Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Enhance Capital Requirements and Make Other Changes, 74130-74143 [2021-28251]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 86, Number 247 (Wednesday, December 29, 2021)]
[Notices]
[Pages 74130-74143]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-28251]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93857; File No. SR-FICC-2021-009]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Enhance Capital 
Requirements and Make Other Changes

December 22, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on December 13, 2021, Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the 
clearing agency. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to the Government 
Securities Division (``GSD'') Rulebook (the ``GSD Rules'') and the 
Mortgage-Backed Securities Division (``MBSD'') Clearing Rules (the 
``MBSD Rules,'' and together with the GSD Rules, the ``Rules'') of FICC 
in order to (i) enhance FICC's capital requirements for Members of GSD 
and Members of MBSD (collectively, ``members''), (ii) redefine FICC's 
Watch List and eliminate FICC's enhanced surveillance list, and (iii) 
make certain other clarifying, technical and supplementary changes in 
the Rules, including definitional updates, to accomplish items (i) and 
(ii), as described in greater detail below.\3\
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    \3\ Capitalized terms not defined herein shall have the meanings 
ascribed to such terms in the GSD Rules and the MBSD Rules, as 
applicable, available at https://www.dtcc.com/legal/rules-and-procedures.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

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

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

1. Purpose
    The purpose of this proposed rule change is to (i) enhance FICC's 
capital requirements for Members of GSD and Members of MBSD 
(collectively, ``members''), (ii) redefine FICC's Watch List and 
eliminate FICC's enhanced surveillance list, and (iii) make certain 
other clarifying, technical and supplementary changes in the Rules, 
including definitional updates, to accomplish items (i) and (ii).
(i) Background
    Central counterparties (``CCPs'') play a key role in financial 
markets by mitigating counterparty credit risk on transactions of their 
participants. CCPs achieve this by providing guaranties to participants 
and, as a consequence, are typically exposed to credit risks that could 
lead to default losses.
    As a CCP, FICC is exposed to the credit risks of its members. The 
credit risks borne by FICC are mitigated, in part, by the capital 
maintained by members, which serves as a loss-absorbing buffer.
    In accordance with Section 17A(b)(4)(B) of the Exchange Act,\4\ a 
registered clearing agency such as FICC may, among other things, deny 
participation to, or condition the participation of, any person on such 
person meeting such standards of financial responsibility prescribed by 
the rules of the registered clearing agency.
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    \4\ 15 U.S.C. 78q-1(b)(4)(B).
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    In furtherance of this authority, FICC requires applicants and 
members to meet the relevant financial responsibility standards 
prescribed by the Rules. These financial responsibility standards 
generally require members to have and maintain certain levels of 
capital, as more particularly described in the Rules and below.
    FICC's capital requirements for its members have not been updated 
in nearly 20 years.\5\ Since that time, there have been significant 
changes to the financial markets that warrant FICC revisiting its 
capital requirements. For example, the regulatory environment within 
which FICC and its members operate has undergone various changes. The 
implementation of the Basel III standards,\6\ the designation of many 
banks as systemically important by the Financial Stability Board,\7\ as 
well as the designation of FICC as a systemically important financial 
market utility (``SIFMU'') by the Financial Stability Oversight 
Council,\8\ have significantly increased the regulatory requirements, 
including capital requirements, of many financial institutions and 
CCPs. Similarly, the Covered Clearing Agency Standards (``CCAS'') 
adopted by the Commission have raised the regulatory standards 
applicable to CCPs such as FICC.\9\
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    \5\ Although FICC has not updated capital requirements for many 
of its members in nearly 20 years, during that time FICC has adopted 
new membership categories with corresponding capital requirements 
that FICC believes are still appropriate. As such, FICC is not 
proposing changes to capital requirements for all membership 
categories.
    \6\ Basel Committee on Banking Supervision, The Basel Framework, 
available at https://www.bis.org/basel_framework/index.htm?export=pdf (``Basel III Standards'').
    \7\ See Financial Stability Board, 2021 list of global 
systemically important banks, available at https://www.fsb.org/wp-content/uploads/P231121.pdf.
    \8\ See U.S. Department of the Treasury, Designations, Financial 
Market Utility Designations, available at https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/designations.
    \9\ 17 CFR 240.17Ad-22(e).
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    There also have been significant membership changes over the past 
20 years. Numerous mergers, acquisitions, and new market entrants 
(e.g., via the CCIT and Sponsoring Member programs at FICC) have 
created a diverse FICC membership that has expanded the credit-risk 
profiles that FICC must manage. For example, post the 2008 financial 
crisis and subsequent changes in regulatory capital requirements, FICC

[[Page 74131]]

has seen a shift in certain activity away from highly capitalized firms 
and, instead, to less capitalized, niche market participants.
    Moreover, FICC clearing activity and market volatility, each of 
which present risk to FICC, also increased significantly over the 
years.\10\ Although these factors do not directly require FICC to 
increase capital requirements for its membership (e.g., there is no 
specific regulation or formula that prescribes a set capital 
requirement for members of a CCP such as FICC), the overarching and 
collective focus of the regulatory changes noted above, in light of the 
many heightened risks to the financial industry, has been to increase 
the stability of the financial markets in order to reduce systemic 
risk. As a self-regulatory organization, a SIFMU, and being exposed to 
the new and increased risks over the past 20 years, FICC has a 
responsibility to do the same. Enhancing its capital requirements helps 
meet that responsibility and improve FICC's credit risk management. 
Enhanced capital requirements also help mitigate other risks posed 
directly or indirectly by members such as legal risk, operational risk 
and cyber risk, as better capitalized members have greater financial 
resources in order to mitigate the effects of these and other risks.
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    \10\ See, e.g., DTCC Annual Reports, available at https://www.dtcc.com/about/annual-report. FICC is a wholly owned subsidiary 
of The Depository Trust & Clearing Corporation (``DTCC''). The DTCC 
Annual Reports highlight and track FICC clearing activity year-over-
year. Moreover, interest rates, which are a key risk factor for 
FICC, experienced a rollercoaster of volatility over the past 14 
years, including historic and near-historic peaks in volatility, in 
response to changing market dynamics (e.g., reduced overall market 
liquidity, a shift in market liquidity relying on less capitalized 
market participants, and the advent of electronic trading), the 
extraordinary monetary policy measures implemented by global central 
banks, and the multiple financial crises over the past 20 years.
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    As for setting the specific capital requirements proposed, again, 
there is no regulation or formula that requires or calculates a 
specific amount (i.e., there is no magic number). Instead, FICC 
considered several factors, including inflation and the capital 
requirements of other Financial Market Infrastructures, both in the 
U.S. and abroad, to which the proposed requirements align.\11\
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    \11\ See The Options Clearing Corporation, OCC Rules, Rule 
301(a), available at https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules (requiring broker-dealers 
to have initial net capital of not less than $2,500,000); Chicago 
Mercantile Exchange Inc., CME Rulebook, Rule 970.A.1, available at 
https://www.cmegroup.com/rulebook/CME/I/9/9.pdf (requiring clearing 
members to maintain capital of at least $5 million, with banks 
required to maintain minimum tier 1 capital of at least $5 billion); 
LCH SA, LCH SA Clearing Rule Book, Section 2.3.2, available at 
https://www.lch.com/resources/rulebooks/lch-sa (requiring, with 
respect to securities clearing, capital of at least EUR 10 million 
for self-clearing members and at least EUR 25 million for members 
clearing for others, subject to partial satisfaction by a letter of 
credit) (1 EUR = $0.8150 as of December 31, 2020; see https://www.fiscal.treasury.gov/reports-statements/treasury-reporting-rates-exchange/current.html (last visited January 14, 2021)).
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    In light of these and other developments described below, FICC 
proposes to enhance its capital requirements for members, as described 
in more detail below.
    FICC also proposes to redefine the Watch List, which is a list of 
members that are deemed by FICC to pose a heightened risk to it and its 
members based on credit ratings and other factors. As part of the 
redefinition of the Watch List, FICC proposes to eliminate the separate 
enhanced surveillance list and implement a new Watch List that consists 
of a relatively smaller group of members that exhibit heightened credit 
risk, as described in more detail below.
    Finally, FICC proposes to make certain other clarification changes 
in the Rules.
(ii) Current FICC Capital Requirements
    The Rules currently specify capital requirements for members based 
on their membership type and type of entity. The current FICC capital 
requirements for Members of GSD are set forth in Section 4(b) of GSD 
Rule 2A (Initial Membership Requirements) \12\ for Netting Members, 
Section 2 of GSD Rule 3A (Sponsoring Members and Sponsored Members) 
\13\ for Sponsoring Members and Section 2(a)(ii) of GSD Rule 3B 
(Centrally Cleared Institutional Triparty Service) \14\ for CCIT 
Members. The current FICC capital requirements for Clearing Members of 
MBSD are set forth in Section 2(e) of MBSD Rule 2A (Initial Membership 
Requirements).\15\
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    \12\ GSD Rule 2A (Initial Membership Requirements), Section 4(b) 
(Financial Responsibility), supra note 3.
    \13\ GSD Rule 3A (Sponsoring Members and Sponsored Members), 
Section 2 (Qualifications of Sponsoring Members, the Application 
Process and Continuance Standards), supra note 3.
    \14\ GSD Rule 3B (Centrally Cleared Institutional Triparty 
Service), Section 2(a)(ii), supra note 3.
    \15\ MBSD Rule 2A (Initial Membership Requirements), Section 
2(e) (Financial Responsibility), supra note 3.
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    An applicant for a membership type is required to meet the 
qualifications, financial responsibility, operational capability and 
business history requirements applicable to the relevant membership 
type, which may vary based on the applicant's type of entity (e.g., a 
broker-dealer vs. a bank or trust company). In particular, financial 
responsibility requirements for a membership type, which generally 
require the applicant to maintain a certain level of capital, may vary 
based on an applicant's type of entity and the relevant capital measure 
for such type of entity.
    As relevant to FICC's proposal to enhance its capital requirements 
for members:
GSD Netting Members
    Section 4(b) of GSD Rule 2A requires applicants to become Netting 
Members to satisfy the following minimum financial requirements:

