[Federal Register Volume 83, Number 188 (Thursday, September 27, 2018)]
[Notices]
[Pages 48890-48893]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21000]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84255; File No. SR-FICC-2018-008]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change To Apply the Government Securities
Division Corporation Default Rule to Sponsored Members and Make Other
Changes
September 21, 2018.
On August 6, 2018, Fixed Income Clearing Corporation (``FICC'')
filed with the U. S. Securities and Exchange Commission
(``Commission'') proposed rule change SR-FICC-2018-008, pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder.\2\ The proposed rule change was published
for comment in the Federal Register on August 21, 2018.\3\ The
Commission did not receive any comment letters on the proposed rule
change. For the reasons discussed below, the Commission approves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 83856 (August 15, 2018),
83 FR 42340 (August 21, 2018) (SR-FICC-2018-008) (``Notice'').
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I. Description of the Proposed Rule Change
The proposed rule change would modify FICC's Government Securities
Division (``GSD'') Rulebook (``GSD
[[Page 48891]]
Rules'') \4\ to amend GSD Rule 3A (Sponsoring Members and Sponsored
Members) to apply GSD Rule 22B (Corporation Default) to Sponsored
Members. In addition, the proposed rule change would make certain other
changes as described below.
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\4\ Capitalized terms not defined herein are defined in the GSD
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_gov_rules.pdf.
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A. GSD Rule 3A (Sponsoring Members and Sponsored Members)
FICC proposes to add an introductory paragraph to Section 17 of GSD
Rule 3A (Sponsoring Members and Sponsored Members) to make it clear
that for purposes of the Rules, Schedules, Interpretations and
Statements of Policy referenced in Section 17 of GSD Rule 3A,
Sponsoring Members and/or Sponsored Members, in their respective
capacities, would be ``Members.'' FICC states that this change would
clarify which Rules, Schedules, Interpretations and Statements of
Policy would govern the rights, liabilities and obligations of
Sponsoring Members and Sponsored Members in their respective
capacities.\5\
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\5\ Notice, 83 FR at 42341.
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Furthermore, FICC would modify GSD Rule 3A so that GSD Rule 22B
(Corporation Default) would apply to Sponsored Members in the same
manner as it applies to all other GSD Members. Specifically, FICC would
add a new subsection (a) to Section 17 of GSD Rule 3A which would
provide that GSD Rule 22B would apply to Sponsored Members. This
proposed change would necessitate a technical change to renumber all
subsequent subsections in Section 17 of GSD Rule 3A.
GSD Rule 22B defines the term ``Corporation Default'' and sets
forth the close out netting process in the event of a Corporation
Default. Section (b)(ii) of GSD Rule 22B provides that the following
events shall constitute a Corporation Default: (1) The dissolution of
FICC (other than pursuant to a consolidation, amalgamation, or merger);
\6\ (2) the institution by FICC of a proceeding seeking a judgment of
insolvency or bankruptcy or any other relief under any bankruptcy or
insolvency law or other similar law affecting creditors' rights, or the
presentation of a petition for FICC's winding-up or liquidation, or the
making of a general assignment for the benefit of creditors; \7\ (3)
the institution of a proceeding against FICC seeking a judgment of
insolvency or bankruptcy or any other relief under any bankruptcy or
insolvency law or other similar law affecting creditors' rights, or the
presentation of a petition for FICC's winding-up or liquidation and, in
each case, such proceeding or petition resulting in a judgement of
insolvency or bankruptcy or the entry of an order for relief or the
making of an order for FICC's winding-up or liquidation; \8\ or (4)
FICC seeking or becoming subject to the appointment of a receiver,
trustee, or other similar official pursuant to the federal securities
laws or Title II of the Dodd-Frank Wall Street Reform and Consumer
Protection Act \9\ for FICC or for all or substantially all of FICC's
assets.\10\
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\6\ See Section (b)(ii)(A) of GSD Rule 22B, supra note 4.
\7\ See Section (b)(ii)(B) of GSD Rule 22B, supra note 4.
\8\ See Section (b)(ii)(C) of GSD Rule 22B, supra note 4.
\9\ 12 U.S.C. 5381 et seq.
\10\ See Section (b)(ii)(D) of GSD Rule 22B, supra note 4.
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In addition, subject to the limitations set forth therein, Section
(b)(i) of GSD Rule 22B provides that a Corporation Default is deemed to
have occurred on the eighth day after FICC receives notice from a GSD
Member of FICC's failure to make, when due, an undisputed payment or
delivery to such Member that is required to be made by FICC under the
GSD Rules; provided that, such failure remains unremedied throughout
the seven-day period following FICC's receipt of the notice.\11\
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\11\ See Section (b)(i) of GSD Rule 22B, supra note 4.
