[Federal Register Volume 90, Number 84 (Friday, May 2, 2025)]
[Notices]
[Pages 18880-18884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-07610]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102938; File No. SR-DTC-2025-006]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Proposed Rule Change To Update the Clearing Agency
Securities Valuation Framework To Include Use of Substantive Inputs
April 28, 2025.
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 April 15, 2025, The Depository Trust Company (``DTC'') 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 primarily 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 updates the Clearing Agency Securities
Valuation Framework (``Framework'') of DTC and its affiliates, Fixed
Income Clearing Corporation (``FICC'') and National Securities Clearing
Corporation (``NSCC,'' and together with FICC, the central
counterparties or ``CCPs,'' and DTC together with the CCPs, the
``Clearing Agencies'') in order to address recently adopted amendments
to the Commission's Standards for Covered Clearing Agencies (``CCAS
Rules'') concerning the use of substantive inputs in covered clearing
agency (``CCA'') risk-based margin systems. The proposed changes to the
Framework would apply to DTC, NSCC, and both of FICC's divisions, the
Government Securities Division (``GSD'') and the Mortgage-Backed
Securities Division (``MBSD'').\3\
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\3\ Capitalized terms not defined herein shall have the meaning
assigned to such terms in the DTC Rules, By-Laws and Organization
Certificate, FICC GSD Rulebook, FICC MBSD Clearing Rules, and NSCC
Rules & Procedures, available at 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
Executive Summary of Proposed Changes
On October 25, 2024, the Commission adopted amendments to the CCAS
Rules to add new requirements for CCAs relying upon substantive inputs
to their risk-based margin models, including when such substantive
inputs are not readily available or reliable.\4\ Rule 17ad-22(e)(6)(iv)
\5\ previously set forth requirements for CCAs to maintain policies and
procedures concerning the use of reliable sources of timely price data
and procedures for addressing circumstances in which price data are not
readily available or reliable. The Commission recently amended Rule
17ad-22(e)(6)(iv) to expand the scope of this rule beyond price data to
also include other substantive inputs to a CCA's risk-based margin
system.\6\ Specifically, the CCAS Margin Rules would require that CCAs
maintain policies and procedures that are reasonably designed to (i)
use reliable sources of timely price data and other substantive inputs
and (ii) address circumstances in which price data and other
substantive inputs are not readily available or reliable, to ensure
that the CCA can continue to meet its obligations under Rule 17ad-
22(e)(6) under the Act.\7\ Such policies and procedures must include
either (i) the use of price data or substantive inputs from an
alternate source; or (ii) if it does not use an alternate source, the
use of a risk-based margin system that does not rely on substantive
inputs that are unavailable or unreliable. As described below, the
proposed changes to the Framework are primarily designed to facilitate
compliance with these requirements.
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\4\ Securities Exchange Act Release No. 101446 (Oct. 25, 2024),
89 FR 91000 (Nov. 18, 2024) (File No. S7-10-23) (``Adopting
Release,'' and the substantive input rules adopted therein referred
to herein as ``CCAS Margin Rules'').
\5\ 17 CFR 240.17ad-22(e)(6)(iv).
\6\ See Adopting Release, supra note 4 at 91011.
\7\ 17 CFR 240.17ad-22(e)(6)(iv).
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[[Page 18881]]
Background
The Clearing Agencies maintain a Framework that sets forth the
manner in which each of the Clearing Agencies identifies, measures,
monitors, and manages the risks related to the pricing of securities
processed or otherwise held by such Clearing Agencies, including (i)
CUSIPs eligible for clearance and settlement processing by the
applicable Clearing Agency and (ii) with respect to the CCPs, eligible
CUSIPs in their respective Clearing Funds.\8\ The Framework describes,
among other things, the Clearing Agencies' use of pricing vendors and
the monitoring, reviewing and processing of pricing data for end-of-day
and intraday pricing.
