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]
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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.
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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;
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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 (https://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 (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
12 15
13 17
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U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
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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
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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
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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.
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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 https://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).
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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
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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.
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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.
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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
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
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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
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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.
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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
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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.
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.
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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.
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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.
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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
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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.
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).
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17:44 Oct 13, 2021
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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).
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Frm 00091
Fmt 4703
Sfmt 4703
57213
website (https://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
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]]>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]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\7\ See Financial Stability Oversight Counsel 2012 Annual
Report, Appendix A (``FSOC 2012 Report''), available at https://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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
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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.
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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.
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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\
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\30\ See Notice of Filing, supra note 4, at 36802.
\31\ See id.
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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.
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\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.
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\38\ 15 U.S.C. 78q-1(b)(3)(F).
\39\ Id.
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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
