Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving the Proposed Rule Change Relating to Confidential Information, Market Disruption Events, and Other Changes, 57208-57213 [2021-22440]

Download as PDF 57208 Federal Register / Vol. 86, No. 196 / Thursday, October 14, 2021 / Notices do today. The proposed rule change permits Market Makers to use a Timein-Force that is already available to all Options Members, including Market Makers, to apply to their orders. While only Market Makers may submit IOC bulk messages (as only Market Makers may currently submit any bulk messages), the Exchange believes this is appropriate given the various obligations Market Makers must satisfy under the Rules and the unique and critical role Market Makers play in the options market by providing liquid and active markets. The Exchange believes providing Market Makers with flexibility to use the IOC instruction with respect to bulk messages will provide Market Makers with an enhanced tool to provide liquidity to the market and satisfy their obligations in a manner they deem appropriate, as they are similarly able to do today by electing the Book Only and Post Only instructions for their bulk messages. The Exchange does not believe that the proposed rule change in connection with IOC bulk messages will impose any burden on intermarket competition that is not necessary or appropriate in furtherance of the purposes of the Act as it relates to quoting functionality available to Market Makers on the Exchange. The Exchange notes that market participants on other exchanges are welcome to become Market Makers on the Exchange if they determine that this proposed rule change has made participation as a Market Maker on the Exchange more attractive or favorable. The proposed rule change in connection with the application of Order Type and Time-in-Force instructions to bulk messages is not competitive in nature but is merely a clarification in the Rule, consistent with existing bulk message functionality and intended to provide clarity to the Rule by more accurately reflecting the current bulk message functionality. All Order Type and Time-in-Force instructions will continue to apply to bulk messages in the same manner as they do today. lotter on DSK11XQN23PROD with NOTICES1 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: A. Significantly affect the protection of investors or the public interest; VerDate Sep<11>2014 17:44 Oct 13, 2021 Jkt 256001 B. impose any significant burden on competition; and C. 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 12 and Rule 19b–4(f)(6) 13 thereunder. 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. If the Commission takes such action, the Commission will institute proceedings to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CboeBZX–2021–065 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–CboeBZX–2021–065. 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 (http://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 12 15 13 17 PO 00000 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). Frm 00086 Fmt 4703 Sfmt 4703 available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CboeBZX–2021–065, and should be submitted on or before November 4, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–22276 Filed 10–13–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–93280; File No. SR–FICC– 2021–004] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving the Proposed Rule Change Relating to Confidential Information, Market Disruption Events, and Other Changes October 8, 2021. I. Introduction On June 25, 2021, Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule change SR–FICC–2021–004 (the ‘‘Proposed Rule Change’’) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder 2 to amend FICC’s Government Securities Division (‘‘GSD’’) rules and Mortgage-Backed Securities Division (‘‘MBSD’’) rules relating to confidentiality requirements, Market Disruption Events, and procedures for disconnecting a participant from FICC’s network, among other changes.3 The Proposed Rule Change was published for comment in 14 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 See Notice of Filing, infra note 4, at 86 FR 36799. 1 15 E:\FR\FM\14OCN1.SGM 14OCN1 Federal Register / Vol. 86, No. 196 / Thursday, October 14, 2021 / Notices the Federal Register on July 13, 2021.4 The Commission received comments that it has considered with respect to the Proposed Rule Change.5 For the reasons discussed below, the Commission is approving the Proposed Rule Change. II. Description of the proposed rule change Pursuant to the Proposed Rule Change, FICC is proposing three main changes to its GSD Rulebook (‘‘GSD Rules’’) and its MBSD Clearing Rules (‘‘MBSD Rules’’) and MBSD Electronic Pool Notification (‘‘EPN Rules’’) (hereinafter collectively, ‘‘Rules’’): 6 (1) Standardizing the confidentiality requirement applicable to FICC with respect to its participants’ information and adding confidentiality requirement applicable to participants with respect to FICC’s information, (2) updating its GSD and MBSD Market Disruption and Force Majeure Rules (‘‘Force Majeure Rule’’) to authorize two additional officers to determine that a Market Disruption Event has occurred, and (3) adding a new GSD rule and MBSD rule setting forth the procedures under which FICC would be able to disconnect a participant from its network in certain circumstances (‘‘Systems Disconnect Rule’’). The Commission provides relevant background and describes each of these proposed changes in greater detail below. A. Background lotter on DSK11XQN23PROD with NOTICES1 FICC plays a prominent role in the fixed income markets as the sole clearing agency in the United States acting as a central counterparty and provider of significant clearance and settlement services for cash settled U.S. treasury and agency securities and the non-private label mortgage-backed 4 Securities Exchange Act Release No. 92341 (June 25, 2021), 86 FR 36799 (July 13, 2021) (File No. SR–FICC–2021–004) (‘‘Notice of Filing’’). 5 Specifically, the Commission received comments on a proposed rule change filed by FICC’s affiliate, the Depository Trust Company, regarding parallel changes to DTC’s Rules. See Securities Exchange Act Release No. 92342 (June 25, 2021), 86 FR 36833 (July 13, 2021) (File No. SR– DTC–2021–011). The comment letters are available on the Commission’s website at https:// www.sec.gov/comments/sr-dtc-2021-011/ srdtc2021011.htm. Because the comments address issues that also appear in this Proposed Rule Change, the Commission has considered it in connection with FICC’s proposal as well. Several comments generally supported the Proposed Rule Change, and the Commission considers the additional comments in its analysis at Section III infra. 6 Capitalized terms not defined herein are defined in the GSD Rulebook, MBSD Clearing Rules, and MBSD EPN Rules, as applicable, available at https://www.dtcc.com/legal/rules-and-procedures. VerDate Sep<11>2014 17:44 Oct 13, 2021 Jkt 256001 securities markets FICC.7 In light of FICC’s critical role in the marketplace, FICC was designated a Systemically Important Financial Market Utility (‘‘SIFMU’’) under Title VIII of the DoddFrank Wall Street Reform and Consumer Protection Act of 2010.8 Due to FICC’s unique position in the marketplace, a failure or a disruption to FICC could, among other things, significantly disrupt settlement of securities transactions cleared by FICC and increase the risk of substantial liquidity problems spreading among financial institutions or markets, and thereby threaten the stability of the financial system in the United States.9 FICC participants connect to FICC’s systems, either directly through the Securely Managed and Reliable Technology (‘‘SMART’’) network or through a third party service provider or service bureau.10 FICC’s parent company, The Depository Trust & Clearing Corporation (‘‘DTCC’’) manages the SMART network, which connects a nationwide complex of networks, processing centers, and control facilities.11 B. Proposed Changes 1. Confidentiality Requirements Confidentiality Requirements Applicable to FICC: FICC collects confidential information from its participants to assess whether each participant meets FICC’s membership requirements either to gain or continue access to FICC’s clearance and settlement services.12 In turn, FICC is required to maintain the confidentiality of any information furnished by its 7 See Financial Stability Oversight Counsel 2012 Annual Report, Appendix A (‘‘FSOC 2012 Report’’), available at http://www.treasury.gov/initiatives/ fsoc/Documents/2012%20Annual%20Report.pdf. 8 12 U.S.C. 5465(e)(1). See FSOC 2012 Report, supra note 7. 9 See FSOC 2012 Report, supra note 7. 10 See Securities Exchange Act Release No. 87697 (December 9, 2019), 84 FR 68266 (December 13, 2019) (File No. SR–FICC–2019–005) (describing the DTCC SMART network). 11 DTCC provides a set of core business processes for FICC and DTCC’s other subsidiaries, including the technology systems and networks, that provide connectivity between FICC and its participants and that provide FICC with the ability to provide its services as required under the Rules. Most corporate functions are established and managed on an enterprise-wide basis pursuant to intercompany agreements under which it is generally DTCC that provides services to FICC and DTCC’s other subsidiaries. 