    (A) For applicants whose Financial Statements are prepared in 
accordance with U.S. generally accepted accounting principles 
(``U.S. GAAP''):
    (1) If the applicant is applying to become a Bank Netting 
Member, it must have a level of equity capital as of the end of the 
month prior to the effective date of its membership of at least $100 
million, and its capital levels and ratios must meet the applicable 
minimum levels for such as required by its Appropriate Regulatory 
Agency (or, if the applicant's Appropriate Regulatory Agency does 
not specify any such minimum levels, such minimum levels as would be 
required if the Member were a member bank of the Federal Reserve 
System and the Member's Appropriate Regulatory Agency were the Board 
of Governors of the Federal Reserve System);
    (2) if the applicant is registered with the SEC pursuant to 
Section 15 of the Exchange Act and is applying to become a Dealer 
Netting Member, it must have, as of the end of the calendar month 
prior to the effective date of its membership, (i) Net Worth of at 
least $25 million and (ii) Excess Net Capital of at least $10 
million;
    (3) if the applicant is registered with the SEC pursuant to 
Section 15C of the Exchange Act and is applying to become a Dealer 
Netting Member, it must have, as of the end of the calendar month 
prior to the effective date of its membership, (i) Net Worth of at 
least $25 million and (ii) Excess Liquid Capital of at least $10 
million;
    (4) if the applicant is applying to become a Futures Commission 
Merchant Netting Member, it must have, as of the end of the calendar 
month prior to the effective date of its membership, $25 million in 
Net Worth and $10 million in Excess Adjusted Net Capital;
    (5) if the applicant is registered with the SEC pursuant to 
Section 15 of the Exchange Act and is applying to become an Inter-
Dealer Broker Netting Member, it must have, as of the end of the 
calendar month prior to the effective date of its membership, (i) 
Net Worth of at least $25 million and (ii) Excess Net Capital of at 
least $10 million;
    (6) if the applicant is registered with the SEC pursuant to 
Section 15C of the Exchange Act and is applying to become an Inter-
Dealer Broker Netting Member, it must have, as of the end of the 
calendar month prior to the effective date of its membership, (i) 
Net Worth of at least $25 million and (ii) Excess Liquid Capital of 
at least $10 million;
    (7) if the applicant is a Foreign Person that is applying to 
become a Foreign Netting

[[Page 74132]]

Member, it must satisfy the minimum financial requirements (defined 
by reference to regulatory capital as defined by the applicant's 
home country regulator) that are applicable to the Netting System 
membership category that FICC determines, in its sole discretion, 
would be applicable to the Foreign Person if it were organized or 
established under the laws of the United States or a State or other 
political subdivision thereof subject to subsections (B), (C) and 
(D) below if the entity's financial statements are not prepared in 
accordance with U.S. GAAP;
    (8) if the applicant is applying to become an Insurance Company 
Netting Member, it must have, as of the end of the month prior to 
the effective date of its membership: (i) An A.M. Best (``Best'') 
rating of ``A-'' or better, (ii) a rating by at least one of the 
other three major rating agencies (Standard & Poor's (``S&P''), 
Moody's, and Fitch Ratings (``Fitch'')) of at least ``A-'' or 
``A3,'' as applicable, (iii) no rating by S&P, Moody's, and Fitch of 
less than ``A-'' or ``A,'' as applicable, (iv) a risk-based capital 
ratio, as applicable to Insurance Companies, of at least 200 
percent, and (v) statutory capital (consisting of adjusted 
policyholders' surplus plus the company's asset valuation reserve) 
of no less than $500 million; and
    (9) if the applicant is applying to become a Registered 
Investment Company Netting Member, it must have minimum Net Assets 
of $100 million.
    (B) For applicants whose Financial Statements are prepared in 
accordance with International Financial Reporting Standards 
(``IFRS''), the U.K. Companies Act of 1985 (``U.K. GAAP''), or 
Canadian generally accepted accounting principles, the minimum 
financial requirements shall be one and one-half times the 
applicable requirements set forth in subsection (A) above.
    (C) For applicants whose Financial Statements are prepared in 
accordance with the generally accepted accounting principles of a 
European Union country other than U.K. GAAP, the minimum financial 
requirements shall be five times the applicable requirements set 
forth in subsection (A) above.
    (D) For applicants whose financial statements are prepared in 
accordance with any other type of generally accepted accounting 
principles, the minimum financial requirements shall be seven times 
the requirements set forth in subsection (A) above.

    Accordingly, a non-U.S. entity that does not prepare its financial 
statements in accordance with U.S. GAAP is required to meet financial 
requirements between 1\1/2\ to 7 times the minimum financial 
requirements that would otherwise be applicable to the non-U.S entity. 
Given that, as noted above, the financial responsibility requirements 
generally require a member to have a certain level of capital, 
subsections (B), (C) and (D) of Section 4(b) of GSD Rule 2A have the 
effect of requiring a non-U.S. entity that does not prepare its 
financial statements in accordance with U.S. GAAP to have capital 
between 1\1/2\ to 7 times the otherwise-applicable capital requirement.
GSD Sponsoring Members
    Section 2(a) of GSD Rule 3A requires a Bank Netting Member applying 
to become a Category 1 Sponsoring Member to (i) have a level of equity 
capital as of the end of the month prior to the effective date of its 
membership of at least $5 billion, (ii) be ``well-capitalized'' as 
defined by the Federal Deposit Insurance Corporation's applicable 
regulations, and (iii) if it has a bank holding company that is 
registered under the Bank Holding Company Act of 1956, as amended, have 
a bank holding company that is also ``well-capitalized'' as defined by 
the applicable regulations of the Board of Governors of the Federal 
Reserve System.
    Section 2(b)(ii) of GSD Rule 3A provides that FICC may impose 
financial requirements on a Netting Member applying to become a 
Category 2 Sponsoring Member that are greater than financial 
requirements applicable to the applicant in its capacity as a Netting 
Member under Section 4(b) of GSD Rule 2A, based upon the level of the 
anticipated positions and obligations of such applicant, the 
anticipated risk associated with the volume and types of transactions 
such applicant proposes to process through FICC as a Category 2 
Sponsoring Member, and the overall financial condition of such 
applicant.
GSD CCIT Members
    Section 2(a)(ii) of GSD Rule 3B requires an applicant to become a 
CCIT Member to satisfy the following minimum financial requirements:

    (A) Except as otherwise provided in subsection (B), (C) or (D) 
below, the applicant must have minimum Net Assets of $100 million. 
FICC, based upon the level of the anticipated positions and 
obligations of the applicant, the anticipated risk associated with 
the volume and types of transactions the applicant proposes to 
process through FICC and the overall financial condition of the 
applicant, may impose greater standards.
    (B) For applicants whose financial statements are prepared in 
accordance with IFRS, U.K. GAAP or Canadian generally accepted 
accounting principles, the minimum financial requirements shall be 
one and one-half times the applicable requirements set forth in 
subsection (A) above.
    (C) For applicants whose financial statements are prepared in 
accordance with the generally accepted accounting principles of a 
European Union country other than U.K. GAAP, the minimum financial 
requirements shall be five times the applicable requirements set 
forth in subsection (A) above.
    (D) For applicants whose financial statements are prepared in 
accordance with any other type of generally accepted accounting 
principles, the minimum financial requirements shall be seven times 
the applicable requirements set forth in subsection (A) above.
MBSD Clearing Members
    Section 2(e) of MBSD Rule 2A requires applicants to become Clearing 
Members to satisfy the following minimum financial requirements:

    (A) For applicants whose Financial Statements are prepared in 
accordance with U.S. GAAP:
    (1) If the applicant is applying to become a Bank Clearing 
Member, it must have a level of equity capital as of the end of the 
month prior to the effective date of its membership of at least $100 
million, and its capital levels and ratios must meet the applicable 
minimum levels for such as required by its Appropriate Regulatory 
Agency (or, if the applicant's Appropriate Regulatory Agency does 
not specify any such minimum levels, such minimum levels as would be 
required if the Member were a member bank of the Federal Reserve 
System and the Member's Appropriate Regulatory Agency were the Board 
of Governors of the Federal Reserve System);
    (2) if the applicant is registered with the SEC pursuant to 
Section 15 or Section 15C of the Exchange Act and is applying to 
become a Dealer Clearing Member, it must have, as of the end of the 
calendar month prior to the effective date of its membership, (i) 
Net Worth of at least $25 million and (ii) Excess Net Capital of at 
least $10 million;
    (3) if the applicant is registered with the SEC pursuant to 
Section 15 or Section 15C of the Exchange Act and is applying to 
become an Inter-Dealer Broker Clearing Member, it must have, as of 
the end of the calendar month prior to the effective date of its 
membership, Excess Net Capital of at least $10 million;
    (4) if the applicant is applying to become an Unregistered 
Investment Pool Clearing Member, it must have an investment advisor 
domiciled in the United States. The Unregistered Investment Pool 
applicant must have at least $250 million in Net Assets. An 
Unregistered Investment Pool that does not meet the $250 million Net 
Asset requirement, but has Net Assets of at least $100 million, 
shall be eligible for membership if the Unregistered Investment 
Pool's investment advisor advises an existing Member and has assets 
under management of at least $1.5 billion. An Unregistered 
Investment Pool must have an investment advisor registered with the 
SEC;
    (5) if the applicant is applying to become a Government 
Securities Issuer Clearing Member, it must have at least $100 
million in equity capital;
    (6) if the applicant is applying to become a Registered 
Investment Company Clearing Member, it must have minimum Net Assets 
of $100 million;
    (7) if the applicant is applying to become an Insured Credit 
Union Clearing Member, it

[[Page 74133]]

must have a level of equity capital as of the end of the month prior 
to the effective date of its membership of at least $100 million and 
achieve the ``well capitalized'' statutory net worth category 
classification as defined by the NCUA under 12 CFR part 702; and
    (8) for all other applicants, they must have sufficient net 
worth, liquid capital, regulatory capital, or Net Assets, as 
applicable to the particular type of entity as determined by FICC, 
and subject to approval of such minimum membership standards by the 
SEC.
    If the applicant in sections (1) through (8) above is a Foreign 
Person that is applying to become a Foreign Clearing Member, it must 
satisfy the minimum financial requirements: (i) Defined by reference to 
regulatory capital as defined by the applicant's home country 
regulator, or (ii) in the case of unregulated entities, as defined by 
FICC in its discretion, that are applicable to the Clearing System 
membership category that FICC determines, in its sole discretion, would 
be applicable to the Foreign Person if it were organized or established 
under the laws of the United States or a State or other political 
subdivision thereof, subject to subsections (B), (C) and (D) below if 
the entity's financial statements are not prepared in accordance with 
U.S. GAAP. For Unregistered Investment Pools, subsections (B), (C) and 
(D) shall apply to the following figures cited in subsection (A)(4) 
above: the $250 million in Net Assets and the $100 million in Net 
Assets.

