[Federal Register Volume 83, Number 96 (Thursday, May 17, 2018)]
[Notices]
[Pages 23032-23036]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10505]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83222; File No. SR-FICC-2018-004]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Introduce a Floor to the 
Calculation of the Fails Charges and Make Other Changes

May 11, 2018.
    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 May 8, 2018, Fixed Income Clearing Corporation (``FICC'') 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 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 would update (a) both the FICC Government 
Securities Division (``GSD'') Rulebook (``GSD Rules'') and the FICC 
Mortgage-Backed Securities Division (``MBSD'') Clearing Rules (``MBSD 
Rules'') \3\ to (i) introduce a floor of one (1) percent to the 
calculation of the existing fails charge rules; (ii) clarify the target 
rate that may be used in the fails charge calculations under certain 
circumstances; (iii) add two defined terms to effectuate the proposed 
target-rate clarification; and (iv) make certain technical changes to 
the fails-charge provisions to ensure consistent use of defined terms; 
and (b) the MBSD Rules

[[Page 23033]]

only, to clarify that a cap applies to the MBSD fails charge.
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    \3\ Capitalized terms not defined herein are defined in the GSD 
Rules and the MBSD Rules, as applicable, available at http://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 update (a) both the 
GSD Rules and the MBSD Rules \4\ to (i) introduce a floor of one (1) 
percent to the calculation of the existing fails charge rules; (ii) 
clarify the target rate that may be used in the fails charge 
calculations under certain circumstances; (iii) add two defined terms 
to effectuate the proposed target-rate clarification; and (iv) make 
certain technical changes to the fails-charge provisions to ensure 
consistent use of defined terms; and (b) the MBSD Rules only, to 
clarify that a cap applies to the MBSD fails charge. Each of these 
proposed changes is described in detail below.
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    \4\ Id.
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(i) Background
    In 2009, the Commission approved FICC's proposal to implement a 
fails charge in the GSD Rules \5\ to be compliant with best practice 
guidelines issued by the Treasury Market Practices Group (``TMPG''). As 
described on the website of the Federal Reserve Bank of New York, the 
TMPG is a group of market professionals committed to supporting the 
integrity and efficiency of the Treasury, agency debt (i.e., debentures 
of certain U.S. government agencies and government-sponsored 
enterprises) and agency mortgage-backed securities markets.\6\ The TMPG 
meets regularly to discuss and promote best practices related to 
trading, settlement and risk management in the Treasury, agency debt 
and agency mortgage-backed securities markets. From time to time, the 
TMPG publishes guidance to market participants, including the Best 
Practices for Treasury, Agency Debt, and Agency Mortgage-Backed 
Securities Markets and Fails Charge Trading Practice recommendations 
for the Treasury, agency debt, and agency mortgage-backed securities 
markets.\7\
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    \5\ Securities Exchange Act Release No. 59802 (April 20, 2009), 
74 FR 19248 (April 28, 2009) (SR-FICC-2009-03).
    \6\ See https://www.newyorkfed.org/tmpg. The TMPG is composed of 
senior business managers and legal and compliance professionals from 
a variety of institutions--including securities dealers, banks, buy-
side firms, market utilities and others--and is sponsored by the 
Federal Reserve Bank of New York. Id.
    \7\ See https://www.newyorkfed.org/tmpg/about.html.
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    The TMPG fails charge guidelines were aimed at addressing 
persistent settlement fails in Treasury securities transactions that 
had arisen in the market. As noted in TMPG's Frequently Asked 
Questions: TMPG Fails Charges, persistent elevated fail levels create 
market inefficiencies, increase credit risk for market participants and 
heighten overall systemic risk.\8\ In order to encourage market 
participants to resolve fails promptly, the TMPG had proposed to adopt 
