Notice2022-18860
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving of Proposed Rule Change To Enhance Capital Requirements and Make Other Changes
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 1, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 87 Issue 169 (Thursday, September 1, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 169 (Thursday, September 1, 2022)]
[Notices]
[Pages 53818-53822]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-18860]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95616; File No. SR-FICC-2021-009]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving of Proposed Rule Change To Enhance Capital Requirements
and Make Other Changes
August 26, 2022.
I. Introduction
On December 13, 2021, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'')
proposed rule change SR-FICC-2021-009 (the ``Proposed Rule Change'')
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 December 29,
2021.\3\ On January 26, 2022, pursuant to Section 19(b)(2) of the
Act,\4\ the Commission designated a longer period within which to
approve, disapprove, or institute proceedings to determine whether to
approve or disapprove the Proposed Rule Change.\5\ On March 23, 2022,
the Commission instituted proceedings to determine whether to approve
or disapprove the Proposed Rule Change.\6\ On June 23, 2022, the
Commission designated a longer period for Commission action on the
proceedings to determine whether to approve or disapprove the Proposed
Rule Change.\7\ The Commission has received comments regarding the
substance of the Proposed Rule Change.\8\ For the reasons discussed
below, the Commission is approving the Proposed Rule Change.\9\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 93857 (December 22,
2021), 86 FR 74130 (December 29, 2021) (File No. SR-FICC-2021-009)
(``Notice of Filing'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ Securities Exchange Act Release No. 94066 (January 26,
2022), 87 FR 5523 (February 1, 2022) (SR-FICC-2021-009).
\6\ Securities Exchange Act Release No. 94497 (March 23, 2022),
87 FR 18409 (March 30, 2022) (SR-FICC-2021-009).
\7\ Securities Exchange Act Release No. 95144 (June 23, 2022),
87 FR 38807 (June 29, 2022) (SR-FICC-2021-009).
\8\ The Commission received one comment letter that does not
bear on the Proposed Rule Change. The comment is available at
<a href="https://www.sec.gov/comments/sr-ficc-2021-009/srficc2021009.htm">https://www.sec.gov/comments/sr-ficc-2021-009/srficc2021009.htm</a>.
Since the proposed changes contained in this Proposed Rule Change
are similar to changes proposed simultaneously by FICC's affiliates,
National Securities Clearing Corporation and The Depository Trust
Company, the Commission has considered all public comments received
on the proposals regardless of whether the comments are submitted to
the Proposed Rule Change or to the proposals filed by FICC's
affiliates.
\9\ Capitalized terms not defined herein are defined in FICC's
Rules, available at <a href="https://www.dtcc.com/legal/rules-and-procedures">https://www.dtcc.com/legal/rules-and-procedures</a>.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
FICC proposes to amend the Government Securities Division (``GSD'')
Rulebook (the ``GSD Rules'') and the Mortgage-Backed Securities
Division (``MBSD'') Clearing Rules (the ``MBSD Rules,'' and together
with the GSD Rules, the ``Rules'') of FICC in order to (A) revise
FICC's capital requirements for GSD members and MBSD members
(collectively, ``members''),\10\ (B) streamline FICC's Watch List and
enhanced surveillance list, and (C) make certain other clarifying,
technical, and supplementary changes to implement items (A) and (B).
---------------------------------------------------------------------------
\10\ FICC states that these capital requirements have not been
updated for nearly 20 years. See Notice of Filing, supra note 3, at
74130. Although FICC has not updated capital requirements for many
of its members in nearly 20 years, during that time FICC has adopted
new membership categories with corresponding capital requirements
that FICC believes are still appropriate. As such, FICC is not
proposing changes to capital requirements for all membership
categories. See id.