    (B) For applicants whose Financial Statements are prepared in 
accordance with IFRS, U.K. GAAP, or Canadian generally accepted 
accounting principles, the minimum financial requirements shall be 
one and one-half times the applicable requirements set forth in 
subsection (A) above.
    (C) For applicants whose Financial Statements are prepared in 
accordance with the generally accepted accounting principles of a 
European Union country other than U.K. GAAP, the minimum financial 
requirements shall be five times the applicable requirements set 
forth in subsection (A) above.
    (D) For applicants whose financial statements are prepared in 
accordance with any other type of generally accepted accounting 
principles, the minimum financial requirements shall be seven times 
the requirements set forth in subsection (A) above.

    As was the case for GSD Netting Members, a non-U.S. entity that 
does not prepare its financial statements in accordance with U.S. GAAP 
is required to meet financial requirements between 1\1/2\ to 7 times 
the minimum financial requirements that would otherwise be applicable 
to the non-U.S entity. Given that, as noted above, the financial 
responsibility requirements generally require a member to have a 
certain level of capital, subsections (B), (C) and (D) of Section 2(e) 
of MBSD Rule 2A have the effect of requiring a non-U.S. entity that 
does not prepare its financial statements in accordance with U.S. GAAP 
to have capital between 1\1/2\ to 7 times the otherwise-applicable 
capital requirement.
(iii) Current FICC Watch List and Enhanced Surveillance List
    FICC's Watch List is a list of members that are deemed by FICC to 
pose a heightened risk to it and its members based on credit ratings 
and other factors.\16\
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    \16\ See GSD Rule 1 (Definitions) and MBSD Rule 1 (Definitions), 
supra note 3.
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    Specifically, the Watch List is the list of members with credit 
ratings derived from FICC's Credit Risk Rating Matrix (``CRRM'') \17\ 
of 5, 6 or 7, as well as members that, based on FICC's consideration of 
relevant factors, including those set forth in Section 12(d) of GSD 
Rule 3 (Ongoing Membership Requirements) \18\ and Section 11(d) of MBSD 
Rule 3 (Ongoing Membership Requirements),\19\ are deemed by FICC to 
pose a heightened risk to it and its members.
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    \17\ FICC's CRRM is a matrix of credit ratings of members 
specified in Section 12 of GSD Rule 3 and Section 11 of MBSD Rule 3. 
The CRRM is developed by FICC to evaluate the credit risk members 
pose to FICC and its members and is based on factors determined to 
be relevant by FICC from time to time, which factors are designed to 
collectively reflect the financial and operational condition of a 
member. These factors include (i) quantitative factors, such as 
capital, assets, earnings, and liquidity, and (ii) qualitative 
factors, such as management quality, market position/environment, 
and capital and liquidity risk management. See GSD Rule 1 
(Definitions) and MBSD Rule 1 (Definitions), supra note 3.
    \18\ GSD Rule 3 (Ongoing Membership Requirements), Section 
12(d), supra note 3.
    \19\ MBSD Rule 3 (Ongoing Membership Requirements), Section 
11(d), supra note 3.
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    In addition to the Watch List, FICC also maintains a separate list 
of members subject to enhanced surveillance in accordance with the 
provisions of GSD Rule 3 and MBSD Rule 3, as discussed below. The 
enhanced surveillance list is a list of members for which FICC has 
heightened credit concerns, which may include members that are already, 
or may soon be, on the Watch List. As described below, a member is 
subject to the same potential consequences from being subject to 
enhanced surveillance or being placed on the Watch List.
GSD Rule 3 (Ongoing Membership Requirements) and MBSD Rule 3 (Ongoing 
Membership Requirements)
    GSD Rule 3 (Ongoing Membership Requirements) and MBSD Rule 3 
(Ongoing Membership Requirements) specify the ongoing membership 
requirements and monitoring applicable to members.\20\
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    \20\ GSD Rule 3 (Ongoing Membership Requirements) and MBSD Rule 
3 (Ongoing Membership Requirements), supra note 3.
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    Section 7 of GSD Rule 3 and Section 6 of MBSD Rule 3 provide that 
FICC may review the financial responsibility and operational capability 
of a member and otherwise require from the member additional reporting 
of its financial or operational condition in order to make a 
determination as to whether such member should be placed on the Watch 
List and/or be subject to enhanced surveillance by FICC consistent with 
the provisions of Section 12 of GSD Rule 3 and Section 11 of MBSD Rule 
3.
    Section 12(b) of GSD Rule 3 and Section 11(b) of MBSD Rule 3 
provide that a member that is (1) a U.S. bank or trust company that 
files the Consolidated Report of Condition and Income (``Call 
Report''), (2) a U.S. broker-dealer that files the Financial and 
Operational Combined Uniform Single Report (``FOCUS Report'') or the 
equivalent with its regulator, or (3) a non-U.S. bank or trust company 
that has audited financial data that is publicly available, will be 
assigned a credit rating by FICC in accordance with the CRRM. A 
member's credit rating is reassessed each time the member provides FICC 
with requested information pursuant to Section 7 of GSD Rule 3, Section 
6 of MBSD Rule 3 or as may be otherwise required under the Rules.
    Section 12(b) of GSD Rule 3 and Section 11(b) of MBSD Rule 3 
further provide that because the factors used as part of the CRRM may 
not identify all risks that a member assigned a credit rating by FICC 
may present to FICC, FICC may, in its discretion, override such 
member's credit rating derived from the CRRM to downgrade the member. 
This downgrading may result in the member being placed on the Watch 
List and/or it may subject the member to enhanced surveillance based on 
relevant factors.
    Section 12(c) of GSD Rule 3 and Section 11(c) of MBSD Rule 3 
provide that members other than those specified in Section 12(b) of GSD 
Rule 3 and Section 11(b) of MBSD Rule 3 will not be assigned a credit 
rating by the CRRM but may be placed on the Watch List and/or may be 
subject to enhanced surveillance based on relevant factors.
    Section 12(d) of GSD Rule 3 and Section 11(d) of MBSD Rule 3 
provide that the factors to be considered by FICC in determining 
whether a member is

[[Page 74134]]

placed on the Watch List and/or subject to enhanced surveillance 
include (i) news reports and/or regulatory observations that raise 
reasonable concerns relating to the member, (ii) reasonable concerns 
around the member's liquidity arrangements, (iii) material changes to 
the member's organizational structure, (iv) reasonable concerns about 
the member's financial stability due to particular facts and 
circumstances, such as material litigation or other legal and/or 
regulatory risks, (v) failure of the member to demonstrate satisfactory 
financial condition or operational capability or if FICC has a 
reasonable concern regarding the member's ability to maintain 
applicable membership standards, and (vi) failure of the member to 
provide information required by FICC to assess risk exposure posed by 
the member's activity.
    Section 12(e) of GSD Rule 3 and Section 11(e) of MBSD Rule 3 
provide that FICC may require a member that has been placed on the 
Watch List to make and maintain a deposit to the Clearing Fund over and 
above the amount determined in accordance with GSD Rule 4 or MBSD Rule 
4, as applicable (which additional deposit shall constitute a portion 
of the member's Required Fund Deposit) or such higher amount as FICC 
may deem necessary for the protection of it or other members.
    Section 12(f) of GSD Rule 3 and Section 11(f) of MBSD Rule 3 
provide that a member being subject to enhanced surveillance or being 
placed on the Watch List (1) will result in a more thorough monitoring 
of the member's financial condition and/or operational capability, 
including on-site visits or additional due diligence information 
requests, and (2) may be required make more frequent financial 
disclosures to FICC. Members that are placed on the Watch List or 
subject to enhanced surveillance are also reported to FICC's management 
committees and regularly reviewed by FICC senior management.
(iv) Proposed Rule Changes
A. Changes To Enhance FICC's Capital Requirements
    As noted earlier, as a CCP, FICC is exposed to the credit risks of 
its members. The credit risks borne by FICC are mitigated, in part, by 
the capital maintained by members, which serves as a loss-absorbing 
buffer.
    FICC's financial responsibility standards for members generally 
require members to have and maintain certain levels of capital.
    As described in more detail below, FICC proposes to enhance its 
capital requirements for members as follows:
GSD Netting Members
Bank Netting Members
    FICC proposes to (1) change the measure of capital requirements for 
banks and trust companies from equity capital to common equity tier 1 
capital (``CET1 Capital''),\21\ (2) raise the minimum capital 
requirements for banks and trust companies, and (3) require U.S. banks 
and trust companies to be well capitalized (``Well Capitalized'') as 
defined in the capital adequacy rules and regulations of the Federal 
Deposit Insurance Corporation (``FDIC'').\22\
---------------------------------------------------------------------------

    \21\ Under the proposal, CET1 Capital would be defined as an 
entity's common equity tier 1 capital, calculated in accordance with 
such entity's regulatory and/or statutory requirements.
    \22\ See 12 CFR 324.403(b)(1).
---------------------------------------------------------------------------

    FICC proposes to change the measure of capital requirements for 
banks and trust companies from equity capital to CET1 Capital and raise 
the minimum capital requirements for banks and trust companies in order 
to align FICC's capital requirements with banking regulators' changes 
to regulatory capital requirements over the past several years, which 
have standardized and harmonized the calculation and measurement of 
bank capital and leverage throughout the world.\23\ Consistent with 
these changes by banking regulators, FICC believes that the appropriate 
capital measure for members that are banks and trust companies should 
be CET1 Capital and that FICC's capital requirements for members should 
be enhanced in light of these increased regulatory capital 
requirements.
---------------------------------------------------------------------------

    \23\ Compare, e.g., 12 CFR 324.20(b) (FDIC's definition of CET1 
Capital), and Regulation (EU) No 575/2013 of the European Parliament 
and of the Council of 26 June 2013 on prudential requirements for 
credit institutions and investment firms and amending Regulation 
(EU) No 648/2012, Article 26, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32013R0575 (European 
Union's definition of CET1 Capital), with Basel Committee on Banking 
Supervision, Basel III Standards, CAP10.6, supra note 6 (Basel III 
Standards' definition of CET1 Capital).
---------------------------------------------------------------------------

    In addition, requiring U.S. banks and trust companies to be Well 
Capitalized ensures that members are well capitalized while also 
allowing adjusted capital to be relative to either the risk-weighted 
assets or average total assets of the bank or trust company. FICC 
proposes to have the definition of Well Capitalized expressly tied to 
the FDIC's definition of ``well capitalized'' to ensure that the 
proposed requirement that U.S. banks and trust companies be Well 
Capitalized will keep pace with future changes to banking regulators' 
regulatory capital requirements.
    Under the proposal, a Bank Netting Member that is a U.S. bank or 
trust company must have and maintain at least $500 million in CET1 
Capital and be Well Capitalized. Under the proposal, a Bank Netting 
Member that is a bank or trust company established or chartered under 
the laws of a non-U.S. jurisdiction and applying through its U.S. 
branch or agency must (i) have CET1 Capital of at least $500 million, 
(ii) comply with the minimum capital requirements (including, but not 
limited to, any capital conservation buffer, countercyclical buffer, 
and any Domestic Systemically Important Banks (``D-SIB'') or Global 
Systemically Important Bank (``G-SIB'') buffer, if applicable) and 
capital ratios required by its home country regulator, or, if greater, 
with such minimum capital requirements or capital ratios standards 
promulgated by the Basel Committee on Banking Supervision and (iii) 
provide an attestation for itself, its parent bank and its parent bank 
holding company (as applicable) detailing the minimum capital 
requirements (including, but not limited to, any capital conservation 
buffer, countercyclical buffer, and any D-SIB or G-SIB buffer, if 
applicable) and capital ratios required by their home country 
regulator.
Dealer Netting Members
    FICC proposes to leave the capital requirements applicable to 
Dealer Netting Members unchanged, however FICC proposes to (i) 
consolidate into a single paragraph the capital requirements applicable 
to Dealer Netting Members, (ii) expressly provide for equivalence among 
measures of Excess Net Capital, Excess Liquid Capital and Excess 
Adjusted Net Capital, depending on what the Dealer Netting Member is 
required to report on its regulatory filings, and (iii) make some 
clarifying and conforming language changes and add a paragraph heading 
to improve the accessibility and transparency of the capital 
requirements, without substantive effect.
    FICC also proposes to clarify that an applicant must satisfy its 
applicable capital requirements when it applies for membership and at 
all times thereafter, and therefore proposes to delete language 
requiring that a member satisfy its capital requirements as of the end 
of the calendar month prior to the effective date of its membership.

