the ``three
lines of defense'' approach adopted by each of the Clearing Agencies
for identifying, assessing, measuring, monitoring, mitigating, and
reporting the risks that arise in or are borne by it. Currently, this
section outlines the role of each line of defense, and specifically
describes the roles of the DTCC Risk Department (``Risk Department'')
and DTCC Internal Audit Department (``Internal Audit'') within this
risk management approach. The DTCC Legal Department (``Legal
Department'') also plays a particular role in the three lines of
defense approach by supporting each line of defense in the management
of legal risks.
While the Legal Department is currently identified as part of the
control functions that form the second line of defense in Section
3.1.2, its particular role is not separately described. Therefore, the
Clearing Agencies are proposing to update the introduction of Section
3.1 to state that the Legal Department supports each line of defense in
the management of legal risks. This proposed change would more
[[Page 42930]]
clearly describe the particular role of the Legal Department in this
risk management approach.
3. Proposed Change To Enhance Description of DTCC's Risk Department as
``Second Line of Defense'' in Risk Management
As stated above, Section 3.1 of the Risk Management Framework
describes the ``three lines of defense'' approach to risk management
adopted by the Clearing Agencies. Section 3.1.2 describes the
particular role of the Risk Department as the second line of defense
within this risk management approach. The Clearing Agencies are
proposing to amend this Section 3.1.2 to enhance the description of the
Risk Department's role, including by providing details relating to the
role of the Operational Risk Management group within the Risk
Department. The proposed amendments would describe how the Operational
Risk Management group addresses and escalates incidents based on a risk
rating of those incidents. In addition, the proposed change would
clarify the description relating to the procedures, processes, tools,
mechanisms, analyses, and testing controls employed by the Risk
Department and indicate that such procedures, etc. are subject to the
parameters set forth in Section 3.3, which discusses the Filing
Requirements and document standards relating to policies, procedures,
frameworks and certain related documents. In addition, the Clearing
Agencies are proposing to add a defined term in Section 3.1 to reflect
that the Risk Department refers to the Risk Department of DTCC. The
proposed changes would more clearly describe the particular role of the
Risk Department in this risk management approach.
4. Proposed Change To Enhance Description of DTCC's Internal Audit
Department as ``Third Line of Defense'' in Risk Management
Section 3.1.3 of the Risk Management Framework describes the
particular role of Internal Audit as the third line of defense within
the risk management approach. The Clearing Agencies are proposing to
amend this Section 3.1.3 to enhance the description of Internal Audit's
role, including by providing a clearer description of the
responsibilities of Internal Audit, making grammatical changes to
certain descriptions to improve readability, and removing references to
Internal Audit as providing an advisory role to the Clearing Agencies.
By removing references to advisory services, the proposed changes would
conform the Risk Management Framework to the charter of the Audit
Committees of the Boards, where similar changes have been made to
reinforce the group's role as the third line of defense in risk
management and its independence and objectivity in the performance of
assurance services. In addition, the Clearing Agencies are proposing to
add a defined term in Section 3.1 to clarify that Internal Audit refers
to the Internal Audit Department of DTCC.
5. Proposed Change To Enhance Description of Policy Regarding
Management Committees and Oversight
Section 3.2 of the Risk Management Framework states that a set of
senior management committees provides oversight of various aspects of
the Clearing Agencies' activities, including risk management, and
describes the policy that sets forth the requirements for establishing
and governing these committees. The Clearing Agencies are proposing to
amend Section 3.2 by including a reference to the described document
and providing a clearer and more complete description of the contents
of this policy and the ongoing governance requirements of senior
management committees. The proposed changes would not make any
substantive changes to this description.