---------------------------------------------------------------------------
A. Changes to FICC's Capital Requirements for Members
i. GSD Netting Members and MBSD Clearing Members
U.S. Broker-Dealer or Future Commission Merchant Members: For
certain GSD Netting Members \11\ and MBSD Clearing Members,\12\ FICC
proposes not to change the applicable capital requirements, but to (i)
provide expressly for equivalence among measures of Excess Net Capital,
Excess Liquid Capital,\13\ and Excess Adjusted Net Capital,\14\
depending on what such members are required to report on their
regulatory filings \15\ and (ii) make some clarifying and conforming
language changes to improve the accessibility and transparency of the
capital requirements, without substantive effect. FICC also proposes to
clarify that an applicant must satisfy its applicable capital
requirements when it applies for membership and at all times
thereafter, and therefore proposes to delete language requiring that a
member satisfy its capital requirements as of the end of the calendar
month prior to the effective date of its membership.
---------------------------------------------------------------------------
\11\ The GSD Netting Members include Dealer Netting Members,
Futures Commission Merchant Netting Members, and Inter-Dealer Broker
Netting Members.
\12\ The MBSD Clearing Members include Dealer Clearing Members
and Inter-Dealer Broker Clearing Members.
\13\ FICC proposes to define, in both the GSD and MBSD Rules,
Excess Liquid Capital as the difference between the Liquid Capital
of a Government Securities Broker or Government Securities Dealer
and the minimum Liquid Capital that such Government Securities
Broker or Government Securities Dealer must have to comply with the
requirements of 17 CFR Section 402.2(a), (b) and (c), or any
successor rule or regulation thereto.
\14\ FICC proposes to define, in both the GSD and MBSD Rules,
Excess Adjusted Net Capital as the difference between the adjusted
net capital of a Futures Commission Merchant and the minimum
adjusted net capital that such Futures Commission Merchant must have
to comply with the requirements of 17 CFR Section 1.17(a)(1) or
(a)(2), or any successor rule or regulation thereto.
\15\ In addition to these requirements, FICC is proposing that
MBSD Inter-Dealer Clearing Members have a Net Worth of $25 million.
---------------------------------------------------------------------------
U.S. Bank and Trust Company Members: For GSD Bank Netting Members
and MBSD Bank Clearing Members, FICC proposes to (1) change the measure
of capital requirements for banks and trust companies from equity
capital to common equity tier 1 capital (``CET1 Capital''),\16\ (2)
raise the minimum capital requirements for banks and trust companies
from $100 million to $500 million, and (3) require
[[Page 53819]]
U.S. banks and trust companies to be well capitalized (``Well
Capitalized'').\17\
---------------------------------------------------------------------------
\16\ Under the proposal, CET1 Capital would be defined as an
entity's common equity tier 1 capital, calculated in accordance with
such entity's regulatory and/or statutory requirements.
\17\ FICC proposes to incorporate the definition of ``Well
Capitalized'' as that term is defined by the Federal Deposit
Insurance Corporation in its capital adequacy rules and regulations.
See 12 CFR 324.403(b)(1). See 12 CFR 324.403(b)(1).
---------------------------------------------------------------------------
The proposal would align FICC's capital requirements with banking
regulators' changes to regulatory capital requirements over the past
several years, which have standardized and harmonized the calculation
and measurement of bank capital and leverage throughout the world.\18\
Consistent with these changes by banking regulators, FICC states that
it believes that the appropriate capital measure for members that are
banks and trust companies should be CET1 Capital and that FICC's
capital requirements for members should be enhanced to be consistent
with these increased regulatory capital requirements.\19\ FICC further
states that it believes the proposed capital requirements for banks
better measures the capital available to bank members to absorb losses
arising out of their clearance and settlement activities at FICC or
otherwise, and would help FICC more effectively manage and mitigate the
credit risks posed by its members.\20\
---------------------------------------------------------------------------
\18\ See Notice of Filing, supra note 3, at 74134.
\19\ See id.
\20\ See id. at 74141.
---------------------------------------------------------------------------
Additionally, FICC states that requiring U.S. banks and trust
companies to be Well Capitalized ensures that bank members are well
capitalized while also allowing CET1 Capital to be relative to either
the risk-weighted assets or average total assets of the bank or trust
company.\21\ FICC further states that expressly tying the definition of
Well Capitalized to the FDIC's definition of ``well capitalized'' will
ensure that the proposed requirement keeps pace with future changes to
regulatory capital requirements.\22\
---------------------------------------------------------------------------
\21\ See id. at 74134.