a market-wide best practice of assessing a charge on failed positions. 
As part of the implementation of this best practice, the TMPG requested 
GSD to impose the fails charge on failed positions within GSD, which 
became the subject of FICC's 2009 proposed rule change.\9\ As one of 
the largest participants in the Treasury market, FICC believes that it 
was imperative that FICC adhere to these best practice recommendations 
and help maintain consistency and symmetry within this market.
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    \8\ Frequently Asked Questions: TMPG Fails Charges (April 23, 
2018) at 1, available at https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/TMPG-Fails-Charge-FAQ-04-23-2018.pdf 
(``FAQ'').
    \9\ Securities Exchange Act Release No. 59802 (April 20, 2009), 
74 FR 19248 (April 28, 2009) (SR-FICC-2009-03).
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    In 2011, FICC amended the GSD Rules to expand the fails charge 
provision to agency debt transactions.\10\ Therefore, the charge now 
applies to fails of Deliver Obligations \11\ of Treasury securities or 
debentures issued by Fannie Mae, Freddie Mac or the Federal Home Loan 
Banks.\12\ The charge is applied daily and is a debit (or a credit for 
those with fails to receive) on the member's GSD monthly bill.
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    \10\ Securities Exchange Act Release No. 65910 (December 8, 
2011), 76 FR 77861 (December 14, 2011) (SR-FICC-2011-08).
    \11\ ``Deliver Obligation'' means a Netting Member's obligation 
to deliver Eligible Netting Securities to FICC at the appropriate 
Settlement Value either in satisfaction of all or a part of a Net 
Short Position or to implement a collateral substitution in 
connection with a Repo Transaction with a Right of Substitution. GSD 
Rule 1, supra note 3.
    \12\ GSD Rule 11, Section 14, supra note 3.
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    The current fails charge calculation, which was approved by the 
Commission, and remains as such in the GSD Rules is equal to the 
product of the (i) funds associated with a failed position and (ii) the 
greater of (a) 0 percent or (b) 3 percent per annum minus the Target 
Fed funds target rate that is effective at 5 p.m. EST on the Business 
Day prior to the originally scheduled settlement date, capped at 3 
percent per annum.\13\ The following example illustrates the manner in 
which the current fails charge applies: Assume that Member A fails 
today on a $50 million position on which he is owed $50.1 million. 
Assume further that the Target Fed funds rate yesterday at 5 p.m. was 1 
percent. The fails charge will be 2 percent per annum and it will be 
applied to the funds amount of $50.1 million, thus equaling a charge of 
$2,783.33 for that day. The member's bill will reflect a debit of 
$2,783.33. The debits and credits will be accrued and will apply to the 
member's monthly bill.
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    \13\ Id.
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    In 2012, the Commission approved the implementation of a fails 
charge in the MBSD Rules, as part of a larger proposed rule change to 
make MBSD a central counterparty.\14\ The fails charge calculation in 
MBSD is identical to the GSD calculation with the exception of the 
percent per annum amount from which the federal funds target rate is 
subtracted--in GSD, this is 3 percent per annum and in MBSD, it is 2 
percent per annum.\15\ The TMPG has explained its reasons for 
recommending the 3 percent rate level for Treasury and agency debt and 
the 2 percent rate level for agency mortgage-backed securities. 
Specifically, the TMPG has stated the TMPG recommendation is designed 
to give sellers an economic incentive to deliver securities even when 
the federal funds rate is low. Experience shows that Treasury and 
agency debt fails have rarely become widespread and chronic if the fed 
funds rate is above about 3 percent. This suggests that market 
participants generally act to cure settlement fails reasonably promptly 
as long as the economic cost of a fail is not less than about 3 
percent.\16\ The TMPG also stated that it recommended a lower charge 
cap level of 2 percent for the agency mortgage-backed securities 
market, given structural differences in this market compared to the 
agency debt

[[Page 23034]]