6. Proposed Change To Enhance Description of Management of Policies,
Procedures, and Other Documents
Section 3.3.1 of the Risk Management Framework states that the
Clearing Agencies maintain comprehensive policies and procedures
designed to identify, measure, monitor and manage the risks that arise
in or are borne by the Clearing Agencies, and describes a set of
standards the Clearing Agencies have established for creating and
managing these documents. The Clearing Agencies are proposing to amend
the description of these standards. The proposed amendments to Section
3.3.1 would re-word the descriptions of these standards by, for
example, more clearly describing the governance of these documents, how
these standards provide guidance on reviews of these documents by
document owners, and the role of the document owners in adhering to
these standards. The proposed changes would not make any substantive
changes to this description.
7. Proposed Change To Clarify Regulatory Basis of Certain Public
Disclosures
Section 4.1 of the Risk Management Framework states that the
Clearing Agencies provide their respective participants with
information and incentives to enable them, and, through them, their
customers, to understand, monitor, manage, and contain the risks they
pose to the respective Clearing Agencies, and identifies some of the
tools the Clearing Agencies provide to their participants to facilitate
this understanding. The Clearing Agencies are proposing to amend
Section 4.1 to make clarifying edits.
First, the proposed amendments would clarify that the tools and
activities described in Section 4.1 support the Clearing Agencies'
compliance with Rule 17Ad-22(e)(23) under the Act.\24\ Rule 17Ad-
22(e)(23) requires, in part, that the Clearing Agencies establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for publicly disclosing relevant basic
data on transaction volume and values, and a comprehensive public
disclosure that describes their material rules, policies, and
procedures regarding their legal, governance, risk management, and
operating framework, accurate in all material respects at the time of
publication.\25\ Certain matters described in Section 4.1 of the
Framework, including the publication of disclosure frameworks and
quantitative disclosures (described below), support the Clearing
Agencies' compliance with the requirements of Rule 17Ad-22(e)(23).\26\
Therefore, the Clearing Agencies would update the introduction to
Section 4.1, and make a conforming change to Section 1 of the
Framework, to refer to Rule 17Ad-22(e)(23).\27\
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\24\ 17 CFR 240.17Ad-22(e)(23).
\25\ Id.
\26\ Id.
\27\ Id.
---------------------------------------------------------------------------
Second, the proposed amendments would correct a statement in
Section 4.1 of the Framework regarding the disclosure frameworks posted
to the DTCC website for each of the Clearing Agencies on a biennial
basis, which provide a comprehensive description of how the businesses
and operations of the Clearing Agencies reflect the Principles for
financial market infrastructures, issued by the Committee on Payment
and Settlement Systems (``CPSS'') and the Technical Committee of the
International Organization of Securities Commissions (``IOSCO'').\28\
These disclosure frameworks also address how the businesses and
operations of the Clearing Agencies
[[Page 42931]]
reflect the Standards. Therefore, the Clearing Agencies would correct
this statement in Section 4.1 regarding the scope of the disclosure
frameworks by also referring to the Standards.
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\28\ CPSS and the Technical Committee of IOSCO, Principles for
financial market infrastructures (April 16, 2012), available at
https://www.bis.org/cpmi/publ/d101a.pdf. In 2014, CPSS became the
Committee on Payments and Market Infrastructures (``CPMI'').
---------------------------------------------------------------------------
Finally, the proposed amendments would correct a statement in
Section 4.1 of the Framework regarding the quantitative disclosures
that are posted to the DTCC website on a quarterly basis, which
disclose certain quantitative data and other information as set out in
the Public quantitative disclosure standards for central counterparties
published by CPMI and IOSCO.\29\ Currently, Section 4.1 states that
these disclosures relate to the Clearing Agencies. However, these
disclosures are only required for central counterparties and, as such,
only relate to NSCC and FICC, and not DTC. The Clearing Agencies would
correct this error by replacing ``Clearing Agencies'' with ``NSCC and
FICC, as central counterparties'' in Section 4.1 of the Framework.
---------------------------------------------------------------------------
\29\ CPMI and the Board of IOSCO, Public quantitative disclosure
standards for central counterparties (February 26, 2015), available
at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD475.pdf.