12 See GSD Rules 2A, 3, 3A, and 3B; MBSD Rules 2A and 3; and EPN Rule 1 of Article III, supra note 6 (establishing FICC’s right to require applicants to furnish information to become participants of FICC, to require participants to furnish information relating to assurances of financial responsibility and operational capability, and to require certain participants to provide FICC access to their books and records). PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 57209 participants, including the books and records FICC has a right to inspect. Currently, FICC’s Rules obligate FICC to hold participants’ information in the same degree of confidence as may be required by law or the rules and regulations (hereinafter collectively, ‘‘regulations’’) of the appropriate regulatory body having jurisdiction over the participant.13 FICC states that its current Rules create ambiguity because FICC’s obligations depend on each participant’s regulatory requirements, which could lead to unequal treatment of participants and conflicts of law with FICC’s regulatory requirements or with respect to a participant who is subject to multiple jurisdictions’ regulations.14 FICC also states that applying different standards creates operational burdens because FICC must track the regulations applicable to each of its participants and must maintain the confidentiality of each participant’s information to the same degree as required by the applicable regulations.15 In order to clarify its confidentiality requirements and to enhance its operational efficiency, FICC proposes to revise its Rules to establish a standard, which will require FICC to hold participant confidential information to the same degree as FICC’s regulatory requirements that relate to the confidentiality of records, and to remove the references to each participant’s particular regulatory obligations. FICC represents that the proposed change would provide participants with similar protections because FICC believes its regulatory requirements are comparable to the regulations applicable to its participants and, therefore, would not result in changes to FICC’s current practices or the protection offered to its participants’ confidential information.16 Confidentiality Requirements Applicable to Participants: FICC’s Rules do not include obligations for its participants to protect confidential information furnished by FICC or its affiliates.17 However, FICC states that, in 13 See Section 5 of GSD Rule 2A and Section 6 of MBSD Rule 2A, Sections 4 and 10 of GSD Rule 3 and Sections 3 and 9 of MBSD Rule 3, Section 2(j) of GSD Rule 3A, Sections 3(e) and 5(k) of GSD Rule 3B, Section 9 of EPN Rule 1 of Article III, supra note 6. 14 See Notice of Filing, supra note 4, at 36800. 15 See id. at 36800–01. 16 See id. at 36801. 17 FICC states that, historically, it has generally not provided, nor been requested to provide, information that contains confidential or proprietary information of FICC or its affiliates to its participants except for information necessary for participants to connect to DTCC Systems, which is E:\FR\FM\14OCN1.SGM Continued 14OCN1 57210 Federal Register / Vol. 86, No. 196 / Thursday, October 14, 2021 / Notices lotter on DSK11XQN23PROD with NOTICES1 connection with the development of cyber and information security programs pursuant to applicable participant regulatory requirements, FICC and DTCC have received an increasing number of requests from participants for confidential information, such as information regarding DTCC’s network operations, data security practices, and legal settlements.18 Additionally, FICC states that participants may request FICC or DTCC to disclose confidential information regarding its cyber threat indicators, sources of cyber threat information, or other information and actions taken following a cyber incident relating to a participant, FICC, or DTCC.19 To facilitate information sharing by FICC while protecting the confidentiality of proprietary and confidential information FICC shares with its participants, FICC proposes to add participant confidentiality requirements to its Rules. The new provisions will require participants to maintain the confidentiality of information furnished by FICC through proper safeguards to prevent disclosure of such confidential information, except as necessary to perform its obligations under FICC’s Rules or as otherwise required by applicable law. FICC proposes that participants be required to maintain the confidentiality of this information to the same extent and using the same means the participant uses to protect its own confidential information, but no less than a reasonable standard of care. FICC’s proposal will also entitle FICC or DTCC to seek any temporary or permanent injunctive or other equitable relief in addition to any monetary damages under the Rules if a participant breaches its confidentiality requirements. Additionally, FICC’s proposal will entitle FICC to impose other disciplinary proceedings or restrictions on access to services for a participant’s failure to comply with its confidentiality requirements, consistent with the existing tools available to FICC regarding a participant’s failure to comply with its Rules. 2. Market Disruption Event FICC’s Rules contain provisions that identify the events or circumstances that FICC would consider to be a Market Disruption Event, including, for example, events that lead to the typically protected under intellectual property laws. See id. 18 See Notice of Filing, supra note 4, at 36801. See also, supra discussion in Section II.A (Background) relating to DTCC Systems. 19 See Notice of Filing, supra note 4, at 36801. VerDate Sep<11>2014 17:44 Oct 13, 2021 Jkt 256001 suspension or limitation of trading or banking in the markets in which FICC operates, or the unavailability or failure of any material payment, bank transfer, wire or securities settlement systems.20 Upon the declaration of a Market Disruption Event, FICC’s Rules provide FICC with tools to address such an event, such as suspending any or all services and taking, or requiring participants to take, any actions FICC considers appropriate to facilitate the continuation of FICC’s services.21 Currently, FICC’s Board of Directors may declare a Market Disruption Event and may take any actions authorized by FICC’s Rules to address the event.22 However, FICC’s Rules also authorize certain officers to make an interim declaration of a Market Disruption Event, to allow FICC to prevent delays in addressing a Market Disruption Event if the Board of Directors is unable to convene.23 In the event of such an interim declaration, the Board of Directors must ratify, modify, or rescind the officer’s determination as soon as practicable.24 Currently, the officers authorized to make such determination are the Chief Executive Officer, Chief Financial Officer, Group Chief Risk Officer, and General Counsel.25 FICC proposes to add two additional officers of FICC, the Chief Information Officer and the Head of Clearing Agency Services, to the list of authorized officers that could make such an interim determination if the Board of Directors is unable to convene. FICC states these two officers, like the other officers currently provided in the Rules, maintain senior executive level positions at FICC, oversee divisions of FICC, and hold positions at FICC that would provide them a necessary global view into FICC’s operations and systems to enable them to determine the existence of a Market Disruption Event.26 FICC states adding these two additional officers would facilitate FICC’s ability to implement its emergency procedures in the event of a Market Disruption Event.27 20 See GSD Rule 50 and MBSD Rule 40, supra note 6. MBSD Rule 40 is incorporated into the EPN Rules. See Section 5 of EPM Rule 1 of Article III, supra note 6. See also Securities Exchange Act Release Nos. 83954 (August 27, 2018), 83 FR 44361 (August 30, 2018) (File No. SR–FICC–2017–805); 83973 (August 28, 2018), 83 FR 44942 (September 4, 2018) (File No. SR–FICC–2017–021). 21 See GSD Rule 50 and MBSD Rule 40, supra note 6. 22 See Section 2 of GSD Rule 50 and Section 2 of MBSD Rule 40, supra note 6. 23 See id. 24 See id. 25 See id. 26 See Notice of Filing, supra note 4, at 36801. 27 See id. PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 3. Systems Disconnect Rule As mentioned above in Section II.A (Background), FICC’s participants connect to FICC’s systems, either through the DTCC-managed SMART network or through other electronic means, such as through a third party service provider or service bureau. FICC’s Rules do not address FICC’s ability to disconnect participant whose network connection risks harming FICC’s systems. FICC’s proposal will establish procedures under which FICC would be able to disconnect a participant from its network due to the risk of an imminent threat to FICC, participants, or other market participants.28 FICC’s proposal will address FICC’s authority to take certain actions upon the occurrence, and during the pendency, of a Major Event. A ‘‘Major Event’’ will be defined as the happening of one or more ‘‘Systems Disruptions’’ reasonably likely to have a significant impact on FICC’s operations, including ‘‘DTCC Systems,’’ 29 that affect the business, operations, safeguarding of securities or funds, or physical functions of FICC, its participants, or other market participants. ‘‘Systems Disruption’’ will, in turn, be defined as the unavailability, failure, malfunction, overload, or restriction (whether partial or total) of a DTCC Systems Participant’s systems that disrupts or degrades the normal operation of such DTCC Systems Participant’s systems; or anything that impacts or alters the normal communication or the files that are received, or information transmitted, to or from the DTCC Systems. FICC’s proposal would also provide governance procedures applicable to FICC’s determination whether, and how, to implement the provisions of the Systems Disconnect rule. The same officers with delegated authority under the Force Majeure Rule may make a determination that a Major Event has occurred. As discussed in Section II.B.2 (Market Disruption Event) above, FICC states these officers maintain senior executive level positions at FICC, oversee divisions of FICC, and hold positions at FICC that would provide them a necessary global view into FICC’s operations and systems to enable them to determine the existence of a Market Disruption Event, which would 28 See Notice of Filing, supra note 4, at 36802. Systems’’ will be defined as the systems, equipment and technology networks of DTCC, FICC and/or their Affiliates, whether owned, leased, or licensed, software, devices, IP addresses or other addresses or accounts used in connection with providing the services set forth in the Rules, or used to transact business or to manage the connection with FICC. 29 ‘‘DTCC E:\FR\FM\14OCN1.SGM 14OCN1 Federal Register / Vol. 86, No. 196 / Thursday, October 14, 2021 / Notices lotter on DSK11XQN23PROD with NOTICES1 also enable them to determine the existence of a Major Event. However, the proposed process for declaring a Major