[Federal Register Volume 79, Number 231 (Tuesday, December 2, 2014)]
[Notices]
[Pages 71481-71483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-28315]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73682; File No. SR-FICC-2014-09]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Amend the Rules of the 
Government Securities Division and the Mortgage-Backed Securities 
Division Regarding the Default of Fixed Income Clearing Corporation

November 25, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 12, 2014, Fixed Income Clearing Corporation (``FICC'' or 
``Corporation'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by FICC. 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 rules of the 
Government Securities Division (``GSD Rules'') of FICC and the rules of 
the Mortgage-Backed Securities Division (``MBSD Rules'') of FICC (each 
of GSD and MBSD, a ``Division'' of FICC) regarding a default by the 
Corporation.

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

    In its filing with the Commission, FICC 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. FICC 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 filing is to amend in certain respects the GSD 
Rules and the MBSD Rules regarding a default by the Corporation.
    By way of background, in 2010, FICC received approval from the 
Securities and Exchange Commission (``SEC'') to amend the GSD Rules to 
add Rule 22B (the ``GSD Corporation Default Rule'').\3\ Certain 
technical clarifying changes to the GSD Corporation Default Rule were 
subsequently filed by FICC with the SEC for immediate effectiveness in 
2011.\4\
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    \3\ See Securities Exchange Act Release No. 34-63038 (October 5, 
2010), 75 FR 62899 (October 13, 2010) (SR-FICC-2010-04).
    \4\ See Securities Exchange Act Release No. 34-64004 (March 2, 
2011), 76 FR 12782 (March 8, 2011) (SR-FICC-2011-02).
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    The GSD Corporation Default Rule was originally added to the GSD 
Rules to make explicit the close out netting that would be applied to 
obligations between FICC and its members in the event that FICC becomes 
insolvent or otherwise defaults on its obligations to its members, and, 
in doing so, provide clarity to member firms in their application of 
balance sheet netting to their transactions at FICC under U.S. GAAP and 
in the calculation of their capital requirements on the basis of their 
net credit exposure to FICC under Basel Accord standards. A rule 
parallel to the GSD Corporation Default Rule was subsequently added as 
Rule 17A to the MBSD Rules \5\ (the ``MBSD Corporation Default Rule'', 
and together with the GSD Corporation Default Rule, the ``Corporation 
Default Rules'').
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    \5\ See Securities Exchange Act Release No. 34-66550 (March 9, 
2012), 77 FR 15155 (March 14, 2012) (SR-FICC-2008-01).
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    There are three general types of default covered by the Corporation 
Default Rules: Voluntary proceedings defaults, involuntary proceedings 
defaults and non-insolvency related defaults.
    With respect to voluntary proceedings defaults, FICC would be 
considered in default under the current Corporation Default Rules 
immediately upon the dissolution of the Corporation, the voluntary 
institution of proceedings by the Corporation seeking a judgment of 
insolvency or bankruptcy or other similar relief or the voluntary 
presentation by the Corporation of a petition for its winding up or 
liquidation.
    With respect to involuntary proceedings defaults, FICC would be 
considered in default under the current Corporation Default Rules on 
the 91st calendar day after the judgment of insolvency or bankruptcy or 
the entry of an order for relief (or similar order) for FICC's winding 
up or liquidation, or the appointment of an administrator, provisional 
liquidator, conservator, receiver, trustee, custodian or other similar 
official for all or substantially all of the Corporation's assets, 
where such judgment, order or appointment, as applicable, remains 
unstayed throughout the 90 calendar day grace period.
    With respect to non-insolvency related defaults, FICC would, as a 
general matter, be considered in default under the current Corporation 
Default Rules on the 91st calendar day after it receives notice from a 
member of its failure to make an undisputed payment or delivery to such 
member that is required under the GSD Rules or the MBSD Rules, 
respectively, where such failure remains unremedied throughout the 90 
calendar day grace period. However, the current Corporation Default 
Rules exclude from the scope of what can be considered a non-insolvency 
related default of the applicable Division of FICC: (1) Failure to 
satisfy obligations to members in wind-down and defaulting members; (2) 
the satisfaction of obligations by alternate means provided for under 
the applicable Division's Rules; (3) failure of the other Division of 
FICC to satisfy an obligation to a member; and (4) failure to satisfy 
obligations as a result of an operational, technological or