and Treasury markets. These differences include monthly settlement 
conventions that make fails more persistent and more challenging to 
resolve quickly.\17\ In 2013, following a new TMPG recommendation,\18\ 
the Commission approved FICC's proposal to delete the two-day grace 
period from the original 2012 implementation of the fails charge in the 
MBSD Rules.\19\
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    \14\ Securities Exchange Act Release No. 66550 (March 9, 2012), 
77 FR 15155 (March 14, 2012) (SR-FICC-2008-01).
    \15\ MBSD Rule 12, supra note 3.
    \16\ FAQ at 6, supra note 8.
    \17\ Id.
    \18\ Press Release, Federal Reserve Bank of New York, TMPG 
Revises Agency MBS Fails Charge Trading Practice (March 1, 2013), 
available at https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/03_01_2013_Fails_charges_press_release.pdf.
    \19\ Securities Exchange Act Release No. 69708 (June 6, 2013), 
78 FR 35333 (June 12, 2013) (SR-FICC-2013-01).
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    Under both the GSD and MBSD versions of the current fails charge, 
the calculation of the charge could result in a zero charge. Under the 
GSD version of the current fails charge, if the fails charge is 3 
percent and the federal funds target rate is 3 percent, then the 
calculation of the charge in this case would result in a zero charge. 
Similarly, under the MBSD version of the current fails charge, if the 
fails charge is 2 percent and the federal funds target rate is 2 
percent, then the calculation of the charge in this case would result 
in a zero charge.
(ii) Proposed Amendments to the GSD and MBSD Fails Charges
    On February 28, 2018, the TMPG announced a proposed change to its 
best practice regarding the fails charge to introduce a floor of one 
(1) percent so that a minimum charge amount would result from the 
calculation of the charge.\20\ The TMPG has stated that this proposed 
change in best practices is to help ensure that processes and 
resourcing to address the fails charges at firms remain in place so 
that during times of increased applicability of the fails charges the 
firms have the staff and systems to handle the charges. There is a 
concern that if the fails charge is permitted to go to zero for a 
prolonged period, firms will begin to deploy resources elsewhere.
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    \20\ See Press Release, Federal Reserve Bank of New York, 
Treasury Market Practices Group Seeks Public Comment on Proposed 
Updates to its Fails Charge Practice Recommendation (February 28, 
2018), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/PressRelease_022818.
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    The TMPG has requested that FICC amend the GSD and MBSD fails 
charges to mirror the TMPG's revised recommendation regarding the 
imposition of the floor. As one of the largest participants in the 
Treasury, agency and mortgage-backed securities markets, FICC believes 
that it is imperative that FICC adhere to these best practice 
recommendations and help maintain consistency and symmetry among the 
markets. FICC agrees with the TMPG recommendation regarding the 
imposition of the floor and proposes to amend the GSD Rules and the 
MBSD Rules to implement such change.
    For the GSD Rules, the proposed rule change would consist of 
deleting the ``0'' in the calculation of the fails charge in GSD Rule 
11, Section 14 and replacing it with ``1.'' For the MBSD Rules, the 
proposed rule change would also consist of deleting the ``0'' in the 
calculation of the fails charge in MBSD Rule 12 and replacing it with 
``1.''
(iii) Proposed Clarifications Regarding the GSD and MBSD Fails Charges 
and Additional Defined Terms To Effectuate Certain of These 
Clarifications
    FICC is also proposing to clarify the target rate that is 
referenced in the calculation of both the GSD and MBSD fails charges. 
Both divisions' fails charges reference the federal funds target rate. 