---------------------------------------------------------------------------
8. Proposed Change To Enhance Description of Governance of Systemic
Risk Management
The proposed change would enhance the description of the governance
of systemic risk management in Section 4.2.1 by including a description
of the Systemic Risk Council, the frequency of this Council's meetings,
and stating that matters discussed at these meetings may be escalated
to the Management Risk Committee or the Board Risk Committee when
appropriate. The proposed changes would improve the descriptions in the
Framework by providing additional details regarding the governance of
systemic risk management.
9. Proposed Change To Enhance Description of Management of Risk Related
to Other External Links
The proposed change would enhance the description of the management
of risks related to external links in Section 4.2.2 by identifying a
policy and a procedure that are maintained by the Clearing Agencies to
govern this process. The proposed change would improve the disclosures
in the Framework by providing a clear reference to these documents.
10. Proposed Change To Remove Unnecessary Phrase
The proposed change would remove an unnecessary phrase ``, is set
forth in'' that is incorrectly at the end of a sentence in Section 1 of
the Framework.
11. Proposed Change To Rephrase Sentences That Incorrectly Indicate
Discretion in Taking Certain Actions
The proposed change would rephrase four sentences in the Framework
that currently indicate the action described is discretionary. First,
the proposed change would rephrase a statement in Section 4.2.1 to
remove the indication that the Clearing Agencies have discretion to not
manage risks related to participants and settlement banks. Second, the
proposed change would rephrase a statement in Section 4.2.1 to remove
the indication that the Clearing Agencies have discretion to not
maintain policies, procedures or templates relating to the management
of third-party risks. Third, the proposed change would rephrase a
statement in Section 4.2.2 to remove the indication that the General
Counsel's Office has discretion in reviewing certain key link
arrangements. Finally, the proposed change would rephrase a statement
in Section 5 to remove the indication that the Clearing Agencies have
discretion to not maintain policies and procedures governing the
development and maintenance of R&W Plans.
12. Proposed Change To Correct Error Regarding Reporting Line of DTCC
Internal Audit Department
The Clearing Agencies are proposing a change to the Framework to
correct an error in Section 3.1.3, which currently states Internal
Audit has a direct reporting line to the Risk Committees of the Boards.
This statement is incorrect, as Internal Audit has a direct reporting
line to the Audit Committees of the Boards. The Clearing Agencies would
correct this error by making a minor revision to Section 3.1.3 of the
Framework. In addition, the Clearing Agencies are proposing to change
references of ``Audit Committee'' to ``Audit Committees'' to reflect
that each of the Boards has an audit committee.
2. Statutory Basis
The Clearing Agencies believe that the proposed changes are
consistent with Section 17A(b)(3)(F) of the Act \30\ and Rules 17Ad-
22(e)(22) and (e)(23) promulgated under the Act,\31\ for the reasons
described below.
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\30\ 15 U.S.C. 78q-1(b)(3)(F).
\31\ 17 CFR 240.17Ad-22(e)(22) and (e)(23).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a registered clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions, and to
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible.\32\ The proposed changes would (1) add a description of
how the Clearing Agencies address compliance with Rule 17Ad-22(e)(22),
(2) update the descriptions of certain matters in the Risk Management
Framework, and (3) clarify and correct other statements within the
Framework, as described above. By addressing the Clearing Agencies'
compliance with Rule 17Ad-22(e)(22), creating clearer, updated
descriptions and correcting errors, the Clearing Agencies believe that
the proposed changes would make the Risk Management Framework more
effective in providing an overview of the important risk management
activities of the Clearing Agencies, as described therein.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described in the Initial Filing, the risk management functions
described in the Risk Management Framework allow the Clearing Agencies
to continue to promote the prompt and accurate clearance and settlement
of securities transactions, and continue to assure the safeguarding of
securities and funds which are in their custody or control or for which
they are responsible notwithstanding the default of a member of an
affiliated family. The proposed changes to describe policies that
address to the Clearing Agencies' communication standards and improve
the clarity and accuracy of the descriptions of risk management
functions within the Framework would assist the Clearing Agencies in
carrying out these risk management functions. Therefore, the Clearing
Agencies believe these proposed changes are consistent with the
requirements of Section 17A(b)(3)(F) of the Act.\33\
---------------------------------------------------------------------------
\33\ Id.