[[Page 74135]]

Futures Commission Merchant Netting Members
    FICC proposes to leave the capital requirements applicable to 
Futures Commission Merchant Netting Members unchanged, however FICC 
proposes to (i) expressly provide for equivalence among measures of 
Excess Adjusted Net Capital, Excess Net Capital and Excess Liquid 
Capital, depending on what the Futures Commission Merchant Netting 
Member is required to report on its regulatory filings, and (ii) make 
some clarifying and conforming language changes and add a paragraph 
heading to improve the accessibility and transparency of the capital 
requirements, without substantive effect.
    FICC also proposes to clarify that an applicant must satisfy its 
applicable capital requirements when it applies for membership and at 
all times thereafter, and therefore proposes to delete language 
requiring that a member satisfy its capital requirements as of the end 
of the calendar month prior to the effective date of its membership.
Inter-Dealer Broker Netting Members
    FICC proposes to leave the capital requirements applicable to 
Inter-Dealer Broker Netting Members unchanged, however FICC proposes to 
(i) consolidate into a single paragraph the capital requirements 
applicable to Inter-Dealer Broker Netting Members, (ii) expressly 
provide for equivalence among measures of Excess Net Capital, Excess 
Liquid Capital and Excess Adjusted Net Capital, depending on what the 
Inter-Dealer Broker Netting Member is required to report on its 
regulatory filings, and (iii) make some clarifying and conforming 
language changes and add a paragraph heading to improve the 
accessibility and transparency of the capital requirements, without 
substantive effect.
    FICC also proposes to clarify that an applicant must satisfy its 
applicable capital requirements when it applies for membership and at 
all times thereafter, and therefore proposes to delete language 
requiring that a member satisfy its capital requirements as of the end 
of the calendar month prior to the effective date of its membership.
Foreign Netting Members
    Under the proposal, a Foreign Person that is a Foreign Netting 
Member must, at a minimum, satisfy its home country regulator's minimum 
financial requirements in addition to the following:

    (1) In the case of a Foreign Person that is a broker or dealer, 
it must have total equity capital of at least $25 million; and
    (2) in the case of a Foreign Person that is a bank or trust 
company established or chartered under the laws of a non-U.S. 
jurisdiction (and not applying to become a Bank Netting Member 
through a U.S. branch or agency), it must (i) have CET1 Capital of 
at least $500 million, (ii) comply with the minimum capital 
requirements (including, but not limited to, any capital 
conservation buffer, countercyclical buffer, and any D-SIB or G-SIB 
buffer, if applicable) and capital ratios required by its home 
country regulator, or, if greater, with such minimum capital 
requirements or capital ratios standards promulgated by the Basel 
Committee on Banking Supervision and (iii) provide an attestation 
for itself and its parent bank holding company detailing the minimum 
capital requirements (including, but not limited to, any capital 
conservation buffer, countercyclical buffer, and any D-SIB or G-SIB 
buffer, if applicable) and capital ratios required by their home 
country regulator.

    FICC may, based on information provided by or concerning an 
applicant applying to become a Foreign Netting Member, also assign 
minimum financial requirements for the applicant based on (i) how 
closely the applicant resembles another existing category of Netting 
Member and (ii) the applicant's risk profile, which assigned minimum 
financial requirements would be promptly communicated to, and discussed 
with, the applicant.
    As described above, under Section 4(b) of GSD Rule 2A, the current 
minimum capital requirements for a member that does not prepare its 
financial statements in accordance with U.S. GAAP is subject to a 
multiplier that requires such member to have capital between 1\1/2\ to 
7 times the otherwise-applicable capital requirement.
    The multiplier was designed to account for the less transparent 
nature of accounting standards other than U.S. GAAP. However, 
accounting standards have converged over the years (namely IFRS and 
U.S. GAAP).\24\ As such, FICC believes the multiplier is no longer 
necessary and its retirement would be a welcomed simplification for 
both FICC and its members.
---------------------------------------------------------------------------

    \24\ The convergence between IFRS and U.S. GAAP began with the 
2002 Norwalk Agreement (available at https://www.ifrs.org/content/dam/ifrs/around-the-world/mous/norwalk-agreement-2002.pdf.). Under 
that agreement, the Financial Accounting Standards Board (``FASB'') 
and the International Accounting Standards Board (``IASB'') signed a 
memorandum of understanding on the convergence of accounting 
standards. Between 2010 and 2013, FASB and IASB published several 
quarterly progress reports on their work to improve and achieve 
convergence of U.S. GAAP and IFRS. In 2013, the International 
Financial Reporting Standards Foundation established the Accounting 
Standards Advisory Forum (``ASAF'') to improve cooperation among 
worldwide standard setters and advise the IASB as it developed IFRS. 
(See https://www.ifrs.org/groups/accounting-standards-advisory-forum/.) FASB was selected as one of the ASAF's twelve members. 
FASB's membership on the ASAF helps represent U.S. interests in the 
IASB's standard-setting process and continues the process of 
improving and converging U.S. GAAP and IFRS. In February 2013, the 
Journal of Accountancy published its view of the success of the 
convergence project citing converged or partially converged 
standards, including business combinations, discontinued operations, 
fair value measurement, and share-base payments. (Available at 
https://www.journalofaccountancy.com/issues/2013/feb/20126984.html.) 
Subsequent to the publication, IASB and FASB converge on revenue 
recognition. While IASB and FASB have not achieved full convergence, 
FICC believes the accounting rules are sufficiently aligned such 
that the multiplier is no longer required.
---------------------------------------------------------------------------

    Accordingly, FICC proposes to delete the language in Section 4(b) 
of GSD Rule 2A providing that the minimum capital requirements for a 
member that does not prepare its financial statements in accordance 
with U.S. GAAP is subject to a multiplier that requires such member to 
have capital between 1\1/2\ to 7 times the otherwise-applicable capital 
requirement.
    As described above, FICC also proposes that non-U.S. banks and 
trust companies be compliant with the minimum capital requirements and 
capital ratios in their home jurisdiction. Given the difficulty in 
knowing and monitoring compliance with various regulatory minimums for 
various jurisdictions, these members would be required to provide FICC 
with periodic attestations relating to the minimum capital requirements 
and capital ratios for their home jurisdiction, as described in greater 
detail below.
    In GSD Rule 3, FICC proposes to add a paragraph providing that a 
Netting Member that is a bank or trust company established or chartered 
under the laws of a non-U.S. jurisdiction and a Bank Netting Member 
that is a U.S. branch or agency must (i) provide, no less than annually 
and upon request by FICC, an attestation for itself, its parent bank 
and its parent bank holding company (as applicable) detailing the 
minimum capital requirements (including, but not limited to, any 
capital conservation buffer, countercyclical buffer, and any D-SIB or 
G-SIB buffer, if applicable) and capital ratios required by their home 
country regulator and (ii) notify FICC: (a) Within two Business Days of 
any of their capital requirements (including, but not limited to, any 
capital conservation buffer, countercyclical buffer, and any D-SIB or 
G-SIB buffer, if applicable) or capital ratios falling below any 
minimum required by their home country regulator; and (b) within 15 
calendar days of any such minimum capital requirement or capital ratio 
changing.

[[Page 74136]]

    FICC also proposes to require Bank Netting Members that are U.S. 
branches or agencies of non-U.S. banks or trust companies, in addition 
to Foreign Netting Members, to provide FICC copies of any regulatory 
notifications required to be made when an entity does not comply with 
the financial reporting and responsibility standards set by their home 
country regulator and to notify FICC in writing within 2 Business Days 
of becoming subject to a disciplinary action by their home country 
regulator.
Government Securities Issuer Netting Members
    FICC proposes to require that a Government Securities Issuer 
Netting Member or an applicant to become a Government Securities Issuer 
Netting Member must have equity capital of at least $100 million. FICC 
does not currently have a capital requirement for Government Securities 
Issuer Netting Members or applicants to become a Government Securities 
Issuer Netting Member.
Insurance Company Netting Members
    FICC proposes to leave the capital requirements applicable to 
Insurance Company Netting Members unchanged, however FICC proposes to 
(i) specify the calculation of the existing risk-based capital ratio 
and (ii) correct typographical errors and make some clarifying and 
conforming language changes and add a paragraph heading to improve the 
accessibility and transparency of the capital requirements, without 
substantive effect.\25\
---------------------------------------------------------------------------

    \25\ As described below, FICC proposes to add a new Section 
3(a)(vii) to GSD Rule 2A describing the eligibility requirements for 
an Insurance Company Netting Member, which was inadvertently omitted 
from the list of categories of Netting Members in Section 3.
---------------------------------------------------------------------------

