[Federal Register Volume 81, Number 177 (Tuesday, September 13, 2016)]
[Notices]
[Pages 62963-62965]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21910]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78778; File Nos. SR-DTC-2016-007; SR-FICC-2016-005; SR-
NSCC-2016-003]


Self-Regulatory Organizations; The Depository Trust Company; 
Fixed Income Clearing Corporation; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Changes Relating to 
Clearing Agency Investment Policy

September 7, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4,\2\ notice is hereby given that on August 
25, 2016, The Depository Trust Company (``DTC''), Fixed Income Clearing 
Corporation (``FICC''), and National Securities Clearing Corporation 
(``NSCC'', and together with DTC and FICC, the ``Clearing Agencies'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the Clearing Agencies. 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 would adopt the Clearing Agency Investment 
Policy, which governs the investment of funds of the Clearing Agencies, 
as described below. This proposed rule change does not require any 
changes to the Rules & Procedures of NSCC (``NSCC Rules''), the DTC 
Rules, By-laws and Organizational Certificate (``DTC Rules''), the 
Clearing Rules of the Mortgage-Backed Securities Division of FICC 
(``MBSD Rules'') or the Rulebook of the Government Securities Division 
of FICC (``GSD Rules'').\3\
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    \3\ Capitalized terms not defined herein are defined in the NSCC 
Rules, DTC Rules, MBSD Rules or GSD Rules, as applicable, available 
at http://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 Agencies 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 Agencies have prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant aspects of such statements.

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

1. Purpose
    The Clearing Agencies have adopted the Clearing Agency Investment 
Policy to govern the management, custody, and investment of cash 
deposited to the respective NSCC and FICC Clearing Funds, and the DTC 
Participants Fund,\4\ the proprietary liquid net assets (cash and cash 
equivalents) of the Clearing Agencies, and other funds held by the 
Clearing Agencies pursuant to their respective rules, as described 
below. Investment of these funds was previously governed by the 
investment policy of the parent company of the Clearing Agencies, The 
Depository Trust & Clearing Corporation (``DTCC''). The Clearing Agency 
Investment Policy would include a glossary of key terms, the roles and 
responsibilities of DTCC staff in administering the Clearing Agency 
Investment Policy, guiding principles for investments, sources of 
investable funds, allowable investments of those funds, limitations on 
such investments, authority required for those investments and 
authority required to exceed established investment limits, as 
described below.
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    \4\ The NSCC and FICC Clearing Funds, and the DTC Participants 
Fund are described further in the rules of each of the Clearing 
Agencies. See Rule 4 (Clearing Fund) of the NSCC Rules, Rule 4 
(Participants Fund and Participants Investment) of the DTC Rules, 
Rule 4 (Clearing Fund and Loss Allocation) of the GSD Rules and Rule 
4 (Clearing Fund and Loss Allocation) of the MBSD Rules. Supra, note 
3.
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Governance and Responsibilities
    The Clearing Agency Investment Policy would be co-owned by DTCC's 
Treasury group (``Treasury'') \5\ and the Counterparty Credit Risk team 
(``CCR'') within DTCC's Financial Risk

[[Page 62964]]