\22\ See id.
---------------------------------------------------------------------------
Foreign Broker-Dealer and Bank Members
Currently, a member who is a foreign broker-dealer or bank is
subject to a multiplier that requires such member to maintain capital
of either 1.5, 5, or 7 times its otherwise-applicable capital
requirements.\23\
---------------------------------------------------------------------------
\23\ The applicable multiplier is based on which generally
accepted accounting standards (``GAAP'') the non-U.S. member uses to
prepare its financial statements, when not prepared in accordance
with U.S. GAAP. See Section 4(b) of Rule 2A of the GSD Rules and
Section 2(e) of Rule 2A of the MBSD Rules, supra note 9.
---------------------------------------------------------------------------
Foreign Broker-Dealer Members: FICC proposes to require a Foreign
Netting Member or Foreign Person Clearing Member \24\ who is a broker
or dealer to maintain a minimum of $25 million in total equity capital.
FICC states the multiplier was designed to account for the less
transparent nature of accounting standards other than U.S. GAAP.\25\
However, given that accounting standards have converged over the years,
FICC no longer believes the multiplier is necessary and its retirement
would be a welcomed simplification for both FICC and its members.\26\
---------------------------------------------------------------------------
\24\ Under the proposal, this requirement would not apply to a
Dealer Clearing Member or Inter-Dealer Broker Clearing Member.
\25\ See id. at 74191.
\26\ See id. at 74191.
---------------------------------------------------------------------------
Non-U.S. Bank Members: Like U.S. bank members, FICC proposes that
non-U.S. bank members maintain at least $500 million in CET1 Capital.
FICC proposes additional requirements for non-U.S. bank members \27\ as
follows: (1) comply with the greater of (i) the member's home country
minimum capital and ratio requirements, including any applicable
buffers, or (ii) the minimum capital and ratio standards promulgated by
the Basel Committee on Banking Supervision,\28\ (2) provide an
attestation for itself, its parent bank, and its parent bank holding
company detailing the minimum capital requirements, including any
applicable buffers, and capital ratios required by their home country
regulator,\29\ and (3) notify FICC of (i) any breach of its minimum
capital, including buffers, and ratio requirements within two business
days, or (ii) any changes to its requirements within 15 calendar days.
---------------------------------------------------------------------------
\27\ For GSD, this includes a Foreign Netting Member that is
bank or trust company established or chartered under the laws of a
non-U.S. jurisdiction and not applying to become a Bank Netting
Member through a U.S. branch or agency. For MBSD, Foreign Person
that is a Clearing Member who is a bank or trust company established
or chartered under the laws of a non-U.S. jurisdiction and not
applying to become a Bank Clearing Member through a U.S. branch or
agency.
\28\ See Basel Committee on Banking Supervision, The Basel
Framework, available at <a href="https://www.bis.org/basel_framework/index.htm?export=pdf">https://www.bis.org/basel_framework/index.htm?export=pdf</a>. NSCC states that the proposal will align
NSCC's capital requirements with banking regulators' changes to
regulatory capital requirements over the past several years, which
have standardized and harmonized the calculation and measurement of
bank capital and leverage throughout the world. See Notice of
Filing, supra note 3, at 74190. See also supra note 30. NSCC
proposes tying its minimum requirement to the requirements
promulgated by the Basel Committee on Banking Supervision to ensure
that its non-U.S. bank members meet minimum international standards
where their home country requirements may be more lenient.
\29\ FICC also proposes to require non-U.S. bank members to
periodically provide new attestations on at least an annual basis
and upon request by FICC.
---------------------------------------------------------------------------
Other Foreign Members: FICC proposes that it may, based on
information provided by or concerning an applicant that is a Foreign
Netting Member or a Foreign Person who is a Clearing Member, also
assign minimum financial requirements for the applicant based on (i)
how closely the applicant resembles another existing category of
Netting Member or Clearing Member and (ii) the applicant's risk
profile, which assigned minimum financial requirements would be
promptly communicated to, and discussed with, the applicant.\30\
---------------------------------------------------------------------------
\30\ The member must also continue to maintain compliance with
its home country's minimum financial requirements. See Section
3(a)(v) of Rule 2A of the GSD Rules and Section 1(j) of Rule 2A of
the MBSD Rules, supra note 9.
