[Federal Register Volume 89, Number 170 (Tuesday, September 3, 2024)]
[Notices]
[Pages 71593-71597]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-19657]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100843; File No. SR-FICC-2024-010]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Adopt the Clearing Agency 
Framework for Certain Requirements on Governance and Conflicts of 
Interest

August 27, 2024.
    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 August 15, 2024, 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 adopt a new framework entitled the 
``Clearing Agency Framework for Certain Requirements on Governance and 
Conflicts of Interest'' (``Framework'') of FICC and its affiliates, The 
Depository Trust Company (``DTC'') and National Securities Clearing 
Corporation (``NSCC,'' and together with

[[Page 71594]]

FICC and DTC, the ``Clearing Agencies''). The Framework would outline 
the way in which the Clearing Agencies and their Boards of Directors 
(``Boards''), as applicable, comply with certain sections of Rule 17ad-
25,\3\ as described below.
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    \3\ See 17 CFR 240.17ad-25 (``Rule 17ad-25'').
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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
    Recently, the Commission adopted a new rule on governance and 
conflicts of interest for registered clearing agencies, Rule 17ad-
25.\4\ The proposed rule changes would establish the Framework, which 
would outline the way in which the Clearing Agencies and their Boards, 
as applicable, comply with sections (g), (h), (i) and (j) of the new 
rule.\5\ The proposed rule changes are discussed in more detail below.
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    \4\ See id.
    \5\ See 17 CFR 240.17ad-25(g), (h), (i) and (j).
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(i) Proposed Section 1 and Section 2 of the Framework
    Proposed Section 1 of the Framework would constitute the executive 
summary of the Framework. Section 1 notes, among other things, that the 
Framework provides an outline for the way in which the Clearing 
Agencies and their Boards comply with the requirements of Rule 17ad-
25(g), (h), (i) and (j) \6\ and that the Clearing Agencies may develop 
policies, procedures and other supplemental documentation to support 
execution of the Framework. The Framework states that individuals 
elected to the DTCC Board of Directors are also elected to the Boards 
of each of the Clearing Agencies, and that the Framework is applicable 
to the directors of each of the Clearing Agencies and DTCC separately 
with respect to their role on each Board.
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    \6\ See id.
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    Section 1 also notes that references in the Framework to the 
Clearing Agencies and governance bodies should be read in the singular 
or the plural as the context requires, and references to individual 
officers or employees, management, or functional areas generally refer 
to employees or functions of DTCC,\7\ acting on behalf of the relevant 
Clearing Agencies.
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    \7\ The Depository Trust & Clearing Corporation (``DTCC'') is 
the parent company of the Clearing Agencies.
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    Proposed Section 2 of the Framework would cover Framework ownership 
and change management. The Framework would be owned and managed by an 
officer, within the General Counsel's Office of DTCC, on behalf of each 
Clearing Agency. Regarding change management, Section 2 would state 
that changes to the Framework would be approved by either (1) the 
Boards, (2) such Board committees as may be delegated authority by the 
Boards from time to time pursuant to their charters, or (3) with 
respect to certain changes, the General Counsel or Deputy General 
Counsels of the Clearing Agencies, pursuant to authority delegated by 
