[Federal Register Volume 87, Number 247 (Tuesday, December 27, 2022)]
[Notices]
[Pages 79398-79400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-28088]



[[Page 79398]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96555; File Nos. SR-DTC-2022-011; SR-FICC-2022-008; SR-
NSCC-2022-013]


Self-Regulatory Organizations; The Depository Trust Company; 
Fixed Income Clearing Corporation; National Securities Corporation; 
Order Granting Proposed Rule Changes To Amend Liquidity Risk Management 
Framework To Include a New Section Describing the Process by Which FICC 
Would Designate Uncommitted Resources as Qualifying Liquid Resources 
and Make Other Changes

December 20, 2022.
    On October 20, 2022, The Depository Trust Company (``DTC''), Fixed 
Income Clearing Corporation (``FICC''), and National Securities 
Clearing Corporation (``NSCC'') (each a ``Clearing Agency,'' and 
collectively, the ``Clearing Agencies''), filed with the Securities and 
Exchange Commission (``Commission'') proposed rule changes SR-DTC-2022-
011, SR-FICC-2022-008, and SR-NSCC-2022-013 (the ``Proposed Rule 
Changes'') pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'') \1\ and Rule 19b-4 thereunder \2\ to Amend the 
Clearing Agencies Liquidity Risk Management Framework adopted by the 
Clearing Agencies. The Proposed Rule Changes were published for comment 
in the Federal Register,\3\ and the Commission has received no comments 
on the changes proposed therein. This order approves the Proposed Rule 
Changes.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 96211 (Nov. 2, 2022), 87 
FR 67527 (Nov. 8, 2022) (File No. SR-DTC-2022-011) (``DTC Notice''); 
Securities Exchange Act Release No. 96210 (Nov. 2, 2022), 87 FR 
67516 (Nov. 8, 2022) (File No. SR-FICC-2022-008) (``FICC Notice''); 
Securities Exchange Act Release No. 96219 (Nov. 3, 2022), 87 FR 
67721 (Nov. 9, 2022) (File No. SR-NSCC-2022-013) (``NSCC Notice'').
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I. Description of the Proposed Rule Changes

A. Background

    The Clearing Agencies adopted the Liquidity Risk Management 
Framework (``Framework'') to set forth the manner in which they 
measure, monitor and manage the liquidity risks that arise in or are 
borne by each of the Clearing Agencies, including (i) the manner in 
which each Clearing Agency deploys their respective liquidity tools to 
meet its settlement obligations on an ongoing and timely basis, and 
(ii) each applicable Clearing Agency's use of intraday liquidity.\4\
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    \4\ See Securities Exchange Act Release No. 82377 (Dec. 21, 
2017), 82 FR 61617 (Dec. 28, 2017) (SR-DTC-2017-004; SR-NSCC-2017-
005; SR-FICC-2017-008).
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B. Process by Which FICC Could Designate Uncommitted Liquidity 
Resources as QLR

