Notice2023-02716
Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Clearing Agency Risk Management Framework
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Published
February 9, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 27 (Thursday, February 9, 2023)</title>
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[Federal Register Volume 88, Number 27 (Thursday, February 9, 2023)]
[Notices]
[Pages 8506-8509]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-02716]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96799; File No. SR-DTC-2023-001]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend the Clearing Agency Risk Management Framework
February 3, 2023.
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 January 30, 2023, 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 by the clearing agency. DTC filed the proposed rule
change pursuant to section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(4) thereunder.\4\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(4).
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change amends the Clearing Agency Risk Management
Framework (``Risk Management Framework'', or ``Framework'') of DTC and
its affiliates, Fixed Income Clearing Corporation (``FICC'') and
National Securities Clearing Corporation (``NSCC,'' and together with
FICC, the ``CCPs'' and the CCPs together with DTC, the ``Clearing
Agencies'').\5\ Specifically, the proposed rule change would amend the
Risk Management Framework to (1) update the description of the
dashboards used by the Clearing Agencies as internal performance
management tools to measure the effectiveness of their various
operations; and (2) clarify and revise the descriptions of certain
matters within the Framework and correct errors in those descriptions,
as further described below. The proposed changes would update and
clarify the Risk Management Framework but do not reflect changes to how
the Clearing Agencies comply with the applicable requirements of Rule
17Ad-22(e), as described in greater detail below.
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\5\ See Securities Exchange Act Release Nos. 81635 (September
15, 2017), 82 FR 44224 (September 21, 2017) (File Nos. SR-DTC-2017-
013; SR-FICC-2017-016; SR-NSCC-2017-012) (``Initial Filing'') and
Securities Exchange Act Release No. 89271 (July 09, 2020), 85 FR
42933 (July 15, 2020) (File No. SR-NSCC-2020-012); Securities
Exchange Act Release No. 89269 (July 09, 2020), 85 FR 42954 (July
15, 2020) (File No. SR-DTC-2020-009); and Securities Exchange Act
Release No. 89270 (July 09, 2020), 85 FR 42927 (July 15, 2020) (File
No. SR-FICC-2020-007) (together with the Initial Filing, the
``Framework Filings'').
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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
The Clearing Agencies adopted the Risk Management Framework \6\ to
provide an outline for how each of the Clearing Agencies (i) maintains
a well-founded, clear, transparent and enforceable legal basis for each
aspect of its activities; (ii) comprehensively manages legal, credit,
liquidity, operational, general business, investment, custody, and
other risks that arise in or are borne by it; (iii) identifies,
monitors, and manages risks related to links it establishes with one or
more clearing agencies, financial market utilities, or trading markets;
(iv) meets the requirements of its participants and the markets it
serves efficiently and effectively; (v) uses, or at a minimum
accommodates, relevant internationally accepted communication
procedures and standards in order to facilitate efficient payment,
clearing and settlement; and (vi) publicly discloses certain
information, including market data. In this way, the Risk Management
Framework currently supports the Clearing Agencies' compliance with
Rules 17Ad-22(e)(1), (3), (20), (21), (22)
[[Page 8507]]
and (23) of the Standards,\7\ as described in the Framework Filings. In
addition to setting forth the manner in which each of the Clearing
Agencies addresses these requirements, the Risk Management Framework
also contains a section titled ``Framework Ownership and Change
Management'' that, among other matters, describes the Framework
ownership and the required governance process for review and approval
of changes to the Framework. In connection with the annual review and
approval of the Framework by the Board of Directors of each of NSCC,
DTC and FICC (each a ``Board'' and collectively, the ``Boards''), the
Clearing Agencies are proposing to make certain revisions to the
Framework.
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\6\ Supra note 5.
\7\ 17 CFR 240.17Ad-22(e)(1), (3), (20), (21), (22) and (23).
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First, the proposed changes would update the Risk Management
Framework to reflect a change to the dashboards used by the Clearing
Agencies as internal performance management tools to measure the
effectiveness of various aspects of their operations, as described in
greater detail below.
The proposed changes would also clarify and enhance the
descriptions in the Risk Management Framework and correct errors in
those descriptions by, for example, (1) enhancing the description of
the Clearing Agencies processes for management of certain risks through
risk tolerance statements; (2) clarifying the description of the
``Three Lines of Defense,'' including but not limited to updating the
descriptions of the ``first line of defense,'' the ``second line of
defense,'' and the ``third line of defense,'' (3) clarifying the
definition of Rules; (4) enhancing the description of the purpose and
approval process of ``Risk Management Frameworks;'' (5) updating the
name of the Operational Risk Management group and the Third Party Risk
function.