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\8\ See Securities Exchange Act Release Nos. 82006 (Nov. 2,
2017), 82 FR 51892 (Nov. 8, 2017) (SR-DTC-2017-016, SR-NSCC-2017-
016, SR-FICC-2017-020); 97280 (Apr. 11, 2023), 88 FR 23482 (Apr. 17,
2023) (SR-NSCC-2023-003); 97283 (Apr. 11, 2023), 88 FR 23478 (Apr.
17, 2023) (SR-FICC-2023-004); and 97284 (Apr. 11, 2023), 88 FR 23474
(Apr. 17, 2023) (SR-DTC-2023-003).
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The Framework is currently owned and managed by an officer within
the DTCC Securities Valuation team, which is part of the Group Chief
Risk Office of DTCC, on behalf of the Clearing Agencies.\9\ The
processes and systems described in the Framework, and any policies,
procedures, or other documents created to support those processes,
support the Clearing Agencies' compliance with the requirements of Rule
17ad-22(e)(4)(i) \10\ and, with respect to the CCPs, Rule 17ad-
22(e)(6)(iv) \11\ under the Act.
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\9\ The parent company of the Clearing Agencies is The
Depository Trust & Clearing Corporation (``DTCC''). DTCC operates on
a shared services model with respect to the Clearing Agencies. Most
corporate functions are established and managed on an enterprise-
wide basis pursuant to intercompany agreements under which it is
generally DTCC that provides a relevant service to a Clearing
Agency.
\10\ 17 CFR 240.17ad-22(e)(4)(i).
\11\ 17 CFR 240.17ad-22(e)(6)(iv).
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Proposed Changes to the Framework
The Clearing Agencies propose to revise the Framework to address
the newly adopted CCAS Margin Rules and make other clarifying,
organizational and cleanup changes. Specifically, the Clearing Agencies
would (i) add a new section on other margin input data (aside from
price data) to address CCAS Margin Rules related to substantive inputs
to CCA margin systems; (ii) add a new glossary of key terms to the
Framework; (iii) make clarifying changes to the securities valuation
section of the Framework; and (iv) make other clarifying and conforming
changes throughout the Framework.
Margin Input Data (Including Substantive Inputs)
The primary purpose of the proposed rule change is to add a new
section to the Framework to address new CCAS Margin Rules concerning
the substantive inputs to CCA margin systems. The proposed new section
would provide that NSCC and FICC, as CCPs, maintain policies and
procedures for (i) evaluating data inputs (other than price data) to
their margin systems and methodologies, (ii) determining which data
inputs are Substantive Inputs (as defined below), (iii) maintaining an
inventory of Substantive Inputs and alternative sources or margin
systems/methodologies that do not rely on Substantive Inputs that are
unavailable or unreliable, and (iv) addressing circumstances in which
Substantive Inputs may not be readily available or reliable.
The proposed new section would describe ``Substantive Inputs'' as
inputs that each CCP determines are ``necessary'' and ``consequential''
to the calculation of its respective margin requirements. Specifically,
a data input is deemed to be ``necessary'' if the margin calculation
cannot be performed without some form of the data input. A data input
is determined to be ``consequential'' if the unavailability or
unreliability of the input would impact margin requirements such that
the CCP is not adequately able to cover the risk intended to be
addressed by the respective margin model, component or charge. The
proposed new section would provide examples of Substantive Inputs that
include, but are not limited to, inputs such as (i) market data, (ii)
reference data, and (iii) sensitivity data.
The proposed new section would also specify the relevant team(s)
within DTCC that would review each CCP's margin inputs to determine
whether they are Substantive Inputs. Based on these determinations, an
inventory of Substantive Inputs for each CCP would be maintained and
reviewed on at least an annual basis.