the Boards and with the advice and direction of the Framework owner. 
Section 2 also states that the Framework would be reviewed and approved 
annually by the Boards, or duly authorized committees of the Boards.
(ii) Proposed Section 3 on Rules 17ad-25(g) and (h)
    Proposed Section 3 of the Framework would describe how the Clearing 
Agencies comply with sections (g) and (h) of Rule 17ad-25.\8\ The 
Clearing Agencies would maintain applicable policies and procedures 
applicable to Board directors and management of the Clearing Agencies, 
respectively. Such policies and procedures would provide that the 
Clearing Agencies identify and document existing or potential conflicts 
of interest in the decision-making process of the Clearing Agencies 
involving directors or senior managers of the Clearing Agencies, and 
mitigate or eliminate and document the mitigation or elimination of 
such conflicts of interest.
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    \8\ See 17 CFR 240.17ad-25(g) and (h).
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    Regarding the directors, the Framework would describe that 
directors are required to exercise their powers in good faith and in 
the best interests of the Clearing Agencies, rather than their own 
interests or the interests of another entity or person. Directors have 
a duty to each Clearing Agency that applies separately. A conflict of 
interest is present whenever the interests of the Clearing Agencies 
compete with the interests of a director, the director's employer, or 
any other party with which a director is associated, or otherwise 
whenever a director's corporate or personal interests could be viewed 
as affecting his or her objectivity or independent judgment in 
fulfilling the director's duties to the Clearing Agencies.
    The Framework would state that directors are required to document 
and inform the Corporate Secretary of the Clearing Agencies promptly of 
the existence of any relationship or interest that reasonably could 
affect the independent judgment or decision-making of the director. The 
Framework would provide that the Corporate Secretary would escalate any 
disclosure to the General Counsel for evaluation. If such disclosure is 
deemed to be an actual conflict of interest, the General Counsel would 
notify the Non-Executive Chairman of the Board and discuss how such 
conflict can be mitigated or eliminated. In certain cases, it may be 
advisable for the involved director to recuse himself/herself from any 
discussion or vote related to the matter. In other cases, where the 
conflict is limited or indirect, the Non-Executive Chairman in 
consultation with the General Counsel may determine that the conflict 
should be disclosed to the full Board of Directors, but in light of 
such disclosure to the Board, recusal of the director is unnecessary. 
Further, there may be cases where a conflict is so significant or 
pervasive that the director would be unable to continue to serve on the 
Boards. In such instances, the Non-Executive Chairman and General 
Counsel would discuss with the Governance Committee. Any measures taken 
to address a conflict of interest would be documented by the Corporate 
Secretary's Office.
    Regarding senior management, the Framework would state that all 
staff, including senior managers, must avoid activities or 
relationships that might affect objectivity in business decisions 
throughout employment with the Clearing Agencies. Staff, including 
senior managers, are required to disclose a relationship or interest 
that reasonably could affect objectivity in business decisions for 
review and determination on the appropriate course of action. A course 
of action for a conflict of interest could include actions such as 
recusal of the staff member from the particular matter, such as a 
vendor selection process or disallowing a staff member from being on 
the board of directors of a Clearing Agency vendor or client. The 
course of action will be documented.