    FICC also proposes to clarify that an applicant must satisfy its 
applicable capital requirements when it applies for membership and at 
all times thereafter, and therefore proposes to delete language 
requiring that a member satisfy its capital requirements as of the end 
of the calendar month prior to the effective date of its membership.
Registered Investment Company Netting Members
    FICC proposes to leave the capital requirements applicable to 
Registered Investment Company Netting Members unchanged, however FICC 
proposes to make some clarifying and conforming language changes and 
add a paragraph heading to improve the accessibility and transparency 
of the capital requirements, without substantive effect.
Other Netting Members
    For Netting Members not otherwise addressed in Section 4(b)(ii) of 
GSD Rule 2A, FICC proposes that such Netting Members be in compliance 
with their regulator's minimum financial requirements. FICC may, based 
on information provided by or concerning an applicant applying to 
become a Netting Member, also assign minimum financial requirements for 
the applicant based on (i) how closely the applicant resembles an 
existing category of Netting Member and (ii) the applicant's risk 
profile, which assigned minimum financial requirements would be 
promptly communicated to, and discussed with, the applicant.
GSD Rule 1
    In connection with its proposal to enhance capital requirements for 
members, FICC proposes to add to GSD Rule 1 new defined terms of ``CET1 
Capital,'' ``Tier 1 RBC Ratio'' and ``Well Capitalized,'' as described 
above.
Other Proposed Changes to GSD Rule 2A
Section 1
    FICC proposes to revise, without substantive effect, language in 
Section 1 of GSD Rule 2A to improve readability and accessibility.
Sections 2 and 3
    FICC proposes to renumber existing Section 3 of GSD Rule 2A as 
Section 2 and renumber existing Section 2 of GSD Rule 2A as Section 3 
in order for the eligibility requirements for Comparison-Only Members 
set forth in Section 1 of GSD Rule 2A to be immediately followed by the 
membership qualifications and standards for Comparison-Only Members. In 
connection therewith, FICC proposes to revise the heading of the newly 
renumbered Section 2 to clarify that such section specifies the 
membership qualifications and standards for Comparison-Only Members.
    FICC proposes to revise newly renumbered Section 3 to clarify that 
such section sets forth the eligibility requirements for each category 
of Netting Member. FICC also proposes to add a heading to the 
eligibility requirements for each category of Netting Member to improve 
readability and accessibility.
    In Section 3(a)(v), FICC proposes to correct an incorrect reference 
to a Foreign Netting Member and incorrect references to GSD's rules and 
procedures.
    In Section 3(a)(vi), FICC proposes to clarify that a Government 
Securities Issuer Netting Member is a Government Securities Issuer or 
Government Sponsored Enterprise whose membership in the Netting System 
has not been terminated. As described below, FICC proposes to add a new 
defined term of Government Sponsored Enterprise to GSD Rule 1 as this 
term was inadvertently not included in the definition of a Government 
Securities Issuer Netting Member in Section 3(a)(vi) of GSD Rule 2A or 
in the defined terms in GSD Rule 1.
    FICC proposes to add a new Section 3(a)(vii) describing the 
eligibility requirements for an Insurance Company Netting Member based 
on the definition of such category of Netting Member in GSD Rule 1, 
which has been inadvertently omitted from the list of categories of 
Netting Members in Section 3. FICC also proposes to renumber the 
remaining paragraphs of Section 3, as well as any affected cross-
references, accordingly.
    In Section 3(b), FICC proposes to clarify that a Person may be only 
one category of Netting Member at a time and that if a Person qualifies 
for more than one category of Netting Member, FICC, in its sole 
discretion, may determine the category of Netting Member for which that 
Person will be considered.
Section 4
    FICC proposes to revise Section 4(a) of GSD Rule 2A to provide that 
an applicant to be a Netting Member that is already a Comparison-Only 
Member is required to continue to meet the requirements for becoming a 
Comparison-Only Member set forth in GSD Rule 2A, and to delete language 
regarding such requirements that is to be superseded by the proposed 
revisions to the Netting Member capital requirements set forth in 
Section 4(b).
    At the end of Section 4(b), FICC proposes to clarify its existing 
policy that the Netting Member financial responsibility standards set 
forth in Section 4(b) are only the minimum requirements and make 
explicit that the Board, based upon the level of the anticipated 
positions and obligations of the applicant, the anticipated risk 
associated with the volume and types of transactions the applicant 
proposes to process through FICC, and the overall financial condition 
of the applicant, may, in its sole discretion, impose heightened or 
different financial responsibility standards on any applicant.
    FICC also proposes to clarify its existing practice that if an 
applicant

[[Page 74137]]

does not itself satisfy the required minimum financial responsibility 
standards, the Board may include for such purposes the financial 
resources of the parent company of the applicant (including, in the 
case of an applicant that is a U.S. branch or agency, its parent bank) 
if the parent company has delivered to FICC a guaranty, satisfactory in 
form and substance to the Board, of the obligations of the applicant to 
FICC.
    FICC proposes to make Section 4(c) the very end of Section 4 to 
improve readability and accessibility by not separating the Netting 
Member financial responsibility standards set forth in Section 4(b) 
with the above-described statements regarding the Board's existing 
authority to impose heightened or different financial responsibility 
standards or to consider the financial resources of a parent company.
GSD Funds-Only Settling Bank Members
    FICC proposes to require that any Funds-Only Settling Bank that, in 
accordance with such entity's regulatory and/or statutory requirements, 
calculates a Tier 1 RBC Ratio must have a Tier 1 RBC Ratio \26\ equal 
to or greater than the Tier 1 RBC Ratio that would be required for such 
Funds-Only Settling Bank to be Well Capitalized. FICC does not 
currently have a capital requirement for Funds-Only Settling Banks.
---------------------------------------------------------------------------

    \26\ Under the proposal, Tier 1 RBC Ratio is the ratio of an 
entity's tier 1 capital to its total risk-weighted assets, 
calculated in accordance with such entity's regulatory and/or 
statutory requirements.
---------------------------------------------------------------------------

GSD Sponsoring Members
    FICC proposes to leave the required equity capital for a Bank 
Netting Member applying to become a Category 1 Sponsoring Member 
unchanged, however FICC proposes to (i) replace the previous references 
to such Bank Netting Member or its bank holding company being ``well-
capitalized'' with the new defined term Well Capitalized and (ii) make 
some clarifying and conforming language changes to improve the 
accessibility and transparency of the capital requirements, without 
substantive effect.
    FICC also proposes to clarify that an applicant must satisfy its 
applicable capital requirements when it applies for membership and at 
all times thereafter, and therefore proposes to delete language 
requiring that a member satisfy its capital requirements as of the end 
of the calendar month prior to the effective date of its membership.
GSD CCIT Members
    FICC proposes to leave the capital requirements for a CCIT Member 
unchanged, but delete the language in Section 2(a)(ii) of GSD Rule 3B 
providing that the minimum capital requirements for a CCIT Member that 
does not prepare its financial statements in accordance with U.S. GAAP 
is subject to a multiplier that requires such CCIT Member to have 
capital between 1\1/2\ to 7 times the otherwise-applicable capital 
requirement.
    As described above, the multiplier was designed to account for the 
less transparent nature of accounting standards other than U.S. GAAP. 
However, accounting standards have converged over the years (namely 
IFRS and U.S. GAAP).\27\ As such, FICC believes the multiplier is no 
longer necessary and its retirement would be a welcomed simplification 
for both FICC and its members.
---------------------------------------------------------------------------

    \27\ Supra note 24.
---------------------------------------------------------------------------

    FICC also proposes to revise the heading and introductory sentence 
of Section 2 of GSD Rule 3B to clarify that, in addition to the 
eligibility requirements for becoming a CCIT Member, such section also 
includes qualifications and standards requirements for CCIT Members. 
FICC also proposes to add a heading of ``Minimum Financial 
Requirements'' to Section 2(a)(ii) for consistency with the other 
subsections in Section 2(a).
    In Section 5 of GSD Rule 3B, FICC proposes to fix a typographical 
error in the heading and clarify existing language that the 
eligibility, qualifications and standards set forth in respect of an 
applicant shall continue to be met upon an applicant's admission as a 
CCIT Member and at all times while a CCIT Member.
MBSD Clearing Members
Bank Clearing Members
    FICC proposes to (1) change the measure of capital requirements for 
banks and trust companies from equity capital to CET1 Capital,\28\ (2) 
raise the minimum capital requirements for banks and trust companies, 
and (3) require U.S. banks and trust companies to be Well Capitalized 
as defined in the capital adequacy rules and regulations of the 
FDIC.\29\
---------------------------------------------------------------------------

    \28\ Under the proposal, CET1 Capital would be defined as an 
entity's common equity tier 1 capital, calculated in accordance with 
such entity's regulatory and/or statutory requirements.
    \29\ See 12 CFR 324.403(b)(1).
---------------------------------------------------------------------------

    FICC proposes to change the measure of capital requirements for 
banks and trust companies from equity capital to CET1 Capital and raise 
the minimum capital requirements for banks and trust companies in order 
to align FICC's capital requirements with banking regulators' changes 
to regulatory capital requirements over the past several years, which 
have standardized and harmonized the calculation and measurement of 
bank capital and leverage throughout the world.\30\ Consistent with 
these changes by banking regulators, FICC believes that the appropriate 
capital measure for members that are banks and trust companies should 
be CET1 Capital and that FICC's capital requirements for members should 
be enhanced in light of these increased regulatory capital 
requirements.
---------------------------------------------------------------------------

    \30\ See supra note 23.
---------------------------------------------------------------------------

    In addition, requiring U.S. banks and trust companies to be Well 
Capitalized ensures that members are well capitalized while also 
allowing adjusted capital to be relative to either the risk-weighted 
assets or average total assets of the bank or trust company. FICC 
proposes to have the definition of Well Capitalized expressly tied to 
the FDIC's definition of ``well capitalized'' to ensure that the 
proposed requirement that U.S. banks and trust companies be Well 
Capitalized will keep pace with future changes to banking regulators' 
regulatory capital requirements.
    Under the proposal, a Bank Clearing Member that is a U.S. bank or 
trust company must have and maintain at least $500 million in CET1 
Capital and be Well Capitalized. Under the proposal, a Bank Clearing 
Member that is a bank or trust company established or chartered under 
the laws of a non-U.S. jurisdiction and applying through its U.S. 
branch or agency must (i) have CET1 Capital of at least $500 million, 
(ii) comply with the minimum capital requirements (including, but not 
limited to, any capital conservation buffer, countercyclical buffer, 
and any D-SIB or G-SIB buffer, if applicable) and capital ratios 
required by its home country regulator, or, if greater, with such 
minimum capital requirements or capital ratios standards promulgated by 
the Basel Committee on Banking Supervision and (iii) provide an 
attestation for itself, its parent bank and its parent bank holding 
company (as applicable) detailing the minimum capital requirements 
(including, but not limited to, any capital conservation buffer, 
countercyclical buffer, and any D-SIB or G-SIB buffer, if applicable) 
and capital ratios required by their home country regulator.