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FICC states that its provision of clearance and settlement
services, including the timely settlement of Transactions in the
ordinary course of business, are a part of FICC's fundamental directive
as a registered clearing agency under the Act.\12\ FICC further states
that the seven-day period provided by Section (b)(i) of GSD Rule 22B is
intended to address the circumstance where FICC experiences an
operational issue that prevents it from completing such clearance and
settlement services.\13\ If FICC is not able to rectify the failure and
satisfy its obligations in seven days, GSD Rule 22B requires an
immediate termination of Transactions that have been subject to
Novation pursuant to the GSD Rules but have not yet settled and any
rights and obligations of the parties thereto.\14\ FICC states that the
seven-day period is designed to avoid a systemic disruption in such
circumstance.\15\
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\12\ Notice, 83 FR at 42342.
\13\ Id.
\14\ See Section (a) of GSD Rule 22B, supra note 4.
\15\ Notice, 83 FR at 42342.
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In connection with the proposed rule change to apply GSD Rule 22B
to Sponsored Members, FICC would add language to clarify that (1) the
commencement of the seven-day period preceding a potential Corporation
Default, as provided by Section (b)(i) of GSD Rule 22B, would not
modify FICC's obligations to satisfy any undisputed payment or delivery
obligation to a Sponsored Member under the GSD Rules, including any
undisputed interest payment obligation owing to the Sponsored Member on
an open Sponsored Member Trade, and (2) the undisputed interest payment
obligation would continue to accrue in favor of the Sponsored Member
for the duration of the seven-day period. Specifically, FICC would
specify in the proposed subsection (a) to Section 17 of GSD Rule 3A
that FICC would be responsible for satisfying any undisputed payment or
delivery obligation required to be made by FICC to a Sponsored Member
under the GSD Rules, including, but not limited to, any undisputed
interest payment obligation that accrues in favor of a Sponsored Member
on a Sponsored Member Trade that has been subject to Novation pursuant
to the GSD Rules but has not yet settled and for which FICC has
received notice from such Sponsored Member of FICC's failure to make,
when due, such undisputed interest payment to such Sponsored Member
within the meaning of Section (b)(i) of GSD Rule 22B.
B. GSD Rule 22B (Corporation Default)
FICC proposes to clarify the third sentence of Section (a) of GSD
Rule 22B regarding the close out netting process upon a Corporation
Default. Specifically, FICC would delete a reference to Section 2(a) of
GSD Rule 22A in that sentence and modify the reference to Section 2(b)
of GSD Rule 22A to specifically refer to Section 2(b)(i) of GSD Rule
22A.
FICC states that the reference to Section 2(a) of GSD Rule 22A is
meant to set forth Transactions that would not be subject to the close
out netting process in the event of a Corporation Default by referring
(by way of analogy) to Transactions that FICC would not close out in
the event FICC ceases to act for a GSD Member.\16\ However, Section (a)
of GSD Rule 22B already contains a statement regarding which
Transactions are subject to the close out netting process in the event
of a Corporation Default: ``all Transactions which have been subject to
Novation pursuant to these [GSD] Rules. . . .'' \17\ Accordingly, FICC
would delete the reference to Section 2(a) of GSD Rule 22A in the
[[Page 48892]]
third sentence of Section (a) of GSD Rule 22B.
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\16\ Notice, 83 FR at 42342.
\17\ See Section (a) of GSD Rule 22B, supra note 4.
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In addition, FICC would modify the reference to Section 2(b) of GSD
Rule 22A in the third sentence of Section (a) of GSD Rule 22B to
specifically refer to Section 2(b)(i) of GSD Rule 22A. Section (a) of
GSD Rule 22B provides, in part, that ``the Board shall determine a
single net amount owed by or to each Member . . . by applying the close
out . . . procedures of Section 2(a) and (b) of [GSD] Rule 22A . . .
.'' \18\ FICC states that the reference to the entirety of Section 2(b)
of GSD Rule 22A could cause confusion for GSD Members because only
subsection (i) of Section 2(b) of GSD Rule 22A, which speaks
specifically to final net settlement positions, is relevant in the
context of GSD Rule 22B.\19\ Therefore, FICC would amend the reference
to point specifically to Section 2(b)(i) of GSD Rule 22A.
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\18\ Id.
\19\ Notice, 83 FR at 42342.
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FICC also proposes to delete ``, to the extent applicable,'' and
``and application'' from the third sentence of Section (a) of GSD Rule
22B. FICC states that it is proposing to delete ``, to the extent
applicable,'' because Section 2(b)(i) of GSD Rule 22A would always be
applicable for purposes of the Board determining a single net amount
owed by or to each Member under GSD Rule 22B after a Corporation
Default has occurred.\20\ Likewise, FICC would delete ``and
application'' from the third sentence of Section (a) of GSD Rule 22B
because, FICC states, it is extraneous wording that is unnecessary and
not relevant in the context of Section 2(b)(i) of GSD Rule 22A.\21\
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\20\ Id.
\21\ Id.