[[Page 71595]]

(iii) Proposed Section 4 on Rule 17ad-25(i)
    Proposed Section 4 of the Framework would describe how the Clearing 
Agencies comply with section (i) of Rule 17ad-25.\9\ The Clearing 
Agencies would adopt the definition of ``service provider for core 
services'' from Rule 17ad-25(a),\10\ which is ``any person that, 
through a written service provider agreement for services provided to 
or on behalf of the registered clearing agency, on an ongoing basis, 
directly supports the delivery of clearance or settlement functionality 
or any other purposes material to the business of the registered 
clearing agency.'' Additionally, the Clearing Agencies would identify 
service providers for core services and manage risks related to 
agreements with such service providers. Specifically, senior management 
would be required to: (1) evaluate and document the risks related to 
agreements with service providers for core services, including under 
changes to circumstances and potential disruptions, and whether the 
risks can be managed in a manner consistent with the Clearing Agencies' 
risk management framework; and (2) perform ongoing monitoring of the 
relationship and report to the Boards for their evaluation of any 
action taken by senior management to remedy significant deterioration 
in performance or address changing risks or material issues identified 
through such monitoring, or if the risk or material issues identified 
cannot be remedied, assess and document weaknesses or deficiencies in 
the relationship with the service provider for core services for 
submission to the Board.
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    \9\ See 17 CFR 240.17ad-25(i).
    \10\ See 17 CFR 240.17ad-25(a).
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    Further, the Boards of the Clearing Agencies would: (1) review and 
approve the procedures described in the previous paragraph; (2) review 
and approve any agreement that would establish a relationship with a 
service provider for core services along with the required risk 
evaluation prepared by senior management; and (3) evaluate any action 
taken by senior management to remedy significant deterioration in 
performance or address changing risks or material issues identified 
through senior management's monitoring of service providers for core 
services.
    Importantly, consistent with the definition from Rule 17ad-25(a), 
service providers for core services to the Clearing Agencies can be 
external service providers or intercompany affiliates (i.e., DTCC or 
one of its subsidiaries). As a general matter, the Clearing Agencies 
employ a proportionate and risk-based approach adapted to the distinct 
characteristics and risks presented by these two different categories 
of service providers.\11\ One core distinction is that the Clearing 
Agencies and their affiliate service providers are all held accountable 
via enterprise-wide risk management systems, processes, and controls 
administered under a common governance arrangement (i.e., one holding 
company). Moreover, this common governance arrangement and the related 
systems, processes, and controls are based upon and largely derived 
from the stringent legal and regulatory compliance standards applicable 
to the Clearing Agencies. Therefore, the Clearing Agencies and their 
affiliates are all held directly accountable by a common governance 
arrangement to a set of performance level and risk management standards 
based upon the Clearing Agencies' requirements, which is administered 
via enterprise-wide systems, processes, and internal controls. In 
contrast, because external service providers are not subject to the 
same governance arrangements and standards that ensure accountability 
for intercompany affiliates, the Clearing Agencies must use different 
mechanisms (e.g., negotiating and enforcing express contractual terms) 
to ensure a comparable degree of risk management and monitoring. Given 
this fundamental difference in accountability mechanisms, the Clearing 
Agencies therefore rely upon a dedicated third party risk management 
function to manage and monitor external relationship risks separately 
from the internal functions described above applied for affiliated 
service provider relationships.
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    \11\ The concept of proportional treatment of affiliated and 
unaffiliated third party service providers is well-documented in 
risk management guidance for financial institutions. See, for 
example, the Financial Stability Board's guidance on Enhancing 
Third-Party Risk Management and Oversight: A toolkit for financial 
institutions and financial authorities available at https://www.fsb.org/wp-content/uploads/P041223-1.pdf.
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(iv) Proposed Section 5 on Rule 17ad-25(j)
    Proposed Section 5 of the Framework would state that in support of 
their compliance with Rule 17ad-25(j),\12\ the Clearing Agencies have 
established various advisory councils (``Advisory Councils'') made up 
of representatives of the Clearing Agencies' participants and other 
relevant stakeholders. In order to ensure appropriate stakeholders are 
consulted for different types of material developments at the Clearing 
Agencies, the Clearing Agencies have established a joint Advisory 
Council to consider material developments in risk management across the 
Clearing Agencies and separate business-line specific Advisory Councils 
to consider material developments in operations. The Clearing Agencies 
may also use other mechanisms, such as ad hoc group meetings of 
Clearing Agency participants and other relevant stakeholders, to assist 
the Boards of the Clearing Agencies in meeting their obligations under 
Rule 17ad-25(j).
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    \12\ See 17 CFR 240.17ad-25(j).
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    The Framework would state further that the Advisory Councils and 
the ad hoc mechanisms assist the Boards of the Clearing Agencies in 
their obligation to solicit, consider, and document their consideration 
of the views of participants and other relevant stakeholders of the 
Clearing Agencies regarding material developments in their respective 
risk management and operations on a recurring basis. Specifically, 
senior management of the Clearing Agencies would bring material 
developments in the Clearing Agencies' risk management and operations 
to the Advisory Councils (or ad hoc mechanisms) for their 
consideration. Senior management would document the views of the 
stakeholders participating in these Advisory Councils and mechanisms on 
such developments. Senior management would then escalate the views on 
material developments in the Clearing Agencies risk management and 
operations to the Boards for their consideration.
    The proposed rule changes also define ``material developments'' in 
the Clearing Agencies' risk management and operations as including 
developments that would significantly affect the risk and/or 
operational profile of a Clearing Agency and/or would significantly 
affect the rights and obligations of relevant stakeholders. Providing 
information on such material developments would enable stakeholders to 
identify and evaluate the risk, fees and other significant costs they 
incur by participating or otherwise interacting with a Clearing Agency. 
``Material developments'' in the Clearing Agencies' risk management and 
operations would cover areas such as financial risk management, margin 
methodologies, cyber and operational resiliency, default management, 
fee structures, the introduction of new cleared products and services, 
access models, and the design and functioning of the processes and 
technology systems that support the infrastructure of the Clearing 
Agencies and the way that