---------------------------------------------------------------------------
Insurance Company Netting Members: FICC proposes to leave the
capital requirements applicable to Insurance Company Netting Members
unchanged, however FICC proposes to (i) specify the calculation of the
existing risk-based capital ratio and (ii) correct typographical errors
and make some clarifying and conforming language changes and add a
paragraph heading to improve the accessibility and transparency of the
capital requirements, without substantive effect.\31\ FICC also
proposes to clarify that an applicant must satisfy its applicable
capital requirements when it applies for membership and at all times
thereafter, and therefore proposes to delete language requiring that a
member satisfy its capital requirements as of the end of the calendar
month prior to the effective date of its membership.
---------------------------------------------------------------------------
\31\ FICC proposes to make some clarifying and conforming
language changes to improve the accessibility and transparency of
the capital requirements, without substantive effect, including, for
GSD, Registered Investment Company Netting Members, and, for MBSD,
Unregistered Investment Pool Clearing Members, Government Securities
Issuer Clearing Members, Insured Credit Union Clearing Members, and
Registered Investment Company Clearing Members.
---------------------------------------------------------------------------
Other Types of Netting Members and Clearing Members
Currently, other types of entities applying to be a Netting Member
or Clearing Member, are required to satisfy such minimum standards of
financial responsibility as determined by FICC. FICC proposes to adopt
more specific standards for these different types of members.
Government Securities Issuer Netting Members: Currently, FICC does
not have a capital requirement for this particular category of Netting
Member. FICC proposes to require equity capital of at least $100
million.
[[Page 53820]]
Other Netting Members and Clearing Members: Similar to other
foreign member applicants discussed above, for other Netting Members or
Clearing Members with no specific financial responsibilities
requirements, FICC proposes that such Netting Members or Clearing
Members be in compliance with their regulator's minimum financial
requirements. FICC also proposes that it may, based on information
provided by or concerning an applicant applying to become a Netting
Member or Clearing Member, also assign minimum financial requirements
for the applicant based on (i) how closely the applicant resembles an
existing category of Netting Member or Clearing Member and (ii) the
applicant's risk profile, which assigned minimum financial requirements
would be promptly communicated to, and discussed with, the applicant.
ii. GSD Funds-Only Settling Bank Members and MBSD Cash Settling Bank
Members
FICC proposes to require that a Funds-Only Settling Bank or a Cash
Settling Bank Member that, in accordance with such entity's regulatory
and/or statutory requirements, calculates a Tier 1 RBC Ratio must have
a Tier 1 RBC Ratio \32\ equal to or greater than the Tier 1 RBC Ratio
that would be required for such Funds-Only Settling Bank to be Well
Capitalized. FICC does not currently have a capital requirement for
Funds-Only Settling Banks or Cash Settling Bank Members.
---------------------------------------------------------------------------
\32\ For both GSD and MBSD, FICC proposes to define the Tier 1
RBC Ratio is the ratio of an entity's tier 1 capital to its total
risk-weighted assets, calculated in accordance with such entity's
regulatory and/or statutory requirements.
---------------------------------------------------------------------------
iii. GSD Sponsoring Members
FICC proposes to leave the required equity capital for a Bank
Netting Member applying to become a Category 1 Sponsoring Member
unchanged, however FICC proposes to (i) replace the previous references
to such Bank Netting Member or its bank holding company being ``well-
capitalized'' with the new defined term Well Capitalized and (ii) make
some clarifying and conforming language changes to improve the
accessibility and transparency of the capital requirements, without
substantive effect.
FICC also proposes to clarify that an applicant must satisfy its
applicable capital requirements when it applies for membership and at
all times thereafter, and therefore proposes to delete language
requiring that a member satisfy its capital requirements as of the end
of the calendar month prior to the effective date of its membership.
iv. GSD CCIT Members
FICC proposes to leave the capital requirements for a CCIT Member
unchanged but delete the required multiplier for a CCIT Member that
does not prepare its financial statements in accordance with U.S.