Finally, the proposed changes would capitalize terms that
mistakenly were not previously capitalized but refer to a specific
term, remove an unnecessary citation and make certain grammatical
changes.
i. Proposed Amendments To Update the Description of Performance
Measurement Tools
The proposed changes would update the Risk Management Framework to
reflect a recent change to the dashboards that are used by the Clearing
Agencies as internal performance management tools and address their
compliance with the requirements of Rule 17Ad-22(e)(21).\8\ Section 4.3
of the Framework identifies certain processes implemented by the
Clearing Agencies to be efficient and effective in meeting the
requirements of their respective participants and the markets they
serve.\9\ This list of processes is not meant to be exhaustive, and the
Clearing Agencies may use other methods to achieve their goals and meet
their regulatory requirements. The proposed change would update the
Framework to remove reference to a process that was previously used by
the Clearing Agencies to monitor their performance and the review
standards for such processes.
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\8\ 17 CFR 240.17Ad-22(e)(21).
\9\ Id.
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The Clearing Agencies previously used the DTCC Core Balanced
Scoreboard (``BBS'') to provide insight into the effectiveness of their
various operations in meeting the needs of their participants and the
markets they serve. The Clearing Agencies have eliminated the BBS and
now utilize multiple other dashboards to measure the outcomes that were
previously measured by the BBS. The elimination of the BBS is not a
material change in how the Clearing Agencies approach risk management,
as they are simply using other methods to continue to comply with the
requirements of Rule 17Ad-22(e)(21).\10\ The use of multiple dashboards
allows for a more holistic view of the performance of the Clearing
Agencies and their subsidiaries. The proposed change would also enhance
the descriptions of these processes by describing the annual review of
this process and how results are tracked.
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\10\ Supra note 8.
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ii. Proposed Amendment To Clarify, Enhance, and Correct Descriptions in
the Framework
The proposed changes would improve the clarity and
comprehensiveness of the descriptions of certain matters within the
Risk Management Framework and correct grammatical errors in certain
descriptions. Some specific examples of such proposed changes include:
1. Proposed Change To Describe the Clearing Agencies' Assessment and
Review of Risk Tolerance Statements
Section 3 of the Framework describes management's responsibility to
establish risk tolerance statements for the range of risks that arise
in or are borne by the Clearing Agencies. Section 3 also outlines the
review and approval process for such risk tolerance statements and the
Clearing Agencies' performance relative to those statements. The
proposed change would clarify that the Clearing Agencies' performance
relative to those risk tolerance statements is assessed quarterly and
is shared with senior management and the Board Risk Committees of the
Clearing Agencies.
2. Proposed Changes To Clarify the Description of the ``Three Lines of
Defense''
Section 3.1 of the Framework describes the ``three lines of
defense'' approach adopted by each of the Clearing Agencies for
identifying, assessing, measuring, monitoring, mitigating, and
reporting the risks that arise in or are borne by it. A proposed change
would remove the last sentence of this Section, which states, ``While
the Framework provides a general description of the Three Lines of
Defense approach for risk management, the Three Lines of Defense
approach may be used by the Clearing Agencies for managing specific
risks, for example operational risk, which is addressed in the
Operational Risk Management Framework (see Section 3 below)'' This
sentence is unnecessarily duplicative of the statements in Section
3.3.3 of the Framework which provides details of the various
frameworks, separate and apart from this Framework, used by the
Clearing Agencies to manage specific risks and, therefore, may cause
confusion to a reader. The deletion of the sentence would resolve any
such possible confusion, thereby clarifying the entirety of Section 3.
The Clearing Agencies are also proposing a change to enhance the
examples provided in Section 3.1.1 to illustrate the Clearing Agency
Business/Support Areas role as the first line of defense in managing
risk by adding two additional examples: (a) ``Defining and monitoring
business risk metrics applicable to their function;'' and (b) ``Clearly
understanding and reporting the residual, unmitigated risk that is
acceptable to their function.'' Additionally, a proposed change to
Section 3.1.3 would update the description of the responsibilities of
internal audit to be in line with the internal audit charter.
3. Proposed Change To Clarify the Definition of ``Rules''
Section 3.3.2 of the Framework includes a defined term for the
``Rules'' of the Clearing Agencies. The proposed change would clarify
that the ``Rules'' referred to for purposes of this Framework are filed
with the Commission. Therefore, the proposed change would update the
definition of Rules for clarification purposes and
[[Page 8508]]
would not substantively change the definition.
4. Enhance the Description of the Purpose and Approval Process of
``Risk Management Frameworks''
Section 3.3.3 describes the system of frameworks, maintained by the
Clearing Agencies, separate and apart from this Framework to manage a
range of risks. This Section outlines in greater detail certain of
these risk management frameworks and their purpose. The proposed
changes to this Section 3.3.3 would enhance the description of one of
these frameworks; clarify that such frameworks are in support of this
Framework; and clarify that such frameworks may be approved by an
applicable Board committee as delegated by the Boards, pursuant to the
Document Standards described in this Framework.