[[Page 71596]]

participants and other relevant stakeholders connect to such systems.
(v) Implementation Timeframe
    Subject to approval by the Commission, the Clearing Agencies would 
implement the proposed rule changes on December 5, 2024.
2. Statutory Basis
    The Clearing Agencies believe that the proposed changes are 
consistent with Section 17A(b)(3)(F) of the Act \13\ for the reasons 
described below. Section 17A(b)(3)(F) of the Act requires, in part, 
that the rules of a registered clearing agency be designed to promote 
the prompt and accurate clearance and settlement of securities 
transactions, safeguard the securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible, and foster cooperation and coordination with persons 
engaged in the clearance and settlement of securities transactions.\14\
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ Id.
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    The proposed rule changes would address potential conflicts of 
interest, as described more fully in Item II(A)1(ii) above. The 
proposed rule changes would help ensure that the Clearing Agencies are 
able to identify potential conflicts of interest at the senior 
management and Board level and subject such conflicts to a uniform 
process of review, mitigation or elimination, and documentation. In 
addition, the proposed changes would address the situation where the 
Clearing Agencies may not have access to information necessary to 
identify a potential conflict of interest by requiring that a director 
be required to document and inform the Clearing Agencies promptly of 
the existence of any relationship or interest that reasonably could 
affect the independent judgment or decision-making of the director. The 
Clearing Agencies believe that including the foregoing requirements in 
the Framework would help ensure the integrity of the governance 
processes of the Clearing Agencies and thereby promote the prompt and 
accurate clearance and settlement of securities transactions and 
safeguard the securities and funds which are in the custody or control 
of the Clearing Agencies or for which they are responsible, consistent 
with Section 17A(b)(3)(F) of the Act.\15\
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    \15\ Id.
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    The proposed rule changes would also address risks presented by 
service providers for core services, as described more fully in Item 
II(A)1(iii) above. The proposed rule changes in this regard would 
require senior management of the Clearing Agencies to manage the risks 
presented by evaluating and documenting such risks, including under 
changes to circumstances and potential disruptions, among other things. 
The proposed rule changes would also provide for Board oversight of 
senior management regarding the management of risks presented by 
service providers for core services. These requirements for both senior 
management and the Boards would help prevent situations where a service 
provider for core services does not perform its obligations and 
therefore help prevent undermining the Clearing Agencies' sound risk 
management and operational resiliency. The Clearing Agencies believe 
that by helping to maintain their sound risk management and operational 
resiliency, the proposed rule changes would promote the prompt and 
accurate clearance and settlement of securities transactions and 
safeguard the securities and funds which are in the custody or control 
of the Clearing Agencies or for which they are responsible, consistent 
with Section 17A(b)(3)(F) of the Act.\16\
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    \16\ Id.
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    The proposed changes would also address the obligation of the 
Boards to solicit and consider viewpoints of participants and other 
relevant stakeholders, as described more fully in Item II(A)1(iv) 
above. The proposed rule changes in this regard would require the 
Boards to solicit, consider and document their consideration of 
participant and relevant stakeholder viewpoints regarding material 
developments in their risk management and operations on a recurring 
basis. Obtaining viewpoints from participants and relevant stakeholders 
on material developments in the Clearing Agencies' risk management and 
operations would help optimize the Clearing Agencies' decisions, rules 
and procedures because it could provide the Clearing Agencies with a 
wider breadth of useful information as they make developments in these 
key areas. The Clearing Agencies believe that because the proposed rule 
changes could lead to better decisions, rules and procedures in these 
key areas, the proposed rule changes would promote the prompt and 
accurate clearance and settlement of securities transactions and foster 
cooperation and coordination with persons engaged in the clearance and 
settlement of securities transactions, consistent with the requirements 
of Section 17A(b)(3)(F) of the Act.\17\
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    \17\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    The Clearing Agencies believe that the proposed rule changes could 
promote competition. Specifically, the Clearing Agencies believe, as 
the Commission noted in its adopting release regarding the adoption of 
Rule 17ad-25(g) and Rule 17ad-25(h),\18\ that the changes on conflicts 
of interest described in Item II(A)1(ii) above would help promote the 
integrity of the Clearing Agencies' governance arrangements by helping 
to ensure the Clearing Agencies are capable of both identifying 
potential conflicts and subjecting such conflicts to a uniform process 
of review, mitigation or elimination and documentation. In addition, 
the proposed changes would address the situation where the Clearing 
Agencies may not have access to information necessary to identify a 
potential conflict of interest by requiring that a director be required 
to document and inform the Clearing Agencies promptly of the existence 
of any relationship or interest that reasonably could affect the 
independent judgment or decision-making of the director. The Clearing 
Agencies believe that these changes taken as a whole serve to ensure 
the equitable treatment of clearing members or other market 
participants by the Clearing Agencies and therefore could promote 
competition.
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    \18\ See Securities Exchange Act Release No. 98959 (Nov. 16, 
2023), 88 FR 84454 (Dec. 5, 2023), at 84474.
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    The Clearing Agencies also believe that the proposed rule changes 
on the management of risks presented by service providers for core 
services described in Item II(A)1(iii) above could also promote 
competition. The proposed rule changes in this regard would require 
senior management of the Clearing Agencies to manage the risks 
presented by evaluating and documenting such risks, including under 
changes to circumstances and potential disruptions, among other things. 
The proposed rule changes would also provide for Board oversight of 
senior management regarding the management of risks presented by 
service providers for core services. These requirements for both senior 
management and the Boards would help prevent situations where a service 
provider for core services does not perform its obligations, and 
therefore help prevent undermining the Clearing Agencies' sound risk 
management and operational resiliency, which could also be costly for 
members of the Clearing Agencies. The Clearing Agencies believe that by 
implementing the proposed