Event, by contrast, would start with a designated officer, whereas, for a Market Disruption Event, the officer would make an interim determination only if the Board of Directors were unable to timely convene. FICC states it designed the process in this way to improve its ability to respond quickly, efficiently, and effectively to a Major Event that arises abruptly.30 Following this determination, any management committee including all of the officers authorized to determine a Major Event would convene, and FICC would convene a Board of Directors meeting as soon as practicable thereafter, and in any event within five Business Days following such determination, to ratify, modify, or rescind the Officer Major Event Action.31 In addition, the proposed rule will require participants to notify FICC immediately upon becoming aware of a Major Event, and, likewise, will require FICC to notify its participants promptly of any action FICC takes or intends to take with respect to a Major Event.32 Finally, the proposal will address certain miscellaneous related matters including: (i) A limitation of liability for any failure or delay in performance, in whole or in part of FICC’s obligations under the Rules, arising out of or related to a Major Event, (ii) a statement that FICC’s power to take any action pursuant to the Systems Disconnect Rule also includes the power to repeal, rescind, revoke, amend or vary such action, (iii) a statement that FICC’s powers pursuant to the Systems Disconnect Rule shall be in addition to, and not in derogation of, authority granted elsewhere in the Rules to take action as specified therein, (iv) a requirement that participants shall keep any confidential information provided to them by FICC in connection with a Major Event confidential, and (v) a statement that in the event of any conflict between the provisions of the Systems Disconnect Rule and any other Rules or Procedures, the provisions of the Systems Disconnect Rule would prevail. III. Discussion and Commission Findings Section 19(b)(2)(C) of the Act 33 directs the Commission to approve a proposed rule change of a self- regulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. After careful consideration, the Commission finds that the Proposed Rule Change is consistent with the requirements of the Act and the rules and regulations applicable to FICC. In particular, the Commission finds that the Proposed Rule Change is consistent with Section 17A(b)(3)(F) 34 of the Act and Rules 17Ad–22(e)(1),35 (e)(2),36 and (e)(17)(i) 37 thereunder. A. Consistency With Section 17A(b)(3)(F) of the Act Section 17A(b)(3)(F) 38 of the Exchange Act requires, in part, that the rules of a clearing agency, such as FICC, be designed, in part, 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. The Commission finds that the Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the Act 39 for the reasons discussed below. As described above in Section II.B.1 (Confidentiality Requirements), FICC proposes to revise its Rules to establish a standard relating to FICC’s obligation to maintain the confidentiality of information it collects from participants to assess each participant’s compliance with FICC’s membership requirements. The Commission believes such a uniform standard will help FICC meet its obligations and will help each participant better understand FICC’s obligations for maintaining the confidential information it shares with FICC, which, in turn, may facilitate the sharing of such information and improve FICC’s ability to evaluate its participants’ eligibility to access FICC’s clearance and settlement services. Also, as described above in Section II.B.1 (Confidentiality Requirements), FICC proposes to add participant confidentiality requirements to its Rules to ensure participants maintain the confidentiality of information FICC shares, which participants may then use to determine whether to participate in FICC’s clearance and settlement services by understanding FICC system requirements and FICC system 34 15 U.S.C. 78q-1(b)(3)(F). CFR 240.17Ad–22(e)(1). 36 17 CFR 240.17Ad–22(e)(2). 37 17 CFR 240.17Ad–22(e)(17)(i). 38 15 U.S.C. 78q-1(b)(3)(F). 39 Id. 35 17 30 See Notice of Filing, supra note 4, at 36802. id. 32 See id. 33 15 U.S.C. 78s(b)(2)(C). 31 See VerDate Sep<11>2014 17:44 Oct 13, 2021 Jkt 256001 PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 57211 safeguards. The Commission believes participant confidentiality requirements will help each participant better understand its rights and obligations for maintaining the confidential information FICC shares, which, in turn, may facilitate participant compliance. Therefore, the Commission believes the proposed changes to FICC and participant confidentiality requirements are consistent with promoting the prompt and accurate clearance and settlement of securities transactions by FICC. As described above in Section II.B.2 (Market Disruption Event) and Section II.B.3 (Systems Disconnect Rule), risks, threats, and potential vulnerabilities due to a Market Disruption Event or a Major Event could impede FICC’s ability to provide its clearance and settlement services. FICC proposes to add two officers authorized to make an interim determination that a Market Disruption Event has occurred if the Board of Directors is unable to timely convene. The Commission believes the proposed change will improve FICC’s ability to respond quickly to a Market Disruption Event, which could help FICC mitigate the impact of such event on FICC, its participants, and the broader market. Additionally, as described above in Section II.B.3 (Systems Disconnect Rule), FICC proposes to add the Systems Disconnect Rule, which will set forth the procedures under which FICC would be authorized, upon the occurrence of a Major Event (as defined in the proposed rules), to take certain actions, including disconnecting a participant from FICC’s systems, suspending data transmissions between FICC and the participant, and requiring the participant to take other actions necessary to protect FICC and its participants. The Commission believes the proposed Systems Disconnect Rule will enable FICC to respond quickly to a potential cyber threat or other network disruption, which could help FICC prevent the spread of a participant’s systems disruptions to FICC, its participants, and other market participants that could otherwise cause losses to FICC or its participants. One commenter suggests certain revisions to the definition of Major Event so that certain terms in the Systems Disconnect Rule are consistent with the definition of Market Disruption Event in the Force Majeure Rule.40 The Commission disagrees. Consistency between the Systems Disconnect Rule and the Force Majeure Rule is not necessary because FICC designed the 40 See letter from Anonymous, dated July 28, 2021, supra note 5. E:\FR\FM\14OCN1.SGM 14OCN1 57212 Federal Register / Vol. 86, No. 196 / Thursday, October 14, 2021 / Notices Systems Disconnect Rule for a different purpose. Although both rules relate to events that, if left unaddressed, could affect FICC’s ability to provide clearance and settlement services, the Force Majeure Rule is designed to cover events caused by external forces that impact FICC and its participants, whereas the Systems Disconnect Rule is designed only to cover disruptions to a participant’s computer systems or network that could flow through to FICC systems. Therefore, differences between the two rules do not raise consistency concerns, because of their different purposes.41 Therefore, for the reasons described above, the Commission believes the proposed changes relating to a Market Disruption Event or a Major Event will help promote the prompt and accurate clearance and settlement of securities transactions and with assuring FICC safeguards securities and funds that are in its custody or control or for which it is responsible. Accordingly, the Commission finds that the implementation of the Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the Act.42 lotter on DSK11XQN23PROD with NOTICES1 B. Consistency With Rule 17Ad–22(e)(1) Rule 17Ad–22(e)(1) under the Exchange Act requires that a covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for a well-founded, clear, transparent and enforceable legal basis for each aspect of its activities in all relevant jurisdictions.43 The Commission finds that the Proposed Rule Change is consistent with Rule 17Ad–22(e)(1) of the Exchange Act 44 for the reasons discussed below. As described above in Sections II.B.1 (Confidentiality Requirements) and II.B.2 (Market Disruption Event), FICC proposes to establish a consistent standard for its obligation to maintain the confidentiality of information it collects from its participants and to establish participant confidentiality requirements. The Commission believes a consistent standard for FICC’s 41 The commenter also suggests adding language to the end of the Major Event definition to indicate that, to avoid doubt, a Major Event would not include disruptions due to normal market forces. The Commission does not believe that such additional language is necessary because, as discussed above in Section II.B.3 (Systems Disconnect Rule), a Major Event is limited to one or more ‘‘Systems Disruption(s)’’ (as defined in the proposed rule), which is properly limited to disruptions to participant systems or its network connection. 42 15 U.S.C. 78q–1(b)(3)(F). 43 17 CFR 240.17Ad–22(e)(1). 