[[Page 74138]]

Dealer Clearing Members
    FICC proposes to leave the capital requirements applicable to 
Dealer Clearing Members unchanged, however FICC proposes to (i) 
expressly provide for equivalence among measures of Excess Net Capital, 
Excess Liquid Capital \31\ and Excess Adjusted Net Capital,\32\ 
depending on what the Dealer Clearing Member is required to report on 
its regulatory filings, and (ii) make some clarifying and conforming 
language changes and add a paragraph heading to improve the 
accessibility and transparency of the capital requirements, without 
substantive effect.
---------------------------------------------------------------------------

    \31\ Under the proposal, Excess Liquid Capital would be defined 
as the difference between the Liquid Capital of a Government 
Securities Broker or Government Securities Dealer and the minimum 
Liquid Capital that such Government Securities Broker or Government 
Securities Dealer must have to comply with the requirements of 17 
CFR Section 402.2(a), (b) and (c), or any successor rule or 
regulation thereto. FICC also proposes to add to MBSD Rule 1 related 
defined terms of Liquid Capital, Government Securities Broker and 
Government Securities Dealer, in each case identical to the 
definitions of such terms in the GSD Rules.
    \32\ Under the proposal, Excess Adjusted Net Capital would be 
defined as the difference between the adjusted net capital of a 
Futures Commission Merchant and the minimum adjusted net capital 
that such Futures Commission Merchant must have to comply with the 
requirements of 17 CFR Section 1.17(a)(1) or (a)(2), or any 
successor rule or regulation thereto. FICC also proposes to add to 
MBSD Rule 1 a related defined term of Futures Commission Merchant 
identical to the definition of such term in the GSD Rules.
---------------------------------------------------------------------------

    FICC also proposes to clarify that an applicant must satisfy its 
applicable capital requirements when it applies for membership and at 
all times thereafter, and therefore proposes to delete language 
requiring that a member satisfy its capital requirements as of the end 
of the calendar month prior to the effective date of its membership.
Inter-Dealer Broker Clearing Members
    FICC proposes to leave the Excess Net Capital requirement 
applicable to Inter-Dealer Broker Clearing Members unchanged, however 
FICC proposes to (i) require Inter-Dealer Broker Clearing Members to 
have Net Worth of $25 million, (ii) expressly provide for equivalence 
among measures of Excess Net Capital, Excess Liquid Capital and Excess 
Adjusted Net Capital, depending on what the Inter-Dealer Broker 
Clearing Member is required to report on its regulatory filings, and 
(iii) make some clarifying and conforming language changes to improve 
the accessibility and transparency of the capital requirements, without 
substantive effect.
    FICC also proposes to clarify that an applicant must satisfy its 
applicable capital requirements when it applies for membership and at 
all times thereafter, and therefore proposes to delete language 
requiring that a member satisfy its capital requirements as of the end 
of the calendar month prior to the effective date of its membership.
Unregistered Investment Pool Clearing Members
    FICC proposes to leave the requirements applicable to Unregistered 
Investment Pool Clearing Members unchanged, however FICC proposes to 
(i) consolidate under one heading the requirements applicable to 
Unregistered Investment Pool Clearing Members and (ii) make some 
clarifying and conforming language changes to improve the accessibility 
and transparency of the requirements, without substantive effect.
Government Securities Issuer Clearing Members
    FICC proposes to leave the capital requirements applicable to 
Government Securities Issuer Clearing Members unchanged, however FICC 
proposes to make some clarifying and conforming language changes and 
add a paragraph heading to improve the accessibility and transparency 
of the capital requirements, without substantive effect.
Insured Credit Union Clearing Members
    FICC proposes to leave the capital requirements applicable to 
Insured Credit Union Clearing Members unchanged, however FICC proposes 
to make some clarifying and conforming language changes and add a 
paragraph heading to improve the accessibility and transparency of the 
capital requirements, without substantive effect.
Registered Investment Company Clearing Members
    FICC proposes to leave the capital requirements applicable to 
Registered Investment Company Clearing Members unchanged, however FICC 
proposes to make some clarifying and conforming language changes and 
add a paragraph heading to improve the accessibility and transparency 
of the capital requirements, without substantive effect.
Foreign Members
    Under the proposal, a Foreign Person that is a Clearing Member 
must, at a minimum, satisfy its home country regulator's minimum 
financial requirements in addition to the following:

    (1) In the case of a Foreign Person that is a broker or dealer 
(and not applying to become a Dealer Clearing Member or Inter-Dealer 
Broker Clearing Member), it must have total equity capital of at 
least $25 million; and
    (2) in the case of a Foreign Person that is a bank or trust 
company established or chartered under the laws of a non-U.S. 
jurisdiction (and not applying to become a Bank Clearing Member 
through a U.S. branch or agency), it must (i) have CET1 Capital of 
at least $500 million, (ii) comply with the minimum capital 
requirements (including, but not limited to, any capital 
conservation buffer, countercyclical buffer, and any D-SIB or G-SIB 
buffer, if applicable) and capital ratios required by its home 
country regulator, or, if greater, with such minimum capital 
requirements or capital ratios standards promulgated by the Basel 
Committee on Banking Supervision and (iii) provide an attestation 
for itself and its parent bank holding company detailing the minimum 
capital requirements (including, but not limited to, any capital 
conservation buffer, countercyclical buffer, and any D-SIB or G-SIB 
buffer, if applicable) and capital ratios required by their home 
country regulator.

    FICC may, based on information provided by or concerning an 
applicant that is a Foreign Person, also assign minimum financial 
requirements for the applicant based on (i) how closely the applicant 
resembles another existing category of Clearing Member and (ii) the 
applicant's risk profile, which assigned minimum financial requirements 
would be promptly communicated to, and discussed with, the applicant.
    As described above, under Section 2(e)(ii) of MBSD Rule 2A, the 
current minimum capital requirements for a member that does not prepare 
its financial statements in accordance with U.S. GAAP is subject to a 
multiplier that requires such member to have capital between 1\1/2\ to 
7 times the otherwise-applicable capital requirement.
    The multiplier was designed to account for the less transparent 
nature of accounting standards other than U.S. GAAP. However, 
accounting standards have converged over the years (namely IFRS and 
U.S. GAAP).\33\ As such, FICC believes the multiplier is no longer 
necessary and its retirement would be a welcomed simplification for 
both FICC and its members.
---------------------------------------------------------------------------

    \33\ Supra note 24.
---------------------------------------------------------------------------

    Accordingly, FICC proposes to delete the language in Section 
2(e)(ii) of MBSD Rule 2A providing that the minimum capital 
requirements for a member that does not prepare its financial 
statements in accordance with U.S. GAAP is subject to a multiplier that 
requires such member to have capital between 1\1/2\ to

[[Page 74139]]

7 times the otherwise-applicable capital requirement.
    As described above, FICC also proposes that non-U.S. banks and 
trust companies be compliant with the minimum capital requirements and 
capital ratios in their home jurisdiction. Given the difficulty in 
knowing and monitoring compliance with various regulatory minimums for 
various jurisdictions, these members would be required to provide FICC 
with periodic attestations relating to the minimum capital requirements 
and capital ratios for their home jurisdiction, as described in greater 
detail below.
    In MBSD Rule 3, FICC proposes to add a paragraph providing that a 
Clearing Member that is a bank or trust company established or 
chartered under the laws of a non-U.S. jurisdiction and a Bank Clearing 
Member that is a U.S. branch or agency must (i) provide, no less than 
annually and upon request by FICC, an attestation for itself, its 
parent bank and its parent bank holding company (as applicable) 
detailing the minimum capital requirements (including, but not limited 
to, any capital conservation buffer, countercyclical buffer, and any D-
SIB or G-SIB buffer, if applicable) and capital ratios required by 
their home country regulator and (ii) notify FICC: (a) Within two 
Business Days of any of their capital requirements (including, but not 
limited to, any capital conservation buffer, countercyclical buffer, 
and any D-SIB or G-SIB buffer, if applicable) or capital ratios falling 
below any minimum required by their home country regulator; and (b) 
within 15 calendar days of any such minimum capital requirement or 
capital ratio changing.
    FICC also proposes to require Foreign Members that are regulated by 
their home country regulator and Bank Clearing Members that are U.S. 
branches or agencies of non-U.S. banks or trust companies to provide 
FICC copies of any regulatory notifications required to be made when an 
entity does not comply with the financial reporting and responsibility 
standards set by their home country regulator and to notify FICC in 
writing within 2 Business Days of becoming subject to a disciplinary 
action by their home country regulator.
Other Clearing Members
    For Clearing Members not otherwise addressed in Section 2(e)(ii) of 
MBSD Rule 2A, FICC proposes that such Clearing Members be in compliance 
with their regulator's minimum financial requirements. FICC may, based 
on information provided by or concerning an applicant applying to 
become a Clearing Member, also assign minimum financial requirements 
for the applicant based on (i) how closely the applicant resembles an 
existing category of Clearing Member and (ii) the applicant's risk 
profile, which assigned minimum financial requirements would be 
promptly communicated to, and discussed with, the applicant.
Other Proposed Changes to MBSD Rule 2A
Section 1
    FICC proposes to revise Section 1 of MBSD Rule 2A to clarify that 
such section sets forth the eligibility requirements for each category 
of Clearing Member. FICC also proposes to add a heading to each of the 
eligibility requirements for each category of Clearing Member to 
improve readability and accessibility.
    In paragraph (d), FICC proposes to clarify that a Person is 
eligible to apply to become an Unregistered Investment Pool Clearing 
Member if it is an Unregistered Investment Pool and that an 
Unregistered Investment Pool Clearing Member is an Unregistered 
Investment Pool whose membership in the Clearing System has not been 
terminated.
    In paragraph (f), FICC proposes to clarify that a Person is 
eligible to apply to become an Insurance Company Clearing Member if it 
is an Insurance Company in good standing with its primary regulator.
    In paragraph (g), FICC proposes to clarify that a Person is 
eligible to apply to become a Registered Clearing Agency Member if it 
is a Registered Clearing Agency in good standing with its primary 
regulator.
    In the next to last paragraph of Section 1, FICC proposes to 
correct an incorrect pluralization of the word ``category'' and a 
potentially confusing consolidation of two defined terms.
    In the last paragraph of Section 1, FICC proposes to correct an 
incorrect reference to a Clearing Member that is a Foreign Person and 
incorrect references to MBSD's rules and procedures.
Section 2
    FICC proposes to revise the introductory sentence to Section 2 of 
MBSD Rule 2A to clarify that the Board's approval of an application to 
become a Clearing Member is subject to the limitations set forth in 
MBSD Rule 2A.
    At the end of Section 2(e), FICC proposes to clarify its existing 
policy that the Clearing Member financial responsibility standards set 
forth in Section 2(e) are only the minimum requirements and make 
explicit that the Board, based upon the level of the anticipated 
positions and obligations of the applicant, the anticipated risk 
associated with the volume and types of transactions the applicant 
proposes to process through FICC, and the overall financial condition 
of the applicant, may, in its sole discretion, impose heightened or 
different financial responsibility standards on any applicant.
    FICC also proposes to clarify its existing practice that if an 
applicant does not itself satisfy the required minimum financial 
responsibility standards, the Board may include for such purposes the 
financial resources of the parent company of the applicant (including, 
in the case of an applicant that is a U.S. branch or agency, its parent 
bank) if the parent company has delivered to FICC a guaranty, 
satisfactory in form and substance to the Board, of the obligations of 
the applicant to FICC.
    FICC proposes to make Section 2(e) the very end of Section 2 to 
improve readability and accessibility by not separating the Clearing 
Member financial responsibility standards set forth in Section 2(e) 
with the above-described statements regarding the Board's existing 
authority to impose heightened or different financial responsibility 
standards or to consider the financial resources of a parent company.
MBSD Cash Settling Bank Members
    FICC proposes to require that any Cash Settling Bank Member that, 
in accordance with such entity's regulatory and/or statutory 
requirements, calculates a Tier 1 RBC Ratio must have a Tier 1 RBC 
Ratio \34\ equal to or greater than the Tier 1 RBC Ratio that would be 
required for such Cash Settling Bank Member to be Well Capitalized. 
FICC does not currently have a capital requirement for Cash Settling 
Bank Members. FICC also proposes to revise the title of MBSD Rule 3A to 
reflect the correct title for this membership category.
---------------------------------------------------------------------------