In addition, the proposed new section would specify the relevant
team(s) within DTCC that would define and implement data quality rules
to regularly monitor the ongoing availability and reliability of each
Substantive Input. If a Substantive Input is unavailable or unreliable,
the designated team(s) would escalate the issue to relevant
stakeholders in accordance with their procedures. The designated
team(s) would also facilitate an internal annual review of the
inventory of data quality rules in accordance with its procedures.
Furthermore, the designated team(s) would maintain procedures for
addressing circumstances in which their respective Substantive Inputs
are not readily available or reliable. Such procedures would include
(i) the use of Substantive Inputs from an alternative source or (ii)
the use of a risk-based margin system that does not rely on the
Substantive Inputs that are unavailable or unreliable. The proposed new
section would provide that an alternate source for a Substantive Input
generally should meet the same level of reliability as the primary
source, is not required to be sourced externally, and may be created
internally. In addition, the new section would provide that an
alternate source may be the result of internal policies and procedures
that establish a methodology or approach to determining an appropriate
input that meets the needs of the CCP's margin methodology and
maintains compliance with the overall requirements of Rule 17ad-
22(e)(6).\12\ Lastly, the new section would provide that any alternate
risk-based margin system is subject to the requirements of Rule 17ad-
22(e)(6)(vi) and (vii) \13\ under the Act with respect to monitoring,
review, testing, verification, and model validation.
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\12\ 17 CFR 240.17ad-22(e)(6).
\13\ 17 CFR 240.17ad-22(e)(6)(vi) and (vii).
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Glossary of Key Terms
In order to enhance the transparency of the Framework, the Clearing
Agencies propose to add a new section to include a glossary of key
terms used in the Framework as well as their definitions. The Clearing
Agencies believe the new glossary would help improve clarity of the
Framework by providing a concise and easy-to-use reference tool for
users of the Framework.
Clarifying Changes Regarding Securities Valuation
The Clearing Agencies propose changes to clarify and further
streamline the description of the Clearing Agencies' practices
concerning the price data of (i) securities eligible for clearance and
settlement processing by the applicable Clearing Agency and (ii) with
respect to the CCPs, eligible securities in their respective Clearing
Funds. Specifically, the Clearing Agencies propose to include
clarifying language that provides each Clearing Agency uses reliable
sources of timely price data and has policies and procedures to address
circumstances in which price data are not readily available or reliable
in support of the Framework. As proposed, such procedures would include
the use of price data from an alternate source or
[[Page 18882]]
an alternative valuation model/methodology.
Other Conforming and Clarifying Changes
The Clearing Agencies propose other conforming and clarifying
changes. These other conforming and clarifying changes include renaming
the Framework as the Clearing Agency Price and Margin Input Data
Framework to reflect that, as proposed, the Framework would set forth
the manner in which each of the Clearing Agencies identifies, measures,
monitors, and manage the risks related to both price and margin input
data. These changes also include updates to the description of
applicable regulatory requirements to align with the new CCAS Margin
Rules concerning the use of substantive inputs in a CCA's risk-based
margin systems. Furthermore, the Clearing Agencies propose changes to
align terminologies used throughout the Framework with those defined in
the new glossary of key terms.
Implementation Timeframe
The Clearing Agencies expect to implement the proposed rule change
by no later than December 15, 2025, and would announce the effective
date of the proposed changes by an Important Notice posted to the DTCC
website.
2. Statutory Basis
The Clearing Agencies believe that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a registered clearing agency. In
particular, the Clearing Agencies believe the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act \14\ and Rules 17ad-
22(e)(4)(i), (e)(6)(i), and (e)(6)(iv) \15\ under the Act for the
reasons set forth below.
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\14\ 15 U.S.C. 78q-1(b)(3)(F).
\15\ 17 CFR 240.17ad-22(e)(4)(i), (e)(6)(i), and (e)(6)(iv).