44 Id. VerDate Sep<11>2014 17:44 Oct 13, 2021 Jkt 256001 confidentiality requirements will provide for clear and transparent standard rules for participants, rather than maintaining potentially different confidentiality standards for participants based on the various, unrelated regulatory bodies governing those participants. Additionally, the Commission believes that imposing specific legal standards applicable to both FICC and its participants to follow will provide for a well-founded legal basis for the sharing and maintaining of confidential information between FICC and its participants.45 Accordingly, the Commission finds that the implementation of the Proposed Rule Change is consistent with Rule 17Ad–22(e)(1) of the Exchange Act.46 C. Consistency With Rule 17Ad–22(e)(2) Rule 17Ad–22(e)(2) under the Exchange Act requires, in part, that a covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for governance arrangements that are clear and transparent and that specify clear and direct lines of responsibility.47 The Commission finds that the Proposed Rule Change is consistent with Rule 17Ad–22(e)(2) of the Exchange Act 48 for the reasons discussed below. The Commission believes FICC’s proposal, as described above in Section II.B.2 (Market Disruption Event), to add two officers authorized to make an interim determination of a Market Disruption Event if the Board of Directors is unable to convene in a timely manner provides for governance arrangements that are clear and transparent and that provide clear and direct lines of responsibility. Likewise, the Commission believes FICC’s proposal to identify the officers authorized to make an interim determination of a Major Event, which will then be ratified, modified, or rescinded by the management committee and the Board of Directors 45 One commenter suggests adding an exception for negligence or fraud to the limitation of liability clause in the proposed Systems Disconnect Rule, which the commenter states is customary contractual language. See letter from Anonymous, dated July 28, 2021, supra note 5. The Commission notes FICC has already included similar language in its Rules, which would be applicable to this aspect of the proposal. See Sections 3 of GSD Rule 39 and MBSD Rule 30 and Section 1 of EPN Rule 6 of Article 5, supra note 6 (providing for FICC liability to its participants for ‘‘gross negligence, willful misconduct, or violations of Federal securities laws for which there is a private right of action’’ notwithstanding any other provision in the Rules). 46 17 CFR 240.17Ad–22(e)(1). 47 17 CFR 240.17Ad–22(e)(2). 48 Id. PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 will provide for clear and transparent governance procedures and will specify clear and direct lines of responsibility. Accordingly, the Commission finds that the implementation of the Proposed Rule Change is consistent with Rule 17Ad–22(e)(2) of the Exchange Act.49 D. Consistency With Rule 17Ad– 22(e)(17)(i) Rule 17Ad–22(e)(17)(i) under the Exchange Act requires that a covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to manage the covered clearing agency’s operational risks by identifying the plausible sources of operational risk, both internal and external, and mitigating their impact through the use of appropriate systems, policies, procedures, and controls.50 The Commission finds that the Proposed Rule Change is consistent with Rule 17Ad–22(e)(17)(i) of the Exchange Act 51 for the reasons discussed below. The Commission believes FICC’s proposal, as described above in Section II.B.2 (Market Disruption Event), to add two officers authorized to make an interim determination of a Market Disruption Event could help FICC mitigate the impact of a Market Disruption Event by ensuring FICC can respond quickly to such event if the Board of Directors were unable to convene in a timely manner. Likewise, the Commission believes the proposed Systems Disconnect Rule, as described in Section II.B.3 above, provides a rulesbased process that will enable FICC to identify potential cyber threats or other network disruptions, which could help FICC prevent the spread of a participant’s systems disruptions to FICC, its participants, and other market participants that could otherwise cause losses to FICC or its participants. One commenter suggests revising the definition of Major Event to be consistent with the definition of Market Disruption Event in the Force Majeure Rule.52 The commenter further argues the impact to FICC covered by the definition of Major Event should be limited to ‘‘DTCC Systems’’ (as defined in the proposed rule) to ensure the scope of the proposed rule is limited to technical systems.53 The Commission 49 Id. 50 17 CFR 240.17Ad–22(e)(17)(i). 51 Id. 52 Specifically, the commenter suggests deleting reference to ‘‘reasonably’’ and by replacing ‘‘significant’’ with ‘‘material’’ when describing the likelihood and level of impact to FICC. See letter from Anonymous, dated July 28, 2021, supra note 5. 53 See id. E:\FR\FM\14OCN1.SGM 14OCN1 Federal Register / Vol. 86, No. 196 / Thursday, October 14, 2021 / Notices disagrees. As noted above, the purposes of both the Force Majeure Rule and the Systems Disconnect Rule are different. The Force Majeure Rule is designed to cover events external to FICC and its participants that materially impact, or are likely to materially impact, FICC’s ability to provide its clearance and settlement services. The Systems Disconnect Rule, by contrast, is designed to cover a participant’s systems or network disruption, which through its connection to FICC, is reasonably likely to have a significant impact on FICC’s systems. The differences between the rules’ purposes support the need for differing standards.54 Furthermore, the Commission notes the reference to ‘‘including DTCC Systems’’ in the proposed definition of Major Event takes into account how FICC’s operations, i.e., its clearance and settlement services, work, in that they utilize DTCC Systems. Consequently, the commenter’s proposed revisions are not necessary.55 Accordingly, the Commission finds that the implementation of the Proposed Rule Change is consistent with Rule 17Ad–22(e)(17)(i) of the Exchange Act.56 lotter on DSK11XQN23PROD with NOTICES1 IV. Conclusion On the basis of the foregoing, the Commission finds that the Proposed Rule Change is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act 57 and the rules and regulations promulgated thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act 58 that 54 The Commission also disagrees with the commenter’s suggestion to remove the references to ‘‘reasonably’’ with respect to the likelihood of an event impacting FICC’s operations. The Commission believes that FICC’s assessment of the likelihood of such an impact should be reasonable before taking actions like disconnecting a participant from its systems. In addition, the Commission notes that FICC’s references to ‘‘reasonably likely’’ and ‘‘significant impact’’ in the proposed definition of Major Event are consistent with the Commission’s definition of a ‘‘Major SCI Event’’ under Regulation SCI. 17 CFR 242.1000. Likewise, the Commission notes that references in the proposed rule text to ‘‘reasonable basis’’ and ‘‘appropriate’’ is consistent with the obligations related to a Major SCI Event under Regulation SCI. 17 CFR 242.1002. 55 Another commenter expressed concern that the proposed Systems Disconnect Rule could be used to benefit the trading activity of certain participants at the detriment of disconnected participants. See letter from Jarrod Knudson, dated June 27, 2021, supra note 5. The Commission disagrees because the proposed rule, by its terms, would only apply when certain Systems Disruptions occur at a participant that could impact FICC’s operations. 56 17 CFR 240.17Ad–22(e)(17)(i). 57 15 U.S.C. 78q–1. 58 15 U.S.C. 78s(b)(2). VerDate Sep<11>2014 17:44 Oct 13, 2021 Jkt 256001 Proposed Rule Change SR–FICC–2021– 004, be, and hereby is, approved.59 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.60 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–22440 Filed 10–13–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–93272; File No. SR– CboeEDGX–2021–041] Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 21.1 in Connection With Time-in-Force Instructions Available for Bulk Messages and To Make a Clarifying Change October 7, 2021. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on September 24, 2021, Cboe EDGX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGX’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Exchange filed the proposal as a ‘‘noncontroversial’’ proposed rule change pursuant to Section 19(b)(3)(A)(iii) 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. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change Cboe EDGX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGX Options’’) proposes to amend Rule 21.1 in connection with Time-in-Force instructions available for bulk messages and to make a clarifying change. The text of the proposed rule change is provided in Exhibit 5. The text of the proposed rule change is also available on the Exchange’s 59 In approving the Proposed Rule Change, the Commission considered the proposals’ impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 60 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)(iii). 4 17 CFR 240.19b–4(f)(6). PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 57213 website (http://markets.cboe.com/us/ options/regulation/rule_filings/edgx/), at the Exchange’s Office of the Secretary, 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 amend Rules 21.1(f) and (j) to allow Users to instruct bulk messages with a Time-inForce of Immediate or Cancel (‘‘IOC’’). Currently, Users may not designate bulk messages as IOC, which, pursuant to Rule 21.1(f)(2), instructs a limit order to be executed in whole or in part as soon as such order is received. The portion not so executed immediately on the Exchange or another options exchange is cancelled and is not posted to the EDGX Options Book. A bulk message is a bid or offer included in a single electronic message a User submits with an M Capacity (i.e., for the account of a Market Maker) to the Exchange in which the User may enter, modify, or cancel up to an Exchange-specified number of bids and offers. More, specifically, bulk message functionality is available to Market Makers and permits them to update their electronic quotes in block quantities across series in a class. Rule 21.1(j)(3)(A)(i) currently provides that a bulk message submitted through a dedicated logical port (i.e., a ‘‘bulk port’’) has a Time-in-Force of Day. Pursuant to Rule 21.1(f)(3), the term ‘‘Day’’ means, for an order so designated, a limit order to buy or sell which, if not executed expires at the RTH market close. All bulk messages have a Time in Force of DAY, as set forth in Rule 21.1(j). The Exchange proposes to allow Market Makers to designate bulk messages as IOC by amending the following: Rule 21.1(j)(3)(A)(i) to provide that a bulk message submitted E:\FR\FM\14OCN1.SGM 14OCN1