[[Page 71597]]

changes described in Item II(A)1(iii) above and thereby helping to 
avoid costs that members may incur if a service provider for core 
services does not meet its obligations, the proposed rule changes could 
promote competition.
    The Clearing Agencies also believe that the proposed changes on the 
obligation of the Boards to solicit and consider viewpoints of 
participants and other relevant stakeholders described in Item 
II(A)1(iv) above could also promote competition. The proposed rule 
changes in this regard would require the Boards to solicit, consider 
and document their consideration of participant and relevant 
stakeholder viewpoints regarding material developments in their risk 
management and operations on a recurring basis. The Clearing Agencies 
believe that the proposed rule changes could promote competition 
because they would formalize a process by which multiple interested 
parties (that is, participants and relevant stakeholders) would have 
their viewpoints on material developments in risk management and 
operations considered by the Boards, and the Boards could have useful 
information on how emerging topics in these areas might impact 
participants and stakeholders.

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

    The Clearing Agencies have not received or solicited any written 
comments relating to this proposal. If any written comments are 
received, they will be publicly filed as an Exhibit 2 to this filing, 
as required by Form 19b-4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to 
Section IV (Solicitation of Comments) of the Exhibit 1A in the General 
Instructions to Form 19b-4, the Commission does not edit personal 
identifying information from comment submissions. Commenters should 
submit only information that they wish to make available publicly, 
including their name, email address, and any other identifying 
information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submitcomments. General questions 
regarding the rule filing process or logistical questions regarding 
this filing should be directed to the Main Office of the Commission's 
Division of Trading and Markets at [email protected] or 202-
551-5777.
    The Clearing Agencies reserve the right not to respond to any 
comments received.

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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FICC-2024-010 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-2024-010. 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 (https://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 (https://dtcc.com/legal/sec-rule-filings.aspx). Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to File Number SR-FICC-2024-010 and should be 
submitted on or before September 24, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-19657 Filed 8-30-24; 8:45 am]
BILLING CODE 8011-01-P