Per the TMPG guidelines, if the Federal Open Market Committee 
(``FOMC'') specifies a target range in lieu of a target level, the 
lower limit of the target range announced by the FOMC would be used in 
the calculation of the fails charge.\21\ Further, if the FOMC were to 
terminate its policy of specifying or announcing a target level or 
range for the federal funds rate, then the rate that is used for the 
calculation of the fails charge would be a successor rate and source 
recommended by the TMPG.\22\ While FICC would follow the TMPG 
guidelines in this regard, the fails charge rule provisions in each of 
the GSD Rules and the MBSD Rules do not state this. Therefore, for 
clarity and transparency, FICC proposes to update the relevant 
provisions to reflect that FICC would follow this practice if those 
circumstances arose. In order to effectuate these clarifications, FICC 
is proposing to add defined terms for ``FOMC'' and ``TMPG'' in each of 
GSD Rule 1 and MBSD Rule 1.
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    \21\ U.S. Treasury Securities: Fails Charge Trading Practice 
(July 13, 2016), at 3, available at https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/Fails-Charge-Trading-Practice-2016-07-13.pdf (``Fails Charge Trading Practice'').
    \22\ Id.
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    In addition, while the GSD Rules expressly set forth the fails 
charge cap (i.e., 3 percent per annum), the MBSD Rules do not. The MBSD 
fails charge cap follows the same convention as the GSD one, which is 
the percentage that is applied to the target federal funds rate. In the 
case of MBSD, this cap is 2 percent per annum. FICC proposes to clarify 
the MBSD fails charge provision by adding language regarding the cap on 
the fails charge.
(iv) Technical Changes
    FICC is proposing to make a technical change regarding references 
to the federal funds rate in the fails charge calculation in the GSD 
Rules and the MBSD Rules. The current term ``Target Fed funds target 
rate'' in Section 14 of GSD Rule 11 and the current term ``fed funds 
target rate'' in MBSD Rule 12 would be replaced with the new term 
``target level for the federal funds rate,'' which is the term used by 
the TMPG in its guidance. FICC believes that this non-substantive 
change would enhance clarity across the GSD Rules and MBSD Rules and 
enhance consistency with the TMPG guidance.
    FICC is also proposing to amend certain terms in the fails charge 
provisions of both the GSD Rules and MBSD Rules in order to use defined 
terms and to enhance clarity and consistency within the GSD Rules and 
MBSD Rules. Specifically, in GSD Rule 11, Section 14 and in MBSD Rule 
12, the term ``Fedwire'' would be replaced with the defined term 
``FedWire.'' In MBSD Rule 12, the terms ``pool delivery obligation'' 
and ``pool deliver obligation'' would be replaced each time it appears 
with the defined term ``Pool Deliver Obligation.'' In MBSD Rule 12, the 
word ``contractual'' in the term ``contractual Settlement Date'' would 
be capitalized to use the defined term ``Contractual Settlement Date'' 
and the term ``business day'' would be replaced with the defined term 
``Business Day.''
Implementation Timeframe
    Pending SEC approval, FICC would implement this proposal on July 2, 
2018. FICC would announce such implementation date by Important Notice. 
As proposed, a legend would be added to each of GSD Rule 1, GSD Rule 
11, MBSD Rule 1, and MBSD Rule 12 stating that there are changes that 
have been approved by the Commission but have not yet been implemented. 
The proposed legend also would include a date on which such changes 
would be implemented and the file number of this proposal, and state 
that, once this proposal is implemented, the legend would automatically 
be removed from such rule.
2. Statutory Basis
    FICC believes that this proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. Specifically, FICC believes 
that this proposal is consistent