[[Page 71482]]

administrative error or impediment, provided that the Corporation 
possesses sufficient funds or assets to satisfy the obligations. 
Moreover, the grace period can be extended beyond 90 calendar days 
under the current Corporation Default Rules in a non-insolvency related 
default situation where a payment or delivery deadline has been 
suspended under the applicable Division's Rules, in which case the 90 
calendar day grace period would commence on the date the Corporation 
receives notice from a member of its failure to make an undisputed 
payment or delivery on the later due date determined pursuant to the 
suspension.
    In order to more closely align FICC's Corporation Default Rules 
with those of its peer central counterparties and to facilitate the 
participation of market participants, including registered investment 
companies, in FICC's services by providing members with further legal 
certainty regarding their rights with respect to a default by the 
Corporation, FICC is proposing to modify the Corporation Default Rules 
as described below.
    With respect to voluntary proceedings defaults, FICC is proposing 
to add as an additional type of voluntary proceeding default under the 
Corporation Default Rules the voluntary making by FICC of a general 
assignment for the benefit of creditors.
    With respect to involuntary proceedings defaults, FICC is proposing 
to eliminate the 90 calendar day grace period such that FICC would be 
considered in an involuntary proceedings default immediately upon the 
judgment of insolvency or bankruptcy or the entry of an order for 
relief (or similar order) for FICC's winding-up or liquidation, or the 
appointment of a receiver, trustee or other similar official for FICC 
or substantially all of FICC's assets, provided that such receiver, 
trustee or other similar official is appointed pursuant to the federal 
securities laws, particularly Section 19(i) of the Act, or Title II of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act.
    With respect to non-insolvency related defaults, FICC is proposing 
to reduce the grace period from 90 to 7 calendar days such that FICC 
would, as a general matter, be considered in a non-insolvency related 
default on the 8th calendar day after it receives notice from a member 
of its failure to make an undisputed payment or delivery to such member 
that is required under the GSD Rules or the MBSD Rules, respectively, 
provided that such failure remains unremedied throughout the 7 calendar 
day grace period. FICC is also proposing to remove the provisions of 
the Corporation Default Rules that provide for a potential extension of 
the grace period in a non-insolvency default situation where the 
deadline for a payment or delivery obligation of the Corporation has 
been suspended by the Corporation under the applicable Division's 
Rules, as well as the provisions of the Corporation Default Rules that 
exclude from the scope of what can be considered a non-insolvency 
related default the failure of the Corporation to satisfy obligations 
based on an operational, technological or administrative error or 
impediment.
    FICC is also proposing to add language to the definition of a 
``Corporation Default'' in order to clarify that no other provision of 
the applicable Division's Rules, including FICC's authority under GSD 
Rule 42 (Suspension of Rules) and MBSD Rule 33 (Suspension of Rules in 
Emergency Circumstances), respectively, can override the definition of 
``Corporation Default'' included in the Corporation Default Rules.
Proposed GSD Rule Changes
    FICC is proposing to amend GSD Rule 22B--``Corporation Default'' as 
follows:
    Clause (b) is revised to clarify that no other provision of GSD's 
Rules, including FICC's authority under GSD Rule 42 (Suspension of 
Rules), can override the definition of ``Corporation Default'' included 
in GSD Rule 22B.
    Clause (b)(i) is revised to reduce the grace period for a non-
insolvency Corporation Default from 90 to 7 calendar days such that 
FICC would be considered in a non-insolvency Corporation Default on the 
8th calendar day after it receives notice from a member of its failure 
to make an undisputed payment or delivery to such member that is 
required under the GSD Rules, provided that such failure remains 
unremedied throughout the 7 calendar day grace period and that none of 
the exclusions enumerated in subclauses (A), (B) and (C) from the scope 
of what is considered a non-insolvency Corporation Default are 
applicable.
    Clause (b)(i) is also revised to remove subclause (D), which 
currently provides for a potential extension of the grace period in a 
non-insolvency Corporation Default where a payment or delivery deadline 
has been suspended under GSD Rule 42, in which case the grace period 
would commence on the date the Corporation receives notice from a 
member of its failure to make an undisputed payment or delivery on the 
later due date determined pursuant to the suspension.
    Clause (b)(i) is further revised to remove subclause (E), which 
currently excludes from the definition of a non-insolvency Corporation 
Default the failure of the Corporation to satisfy obligations based on 
an operational, technological or administrative error or impediment.
    Clause (b)(ii)(B) is revised to add the voluntary making by FICC of 
a general assignment for the benefit of creditors as a type of 
voluntary Corporation Default for purposes of the GSD Corporation 
Default Rule.
    Clause (b)(ii)(C) is revised to eliminate the 90 calendar day grace 
period for an involuntary Corporation Default such that FICC would be 
considered in an involuntary Corporation Default immediately upon the 
judgment of insolvency or bankruptcy or the entry of an order for 
relief (or similar order) for FICC's winding-up or liquidation.
    Clause (b)(ii)(D) is similarly revised to eliminate the 90 calendar 
day grace period after the involuntary appointment of a receiver, 
trustee or other similar official for FICC or substantially all of 
FICC's assets, but is also revised to eliminate the references to an 
administrator, provisional liquidator, conservator or custodian being 
appointed and provide that a receiver, trustee or other similar 
official must be appointed pursuant to the federal securities laws or 
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act in order for such appointment to be considered an involuntary 
Corporation Default.
Proposed MBSD Rule Changes
    FICC is proposing to amend the MBSD Rule 17A--``Corporation 
Default'' as follows:
    Clause (b) is revised to clarify that no other provision of MBSD's 
Rules, including FICC's authority under MBSD Rule 33 (Suspension of 
Rules in Emergency Circumstances), can override the definition of 
``Corporation Default'' included in MBSD Rule 17A.
    Clause (b)(i) is revised to reduce the grace period for a non-
insolvency Corporation Default from 90 to 7 calendar days such that 
FICC would be considered in a non-insolvency Corporation Default on the 
8th calendar day after it receives notice from a member of its failure 
to make an undisputed payment or delivery to such member that is 
required under the MBSD Rules, provided that such failure remains 
unremedied throughout the 7 calendar day grace period and that none of 
the exclusions enumerated in subclauses (A), (B) and (C) from the scope 
of what is considered a non-