Agencies

[Federal Register Volume 86, Number 196 (Thursday, October 14, 2021)]
[Notices]
[Pages 57208-57213]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-22440]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93280; File No. SR-FICC-2021-004]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving the Proposed Rule Change Relating to Confidential 
Information, Market Disruption Events, and Other Changes

October 8, 2021.

I. Introduction

    On June 25, 2021, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2021-004 (the ``Proposed Rule Change'') 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ to amend FICC's Government 
Securities Division (``GSD'') rules and Mortgage-Backed Securities 
Division (``MBSD'') rules relating to confidentiality requirements, 
Market Disruption Events, and procedures for disconnecting a 
participant from FICC's network, among other changes.\3\ The Proposed 
Rule Change was published for comment in

[[Page 57209]]

the Federal Register on July 13, 2021.\4\ The Commission received 
comments that it has considered with respect to the Proposed Rule 
Change.\5\ For the reasons discussed below, the Commission is approving 
the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing, infra note 4, at 86 FR 36799.
    \4\ Securities Exchange Act Release No. 92341 (June 25, 2021), 
86 FR 36799 (July 13, 2021) (File No. SR-FICC-2021-004) (``Notice of 
Filing'').
    \5\ Specifically, the Commission received comments on a proposed 
rule change filed by FICC's affiliate, the Depository Trust Company, 
regarding parallel changes to DTC's Rules. See Securities Exchange 
Act Release No. 92342 (June 25, 2021), 86 FR 36833 (July 13, 2021) 
(File No. SR-DTC-2021-011). The comment letters are available on the 
Commission's website at https://www.sec.gov/comments/sr-dtc-2021-011/srdtc2021011.htm. Because the comments address issues that also 
appear in this Proposed Rule Change, the Commission has considered 
it in connection with FICC's proposal as well. Several comments 
generally supported the Proposed Rule Change, and the Commission 
considers the additional comments in its analysis at Section III 
infra.
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II. Description of the proposed rule change

    Pursuant to the Proposed Rule Change, FICC is proposing three main 
changes to its GSD Rulebook (``GSD Rules'') and its MBSD Clearing Rules 
(``MBSD Rules'') and MBSD Electronic Pool Notification (``EPN Rules'') 
(hereinafter collectively, ``Rules''): \6\ (1) Standardizing the 
confidentiality requirement applicable to FICC with respect to its 
participants' information and adding confidentiality requirement 
applicable to participants with respect to FICC's information, (2) 
updating its GSD and MBSD Market Disruption and Force Majeure Rules 
(``Force Majeure Rule'') to authorize two additional officers to 
determine that a Market Disruption Event has occurred, and (3) adding a 
new GSD rule and MBSD rule setting forth the procedures under which 
FICC would be able to disconnect a participant from its network in 
certain circumstances (``Systems Disconnect Rule''). The Commission 
provides relevant background and describes each of these proposed 
changes in greater detail below.
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    \6\ Capitalized terms not defined herein are defined in the GSD 
Rulebook, MBSD Clearing Rules, and MBSD EPN Rules, as applicable, 
available at https://www.dtcc.com/legal/rules-and-procedures.
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A. Background

    FICC plays a prominent role in the fixed income markets as the sole 
clearing agency in the United States acting as a central counterparty 
and provider of significant clearance and settlement services for cash 
settled U.S. treasury and agency securities and the non-private label 
mortgage-backed securities markets FICC.\7\ In light of FICC's critical 
role in the marketplace, FICC was designated a Systemically Important 
Financial Market Utility (``SIFMU'') under Title VIII of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010.\8\ Due to 
FICC's unique position in the marketplace, a failure or a disruption to 
FICC could, among other things, significantly disrupt settlement of 
securities transactions cleared by FICC and increase the risk of 
substantial liquidity problems spreading among financial institutions 
or markets, and thereby threaten the stability of the financial system 
in the United States.\9\
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    \7\ See Financial Stability Oversight Counsel 2012 Annual 
Report, Appendix A (``FSOC 2012 Report''), available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
    \8\ 12 U.S.C. 5465(e)(1). See FSOC 2012 Report, supra note 7.
    \9\ See FSOC 2012 Report, supra note 7.
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    FICC participants connect to FICC's systems, either directly 
through the Securely Managed and Reliable Technology (``SMART'') 
network or through a third party service provider or service 
bureau.\10\ FICC's parent company, The Depository Trust & Clearing 
Corporation (``DTCC'') manages the SMART network, which connects a 
nationwide complex of networks, processing centers, and control 
facilities.\11\
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    \10\ See Securities Exchange Act Release No. 87697 (December 9, 
2019), 84 FR 68266 (December 13, 2019) (File No. SR-FICC-2019-005) 
(describing the DTCC SMART network).
    \11\ DTCC provides a set of core business processes for FICC and 
DTCC's other subsidiaries, including the technology systems and 
networks, that provide connectivity between FICC and its 
participants and that provide FICC with the ability to provide its 
services as required under the Rules. Most corporate functions are 
established and managed on an enterprise-wide basis pursuant to 
intercompany agreements under which it is generally DTCC that 
provides services to FICC and DTCC's other subsidiaries.
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B. Proposed Changes

1. Confidentiality Requirements
    Confidentiality Requirements Applicable to FICC: FICC collects 
confidential information from its participants to assess whether each 
participant meets FICC's membership requirements either to gain or 
continue access to FICC's clearance and settlement services.\12\ In 
turn, FICC is required to maintain the confidentiality of any 
information furnished by its participants, including the books and 
records FICC has a right to inspect. Currently, FICC's Rules obligate 
FICC to hold participants' information in the same degree of confidence 
as may be required by law or the rules and regulations (hereinafter 
collectively, ``regulations'') of the appropriate regulatory body 
having jurisdiction over the participant.\13\
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    \12\ See GSD Rules 2A, 3, 3A, and 3B; MBSD Rules 2A and 3; and 
EPN Rule 1 of Article III, supra note 6 (establishing FICC's right 
to require applicants to furnish information to become participants 
of FICC, to require participants to furnish information relating to 
assurances of financial responsibility and operational capability, 
and to require certain participants to provide FICC access to their 
books and records).
    \13\ See Section 5 of GSD Rule 2A and Section 6 of MBSD Rule 2A, 
Sections 4 and 10 of GSD Rule 3 and Sections 3 and 9 of MBSD Rule 3, 
Section 2(j) of GSD Rule 3A, Sections 3(e) and 5(k) of GSD Rule 3B, 
Section 9 of EPN Rule 1 of Article III, supra note 6.
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    FICC states that its current Rules create ambiguity because FICC's 
obligations depend on each participant's regulatory requirements, which 
could lead to unequal treatment of participants and conflicts of law 
with FICC's regulatory requirements or with respect to a participant 
who is subject to multiple jurisdictions' regulations.\14\ FICC also 
states that applying different standards creates operational burdens 
because FICC must track the regulations applicable to each of its 
participants and must maintain the confidentiality of each 
participant's information to the same degree as required by the 
applicable regulations.\15\
---------------------------------------------------------------------------