    \34\ See supra note 26.
---------------------------------------------------------------------------

B. Changes to FICC's Watch List and Enhanced Surveillance List

    FICC proposes to redefine the Watch List and eliminate the separate 
enhanced surveillance list and instead implement a new Watch List that 
consists of a relatively smaller group of members that pose heightened 
risk to FICC and its members.
    FICC believes that the current system of having both a Watch List 
and an

[[Page 74140]]

enhanced surveillance list has confused various FICC stakeholders, 
while the proposed approach, as FICC understands from its experience, 
will be more consistent with industry practices and understanding of a 
``Watch List.''
    The new Watch List would include members with a CRRM rating of 6 or 
7, as well as members that are deemed by FICC to pose a heightened risk 
to it and its members. The separate enhanced surveillance list would be 
merged into the new Watch List and references to the separate enhanced 
surveillance list would be deleted from the Rules.
    In sum, the new Watch List would consist of members on the existing 
enhanced surveillance list, members with a CRRM rating of 6 or 7, and 
any other members that are deemed by FICC to pose a heightened risk to 
it and its members.
    The proposed change will mean that members with a CRRM rating of 5 
would no longer automatically be included on the Watch List. Members 
with a CRRM rating of 5 represent the largest single CRRM rating 
category, but FICC does not believe all such members present heightened 
credit concerns.\35\ Nevertheless, FICC would continue to have the 
authority to place a member on the new Watch List if it is deemed to 
pose a heightened risk to FICC and its members and/or to downgrade the 
CRRM rating of a member.
---------------------------------------------------------------------------

    \35\ The majority of members with a CRRM rating of 5 are either 
rated ``investment grade'' by external rating agencies or, in the 
absence of external ratings, FICC believes are equivalent to 
investment grade, as many of these members are primary dealers and 
large foreign banks. A firm with a rating of ``investment grade'' is 
understood to be better able to make its payment obligations 
compared to a firm with a lesser rating, such as a rating of 
``speculative.'' As such, among the total population, firms with 
investment grade ratings are generally considered good credit risk 
along a credit risk scale.
---------------------------------------------------------------------------

    In GSD Rule 1, FICC proposes to update a reference to ``members'' 
in the definition of the Watch List to be a reference to the defined 
term ``Members.'' In Section 12 of GSD Rule 3, FICC proposes to update 
references to ``members'' with the defined term ``Members.'' FICC also 
proposes to clarify in Section 12(f) of GSD Rule 3 and Section 11(f) of 
MBSD Rule 3 that members on the Watch List are reported to FICC's 
management committees and regularly reviewed by FICC's senior 
management.

C. Certain Other Clarification Changes

    In connection with the above-described changes to the Rules to 
enhance FICC's capital requirements for members and redefine the Watch 
List and eliminate the enhanced surveillance list, FICC proposes to 
make certain other clarification changes in order to improve the 
accessibility and transparency of the Rules including the following:
GSD Rules
    In GSD Rule 1, FICC proposes to update cross-references in the 
definitions of ``Bank Netting Member,'' ``Dealer Netting Member,'' 
``Foreign Netting Member,'' ``Futures Commission Merchant Netting 
Member,'' ``Government Securities Issuer Netting Member,'' ``Insurance 
Company Netting Member,'' ``Inter-Dealer Broker Netting Member,'' 
``Registered Clearing Agency Netting Member'' and ``Registered 
Investment Company Netting Member'' to reflect the renumbering of 
Section 2 of GSD Rule 2A as Section 3.
    FICC proposes to add a new defined term of ``Government Sponsored 
Enterprise'' in GSD Rule 1 which would be used in the revised 
definition of ``Government Securities Issuer Netting Member'' in 
Section 3 of GSD Rule 2A, from which such term was inadvertently 
omitted. The proposed definition of ``Government Sponsored Enterprise'' 
in GSD Rule 1 is the same as the definition of such term in MBSD Rule 
1.\36\
---------------------------------------------------------------------------

    \36\ MBSD Rule 1 (Definitions), supra note 3.
---------------------------------------------------------------------------

    FICC also proposes to revise the definition of ``Excess Capital 
Differential'' in GSD Rule 1 to replace the reference to ``Excess 
Capital'' with a reference to ``Netting Member Capital.'' FICC 
previously deleted the defined term ``Excess Capital'' from GSD Rule 1 
and replaced it with the defined term ``Netting Member Capital'' \37\ 
but inadvertently did not update the reference to ``Excess Capital'' in 
the defined term ``Excess Capital Differential'' with a reference to 
``Netting Member Capital.''
---------------------------------------------------------------------------

    \37\ See Securities Exchange Act Release Nos. 83362 (June 1, 
2018), 83 FR 26514 (June 7, 2018) (SR-FICC-2018-001) and 83223 (May 
11, 2018), 83 FR 23020 (May 17, 2018) (SR-FICC-2018-801).
---------------------------------------------------------------------------

    In GSD Rule 2, FICC proposes to clarify that FICC would make its 
services available to applicants that meet the eligibility, 
qualifications and standards specified in the GSD Rules. FICC also 
proposes to separate a sentence specifying the GSD Rules governing 
Sponsored Members and Sponsoring Members, CCIT Members and Funds-Only 
Settling Bank Members into three separate sentences to improve 
accessibility and transparency.
    In GSD Rule 3, FICC proposes to clarify existing language that the 
eligibility, qualifications and standards set forth in GSD Rule 2A in 
respect of an applicant shall continue to be met upon an applicant's 
admission as a Member and at all times while a Member. FICC also 
proposes to fix incorrect usages of certain defined terms, incorrect 
references to certain Exchange Act Rules, a reference to a ``domestic'' 
bank or trust company rather than a ``U.S.'' bank or trust company, as 
well as make other typographical and clarifying changes.
    FICC proposes to revise the existing requirements in Sections 2(e) 
and (f) of GSD Rule 3 for Members established in the United Kingdom to 
provide FICC certain financial information and reports submitted to 
their regulators by expanding such requirement to include Members 
established in any non-U.S. jurisdiction, any financial information 
requested by FICC and any reports submitted to such Member's home 
country regulator.
    FICC proposes to revise Sections 2(g) and 8 of GSD Rule 3 to 
clarify the circumstances when a Member is out of compliance with 
certain membership standards, and to move a sentence regarding when 
FICC begins to assess a premium to the Required Fund Deposit of a 
Member that falls below its minimum financial requirements.
    FICC proposes to revise Section 2(h) of GSD Rule 3 to clarify that 
a parent company that has guaranteed the obligations of its subsidiary 
to FICC also includes, in the case of a Member that is a U.S. branch or 
agency, its parent bank.
    In Section 7 of GSD Rule 2A, FICC proposes to update a reference to 
Section 3 of GSD Rule 2A with a reference to Section 2 to reflect the 
renumbering of such sections.
MBSD Rules
    In MBSD Rule 1, FICC proposes to add a defined term for 
``Registered Clearing Agency Member,'' which was inadvertently not 
included in the list of defined terms in MBSD Rule 1.
    In MBSD Rule 2, FICC proposes to clarify that FICC will make its 
services available to applicants that meet the eligibility, 
qualifications and standards specified in the MBSD Rules, and to 
reflect that FICC, in addition to the Board, has the existing authority 
to approve certain membership applications.
    In MBSD Rule 3, FICC proposes to clarify existing language that the 
eligibility, qualifications and standards set forth in MBSD Rule 2A in 
respect of an applicant shall continue to be met upon an applicant's 
admission as a Member and at all times while a Member. FICC also 
proposes to fix incorrect usages of certain defined terms, incorrect 
references to certain Exchange Act Rules, a reference to a ``domestic'' 
bank or trust company