5. Stating a Change to the Name of the Vendor Risk Management Group and
to the Third-Party Risk Function Group
The Framework describes the role of the Operational Risk Management
Group as the group that manages incidents, and the Third-Party
Management Function manages third party risks to the Clearing Agencies.
The proposed change would update the Framework to reflect a change in
the name of these two groups. The Operational Risk Management Group is
now referred to as Operational and Technology Risk and the Third-Party
Risk Management group is now referred to as Third Party Risk. This
proposed change would reflect a recent organizational name change.
6. Proposed Changes To Capitalize Defined Terms and Correct Grammatical
and Formatting Errors, Removal of Citation
These proposed changes would fix grammatical errors and capitalize
terms that should be defined terms in the Framework or removes
inconsistent wording. Some of these changes include: (i) make IOSCO a
defined term in footnote 2 for clarification purposes; (ii) change the
word ``settlement'' to ``settling'' in Section 4.2 for consistency; (3)
remove the words ``and Liquidity Providers'' from the heading ``Risks
Related to Investment Counterparties and Liquidity Providers'' in
Section 4.2.1 as the paragraph does not discuss liquidity providers and
(4) deletion of footnote 21 as unnecessary.
The proposed rule change would make additional immaterial edits to
the Framework that do not alter how the Clearing Agencies comply with
the applicable requirements of Rule 17Ad-22(e).
2. Statutory Basis
The Clearing Agencies believe that the proposed changes are
consistent with section 17A(b)(3)(F) of the Act \11\ 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, 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.\12\ The proposed changes would (1) update the Risk
Management Framework to remove reference to the BBS and include a
description of the governance around the dashboards used by the
Clearing Agencies to measure the effectiveness of their operations, and
(2) clarify the descriptions of certain matters within the Framework to
improve comprehensiveness and correct errors, as described above. By
creating clearer, updated descriptions and correcting errors, the
Clearing Agencies believe that the proposed changes would make the Risk
Management Framework more effective in providing an overview of the
important risk management activities of the Clearing Agencies, as
described therein.
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
\12\ Id.
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As described in the Framework Filings, the risk management
functions described in the Risk Management Framework allow the Clearing
Agencies to continue to promote the prompt and accurate clearance and
settlement of securities transactions and continue to assure the
safeguarding of securities and funds which are in their custody or
control or for which they are responsible notwithstanding the default
of a member of an affiliated family. The proposed changes to improve
the clarity and accuracy of the descriptions of risk management
functions within the Framework would assist the Clearing Agencies in
carrying out these risk management functions. Therefore, the Clearing
Agencies believe these proposed changes are consistent with the
requirements of section 17A(b)(3)(F) of the Act.\13\
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\13\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
The Clearing Agencies do not believe that the proposed changes to
the Framework described above would have any impact, or impose any
burden, on competition. As described above, the proposed rule change
would improve the comprehensiveness of the Framework by creating
clearer, updated descriptions and correcting errors, thereby making the
Risk Management Framework more effective in providing an overview of
the important risk management activities of the Clearing Agencies. As
such, the Clearing Agencies do not believe that the proposed rule
change would have any impact on competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
DTC has 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 <a href="https://www.sec.gov/regulatory-actions/how-to-submitcomments">https://www.sec.gov/regulatory-actions/how-to-submitcomments</a>. 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 <a href="/cdn-cgi/l/email-protection#45313724212c2b22242b212824372e203136053620266b222a33"><span class="__cf_email__" data-cfemail="f084829194999e97919e949d91829b958483b0839593de979f86">[email protected]</span></a> or 202-
551-5777.
DTC reserves the right not to respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
The foregoing rule change has become effective pursuant to section
19(b)(3)(A) \14\ of the Act and paragraph (f) \15\ of Rule 19b-4
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors,
[[Page 8509]]
or otherwise in furtherance of the purposes of the Act.
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 17 CFR 240.19b-4(f).
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The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#1062657c753d737f7d7d757e6463506375733e777f66"><span class="__cf_email__" data-cfemail="681a1d040d450b0705050d061c1b281b0d0b460f071e">[email protected]</span></a>. Please include
File Number SR-DTC-2023-001 on the subject line.
Paper Comments
<bullet> 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-2023-001. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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 DTC and on DTCC's website
(<a href="http://dtcc.com/legal/sec-rule-filings.aspx">http://dtcc.com/legal/sec-rule-filings.aspx</a>). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-DTC-2023-001 and should be submitted on
or before March 2, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-02716 Filed 2-8-23; 8:45 am]
BILLING CODE 8011-01-P
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