GAAP.\33\ FICC also proposes to fix a typographical error and clarify
existing language that the eligibility, qualifications and standards
set forth in respect of an applicant shall continue to be met upon an
applicant's admission as a CCIT Member and at all times while a CCIT
Member.
---------------------------------------------------------------------------
\33\ See supra text accompanying note 23.
---------------------------------------------------------------------------
v. Implementation Timeframe
FICC proposes to implement the proposed changes to its membership
capital requirements one year after the Commission's approval of the
Proposed Rule Change.\34\ During the one-year period, FICC would
periodically provide members with an estimate of their capital
requirements based on the proposal.\35\
---------------------------------------------------------------------------
\34\ The changes to FICC's Watch List and enhanced surveillance
list discussed in Section II.B below will not be subject to the one
year delayed implementation.
\35\ See Notice of Filing, supra note 3, at 74141.
---------------------------------------------------------------------------
B. Changes to FICC's Watch List and Enhanced Surveillance List
FICC currently uses two credit risk monitoring systems: a Watch
List and a separate list of members subject to enhanced surveillance
(``enhanced surveillance list''). The current Watch List includes
members that have either (1) receive a heightened credit risk rating
based on FICC's Credit Risk Rating Matrix (``CRRM''),\36\ or (2) been
deemed to pose a heightened credit risk to FICC or other members.\37\
FICC may require a member placed on the Watch List to post additional
collateral above the member's margin calculated pursuant to FICC's
margin methodology.\38\ Members on the Watch List are also subject to
more thorough monitoring by FICC of its financial condition and
operational capability.\39\
---------------------------------------------------------------------------
\36\ FICC members generally are subject to the CRRM, in which
each member is rated on a scale of one to seven with seven
reflecting the highest credit risk posed to FICC. Members who
receive a CRRM rating of five to seven are currently, automatically
placed on the Watch List. See Rule 1 and Section 12 of Rule 3 of the
GSD Rules and Rule 1 and Section 11 of Rule 3 of the MBSD Rules,
supra note 9.
\37\ See id. In making its determination, NSCC may consider any
information NSCC obtains through continuously monitoring its members
for compliance with its membership requirements.
\38\ See Section 12(e) of Rule 3 of the GSD Rules and Section
11(e) of Rule 3 of the MBSD Rules, supra note 9.
\39\ See Section 12(f) of Rule 3 of the GSD Rules and Section
11(f) of Rule 3 of the MBSD Rules, supra note 9.
---------------------------------------------------------------------------
FICC also maintains a separate enhanced surveillance list, which
includes members who are subject to a more thorough monitoring of its
financial condition and operational capability based on FICC's
determination that the member poses heightened credit risks, which may
include members already on or soon to be on the Watch List.\40\ Members
on the enhanced surveillance list are reported to FICC's management
committees, are regularly reviewed by FICC senior management, and may
be required to make more frequent financial disclosures to FICC.\41\
---------------------------------------------------------------------------
\40\ See id.
\41\ See id.
---------------------------------------------------------------------------
FICC believes that maintaining two separate lists has confused
various FICC stakeholders,\42\ so FICC proposes to remove references to
an enhanced surveillance list from its Rules.\43\ FICC also proposes to
remove members with a CRRM rating of five from being automatically
included on the Watch List. FICC states that members with a CRRM rating
of five represent the largest single CRRM rating category, but FICC
does not believe all such members present heightened credit
concerns.\44\ FICC would still retain the authority to place a member
with a CRRM rating of five on the Watch List or otherwise if FICC deems
the member poses a heightened risk to FICC. FICC believes that these
procedures would allow it to appropriately monitor the credit risks
presented to it by its members and that the enhanced surveillance list
is not necessary because members on the enhanced surveillance list are
subject to the same potential consequences as members placed on the
Watch List.\45\
---------------------------------------------------------------------------
\42\ See Notice of Filing, supra note 3, at 74140.