    \14\ See Notice of Filing, supra note 4, at 36800.
    \15\ See id. at 36800-01.
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    In order to clarify its confidentiality requirements and to enhance 
its operational efficiency, FICC proposes to revise its Rules to 
establish a standard, which will require FICC to hold participant 
confidential information to the same degree as FICC's regulatory 
requirements that relate to the confidentiality of records, and to 
remove the references to each participant's particular regulatory 
obligations. FICC represents that the proposed change would provide 
participants with similar protections because FICC believes its 
regulatory requirements are comparable to the regulations applicable to 
its participants and, therefore, would not result in changes to FICC's 
current practices or the protection offered to its participants' 
confidential information.\16\
---------------------------------------------------------------------------

    \16\ See id. at 36801.
---------------------------------------------------------------------------

    Confidentiality Requirements Applicable to Participants: FICC's 
Rules do not include obligations for its participants to protect 
confidential information furnished by FICC or its affiliates.\17\ 
However, FICC states that, in

[[Page 57210]]

connection with the development of cyber and information security 
programs pursuant to applicable participant regulatory requirements, 
FICC and DTCC have received an increasing number of requests from 
participants for confidential information, such as information 
regarding DTCC's network operations, data security practices, and legal 
settlements.\18\ Additionally, FICC states that participants may 
request FICC or DTCC to disclose confidential information regarding its 
cyber threat indicators, sources of cyber threat information, or other 
information and actions taken following a cyber incident relating to a 
participant, FICC, or DTCC.\19\
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    \17\ FICC states that, historically, it has generally not 
provided, nor been requested to provide, information that contains 
confidential or proprietary information of FICC or its affiliates to 
its participants except for information necessary for participants 
to connect to DTCC Systems, which is typically protected under 
intellectual property laws. See id.
    \18\ See Notice of Filing, supra note 4, at 36801. See also, 
supra discussion in Section II.A (Background) relating to DTCC 
Systems.
    \19\ See Notice of Filing, supra note 4, at 36801.
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    To facilitate information sharing by FICC while protecting the 
confidentiality of proprietary and confidential information FICC shares 
with its participants, FICC proposes to add participant confidentiality 
requirements to its Rules. The new provisions will require participants 
to maintain the confidentiality of information furnished by FICC 
through proper safeguards to prevent disclosure of such confidential 
information, except as necessary to perform its obligations under 
FICC's Rules or as otherwise required by applicable law. FICC proposes 
that participants be required to maintain the confidentiality of this 
information to the same extent and using the same means the participant 
uses to protect its own confidential information, but no less than a 
reasonable standard of care. FICC's proposal will also entitle FICC or 
DTCC to seek any temporary or permanent injunctive or other equitable 
relief in addition to any monetary damages under the Rules if a 
participant breaches its confidentiality requirements. Additionally, 
FICC's proposal will entitle FICC to impose other disciplinary 
proceedings or restrictions on access to services for a participant's 
failure to comply with its confidentiality requirements, consistent 
with the existing tools available to FICC regarding a participant's 
failure to comply with its Rules.
2. Market Disruption Event
    FICC's Rules contain provisions that identify the events or 
circumstances that FICC would consider to be a Market Disruption Event, 
including, for example, events that lead to the suspension or 
limitation of trading or banking in the markets in which FICC operates, 
or the unavailability or failure of any material payment, bank 
transfer, wire or securities settlement systems.\20\ Upon the 
declaration of a Market Disruption Event, FICC's Rules provide FICC 
with tools to address such an event, such as suspending any or all 
services and taking, or requiring participants to take, any actions 
FICC considers appropriate to facilitate the continuation of FICC's 
services.\21\
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    \20\ See GSD Rule 50 and MBSD Rule 40, supra note 6. MBSD Rule 
40 is incorporated into the EPN Rules. See Section 5 of EPM Rule 1 
of Article III, supra note 6. See also Securities Exchange Act 
Release Nos. 83954 (August 27, 2018), 83 FR 44361 (August 30, 2018) 
(File No. SR-FICC-2017-805); 83973 (August 28, 2018), 83 FR 44942 
(September 4, 2018) (File No. SR-FICC-2017-021).
    \21\ See GSD Rule 50 and MBSD Rule 40, supra note 6.
---------------------------------------------------------------------------

    Currently, FICC's Board of Directors may declare a Market 
Disruption Event and may take any actions authorized by FICC's Rules to 
address the event.\22\ However, FICC's Rules also authorize certain 
officers to make an interim declaration of a Market Disruption Event, 
to allow FICC to prevent delays in addressing a Market Disruption Event 
if the Board of Directors is unable to convene.\23\ In the event of 
such an interim declaration, the Board of Directors must ratify, 
modify, or rescind the officer's determination as soon as 
practicable.\24\ Currently, the officers authorized to make such 
determination are the Chief Executive Officer, Chief Financial Officer, 
Group Chief Risk Officer, and General Counsel.\25\
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    \22\ See Section 2 of GSD Rule 50 and Section 2 of MBSD Rule 40, 
supra note 6.
    \23\ See id.
    \24\ See id.
    \25\ See id.
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    FICC proposes to add two additional officers of FICC, the Chief 
Information Officer and the Head of Clearing Agency Services, to the 
list of authorized officers that could make such an interim 
determination if the Board of Directors is unable to convene. FICC 
states these two officers, like the other officers currently provided 
in the Rules, maintain senior executive level positions at FICC, 
oversee divisions of FICC, and hold positions at FICC that would 
provide them a necessary global view into FICC's operations and systems 
to enable them to determine the existence of a Market Disruption 
Event.\26\ FICC states adding these two additional officers would 
facilitate FICC's ability to implement its emergency procedures in the 
event of a Market Disruption Event.\27\
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    \26\ See Notice of Filing, supra note 4, at 36801.
    \27\ See id.
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3. Systems Disconnect Rule
    As mentioned above in Section II.A (Background), FICC's 
participants connect to FICC's systems, either through the DTCC-managed 
SMART network or through other electronic means, such as through a 
third party service provider or service bureau. FICC's Rules do not 
address FICC's ability to disconnect participant whose network 
connection risks harming FICC's systems. FICC's proposal will establish 
procedures under which FICC would be able to disconnect a participant 
from its network due to the risk of an imminent threat to FICC, 
participants, or other market participants.\28\
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    \28\ See Notice of Filing, supra note 4, at 36802.
---------------------------------------------------------------------------

    FICC's proposal will address FICC's authority to take certain 
actions upon the occurrence, and during the pendency, of a Major Event. 
A ``Major Event'' will be defined as the happening of one or more 
``Systems Disruptions'' reasonably likely to have a significant impact 
on FICC's operations, including ``DTCC Systems,'' \29\ that affect the 
business, operations, safeguarding of securities or funds, or physical 
functions of FICC, its participants, or other market participants. 
``Systems Disruption'' will, in turn, be defined as the unavailability, 
failure, malfunction, overload, or restriction (whether partial or 
total) of a DTCC Systems Participant's systems that disrupts or 
degrades the normal operation of such DTCC Systems Participant's 
systems; or anything that impacts or alters the normal communication or 
the files that are received, or information transmitted, to or from the 
DTCC Systems.
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    \29\ ``DTCC Systems'' will be defined as the systems, equipment 
and technology networks of DTCC, FICC and/or their Affiliates, 
whether owned, leased, or licensed, software, devices, IP addresses 
or other addresses or accounts used in connection with providing the 
services set forth in the Rules, or used to transact business or to 
manage the connection with FICC.
---------------------------------------------------------------------------