    The proposed changes to the Framework \5\ would add a new section 
describing the process by which FICC could designate uncommitted 
liquidity resources as qualifying liquid resources (``QLR'').\6\ FICC 
states that, at this time, it does not have uncommitted liquidity 
resources designated as QLR; \7\ however, the proposed new section 
would allow FICC to have such QLR to the extent the requirements of 
Rule 17Ad-22(a)(14)(ii)(B) are followed.\8\
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    \5\ In addition to the proposed changes to the Framework, 
submitted as confidential Exhibit 5 to these Proposed Rule Changes, 
the Clearing Agencies submitted excerpts from their Liquidity Risk 
Management Procedures, submitted as confidential Exhibit 3 to these 
Proposed Rule Changes. The Clearing Agencies requested confidential 
treatment of Exhibits 3 and 5 pursuant to 17 CFR 240.24b-2.
    \6\ The Framework defines QLR consistent with the definition set 
forth in the Commission's rules. See 17 CFR 240.17Ad-22(a)(14). Rule 
17Ad-22(a)(14) defines qualifying liquid resources to include, among 
other things, assets that are readily available and convertible into 
cash through prearranged funding arrangements, such as prearranged 
funding arrangements determined to be highly reliable even in 
extreme but plausible market conditions by the board of directors of 
the covered clearing agency following a review conducted for this 
purpose not less than annually. Id.
    \7\ See FICC Notice, supra note 3, 87 FR at 67516. FICC further 
states that, consistent with its existing processes, FICC would 
consider whether any uncommitted liquidity resources, including 
those that are designated as QLR, would require a proposed rule 
change with the Commission pursuant to Section 19(b)(1) of the Act, 
and the rules thereunder, or an advance notice with the Commission 
pursuant to Section 806(e)(1) of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, entitled the Payment, Clearing, and 
Settlement Supervision Act of 2010, and the rules thereunder. See 
id.; 15 U.S.C. 78s(b)(1); 12 U.S.C. 5465(e)(1).
    \8\ See FICC Notice, supra note 3, 87 FR at 67516; 17 CFR 
240.17Ad-22(a)(14)(ii)(B).
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    The proposed new section would provide that, in order to designate 
an uncommitted liquidity resource as a QLR, FICC would identify the 
properties of each financing arrangement, including the underlying 
collateral and the liquidity providers, determine the rigorous analysis 
that would be appropriate based on the nature of that liquidity 
resource, and conduct that analysis at least annually. The components 
and results of that analysis would be presented to the Board Risk 
Committee at least annually. When considering whether to designate the 
uncommitted resource as a QLR, the Board Risk Committee would determine 
if the uncommitted liquid resource is highly reliable under extreme but 
plausible market conditions consistent with Rule 17Ad-22(a)(14)(ii)(B) 
under the Act.\9\
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    \9\ 17 CFR 240.17Ad-22(a)(14)(ii)(B). According to FICC, 
examples of the type of information that the Board Risk Committee 
could rely on in order to determine whether it would be appropriate 
to designate the proposed uncommitted resource as a QLR would 
include whether (i) FICC has identified securities that may be 
pledged pursuant to the proposed financing arrangement and that such 
securities are reasonably likely to be readily available for 
pledging and acceptable as collateral; (ii) FICC has reviewed the 
terms of the proposed financing arrangement to confirm such terms 
are current, appropriate and not expected to restrict FICC's use of 
the proposed financing arrangement; (iii) FICC has completed due 
diligence of each liquidity provider as required by Rule 17Ad-
22(e)(7)(iv) under the Act; and (iv) FICC has developed procedures 
to test the proposed financing arrangement at least annually to 
confirm the liquidity providers are operationally able to perform 
their commitments and are familiar with the drawdown process, 
consistent with the requirements of Rule 17Ad-22(e)(7)(v) under the 
Act. See FICC Notice, supra note 3, 87 FR at 67517, n. 12; 17 CFR 
240.17Ad-22(e)(7)(iv) and (v). In addition, FICC would include in 
the analysis presented to the Board Risk Committee recommendations 
and analyses of an independent third party that the proposed 
resource is highly reliable in extreme but plausible market 
conditions. See FICC Notice, supra note 3, 87 FR at 67517, n. 12. 
The Commission's review of the underlying procedures submitted as 
confidential exhibits, see supra note 5, is consistent with FICC's 
statements in this regard.
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C. Liquidity Resources That Are Not Designated as QLR

    The proposed changes to the Framework would also clarify that FICC 
may have access to liquidity resources that are not designated as QLR. 
FICC states that it maintains uncommitted master repurchase agreements 
(``MRAs'') that can be utilized to finance via the repo market the 
securities in FICC's Clearing Funds and those purchased on behalf of a 
defaulting Member to raise funds.\10\ According to FICC, the MRAs may 
be utilized as liquidity resources in the event of a Member default, 
even though they are not designated as QLR.\11\ The proposed rule 
change provides that, on a weekly basis, FICC would perform a study to 
estimate the depth of the repo market under prevailing market 
conditions as well as a sample stress scenario to assess potential 
available liquidity in the event of default of the largest Member. 
Moreover, at least annually, FICC would conduct counterparty due 
diligence reviews that would assess each non-QLR liquidity provider's 
ability to provide liquidity to FICC under current market conditions 
and would provide a summary of these