\43\ For any members currently on the enhanced surveillance list
that are not also on the Watch List, FICC will add these members to
the Watch List. See id.
\44\ See id. FICC states that the majority of members with a
CRRM rating of 5 are either rated ``investment grade'' by external
rating agencies or, in the absence of external ratings, FICC
believes are equivalent to investment grade, as many of these
members are primary dealers and large foreign banks. See id.
\45\ See id. at 74133, 74140.
---------------------------------------------------------------------------
C. Other Changes
FICC proposes to (1) revise or add headings and sub-headings as
appropriate, (2) revise defined terms and add appropriate defined terms
to facilitate the proposed changes, (3) rearrange and consolidate
paragraphs to promote readability, (4) fix
[[Page 53821]]
typographical and other errors, and (5) make specified other changes in
order to improve clarity and the accessibility and transparency of the
Rules.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \46\ provides that the Commission
shall 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 careful review of the Proposed Rule Change
and consideration of the comments on the proposal, the Commission finds
that the Proposed Rule Change is consistent with the requirements of
the Act and the rules and regulations thereunder applicable to FICC. In
particular, the Commission finds that the Proposed Rule Change is
consistent with Sections 17A(b)(3)(F) of the Act,\47\ and Rules 17Ad-
22(e)(4) and (e)(18) thereunder,\48\ for the reasons described below.
---------------------------------------------------------------------------
\46\ 15 U.S.C. 78s(b)(2)(C).
\47\ 15 U.S.C. 78q-1(b)(3)(F).
\48\ 17 CFR 240.17Ad-22(e)(4) and (e)(18).
---------------------------------------------------------------------------
A. Consistency with Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of a clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions, assure
the safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible, and
protect investors and the public interest; and are not designed to
permit unfair discrimination in the admission of participants or among
participants in the use of the clearing agency.\49\ Based on its review
of the record, the Commission finds that the proposal is consistent
with Section 17A(b)(3)(F) of the Act.
---------------------------------------------------------------------------
\49\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
i. Prompt and Accurate Clearance and Settlement and Safeguarding of
Securities and Funds
The Commission believes that the proposal is designed to promote
the prompt and accurate clearance and settlement of securities
transactions, and assure the safeguarding of securities and funds which
are in the custody or control of FICC. The Commission believes that
membership standards at covered clearing agencies should seek to limit
the potential for member defaults and, as a result, losses to non-
defaulting members in the event of a member default. As the Commission
stated when adopting the Covered Clearing Agency Standards, using risk-
based criteria helps to protect investors by limiting the participants
of a covered clearing agency to those for which the covered clearing
agency has assessed the likelihood of default.\50\ More specifically,
the Commission believes that membership standards related to minimum
capital requirements serve as one tool in limiting this default risk by
ensuring that members have sufficient capital to meet its obligations
and to absorb losses.
---------------------------------------------------------------------------
\50\ See Securities Exchange Act Release No. 78961 (September
28, 2016), 81 FR 70786, 70839 (October 13, 2016) (S7-03-14)
(``Covered Clearing Agency Standards'').
---------------------------------------------------------------------------
Covered clearing agencies employ membership standards as the first
line of defense in their risk management, ensuring that its members,
among other things, hold sufficient financial resources to meet the
obligations that they may incur as a member of the covered clearing
agency. These requirements are separate from the collection of margin,
which addresses the risk of the cleared transactions. Instead, capital
requirements seek to ensure that FICC has sufficiently addressed the
member's counterparty credit risk, that is, that the member has
sufficient financial resources both to meet its margin requirements or
potential loss allocation in the event of a member default; these
requirements are not a substitute for margin.