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Section 17A(b)(3)(F) of the Act \16\ 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. The proposed rule change would amend the Framework to
describe how the Clearing Agencies maintain policies and procedures
that are reasonably designed to (i) use reliable sources of timely
price data and other substantive inputs and (ii) address circumstances
in which price data and other substantive inputs are not readily
available or reliable. The Framework and the policies and procedures
that support the Framework help assure that each Clearing Agency is
using reliable sources of timely price data and other substantive
inputs, as applicable, for determining margin requirements and
collateral valuation for risk management and settlement purposes. Since
margin and collateral play key roles in the applicable Clearing
Agency's risk management process, having accurate margin requirements
and collateral valuation facilitate the Clearing Agencies' ability to
continue the prompt and accurate clearance and settlement of securities
transactions and assure the safeguarding of securities and funds which
are in their custody or control or for which they are responsible, in
accordance with Section 17A(b)(3)(F) of the Act.
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\16\ 15 U.S.C. 78q-1(b)(3)(F).
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The proposed rule change has also been designed to be consistent
with Rules 17ad-22(e)(4)(i), (e)(6)(i) and (e)(6)(iv) under the
Act.\17\ Rule 17ad-22(e)(4)(i) under the Act \18\ requires a CCA to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
exposures arising from its payment, clearing, and settlement processes
by maintaining sufficient financial resources to cover its credit
exposure to each participant fully with a high degree of confidence.
The proposed rule change would amend the Framework to describe how the
Clearing Agencies maintain policies and procedures that are reasonably
designed to (i) use reliable sources of timely price data and other
substantive inputs and (ii) address circumstances in which price data
and other substantive inputs are not readily available or reliable. The
Framework and the policies and procedures that support the Framework
help assure that each Clearing Agency is using reliable sources of
timely price data and other substantive inputs, as applicable, for
determining margin requirements and collateral valuation for risk
management and settlement purposes. Since margin and collateral play
key roles in the applicable Clearing Agency's risk management process,
having accurate margin requirements and collateral valuation would
enable it to better identify, measure, monitor, and manage its credit
exposures to participants by maintaining sufficient resources to cover
those credit exposures fully with a high degree of confidence. As a
result, the Clearing Agencies believe that the proposed rule change
would enhance the applicable Clearing Agency's ability to effectively
identify, measure, and monitor its credit exposures and would enhance
its ability to maintain sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence, consistent with the requirements of Rule 17ad-22(e)(4)(i)
under the Act.\19\
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\17\ 17 CFR 240.17ad-22(e)(4)(i), (e)(6)(i) and (e)(6)(iv).
\18\ 17 CFR 240.17ad-22(e)(4)(i).
\19\ Id.
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Rule 17ad-22(e)(6)(i) under the Act \20\ requires each CCA that is
a CCP to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market.\21\ The proposed rule change would amend the Framework to
describe how the Clearing Agencies maintain policies and procedures
that are reasonably designed to (i) use reliable sources of timely
price data and other substantive inputs and (ii) address circumstances
in which price data and other substantive inputs are not readily
available or reliable. The Framework and the policies and procedures
that support the Framework help assure that each Clearing Agency is
using reliable sources of timely price data and other substantive
inputs, as applicable, for determining margin requirements and
collateral valuation for risk management and settlement purposes. Since
margin and collateral play key roles in the applicable Clearing
Agency's risk management process, having accurate margin requirements
and collateral valuation would help to ensure that margin levels are
commensurate with the risk exposure of each portfolio throughout the
day and that the margin that the applicable Clearing Agency collects
from participants is sufficient to mitigate the credit exposure
presented by the participants. Overall, the proposed change would allow
the applicable Clearing Agency to more effectively address the risks
presented by participants. In this way, the proposed change would
enhance the ability of the applicable Clearing Agency to produce margin
levels commensurate with the risks and particular attributes of each
relevant product, portfolio, and market. As such, the Clearing Agencies
believe that the
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proposed change is consistent with the requirements of Rule 17ad-
22(e)(6)(i) under the Act.\22\ Rule 17ad-22(e)(6)(iv) \23\ under the
Act requires each CCA that is a CCP to establish, implement, maintain
and enforce written policies and procedures reasonably designed to
cover its credit exposures to its participants by establishing a risk-
based margin system that, at a minimum, uses reliable sources of timely
price data and other substantive inputs (and, with respect to price
data, sound valuation models) for addressing circumstances in which
price data or other substantive inputs are not readily available or
reliable, to ensure that the CCA can continue to meet its obligations
under Rule 17ad-22(e)(6).\24\ Such policies and procedures must include
either (i) the use of price data or substantive inputs from an
alternate source; or (ii) if it does not use an alternate source, the
use of a risk-based margin system that does not rely on substantive
inputs that are unavailable or unreliable.