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Rule 17Ad-22(e)(22) under the Act requires that each covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to use, or at a minimum
accommodate, relevant internationally accepted communication procedures
and standards in order to facilitate efficient payment, clearing, and
settlement.\34\ The Framework would describe a policy maintained by the
Clearing Agencies that (1) identifies the communication standards and
data forms used by the Clearing Agencies for payment, clearing and
settlement that are regarded as accepted industry standards for
transactions processed through the Clearing Agencies, and (2)
[[Page 42932]]
provides that the Clearing Agencies would accommodate relevant
internationally accepted communication procedures and standards when
new industry standards are introduced. By describing the Clearing
Agencies' use of accepted industry communication standards and their
policy of supporting new industry standards when introduced, this
policy, and a supporting communication standards document, both support
the Clearing Agencies' compliance with Rule 17Ad-22(e)(22).\35\
Therefore, the Clearing Agencies believe that the proposed rule change
to include this policy in the Risk Management Framework is consistent
with Rule 17Ad-22(e)(22).\36\
---------------------------------------------------------------------------
\34\ 17 CFR 240.17Ad-22(e)(22).
\35\ Id.
\36\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(23) under the Act requires, in part, that the
Clearing Agencies establish, implement, maintain and enforce written
policies and procedures reasonably designed to provide for publicly
disclosing relevant basic data on transaction volume and values, and a
comprehensive public disclosure that describes their material rules,
policies, and procedures regarding their legal, governance, risk
management, and operating framework, accurate in all material respects
at the time of publication.\37\ Section 4.1 of the Framework currently
describes how the Clearing Agencies provide their respective
participants with information and incentives to enable them, and,
through them, their customers, to understand, monitor, manage and
contain the risks they pose to the respective Clearing Agencies, and
identifies some of the tools the Clearing Agencies provide to their
participants to facilitate this understanding. The proposed rule change
would revise Section 4.1 of the Framework to state that those tools and
activities support the Clearing Agencies' compliance with Rule 17Ad-
22(e)(23) under the Act.\38\ By describing these actions, including the
publication of disclosure frameworks and quantitative disclosures, the
Clearing Agencies believe that the proposed change to the Risk
Management Framework is consistent with Rule 17Ad-22(e)(23).\39\
---------------------------------------------------------------------------
\37\ 17 CFR 240.17Ad-22(e)(23).
\38\ Id.
\39\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
The Clearing Agencies do not believe that the proposed changes to
the Framework described above would have any impact, or impose any
burden, on competition. As described above, the proposed rule changes
would improve the comprehensiveness of the Framework by including a
description of the Clearing Agencies' compliance with Rule 17Ad-
22(e)(22) under the Act and would also improve the clarity and accuracy
of the descriptions of certain matters within the Framework. Therefore,
the proposed changes are technical and non-material in nature, relating
mostly to the operation of the Framework rather than the risk
management functions described therein. As such, the Clearing Agencies
do not believe that the proposed rule changes would have any impact 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.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Because the foregoing proposed rule change does not:
(i) Significantly affect the protection of investors or the public
interest;
(ii) impose any significant burden on competition; and
(iii) become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \40\ and
Rule 19b-4(f)(6) thereunder.\41\
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\40\ 15 U.S.C. 78s(b)(3)(A).
\41\ 17 CFR 240.19b-4(f)(6).
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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:
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-2020-007 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-2020-007. 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-2020-007 and should be submitted on
or before August 5, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-15207 Filed 7-14-20; 8:45 am]
BILLING CODE 8011-01-P