The Commission also considered other factors as support for its
determination that these proposed minimum capital requirements are
reasonable. The Commission understands that FICC has not revised these
requirements in over 20 years. During that time, the Commission
recognizes that there have been significant changes to the financial
markets during that timeframe, such as new risks arising from cyber
threats and online trading technologies, and heightened operational
risk due to a more sophisticated and complex business environment. In
addition, the Commission understands that FICC considered several
factors, including inflation and the capital requirements of other
financial market infrastructures, and the Commission agrees that these
factors support the reasonableness of the proposed minimum capital
requirements.\51\ Further, the Commission believes that the consistency
between the proposed requirements and those of other financial market
infrastructures tends to indicate that such requirements should address
the obligations attendant to participating in a financial market
infrastructure like FICC, i.e., that they are tailored to ensure that a
member can meet its requirements to FICC in the event of, for example,
a loss allocation or an intraday margin call. Finally, based on its
supervisory experience, the Commission understands that trading volume,
in terms of both number of transactions and notional value, have
increased significantly across the FICC membership during that time
period.\52\ The Commission believes that this significant increase in
trading volumes represents additional risk for FICC and supports the
need for the proposed minimum capital requirements. Taken together, the
Commission believes that these factors support its determination
regarding the reasonableness of the proposed minimum capital
requirements, as they would allow FICC to ensure that its members have
capital sufficient to address the risks posed by their activities in
addition to the margin for particular transactions.
---------------------------------------------------------------------------
\51\ See Notice, supra note 3, at 74186, (citing, e.g., The
Options Clearing Corporation, OCC Rules, Rule 301(a), available at
<a href="https://www.theocc.com/Company-Information/Documents-and-Archives/ByLaws-and-Rules">https://www.theocc.com/Company-Information/Documents-and-Archives/ByLaws-and-Rules</a> (requiring broker-dealers to have initial net
capital of not less than $2,500,000); Chicago Mercantile Exchange
Inc., CME Rulebook, Rule 970.A.1, available at <a href="https://www.cmegroup.com/rulebook/CME/I/9/9.pdf">https://www.cmegroup.com/rulebook/CME/I/9/9.pdf</a> (requiring clearing members
to maintain capital of at least $5 million, with banks required to
maintain minimum tier 1 capital of at least $5 billion).
\52\ See, e.g., DTCC Annual Reports, available at <a href="https://www.dtcc.com/about/annual-report">https://www.dtcc.com/about/annual-report</a>, and CPMI-IOSCO Quantitative
Disclosures for FICC, section 23.1 (setting forth daily average
volumes by asset class and average notional value), available at
<a href="https://www.dtcc.com/legal/policy-and-compliance">https://www.dtcc.com/legal/policy-and-compliance</a>.
---------------------------------------------------------------------------
For most members, the changes would increase the minimum capital
requirements and ensure that members, such as U.S. and foreign bank
members, would continue to hold sufficient financial resources
consistent with those requirements and their applicable regulatory
obligations, although they would not actually increase the amounts held
as the members generally meet the new requirements already based on
their current capital. Through these changes, FICC should be able to
ensure members have sufficient capital to meet its obligations and to
absorb losses, which could further limit the potential for a member
default. In turn, limiting the potential for a member default should
promote the prompt and accurate clearance and settlement of securities
transactions. In addition, FICC's proposed minimum capital requirements
would thereby further limit potential losses to non-defaulting members
in the event of a member
[[Page 53822]]
default, which helps assure the safeguarding of securities and funds
which are in the custody or control of FICC.
Additionally, the Commission believes FICC's proposal to streamline
its credit risk monitoring systems into one Watch List, as described
above in Section II.B., would eliminate existing confusion and should
enhance FICC's efficiency in monitoring its members' credit risk by
focusing on only those members that present heightened credit risk.
Similarly, the Commission believes FICC's proposal to make clarifying
and transparency changes, as described above in Section II.C., would
remove ambiguity and ensure FICC's Rules are clear and accurate, which
would help ensure FICC's members understand its obligations to FICC and
FICC's clearance and settlement activities. Therefore, the Commission
believes these changes should promote the prompt and accurate clearance
and settlement of securities transactions.
ii. Protection of Investors and the Public Interest
The Commission believes that FICC's proposal to increase the
capital requirements applicable to its members would protect investors
and the public interest. As discussed above in Section III.A.1, the
Commission believes the proposal is designed to strengthen FICC's risk
management practices. Because a defaulting member could place stresses
on FICC with respect to FICC's ability to meet its clearance and
settlement obligations upon which the broader financial system relies,
it is important that FICC has strong membership requirements to ensure
that its members are able to meet their obligations. By reducing the
risk of a member default and any subsequent allocation of losses, the
proposal should help to protect investors and the public interest by
helping to ensure that investors' securities transactions are cleared
and settled promptly and accurately and to assure the safeguarding of
securities and funds which are in FICC's custody or control.