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\20\ 17 CFR 240.17ad-22(e)(6)(i).
\21\ Id.
\22\ Id.
\23\ 17 CFR 240.17ad-22(e)(6)(iv).
\24\ See 17 CFR 240.17ad-22(e)(6).
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As discussed above, the proposed rule change would amend the
Framework to describe how the Clearing Agencies maintain policies and
procedures that are reasonably designed to (i) use reliable sources of
timely price data and other substantive inputs and (ii) address
circumstances in which price data and other substantive inputs are not
readily available or reliable. This includes the maintenance of
procedures detailing (i) the use of price data or substantive inputs
from an alternate source or (ii) if the CCP does not use an alternate
source, the use of a risk-based margin system that does not rely on
substantive inputs that are unavailable or unreliable. The Clearing
Agencies believe the proposed changes to the Framework are designed to
facilitate the use of timely and reliable substantive inputs to each
CCP's margin system, and where such inputs are unavailable or
unreliable, the use of appropriate alternative sources or procedures,
to ensure that the Clearing Agencies continue to meet their obligations
under Rule 17ad-22(e)(6) under the Act.\25\
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\25\ See 17 CFR 240.17ad-22(e)(6).
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For the reasons set forth above, the Clearing Agencies believe the
proposed rule change is consistent with Section 17A(b)(3)(F) of the Act
\26\ and Rules 17ad-22(e)(4)(i), (e)(6)(i), and (e)(6)(iv)
thereunder.\27\
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\26\ 15 U.S.C. 78q-1(b)(3)(F).
\27\ 17 CFR 240.17ad-22(e)(4)(i), (e)(6)(i), and (e)(6)(iv).
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of Act \28\ requires that the rules of a
clearing agency do not impose any burden on competition not necessary
or appropriate in furtherance of the purposes of the Act. The Clearing
Agencies do not believe that the proposed rule change would have any
impact, or impose any burden, on competition. The proposed changes
would enhance the Framework by addressing the new CCAS Margin Rules
concerning the use of substantive inputs in a CCA's risk-based margin
systems. These changes apply to the CCA's margin systems generally and
would not advantage or disadvantage any particular participant or user
of the Clearing Agencies' services or unfairly inhibit access to the
Clearing Agencies' services. The Clearing Agencies therefore do not
believe that the proposed rule change would have any impact, or impose
any burden, on competition.
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\28\ 15 U.S.C. 78q-1(b)(3)(I).
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(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, the Clearing Agencies will amend this filing by publicly
filing such comments as an Exhibit 2 to this filing, as required by
Form 19b-4 and the General Instructions thereto.
Persons submitting written 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 www.sec.gov/regulatory-actions/how-to-submit-comments. 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 tradingandmarkets@sec.gov or 202-551-5777.
The Clearing Agencies reserve the right to not 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 rule-comments@sec.gov. Please include
file number SR-DTC-2025-006 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to file number SR-DTC-2025-006. 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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and
[[Page 18884]]
copying at the principal office of DTC and on DTCC's website (https://www.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-DTC-2025-006 and should be submitted on or
before May 23, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-07610 Filed 5-1-25; 8:45 am]
BILLING CODE 8011-01-P