[[Page 71483]]

insolvency Corporation Default are applicable.
    Clause (b)(i) is also revised to remove subclause (D), which 
currently provides for a potential extension of the grace period in a 
non-insolvency Corporation Default where a payment or delivery deadline 
has been suspended under MBSD Rule 33, in which case the grace period 
would commence on the date the Corporation receives notice from a 
member of its failure to make an undisputed payment or delivery on the 
later due date determined pursuant to the suspension.
    Clause (b)(i) is further revised to remove subclause (E), which 
currently excludes from the definition of a non-insolvency Corporation 
Default the failure of the Corporation to satisfy obligations based on 
an operational, technological or administrative error or impediment.
    Clause (b)(ii)(B) is revised to add the voluntary making by FICC of 
a general assignment for the benefit of creditors as a type of 
voluntary Corporation Default for purposes of the MBSD Corporation 
Default Rule.
    Clause (b)(ii)(C) is revised to eliminate the 90 calendar day grace 
period for an involuntary Corporation Default such that FICC would be 
considered in an involuntary Corporation Default immediately upon the 
judgment of insolvency or bankruptcy or the entry of an order for 
relief (or similar order) for FICC's winding-up or liquidation.
    Clause (b)(ii)(D) is similarly revised to eliminate the 90 calendar 
day grace period after the involuntary appointment of a receiver, 
trustee or other similar official for FICC or substantially all of 
FICC's assets, but is also revised to eliminate the references to an 
administrator, provisional liquidator, conservator or custodian being 
appointed and provide that a receiver, trustee or other similar 
official must be appointed pursuant to the federal securities laws or 
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act in order for such appointment to be considered an involuntary 
Corporation Default.
(2) Statutory Basis
    The proposed rule is consistent with Section 17A(b)(3)(F) \6\ of 
the Act and the rules and regulations promulgated thereunder because it 
will promote the prompt and accurate clearance and settlement of 
securities transactions in that it will provide FICC members with 
further legal certainty regarding their rights with respect to a 
default by the Corporation and, thereby, enable market participants, 
including registered investment companies, to avail themselves of the 
benefits of clearing through FICC.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Clearing Agency's Statement on Burden on Competition

    FICC does not believe that the proposed rule change will have any 
impact, or impose any burden, on competition because it relates to 
changes to the Corporation Default Rules that would apply equally to 
all members of each Division of FICC.

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

    Written comments relating to the proposed rule change have not yet 
been solicited or received. FICC will notify the Commission of any 
written comments received by FICC.

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.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FICC-2014-09 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FICC-2014-09. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549-1090 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 
FICC's Web site: http://www.dtcc.com/~/media/Files/Downloads/legal/
rule-filings/2014/ficc/SR-FICC-2014-09.pdf.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-FICC-2014-09 
and should be submitted on or before December 23, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
Kevin M. O'Neill,
Deputy Secretary.
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    \7\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2014-28315 Filed 12-1-14; 8:45 am]
BILLING CODE 8011-01-P