[[Page 74141]]

rather than a ``U.S.'' bank or trust company, as well as make other 
typographical and clarifying changes.
    FICC proposes to revise the existing requirements in Sections 2(d) 
and (e) of MBSD Rule 3 for Members established in the United Kingdom to 
provide FICC certain financial information and reports submitted to 
their regulators by expanding such requirement to include Members 
established in any non-U.S. jurisdiction, any financial information 
requested by FICC and any reports submitted to such Member's home 
country regulator.
    FICC proposes to revise Section 2(g) of MBSD Rule 3 to clarify the 
circumstances when a Member is out of compliance with certain 
membership standards and how often a Member is required to provide 
unaudited financial information to FICC.
    FICC proposes to revise Section 2(h) of MBSD Rule 3 to clarify that 
a parent company that has guaranteed the obligations of its subsidiary 
to FICC also includes, in the case of a Member that is a U.S. branch or 
agency, its parent bank, and to correct a grammatical error.
Member Outreach
    Beginning in June 2019, FICC has conducted outreach to various 
members in order to provide them with advance notice of the proposed 
enhancements to FICC's capital requirements for members, the proposed 
redefinition of the Watch List, and the proposed elimination of the 
enhanced surveillance list. FICC has not conducted outreach to members 
providing them with advance notice of the proposed clarification 
changes to the Rules. FICC has not received any written feedback from 
members on the proposal. The Commission will be notified of any written 
comments received.
Implementation Timeframe
    Pending Commission approval, FICC would implement the proposed 
changes to enhance its capital requirements for members, as well as the 
clarification changes to the Rules, one year after the Commission's 
approval of this proposed rule change. During that one-year period, 
FICC would periodically provide members with estimates of their capital 
requirements, based on the approved changes, with more outreach 
expected for members impacted by the changes. The deferred 
implementation for all members and the estimated capital requirements 
for members are designed to give members the opportunity to assess the 
impact of their enhanced capital requirements on their business 
profile. All members would be advised of the implementation date of 
these proposed changes through issuance of an FICC Important Notice, 
posted to its website. FICC also would inform firms applying for 
membership of the new capital requirements. Members and applicants 
should note that the methodology/processes used to set their initial 
capital requirements would be the same at implementation of the 
proposed changes as it would be on an ongoing basis.
    FICC expects to implement the proposed changes to redefine the 
Watch List and eliminate the enhanced surveillance list within 90 days 
of Commission approval. All members would be advised of such 
implementation through issuance of an FICC Important Notice, posted to 
its website.
2. Statutory Basis
    FICC believes that the proposed rule change is consistent with the 
requirements of the Exchange Act, and the rules and regulations 
thereunder applicable to a registered clearing agency. Specifically, 
FICC believes that the proposed rule change is consistent with Section 
17A(b)(3)(F) of the Exchange Act \38\ and Rules 17Ad-22(b)(7), 
(e)(4)(i) and (e)(18),\39\ each as promulgated under the Exchange Act, 
for the reasons described below.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78q-1(b)(3)(F).
    \39\ 17 CFR 240.17Ad-22(b)(7), (e)(4)(i) and (e)(18).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Exchange Act requires, in part, that 
the Rules be designed to promote the prompt and accurate clearance and 
settlement of securities transactions.\40\ As described above, the 
proposed rule changes would (1) enhance FICC's capital requirements for 
members, (2) redefine the Watch List and eliminate the enhanced 
surveillance list, and (3) make clarification changes to the Rules. 
FICC believes that enhancing its capital requirements for members, 
including continuing to recognize and account for varying members and 
memberships, would help ensure that members maintain sufficient capital 
to absorb losses arising out of their clearance and settlement 
activities at FICC and otherwise, and would help FICC more effectively 
manage and mitigate the credit risks posed by its members, which would 
in turn help FICC be better able to withstand such credit risks and 
continue to meet its clearance and settlement obligations to its 
members. Similarly, FICC believes that redefining the Watch List and 
eliminating the enhanced surveillance list, as described above, would 
help FICC better allocate its resources for monitoring the credit risks 
posed by its members, which would in turn help FICC more effectively 
manage and mitigate such credit risks so that FICC is better able to 
withstand such credit risks and continue to meet its clearance and 
settlement obligations to its members. FICC believes that making 
clarification changes to the Rules, including through the use of new 
defined terms, would help ensure that the Rules remain clear and 
accurate, which would in turn help facilitate members' understanding of 
the Rules and provide members with increased predictability and 
certainty regarding their rights and obligations with respect to FICC's 
clearance and settlement activities. Therefore, FICC believes that 
these proposed rule changes would promote the prompt and accurate 
clearance and settlement of securities transactions, consistent with 
Section 17A(b)(3)(F) of the Exchange Act.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(7) under the Exchange Act requires, in part, that 
FICC establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide a person that maintains net 
capital equal to or greater than $50 million with the ability to obtain 
membership at FICC, provided that FICC may provide for a higher net 
capital requirement as a condition for membership if it demonstrates to 
the Commission that such a requirement is necessary to mitigate risks 
that could not otherwise be effectively managed by other measures.\41\ 
As described above, FICC proposes to enhance its capital requirements 
for members. FICC believes that these proposed rule changes, while 
referencing capital measures other than net capital, would help ensure 
that members maintain sufficient capital to absorb losses arising out 
of their clearance and settlement activities at FICC and otherwise, and 
would help FICC more effectively manage and mitigate the credit risks 
posed by its members while providing fair and open access to membership 
at FICC. FICC believes that the proposed changes would utilize capital 
measures that are appropriately matched to the regulatory and other 
capital requirements applicable to the types of entities that apply for 
and have membership at FICC, which would in turn help facilitate 
members' understanding of and compliance with FICC's enhanced capital 
requirements. FICC also believes that these other capital measures are 
more appropriate measures of the capital available to members to absorb 
losses arising out of

[[Page 74142]]

their clearance and settlement activities at FICC than simply net 
capital because a member's net capital alone may not be available to 
absorb losses arising out of such activities. Thus, relying on measures 
beyond net capital would help members more effectively understand and 
manage the resources available to mitigate the credit risks they pose 
to FICC. In the case of those proposed rule changes that may require 
members such as U.S. banks and trust companies or non-U.S. banks and 
trust companies to maintain capital greater than $50 million, FICC 
believes that enhanced capital requirements for such members are 
necessary and appropriate in light of the regulatory and other capital 
requirements that such members face and the credit risks they pose to 
FICC, which would help FICC more effectively manage and mitigate such 
credit risks. Therefore, FICC believes that the enhanced capital 
requirements for members are necessary to mitigate risks that could not 
otherwise be effectively managed by other measures, consistent with 
Rule 17Ad-22(b)(7) under the Exchange Act.
---------------------------------------------------------------------------

    \41\ 17 CFR 240.17Ad-22(b)(7).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(i) under the Exchange Act requires that FICC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively identify, measure, 
monitor, and manage its credit exposures to participants and those 
arising from its payment, clearing, and settlement processes, including 
by maintaining sufficient financial resources to cover its credit 
exposure to each participant fully with a high degree of 
confidence.\42\ As described above, FICC proposes to enhance its 
capital requirements for members, redefine the Watch List, and 
eliminate the enhanced surveillance list. FICC believes that enhancing 
its capital requirements for members would help ensure that members 
maintain sufficient capital to absorb losses arising out of their 
clearance and settlement activities at FICC and otherwise, which would 
in turn help FICC more effectively manage and mitigate its credit 
exposures to its members and thereby help enhance the ability of FICC's 
financial resources to cover fully FICC's credit exposures to members 
with a high degree of confidence. FICC believes that redefining the 
Watch List and eliminating the enhanced surveillance list would help 
FICC better allocate its resources for monitoring its credit exposures 
to members. By helping to better allocate resources, the proposal would 
in turn help FICC more effectively manage and mitigate its credit 
exposures to its members, thereby helping to enhance the ability of 
FICC's financial resources to cover fully FICC's credit exposures to 
members with a high degree of confidence. Therefore, FICC believes that 
its proposal to enhance its capital requirements for members, redefine 
the Watch List, and eliminate the enhanced surveillance list is 
consistent with Rule 17Ad-22(e)(4)(i) under the Exchange Act.
---------------------------------------------------------------------------

    \42\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(18) under the Exchange Act requires that FICC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to establish objective, risk-based, and 
publicly disclosed criteria for participation, which permit fair and 
open access by direct and, where relevant, indirect participants and 
other financial market utilities, require participants to have 
sufficient financial resources and robust operational capacity to meet 
obligations arising from participation in the clearing agency, and 
monitor compliance with such participation requirements on an ongoing 
basis.\43\ As described above, FICC proposes to enhance its capital 
requirements for members, redefine the Watch List, and eliminate the 
enhanced surveillance list. FICC's proposed capital requirements would 
utilize objective measurements of member capital that would be fully 
disclosed in the Rules. The proposed capital requirements also would be 
risk-based and allow for fair and open access in that they would be 
based on the credit risks imposed by the member, such as its membership 
type and type of entity (including whether it is a non-U.S. entity). 
Accordingly, FICC's proposed capital requirements would establish 
objective, risk-based and publicly disclosed criteria for membership, 
which would permit fair and open access by members. The proposed 
capital requirements also would ensure that members maintain sufficient 
capital to absorb losses arising out of their clearance and settlement 
activities at FICC and otherwise, which would help ensure that they 
have sufficient financial resources to meet the obligations arising 
from their membership at FICC. FICC's proposed redefinition of the 
Watch List and the elimination of the enhanced surveillance list would 
help FICC better allocate its resources for monitoring the credit risks 
posed by its members, including their ongoing compliance with FICC's 
proposed enhancements to its capital requirements. Therefore, FICC 
believes that its proposal to enhance its capital requirements for 
members, redefine the Watch List, and eliminate the enhanced 
surveillance list is consistent with Rule 17Ad-22(e)(18) under the 
Exchange Act.
---------------------------------------------------------------------------

    \43\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    FICC does not believe the proposed changes to enhance its capital 
requirements for members would have an impact on competition because 
all of its members already meet, and in most cases exceed, the proposed 
capital requirements.
    Additionally, FICC does not believe that the proposed changes to 
(i) redefine the Watch List and eliminate the enhanced surveillance 
list and (ii) make clarification changes to the Rules would impact 
competition. Redefining the Watch List and eliminating the enhanced 
surveillance list are simply intended to streamline and clarify these 
monitoring practices. If anything, by no longer automatically including 
members with a CRRM rating of 5 on the Watch List, as proposed, the 
change could promote competition for such members, as such members 
would no longer automatically be subject to increased scrutiny by FICC, 
including the possibility of increased financial and reporting 
obligations. Meanwhile, making clarification changes to the Rules to 
ensure that they remain accessible and transparent would help 
facilitate members' understanding of the Rules and provide members with 
increased predictability and certainty regarding their rights and 
obligations with respect to FICC's clearance and settlement activities.

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

    FICC has not received or solicited any written comments relating to 
this proposal. If any written comments are received, FICC will amend 
this filing to publicly file such comments as an Exhibit 2 to this 
filing, as required by Form 19b-4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to 
Section IV (Solicitation of Comments) of the Exhibit 1A in the General 
Instructions to Form 19b-4, the SEC does not edit personal identifying 
information from comment submissions. Commenters should submit only 
information that they wish to make available publicly, including their 
name, email address, and any other identifying information.
    All prospective commenters should follow the SEC's instructions on 
How to Submit Comments, available at https://

[[Page 74143]]

www.sec.gov/regulatory-actions/how-to-submit-comments. General 
questions regarding the rule filing process or logistical questions 
regarding this filing should be directed to the Main Office of the 
SEC's Division of Trading and Markets at [email protected] or 
202-551-5777.
    FICC reserves the right to not respond to any comments received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be 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 Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FICC-2021-009 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2021-009. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of FICC and on DTCC's website 
(https://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FICC-2021-009 and should be submitted on 
or before January 19, 2022.
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    \44\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-28251 Filed 12-28-21; 8:45 am]
BILLING CODE 8011-01-P