[[Page 23035]]

with Section 17A(b)(3)(F) of the Act \23\ and Rule 17Ad-
22(e)(23)(ii),\24\ as promulgated under the Act, for the reasons 
described below.
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    \23\ 15 U.S.C. 78q-1(b)(3)(F).
    \24\ 17 CFR 240.17Ad-22(e)(23)(ii).
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    Section 17A(b)(3)(F) of the Act requires, in part, that the GSD 
Rules and the MBSD Rules be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\25\ FICC believes 
the proposed rule changes to amend the GSD and MBSD fails charges to 
include a floor in the calculation of the charges would encourage firms 
to complete their securities settlement obligations on a timely basis. 
By doing so, settlement in the applicable markets covered by FICC's 
processes would occur on a timely basis and thereby promote the prompt 
and accurate clearance and settlement of securities transactions, 
consistent with Section 17A(b)(3)(F) of the Act.\26\
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    \25\ 15 U.S.C. 78q-1(b)(3)(F).
    \26\ Id.
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    This proposal is also consistent with Rule 17Ad-22(e)(23)(ii) under 
the Act. Rule 17Ad-22(e)(23)(ii) under the Act requires FICC to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide sufficient information to 
enable participants to identify and evaluate the risks, fees, and other 
material costs they incur by participating in the covered clearing 
agency.\27\ The proposed rule changes would update: (a) Both the GSD 
Rules and the MBSD Rules to (i) clarify the target rate that may be 
used in the fails charge calculations under certain circumstances; (ii) 
add two defined terms to effectuate the proposed target-rate 
clarification; and (iii) make certain technical changes to the fails-
charge provisions to ensure consistent use of defined terms; and (b) 
the MBSD Rules only, to clarify that a cap applies to the MBSD fails 
charge. FICC believes these proposed rule changes would help ensure 
that the GSD and MBSD fails charges are transparent and clear to 
members. Having transparent and clear provisions in this regard would 
enable members to better understand the operation of the fails charges 
in GSD and MBSD and would provide members with increased predictability 
and certainty regarding their obligations. As such, FICC believes that 
the proposed rule changes are consistent with Rule 17Ad-22(e)(23)(ii) 
under the Act.\28\
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    \27\ 17 CFR 240.17Ad-22(e)(23)(ii).
    \28\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    FICC believes that the proposed rule changes to amend the 
calculation of the fails charge in each of the GSD Rules and the MBSD 
Rules to implement a floor could have an impact on competition because 
the implementation of the floor would result in higher fail charges for 
members that incur the charge.\29\ Specifically, FICC believes this 
proposed rule change could burden competition by negatively affecting 
such members' operating costs. While such members may experience 
increases in their fails charges, FICC does not believe such change 
would in and of itself mean that the burden on competition is 
significant. Even though the amount of the increase may be significant, 
FICC believes the increase in the charge would similarly affect all 
members that tend to incur the fails charge. Regardless of whether the 
burden on competition is deemed significant, FICC believes any burden 
on competition that is created by the proposed rule changes to 
implement the proposed floor would be necessary and appropriate in 
furtherance of the purposes of the Act, as permitted by Section 
17A(b)(3)(I) of the Act.\30\
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    \29\ 15 U.S.C. 78q-1(b)(3)(I).
    \30\ Id.
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    FICC believes the proposed rule changes to amend the calculation of 
the fails charge in each of the GSD Rules and the MBSD Rules to 
implement a floor would be necessary in furtherance of the purposes of 
the Act.\31\ FICC believes that persistent elevated fail levels create 
overall systemic risk because they (i) do not permit members and FICC 
to complete timely settlement and (ii) create uncertainty regarding the 
timing of settlement. The proposed rule changes to implement the floor 
would further discourage fails and therefore mitigate against this 
systemic risk. Therefore, FICC believes the proposed rule changes to 
amend the calculation of the fails charge in each of the GSD Rules and 
the MBSD Rules to implement a floor would be necessary in furtherance 
of the purposes of the Act, as permitted by Section 17A(b)(3)(I) of the 
Act.\32\
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    \31\ Id.
    \32\ Id.
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    FICC also believes any burden on competition that is created by the 
proposed rule changes to amend the calculation of the fails charge in 
each of the GSD Rules and the MBSD Rules to implement a floor would be 
appropriate in furtherance of the purposes of the Act.\33\ Under the 
proposal, the fails charge would continue to apply to those members 
that engage in fails, and the application of the charge as such would 
not be changed by the proposed rule change. The proposed change to 
impose the floor would result in a charge being realized each time that 
a member engages in a fail, but this would apply equally to all members 
who do so. As such, FICC believes that the proposed rule changes to 
amend the calculation of the fails charge in each of the GSD Rules and 
the MBSD Rules to implement a floor would be appropriate in furtherance 
of the purposes of the Act, as permitted by Section 17A(b)(3)(I) of the 
Act.\34\
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    \33\ Id.
    \34\ Id.
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    FICC does not believe there would be an impact on competition with 
the proposed rule changes that would update (a) both the GSD Rules and 
the MBSD Rules to (i) clarify the target rate that may be used in the 
fails charge calculations under certain circumstances; (ii) add two 
defined terms to effectuate the target-rate clarification; and (iii) 
make certain technical changes to the fails-charge provisions to ensure 
consistent use of defined terms; and (b) the MBSD Rules only, to 
clarify that a cap applies to the MBSD fails charge.\35\ These changes 
would ensure that the GSD Rules and the MBSD Rules remain clear and 
would facilitate members' understanding regarding the applicability of 
the GSD and MBSD fails charges. These changes would not affect members' 
rights and obligations. As such, FICC believes that these proposed rule 
changes would not have any impact on competition.
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    \35\ Id.
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    Written comments relating to this proposed rule change have not 
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

[[Page 23036]]

    (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-FICC-2018-004 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-2018-004. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be 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 
(http://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-2018-004 and should be submitted on 
or before June 7, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-10505 Filed 5-16-18; 8:45 am]
BILLING CODE 8011-01-P