[[Page 79399]]

reviews to the Board Risk Committee.\12\ In addition, FICC would test 
any non-QLR annually with the respective liquidity providers to confirm 
that such liquidity providers are operationally able to perform their 
commitments and are familiar with the applicable process.
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    \10\ See FICC Notice, supra note 3, 87 FR at 67517.
    \11\ Id.
    \12\ Such due diligence would include reviews of relevant member 
financial metrics, results of operational testing, and relevant 
market data applicable to the type of securities being financed.
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    As a conforming change, the proposed changes would delete language 
referring to MRAs as QLR and add a sentence stating that FICC may count 
MRAs as QLR if the procedures for designating them described in I.B as 
such are followed. The proposed changes would also clarify that this 
section of the Framework regarding liquidity resources that are not 
designated as QLR applies specifically to FICC.

D. Descriptions of Due Diligence and Testing

    The proposed changes would delete a stand-alone section on the due 
diligence and testing of liquidity providers in the Framework, move 
those descriptions of the due diligence and testing to the respective 
sections of the Framework where each liquidity resource is described, 
and clarify where testing would not be performed. The stand-alone 
section currently states that the Counterparty Credit Risk department 
(``CCR'') reviews the limits, outstanding investments, and collateral 
held (if applicable) at each investment counterparty. The proposed 
changes would (i) restate this language to make clear that CCR's review 
includes a financial analysis of each counterparty, the Clearing 
Agencies' investments at each counterparty, and any recommendations for 
changes in limits to these investments, and (ii) place the restated 
sentence in the section of the Framework related to the specific 
liquidity resource that CCR is surveilling.\13\ The stand-alone section 
also references formal reviews on the reliability of QLR providers and 
specifically ascribes certain due diligence and review responsibilities 
to CCR. The proposed changes would describe CCR's obligations regarding 
liquidity providers in the appropriate section of the Framework related 
to the specific liquidity resource that CCR is surveilling. The 
proposed changes also indicate where another department, such as 
Treasury, is responsible for actions that the stand-alone section 
ascribes to CCR. For non-QLR liquidity resources, the proposed rule 
change would describe FICC's role in reviewing these resources.
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    \13\ The Clearing Agencies note that a sentence in the stand-
alone section that refers to a review of each investment 
counterparty's deposit level at the Federal Reserve Bank of New York 
would not be retained because it reflects a drafting error (the 
Clearing Agencies are concerned with their deposits at the 
counterparties and not the counterparties' deposits at the Federal 
Reserve Bank of New York). See DTC Notice, supra note 3, 87 FR at 
67529, n.14; FICC Notice, supra note 3, 87 FR at 67517, n.14; NSCC 
Notice, supra note 3, 87 FR at 67723, n.14.
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    In addition, the proposed changes would add language to the 
descriptions of DTC's and NSCC's QLR to reflect DTC's and NSCC's 
current practices of conducting surveillance of bank lenders to their 
committed credit facility, and testing the committed credit facility at 
least annually to confirm that the lenders, agents and respective 
Clearing Agency are operationally prepared to meet their obligations 
under the facility and are familiar with the borrowing process.
    With respect to NSCC, the proposed changes would provide that, 
because the process for collecting Supplemental Liquidity Deposits 
(``SLD''), pursuant to NSCC Rule 4A, is the same process used for 
collecting required deposits to the NSCC Clearing Fund, and Members are 
aware of such process, no testing is required for purposes of Rule 
17Ad-22(e)(7)(v) under the Act.\14\ In addition, the proposed changes 
would state that NSCC conducts Member outreach with those Members whose 
liquidity exposure may require them to make SLD in the future.
    The proposed changes would also make a correction to the 
description of DTC's Collateral Monitor. Currently, the Framework 
states that the Liquidity Risk Product Unit verifies that the 
Collateral Monitor will not become negative if the transaction is 
processed. Since DTC states that verification is done 
automatically,\15\ the proposed rule change would correct the sentence 
to state that DTC performs this verification automatically.
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    \15\ See DTC Notice, supra note 3, 87 FR at 67530.
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E. Description of the Clearing Agencies' QLR