    FICC's proposal would also provide governance procedures applicable 
to FICC's determination whether, and how, to implement the provisions 
of the Systems Disconnect rule. The same officers with delegated 
authority under the Force Majeure Rule may make a determination that a 
Major Event has occurred. As discussed in Section II.B.2 (Market 
Disruption Event) above, FICC states these officers maintain senior 
executive level positions at FICC, oversee divisions of FICC, and hold 
positions at FICC that would provide them a necessary global view into 
FICC's operations and systems to enable them to determine the existence 
of a Market Disruption Event, which would

[[Page 57211]]

also enable them to determine the existence of a Major Event.
    However, the proposed process for declaring a Major Event, by 
contrast, would start with a designated officer, whereas, for a Market 
Disruption Event, the officer would make an interim determination only 
if the Board of Directors were unable to timely convene. FICC states it 
designed the process in this way to improve its ability to respond 
quickly, efficiently, and effectively to a Major Event that arises 
abruptly.\30\ Following this determination, any management committee 
including all of the officers authorized to determine a Major Event 
would convene, and FICC would convene a Board of Directors meeting as 
soon as practicable thereafter, and in any event within five Business 
Days following such determination, to ratify, modify, or rescind the 
Officer Major Event Action.\31\
---------------------------------------------------------------------------

    \30\ See Notice of Filing, supra note 4, at 36802.
    \31\ See id.
---------------------------------------------------------------------------

    In addition, the proposed rule will require participants to notify 
FICC immediately upon becoming aware of a Major Event, and, likewise, 
will require FICC to notify its participants promptly of any action 
FICC takes or intends to take with respect to a Major Event.\32\ 
Finally, the proposal will address certain miscellaneous related 
matters including: (i) A limitation of liability for any failure or 
delay in performance, in whole or in part of FICC's obligations under 
the Rules, arising out of or related to a Major Event, (ii) a statement 
that FICC's power to take any action pursuant to the Systems Disconnect 
Rule also includes the power to repeal, rescind, revoke, amend or vary 
such action, (iii) a statement that FICC's powers pursuant to the 
Systems Disconnect Rule shall be in addition to, and not in derogation 
of, authority granted elsewhere in the Rules to take action as 
specified therein, (iv) a requirement that participants shall keep any 
confidential information provided to them by FICC in connection with a 
Major Event confidential, and (v) a statement that in the event of any 
conflict between the provisions of the Systems Disconnect Rule and any 
other Rules or Procedures, the provisions of the Systems Disconnect 
Rule would prevail.
---------------------------------------------------------------------------

    \32\ See id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \33\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. After careful consideration, the 
Commission finds that the Proposed Rule Change is consistent with the 
requirements of the Act and the rules and regulations applicable to 
FICC. In particular, the Commission finds that the Proposed Rule Change 
is consistent with Section 17A(b)(3)(F) \34\ of the Act and Rules 17Ad-
22(e)(1),\35\ (e)(2),\36\ and (e)(17)(i) \37\ thereunder.
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    \33\ 15 U.S.C. 78s(b)(2)(C).
    \34\ 15 U.S.C. 78q-1(b)(3)(F).
    \35\ 17 CFR 240.17Ad-22(e)(1).
    \36\ 17 CFR 240.17Ad-22(e)(2).
    \37\ 17 CFR 240.17Ad-22(e)(17)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) \38\ of the Exchange Act requires, in part, 
that the rules of a clearing agency, such as FICC, be designed, in 
part, 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. The Commission finds that the Proposed 
Rule Change is consistent with Section 17A(b)(3)(F) of the Act \39\ for 
the reasons discussed below.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78q-1(b)(3)(F).
    \39\ Id.
---------------------------------------------------------------------------

    As described above in Section II.B.1 (Confidentiality 
Requirements), FICC proposes to revise its Rules to establish a 
standard relating to FICC's obligation to maintain the confidentiality 
of information it collects from participants to assess each 
participant's compliance with FICC's membership requirements. The 
Commission believes such a uniform standard will help FICC meet its 
obligations and will help each participant better understand FICC's 
obligations for maintaining the confidential information it shares with 
FICC, which, in turn, may facilitate the sharing of such information 
and improve FICC's ability to evaluate its participants' eligibility to 
access FICC's clearance and settlement services.
    Also, as described above in Section II.B.1 (Confidentiality 
Requirements), FICC proposes to add participant confidentiality 
requirements to its Rules to ensure participants maintain the 
confidentiality of information FICC shares, which participants may then 
use to determine whether to participate in FICC's clearance and 
settlement services by understanding FICC system requirements and FICC 
system safeguards. The Commission believes participant confidentiality 
requirements will help each participant better understand its rights 
and obligations for maintaining the confidential information FICC 
shares, which, in turn, may facilitate participant compliance. 
Therefore, the Commission believes the proposed changes to FICC and 
participant confidentiality requirements are consistent with promoting 
the prompt and accurate clearance and settlement of securities 
transactions by FICC.
    As described above in Section II.B.2 (Market Disruption Event) and 
Section II.B.3 (Systems Disconnect Rule), risks, threats, and potential 
vulnerabilities due to a Market Disruption Event or a Major Event could 
impede FICC's ability to provide its clearance and settlement services. 
FICC proposes to add two officers authorized to make an interim 
determination that a Market Disruption Event has occurred if the Board 
of Directors is unable to timely convene. The Commission believes the 
proposed change will improve FICC's ability to respond quickly to a 
Market Disruption Event, which could help FICC mitigate the impact of 
such event on FICC, its participants, and the broader market.
    Additionally, as described above in Section II.B.3 (Systems 
Disconnect Rule), FICC proposes to add the Systems Disconnect Rule, 
which will set forth the procedures under which FICC would be 
authorized, upon the occurrence of a Major Event (as defined in the 
proposed rules), to take certain actions, including disconnecting a 
participant from FICC's systems, suspending data transmissions between 
FICC and the participant, and requiring the participant to take other 
actions necessary to protect FICC and its participants. The Commission 
believes the proposed Systems Disconnect Rule will enable FICC to 
respond quickly to a potential cyber threat or other network 
disruption, which could help FICC prevent the spread of a participant's 
systems disruptions to FICC, its participants, and other market 
participants that could otherwise cause losses to FICC or its 
participants.
    One commenter suggests certain revisions to the definition of Major 
Event so that certain terms in the Systems Disconnect Rule are 
consistent with the definition of Market Disruption Event in the Force 
Majeure Rule.\40\ The Commission disagrees. Consistency between the 
Systems Disconnect Rule and the Force Majeure Rule is not necessary 
because FICC designed the

[[Page 57212]]

Systems Disconnect Rule for a different purpose. Although both rules 
relate to events that, if left unaddressed, could affect FICC's ability 
to provide clearance and settlement services, the Force Majeure Rule is 
designed to cover events caused by external forces that impact FICC and 
its participants, whereas the Systems Disconnect Rule is designed only 
to cover disruptions to a participant's computer systems or network 
that could flow through to FICC systems. Therefore, differences between 
the two rules do not raise consistency concerns, because of their 
different purposes.\41\
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    \40\ See letter from Anonymous, dated July 28, 2021, supra note 
5.
    \41\ The commenter also suggests adding language to the end of 
the Major Event definition to indicate that, to avoid doubt, a Major 
Event would not include disruptions due to normal market forces. The 
Commission does not believe that such additional language is 
necessary because, as discussed above in Section II.B.3 (Systems 
Disconnect Rule), a Major Event is limited to one or more ``Systems 
Disruption(s)'' (as defined in the proposed rule), which is properly 
limited to disruptions to participant systems or its network 
connection.
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    Therefore, for the reasons described above, the Commission believes 
the proposed changes relating to a Market Disruption Event or a Major 
Event will help promote the prompt and accurate clearance and 
settlement of securities transactions and with assuring FICC safeguards 
securities and funds that are in its custody or control or for which it 
is responsible. Accordingly, the Commission finds that the 
implementation of the Proposed Rule Change is consistent with Section 
17A(b)(3)(F) of the Act.\42\
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    \42\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(1)