Management group.\6\ Additionally, the Clearing Agency Investment 
Policy would be reviewed annually and material changes would be 
required to be approved by the Board of Directors of each of NSCC, DTC 
and FICC (the ``Boards''), or such other committee to which such 
authority may be delegated by the Boards from time to time. Future 
changes to the Clearing Agency Investment Policy would be subject to a 
subsequent rule filing and approval by the Commission.
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    \5\ Treasury is a part of the DTCC Finance Department and is 
responsible for the safeguarding, investment and disbursement of 
funds on behalf of the Clearing Agencies and in accordance with the 
principles outlined in the Clearing Agency Investment Policy.
    \6\ Among other responsibilities, DTCC's Financial Risk 
Management group (formerly known as DTCC's ``Enterprise Risk 
Management'' group) is generally responsible for the systems and 
processes designed to identify and manage credit, market and 
liquidity risks to the Clearing Agencies.
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    Treasury would be responsible for identifying potential 
counterparties to investment transactions, establishing and managing 
investment relationships with approved investment counterparties, and 
making and monitoring all investment transactions with respect to the 
Clearing Agencies. Additionally, Treasury would be responsible for 
managing, monitoring and internal reporting of investment capacity 
utilization relative to established aggregate investment limits.\7\
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    \7\ All investments are subject to limits set by type of 
allowable investment and by counterparty. Investment limits are set 
at an aggregate DTCC-wide level and would apply to investments made 
by any of DTCC and each of its subsidiaries, including each of the 
Clearing Agencies.
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    CCR would be responsible for conducting a credit review of any 
potential counterparty, updating those reviews on a quarterly basis and 
establishing the investment limit for each counterparty approved by 
CCR. In conducting a credit review, CCR would evaluate the 
creditworthiness of counterparties based on a number of factors, 
including the credit ratings provided by external credit rating 
agencies. Counterparties generally would be required to meet a minimum 
external credit rating set forth in the Clearing Agency Investment 
Policy; however, CCR would be permitted to grant an exception to the 
minimum external credit rating requirement for a particular 
counterparty where CCR concludes that approving exposures to that 
counterparty would serve a valid business or investment purposes [sic] 
of the Clearing Agencies and the risk of loss or default to the 
Clearing Agencies is assessed as minimal. CCR could grant an exception 
on the foregoing basis based on an assessment of the counterparty's 
capitalization levels, liquidity resources, earnings trends and any 
other relevant information, and any such exception would be approved by 
a Managing Director in DTCC's Financial Risk Management group in 
accordance with the Clearing Fund [sic] Investment Policy.
Clearing Agency Investment Policy Overview
    The Clearing Agency Investment Policy would identify permitted 
investments and the parameters of, and limitations on, each type of 
investment. In general, assets would be required to be held by 
regulated and creditworthy financial institution counterparties and 
invested in specified types of financial instruments. Permitted 
financial investments may include, for example, deposits with banks, 
including the Federal Reserve Bank of New York (``FRBNY''), 
collateralized reverse-repurchase agreements, direct obligations of the 
U.S. government, money-market mutual funds and high-grade corporate 
debt.\8\ Additionally, the Clearing Agencies would, pursuant to the 
Clearing Agency Investment Policy, be permitted to use general 
corporate funds, and only such funds, to enter into hedge transactions 
to manage certain corporate exposures, such as interest rate or foreign 
currency risk; hedge transactions would not be permitted to be engaged 
in for speculative purposes.
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    \8\ Only general corporate funds of a Clearing Agency would be 
permitted to be invested in high-grade corporate debt.
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    The Clearing Agency Investment Policy would set forth guiding 
principles for the investment of funds, which include adherence to a 
prudent and conservative investment philosophy that places the highest 
priority on maximizing liquidity and avoiding risk. The guiding 
principles would also mandate the segregation and separation of 
deposits to the respective NSCC and FICC Clearing Funds and the DTC 
Participants Fund, so that such amounts are not commingled with each 
other or with other funds held by the Clearing Agencies. The guiding 
principles would also address the process for evaluating the credit 
ratings of counterparties and setting investment limits, which would be 
evaluated, reviewed and approved quarterly by CCR. Finally, the guiding 
principles would make clear that risk of investment loss is addressed 
by the rules of each of the Clearing Agencies.
    Funds invested pursuant to the Clearing Agency Investment Policy 
would include (i) cash deposits to the respective NSCC and FICC 
Clearing Funds and the DTC Participants Fund, (ii) general corporate 
funds of each of the Clearing Agencies, (iii) NSCC's prefunded default 
liquidity funds raised from the private placement of unsecured debt,\9\ 
(iv) amounts deposited with NSCC by its participants to meet Rule 15c3-
3, promulgated under the Act as part of its fully-paid-for service,\10\ 
(v) corporate action payments or principal and interest payments on 
Securities credited to the Accounts of DTC Participants that are 
received by DTC too late in the day or missing information needed for 
same-day allocation,\11\ (vi) funds collected from DTC Participants 
through net funds settlement and held by DTC to cover 130% of the 
market value of ``short positions,'' \12\ and (vii) cash debited from 
Netting Members of FICC's Government Securities Division to satisfy 
such Members' mark-to-market deficits on forward settling 
transactions.\13\
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    \9\ See Securities Exchange Act Release No. 75730 (August 19, 
2015), 80 FR 51638 (August 25, 2015) (File No. SR-NSCC-2015-802).
    \10\ 17 CFR 240.15c3-3; see supra, note 3.
    \11\ See supra, note 3.
    \12\ In this context, ``short positions'' refer to Securities 
that have been deposited by, and credited to the Account of, a DTC 
Participant, pending re-registration into the name of Cede & Co., 
the DTC nominee, which are nevertheless permitted to be delivered to 
another DTC Participant; this 130% charge is held by DTC until the 
Securities are re-registered. See supra, note 3.
    \13\ See supra, note 3.
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    Investments in collateralized reverse repurchase agreements would 
be secured by debt obligations of the U.S. Government or Agencies 
guaranteed by the U.S. Government, or by mortgage pass-through 
obligations issued by the Government National Mortgage Association, the 
Federal Home Loan Mortgage Corporation and the Federal National 
Mortgage Association. Collateral posted by a counterparty to a reverse 
repurchase agreement (whether securities or a combination of securities 
and cash) would be required to have a market value equal to 102% or 
greater of the cash invested. Investments would also be permitted in 
money market mutual funds that have a credit rating from one or more 
recognized rating agencies. All permitted investments would be short 
term and readily accessible for liquidity, should the need arise, 
minimizing market risk.
    Finally, the Clearing Agency Investment Policy would identify those 
individuals who may authorize certain investments, the establishment of 
investment relationships with approved counterparties, the execution of 
investment transactions with certain maturities, and requests to exceed 
investment limits for any counterparty or any investment type. Requests 
to exceed counterparty limits would be capped at a certain percent of 
the