    The proposed changes would also make certain clarifications 
regarding each Clearing Agency's QLR, although they would not change 
what resources are available as QLR.
    With respect to FICC, the proposed changes would clarify that each 
FICC division has its own Clearing Fund that includes deposits of cash 
and delete language regarding the ability of FICC to borrow from the 
Clearing Fund that is already covered in the Rules of each 
division.\16\ The proposed changes would also clarify that such cash 
deposits would be held at creditworthy commercial banks that provide 
same day access to funds. Moreover, the proposed changes would clarify 
that the rules-based committed Capped Contingency Liquidity Facility 
programs are determined for each FICC division per the division's 
respective Rules.\17\ Further, the Framework would clarify that FICC's 
members are not considered ``liquidity providers'' with respect to 
their Clearing Fund deposits, with reference to Rules 17Ad-22(e)(7)(iv) 
and (v) under the Act.\18\
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    \16\ See FICC/GSD Rule 4, Section 5 and FICC/MBSD Rule 4, 
Section 5, available at http://dtcc.com/legal/rules-and-procedures.
    \17\ See FICC/GSD Rule 22A, Section 2a and FICC/MBSD Rule 17, 
Section 2a, available at http://dtcc.com/legal/rules-and-procedures.
    \18\ 17 CFR 240.17Ad-22(e)(7)(iv) and (v).
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    With respect to NSCC, the proposed changes would clarify the 
description of QLR by deleting language regarding the ability of NSCC 
to borrow from the Clearing Fund that is already covered in the NSCC 
Rules \19\ and replacing ``medium- and long-term'' with ``senior'' 
(which covers both medium- and long-term) before ``unsecured notes'' to 
simplify terminology.\20\
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    \19\ See NSCC Rule 4, Section 12, available at http://dtcc.com/legal/rules-and-procedures.
    \20\ See NSCC Notice, supra note 3, 87 FR at 67723.
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    The proposed changes would also clarify the descriptions of DTC's 
and NSCC's QLR by adding language on same day access to funds regarding 
deposits of DTC Participants Fund and NSCC Clearing Fund in 
creditworthy commercial banks. Moreover, the proposed changes would 
make clear that DTC Participants and NSCC Members, respectively, are 
not considered ``liquidity providers'' with respect to their DTC 
Participants Fund deposits and NSCC Clearing Fund deposits, with 
reference to Rules 17Ad-22(e)(7)(iv) and (v) under the Act.\21\
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    \21\ 17 CFR 240.17Ad-22(e)(7)(iv) and (v).
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F. Technical Changes

    The proposed changes include certain technical changes as follows:
     Make conforming and cross-reference changes in the 
Executive Summary;
     Delete a sentence that states that liquidity resources are 
maintained consistent with risk tolerances, whereas the correct 
statement is that liquidity resources are maintained consistent with 
Rule 17Ad-22(e)(7) under the Act,\22\ which is already stated elsewhere 
in the Framework;
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    \22\ 17 CFR 240.17Ad-22(e)(7).
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     Make conforming and cross-reference changes in the general 
section on ``Liquidity Resources;''

[[Page 79400]]