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Lastly, FICC proposes to clarify the third sentence of Section (a)
of GSD Rule 22B by stating that, although GSD Rule 22B would apply to
Sponsored Members pursuant to this proposal, the loss allocation
provisions of GSD Rule 4 (Clearing Fund and Loss Allocation) referenced
in GSD Rule 22B would not apply to Sponsored Members. Specifically,
FICC would add ``, to the extent such provisions are otherwise
applicable to such Member'' following the reference in that sentence to
the loss allocation provisions in GSD Rule 4. FICC states that this
proposed change would be consistent with Section 12(a) of GSD Rule 3A,
which provides that Sponsored Members are not obligated for
allocations, pursuant to GSD Rule 4, of loss or liability incurred by
FICC.
II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and rules and regulations thereunder applicable to such
organization.\22\ The Commission believes the proposal is consistent
with Act, specifically Section 17A(b)(3)(F) of the Act \23\ and Rule
17Ad-22(e)(23)(i) under the Act.\24\
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\22\ 15 U.S.C. 78s(b)(2)(C).
\23\ 15 U.S.C. 78q-1(b)(3)(F).
\24\ 17 CFR 240.17Ad-22(e)(23)(i).
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A. Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a clearing agency, such as FICC, be designed to promote the prompt
and accurate clearance and settlement of securities transactions.\25\
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\25\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above, the proposed rule change would apply GSD Rule
22B to Sponsored Members in the same manner as it applies to all other
GSD Members. The proposed rule change is designed to ensure that all
GSD Members are subject to a common, transparent legal framework in a
Corporation Default situation. The Commission believes that having a
common, transparent legal framework in a Corporation Default situation
would help facilitate an orderly close out netting of obligations
between FICC and the GSD Members in the event that a Corporation
Default occurs. In turn, an orderly close out netting of obligations
between FICC and the GSD Members would help provide clarity and
certainty to market participants in a time of distress regarding their
rights and obligations, and the rights and obligations of FICC. By
providing clarity and certainty of such rights and obligations, the
Commission believes the proposed rule change is designed to promote the
prompt and accurate clearance and settlement of securities
transactions. Therefore, the Commission finds that the proposed rule
change to apply GSD Rule 22B to Sponsored Members in the same manner as
it applies to all other GSD Members is consistent with Section
17A(b)(3)(F) of the Act.
B. Rule 17Ad-22(e)(23)(i) Under the Act
Rule 17Ad-22(e)(23)(i) under the Act requires that each covered
clearing agency,\26\ establish, implement, maintain and enforce written
policies and procedures reasonably designed to publicly disclose all
relevant rules and material procedures, including key aspects of its
default rules and procedures.\27\
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\26\ A ``covered clearing agency'' means, among other things, a
clearing agency registered with the Commission under Section 17A of
the Exchange Act (15 U.S.C. 78q-1 et seq.) that is designated
systemically important by Financial Stability Oversight Council
(``FSOC'') pursuant to the Clearing Supervision Act (12 U.S.C. 5461
et seq.). See 17 CFR 240.17Ad-22(a)(5)-(6). Because FICC is a
registered clearing agency with the Commission that has been
designated systemically important by FSOC, FICC is a covered
clearing agency.
\27\ 17 CFR 240.17Ad-22(e)(23)(i).
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As described above, the proposed rule changes to (i) apply GSD Rule
22B (Corporation Default) to Sponsored Members in the same manner as it
applies to all other GSD Members, and (ii) clarify that the loss
allocation provisions of GSD Rule 4 (Clearing Fund and Loss Allocation)
referenced in GSD Rule 22B would not apply to Sponsored Members, are
designed to publicly clarify the application of these specific rules
with respect to the rights and obligations of Sponsored Members in the
event Corporation Default occurs. In addition, the proposed rule
changes to (i) amend the third sentence of Section (a) of GSD Rule 22B
by (A) deleting the unnecessary and potentially confusing reference to
Section 2(a) of GSD Rule 22A and (B) modifying the reference to Section
2(b) of GSD Rule 22A to specifically refer to Section 2(b)(i) of GSD
Rule 22A, and (ii) make clarifying and/or technical changes in GSD Rule
3A and GSD Rule 22B, are designed to enhance the clarity and accuracy
of these public rules with respect to the rights and obligations of
Sponsored Members in the event Corporation Default. As such, the
Commission finds that the proposed rule changes are reasonably designed
to publicly disclose relevant rules and material procedures, including
key aspects of its default rules and procedures, consistent with Rule
17Ad-22(e)(23)(i) under the Act.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act, in particular
the requirements of Section 17A of the Act \28\ and the rules and
regulations thereunder.
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\28\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that proposed rule change SR-FICC-2018-008 be, and hereby is,
APPROVED.\29\
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\29\ In approving the proposed rule change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
[[Page 48893]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-21000 Filed 9-26-18; 8:45 am]
BILLING CODE 8011-01-P