[[Page 62965]]

respective limits, as set forth in the Clearing Agency Investment 
Policy.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the Clearing Agencies' respective rules be designed to promote the 
prompt and accurate clearance and settlement of securities 
transactions, to assure the safeguarding of securities and funds which 
are in the custody or control of the Clearing Agency or for which it is 
responsible, and, in general, to protect investors and the public 
interest.\14\
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
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    The investment guidelines and governance procedures set forth in 
the Clearing Agency Investment Policy are designed to safeguard assets 
and to facilitate access to these assets, as needed, without delay, 
because certain assets that would be invested pursuant to the Clearing 
Agency Investment Policy constitute key liquidity resources of the 
Clearing Agencies. As such, these assets should be readily available to 
facilitate end-of-day settlement, including in the event of a member 
default, and to cover potential losses due to such an event. Therefore, 
the protections that would be afforded these assets under the Clearing 
Agency Investment Policy, which include, for example, following a 
prudent and conservative investment philosophy that places highest 
priority on maximizing liquidity and risk avoidance, promote the prompt 
and accurate clearance and settlement of securities transactions and 
assure the safeguarding of securities and funds related thereto, all in 
furtherance of protecting investors and the public interest, in 
compliance with Section 17A(b)(3)(F) of the Act.\15\
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    \15\ Id.
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    Rule 17Ad-22(d)(3), promulgated under the Act, requires the 
Clearing Agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to hold assets in a manner 
that minimizes risk of loss or of delay in its access to them and to 
invest assets in instruments with minimal credit, market and liquidity 
risks.\16\ As stated above, the Clearing Agency Investment Policy 
follows a prudent and conservative investment philosophy, placing the 
highest priority on maximizing liquidity and avoiding risk of loss, by 
requiring the segregation of funds of each Clearing Agency and of types 
of funds of each Clearing Agency, using external credit ratings in the 
evaluation of counterparties, and establishing counterparty investment 
limits by counterparty as well as investment type. Further, by 
requiring that each Clearing Agency invest its assets in instruments 
with minimal credit, market and liquidity risks, the Clearing Agency 
Investment Policy complies with the requirements of Rule 17Ad-22(d)(3), 
promulgated under the Act.\17\
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    \16\ 17 CFR 240.17Ad-22(d)(3).
    \17\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    Each of the Clearing Agency [sic] believes that the Clearing Agency 
Investment Policy would not have any impact, or impose any burden, on 
competition because the proposed rule change would (1) apply equally to 
the Clearing Fund or Participants Fund deposits, as applicable, of each 
member of the respective Clearing Agencies and (2) establish a uniform 
policy at the Clearing Agencies.

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

    The Clearing Agencies have not solicited or received any written 
comments relating to this proposal. The Clearing Agencies will notify 
the Commission of any written comments received by the Clearing 
Agencies.

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

    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 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-DTC-2016-007, SR-FICC-2016-005, or SR-NSCC-2016-003 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-DTC-2016-007, SR-FICC-
2016-005, or SR-NSCC-2016-003. One of these file numbers 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 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 each of the Clearing Agencies 
and on DTCC's Web site (http://dtcc.com/legal/sec-rule-filings.aspx). 
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-DTC-2016-007, 
SR-FICC-2016-005, or SR-NSCC-2016-003 and should be submitted on or 
before October 4, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-21910 Filed 9-12-16; 8:45 am]
 BILLING CODE 8011-01-P