    Rule 17Ad-22(e)(1) under the Exchange Act requires that a covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide for a well-
founded, clear, transparent and enforceable legal basis for each aspect 
of its activities in all relevant jurisdictions.\43\ The Commission 
finds that the Proposed Rule Change is consistent with Rule 17Ad-
22(e)(1) of the Exchange Act \44\ for the reasons discussed below.
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    \43\ 17 CFR 240.17Ad-22(e)(1).
    \44\ Id.
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    As described above in Sections II.B.1 (Confidentiality 
Requirements) and II.B.2 (Market Disruption Event), FICC proposes to 
establish a consistent standard for its obligation to maintain the 
confidentiality of information it collects from its participants and to 
establish participant confidentiality requirements. The Commission 
believes a consistent standard for FICC's confidentiality requirements 
will provide for clear and transparent standard rules for participants, 
rather than maintaining potentially different confidentiality standards 
for participants based on the various, unrelated regulatory bodies 
governing those participants. Additionally, the Commission believes 
that imposing specific legal standards applicable to both FICC and its 
participants to follow will provide for a well-founded legal basis for 
the sharing and maintaining of confidential information between FICC 
and its participants.\45\
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    \45\ One commenter suggests adding an exception for negligence 
or fraud to the limitation of liability clause in the proposed 
Systems Disconnect Rule, which the commenter states is customary 
contractual language. See letter from Anonymous, dated July 28, 
2021, supra note 5. The Commission notes FICC has already included 
similar language in its Rules, which would be applicable to this 
aspect of the proposal. See Sections 3 of GSD Rule 39 and MBSD Rule 
30 and Section 1 of EPN Rule 6 of Article 5, supra note 6 (providing 
for FICC liability to its participants for ``gross negligence, 
willful misconduct, or violations of Federal securities laws for 
which there is a private right of action'' notwithstanding any other 
provision in the Rules).
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    Accordingly, the Commission finds that the implementation of the 
Proposed Rule Change is consistent with Rule 17Ad-22(e)(1) of the 
Exchange Act.\46\
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    \46\ 17 CFR 240.17Ad-22(e)(1).
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C. Consistency With Rule 17Ad-22(e)(2)

    Rule 17Ad-22(e)(2) under the Exchange Act requires, in part, that a 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide for 
governance arrangements that are clear and transparent and that specify 
clear and direct lines of responsibility.\47\ The Commission finds that 
the Proposed Rule Change is consistent with Rule 17Ad-22(e)(2) of the 
Exchange Act \48\ for the reasons discussed below.
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    \47\ 17 CFR 240.17Ad-22(e)(2).
    \48\ Id.
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    The Commission believes FICC's proposal, as described above in 
Section II.B.2 (Market Disruption Event), to add two officers 
authorized to make an interim determination of a Market Disruption 
Event if the Board of Directors is unable to convene in a timely manner 
provides for governance arrangements that are clear and transparent and 
that provide clear and direct lines of responsibility. Likewise, the 
Commission believes FICC's proposal to identify the officers authorized 
to make an interim determination of a Major Event, which will then be 
ratified, modified, or rescinded by the management committee and the 
Board of Directors will provide for clear and transparent governance 
procedures and will specify clear and direct lines of responsibility. 
Accordingly, the Commission finds that the implementation of the 
Proposed Rule Change is consistent with Rule 17Ad-22(e)(2) of the 
Exchange Act.\49\
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    \49\ Id.
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D. Consistency With Rule 17Ad-22(e)(17)(i)

    Rule 17Ad-22(e)(17)(i) under the Exchange Act requires that a 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to manage the 
covered clearing agency's operational risks by identifying the 
plausible sources of operational risk, both internal and external, and 
mitigating their impact through the use of appropriate systems, 
policies, procedures, and controls.\50\ The Commission finds that the 
Proposed Rule Change is consistent with Rule 17Ad-22(e)(17)(i) of the 
Exchange Act \51\ for the reasons discussed below.
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    \50\ 17 CFR 240.17Ad-22(e)(17)(i).
    \51\ Id.
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    The Commission believes FICC's proposal, as described above in 
Section II.B.2 (Market Disruption Event), to add two officers 
authorized to make an interim determination of a Market Disruption 
Event could help FICC mitigate the impact of a Market Disruption Event 
by ensuring FICC can respond quickly to such event if the Board of 
Directors were unable to convene in a timely manner. Likewise, the 
Commission believes the proposed Systems Disconnect Rule, as described 
in Section II.B.3 above, provides a rules-based process that will 
enable FICC to identify potential cyber threats or other network 
disruptions, which could help FICC prevent the spread of a 
participant's systems disruptions to FICC, its participants, and other 
market participants that could otherwise cause losses to FICC or its 
participants.
    One commenter suggests revising the definition of Major Event to be 
consistent with the definition of Market Disruption Event in the Force 
Majeure Rule.\52\ The commenter further argues the impact to FICC 
covered by the definition of Major Event should be limited to ``DTCC 
Systems'' (as defined in the proposed rule) to ensure the scope of the 
proposed rule is limited to technical systems.\53\ The Commission

[[Page 57213]]

disagrees. As noted above, the purposes of both the Force Majeure Rule 
and the Systems Disconnect Rule are different. The Force Majeure Rule 
is designed to cover events external to FICC and its participants that 
materially impact, or are likely to materially impact, FICC's ability 
to provide its clearance and settlement services. The Systems 
Disconnect Rule, by contrast, is designed to cover a participant's 
systems or network disruption, which through its connection to FICC, is 
reasonably likely to have a significant impact on FICC's systems. The 
differences between the rules' purposes support the need for differing 
standards.\54\ Furthermore, the Commission notes the reference to 
``including DTCC Systems'' in the proposed definition of Major Event 
takes into account how FICC's operations, i.e., its clearance and 
settlement services, work, in that they utilize DTCC Systems. 
Consequently, the commenter's proposed revisions are not necessary.\55\
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    \52\ Specifically, the commenter suggests deleting reference to 
``reasonably'' and by replacing ``significant'' with ``material'' 
when describing the likelihood and level of impact to FICC. See 
letter from Anonymous, dated July 28, 2021, supra note 5.
    \53\ See id.
    \54\ The Commission also disagrees with the commenter's 
suggestion to remove the references to ``reasonably'' with respect 
to the likelihood of an event impacting FICC's operations. The 
Commission believes that FICC's assessment of the likelihood of such 
an impact should be reasonable before taking actions like 
disconnecting a participant from its systems. In addition, the 
Commission notes that FICC's references to ``reasonably likely'' and 
``significant impact'' in the proposed definition of Major Event are 
consistent with the Commission's definition of a ``Major SCI Event'' 
under Regulation SCI. 17 CFR 242.1000. Likewise, the Commission 
notes that references in the proposed rule text to ``reasonable 
basis'' and ``appropriate'' is consistent with the obligations 
related to a Major SCI Event under Regulation SCI. 17 CFR 242.1002.
    \55\ Another commenter expressed concern that the proposed 
Systems Disconnect Rule could be used to benefit the trading 
activity of certain participants at the detriment of disconnected 
participants. See letter from Jarrod Knudson, dated June 27, 2021, 
supra note 5. The Commission disagrees because the proposed rule, by 
its terms, would only apply when certain Systems Disruptions occur 
at a participant that could impact FICC's operations.
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    Accordingly, the Commission finds that the implementation of the 
Proposed Rule Change is consistent with Rule 17Ad-22(e)(17)(i) of the 
Exchange Act.\56\
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    \56\ 17 CFR 240.17Ad-22(e)(17)(i).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \57\ and 
the rules and regulations promulgated thereunder.
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    \57\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\58\ that Proposed Rule Change SR-FICC-2021-004, be, and hereby is, 
approved.\59\
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    \58\ 15 U.S.C. 78s(b)(2).
    \59\ In approving the Proposed Rule Change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\60\
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    \60\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-22440 Filed 10-13-21; 8:45 am]
BILLING CODE 8011-01-P