     Restate the first sentence in the section describing 
FICC's QLR for clarity;
     Remove cross-references and phrases referencing other 
sections of the Framework where such references are no longer correct;
     Add the word ``FICC'' to the end of a sentence where it 
was inadvertently deleted; and
     Renumber the last three sections of the Framework to 
account for the deletion of the section on due diligence/testing.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \23\ 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. After carefully considering the Proposed Rule 
Changes and confidential Exhibit 3,\24\ the Commission finds that the 
Proposed Rule Changes are consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the Clearing 
Agencies. In particular, the Commission finds that the Proposed Rule 
Change is consistent with Sections 17A(b)(3)(F) \25\ of the Act and 
Rule 17Ad-22(e)(7) thereunder.\26\
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    \23\ 15 U.S.C. 78s(b)(2)(C).
    \24\ See supra note 5.
    \25\ 15 U.S.C. 78q-1(b)(3)(F).
    \26\ 17 CFR 240.17Ad-22(e)(7).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act \27\ requires, in part, that the 
rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions, and 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.\28\
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    \27\ 15 U.S.C. 78q-1(b)(3)(F).
    \28\ Id.
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    The proposed changes would update the Framework to (1) describe the 
process by which FICC would designate uncommitted liquidity resources 
as QLR; (2) clarify that FICC may have access to liquidity resources 
that are not designated as QLR; (3) delete the stand-alone section on 
due diligence and testing of liquidity providers, and instead add due 
diligence and testing descriptions where each liquidity resource is 
described; (4) clarify the description of FICC's QLR; (5) clarify the 
description of NSCC's and DTC's QLR, add language to reflect NSCC's and 
DTC's current due diligence and testing processes regarding their 
committed line of credit, and make a correction to the description of 
DTC's Collateral Monitor; and (6) make technical changes.
    The Commission believes that these proposed changes will improve 
the clarity of descriptions of the Clearing Agencies' Framework and 
enable the Clearing Agencies to more effectively deploy their risk 
management tools to manage liquidity risks presented by their members. 
For example, the proposed changes will describe the specific process 
through which FICC could designate uncommitted resources as QLR, and 
this process would be designed to ensure that any uncommitted resource 
that is designated as QLR would be highly reliable in extreme but 
plausible market conditions. The proposed changes, therefore, would 
enhance the Clearing Agencies' liquidity risk management functions, 
which are designed help the Clearing Agencies maintain sufficient 
liquid resources to meet their potential funding obligations to timely 
settle outstanding transactions of a defaulting participant or family 
of affiliated participants. For these reasons, the Commission finds 
that the proposed changes are designed to promote the prompt and 
accurate clearance and settlement of securities transactions, and to 
assure the safeguarding of securities and funds in the custody and 
control of the Clearing Agencies consistent with the requirements of 
Section 17A(b)(3)(F) of the Act.\29\
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    \29\ Id.
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B. Consistency With Rule 17Ad-22(e)(7)

    Rule 17Ad-22(e)(7) under the Act \30\ requires covered clearing 
agencies to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to, among other things, effectively 
measure, monitor, and manage the liquidity risk that arises in or is 
borne by the covered clearing agency, including measuring, monitoring, 
and managing its settlement and funding flows on an ongoing and timely 
basis, and its use of intraday liquidity by, at a minimum, meeting the 
requirements set forth in Rule 17Ad-22(e)(7).
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    \30\ 17 CFR 240.17Ad-22(e)(7).
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    The Commission believes that the proposed changes described above 
are consistent with the requirements of Rule 17Ad-22(e)(7). By 
clarifying FICC's process for designating uncommitted liquidity 
resources as QLR, the proposed changes are designed to ensure that any 
uncommitted resource that is designated as QLR would be highly reliable 
in extreme but plausible market conditions to be consistent with the 
requirements of Rule 17Ad-22(a)(14) under the Act,\31\ thereby 
facilitating FICC's ability to hold QLR sufficient to meet its minimum 
liquidity resource requirements under Rule 17Ad-22(e)(7). Moreover, by 
identifying liquidity resources that are not QLR and providing various 
clarifications, the proposed changes would reduce ambiguity and thus 
assist risk management staff in the performance of their duties 
associated with the Clearing Agencies' compliance with Rule 17Ad-
22(e)(7).
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    \31\ 17 CFR 240.17Ad-22(a)(14).
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    For these reasons, the Commission believes that proposed changes 
are consistent with Rule 17Ad-22(e)(7) under the Act.\32\
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    \32\ 17 CFR 240.17Ad-22(e)(7).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Changes are consistent with the requirements of the Act 
and in particular with the requirements of Section 17A of the Act \33\ 
and the rules and regulations promulgated thereunder.
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    \33\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\34\ that proposed rule changes SR-DTC-2022-011, SR-FICC-2022-008, and 
SR-NSCC-2022-013, be, and hereby are, approved.\35\
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    \34\ 15 U.S.C. 78s(b)(2).
    \35\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    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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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-28088 Filed 12-23-22; 8:45 am]
BILLING CODE 8011-01-P