For the reasons discussed in this Sections III.A., the Commission
finds that the Proposed Rule Change is consistent with the requirements
of Section 17A(b)(3)(F) of the Act.\53\
---------------------------------------------------------------------------
\53\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(4)
Rule 17Ad-22(e)(4)(i) under the Act requires that a covered
clearing agency 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 arising from its payment, clearing, and settlement processes,
including by maintaining sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence.\54\
---------------------------------------------------------------------------
\54\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
Increasing membership capital requirements, as described above in
Section II.A., would help ensure that members maintain sufficient
capital to meet their obligations to FICC, including potential future
obligations required to fund its trading activity with FICC or to
absorb losses allocated to it. By ensuring members' ability to meet
their financial obligations to FICC, the proposal, in turn, will help
ensure FICC continues to maintain sufficient financial resources to
cover its credit exposure to each participant fully with a high degree
of confidence.
Additionally, the proposal to revise the Watch List, as described
above in Section II.B, could help FICC better allocate its resources
for monitoring its credit exposures to members, which, in turn, could
help FICC more effectively manage and mitigate its credit exposures to
its members. Therefore, the Commission finds the Proposed Rule Change
is consistent with Rule 17Ad-22(e)(4)(i) under the Exchange Act.
C. Consistency With Rule 17Ad-22(e)(18)
Rule 17Ad-22(e)(18) under the Act requires that a covered clearing
agency establish, implement, maintain, and enforce written policies and
procedures reasonably designed to establish objective, risk-based, and
publicly disclosed criteria for participation, which permit fair and
open access by direct and, where relevant, indirect participants and
other financial market utilities, require participants to have
sufficient financial resources and robust operational capacity to meet
obligations arising from participation in the clearing agency, and
monitor compliance with such participation requirements on an ongoing
basis.\55\
---------------------------------------------------------------------------
\55\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------
As described above in Section II.A., the proposal will increase
FICC's minimum capital requirements for its members. For both U.S. and
non-U.S. bank and trust company members, the proposal will revise how
net capital is defined to incorporate a measurement used by banking
regulators and impose additional financial requirements on non-U.S.
bank and trust company members tied to home country regulatory
requirements and international standards. For non-U.S. broker-dealers
and government securities issuers, the proposal would eliminate
conditional and discretionary minimum capital requirements in favor of
establishing objective minimum capital requirements. The proposal will
also establish a category for all other members, which will impose
minimum financial requirements tied to that entity's regulatory
requirements, which FICC may increase based on how closely it resembles
another membership type and its risk-profile.
Additionally, as discussed above in Section III.A.i, the Commission
understands that FICC considered several additional risks faced by its
members, both qualitative and quantitative, in determining its proposed
capital requirements.\56\ Therefore, the Commission concludes the
proposal is reasonably designed to establish objective, risk-based, and
publicly disclosed criteria for participation. For the reasons
described above, the Commission finds that the Proposed Rule Change is
consistent with Rule 17Ad-22(e)(18) under the Act.\57\
---------------------------------------------------------------------------
\56\ See Notice of Filing, supra note 3, at 74131.
\57\ Id.
---------------------------------------------------------------------------
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act,
and in particular with the requirements of Section 17A of the Act \58\
and the rules and regulations promulgated thereunder.
---------------------------------------------------------------------------
\58\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\59\ that proposed rule change SR-FICC-2021-009, be, and hereby is,
approved.\60\
---------------------------------------------------------------------------
\59\ 15 U.S.C. 78s(b)(2).
\60\ In approving the Proposed Rule Change, the Commission
considered its 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.\61\
---------------------------------------------------------------------------
\61\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-18860 Filed 8-31-22; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on September 1, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.