Notice2023-07962
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Update the Clearing Agency Securities Valuation Framework
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
April 17, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 88 Issue 73 (Monday, April 17, 2023)</title>
</head>
<body><pre>
[Federal Register Volume 88, Number 73 (Monday, April 17, 2023)]
[Notices]
[Pages 23478-23482]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-07962]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97283; File No. SR-FICC-2023-004]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Update the Clearing Agency Securities Valuation Framework
April 11, 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 March 28, 2023, Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency. FICC filed the
proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and
Rule 19b-4(f)(6) thereunder.\4\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\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)(6).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of amendments to the Clearing
Agency Securities Valuation Framework (``Framework'') of FICC and its
affiliates, National Securities Clearing Corporation (``NSCC,'' and
together with FICC, the central counterparties or ``CCPs'') and The
Depository Trust Company (``DTC,'' and together with the CCPs, the
``Clearing Agencies''), as described below. The proposed changes to the
Framework would apply to DTC, NSCC, and both of FICC's divisions, the
Government Securities Division and the Mortgage-Backed Securities
Division.
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,
[[Page 23479]]
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 proposed rule change consists of modifications to the Framework
to clarify the Clearing Agencies' practices concerning the valuation 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 (each, a ``CUSIP'').
Specifically, the proposed rule change would clarify certain aspects of
the Framework concerning (i) the selection of third-party pricing
vendors (``Pricing Vendors''); (ii) the monitoring and review of
Pricing Vendor data; (iii) the processing and use of Pricing Vendor
data; and (iv) other non-substantive aspects of the Framework. The
proposed changes are discussed in detail below.
(i) 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.\5\ 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.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 82006 (November 2,
2017), 82 FR 51892 (November 8, 2017) (SR-DTC-2017-016; SR-NSCC-
2017-016; SR-FICC-2017-020).
---------------------------------------------------------------------------
The Framework is 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.\6\ 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) \7\ and, with respect to the CCPs, Rule 17Ad-22(e)(6)(iv)
\8\ under the Act.
---------------------------------------------------------------------------
\6\ 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.
\7\ 17 CFR 240.17Ad-22(e)(4)(i).
\8\ 17 CFR 240.17Ad-22(e)(6)(iv).
---------------------------------------------------------------------------
(ii) Proposed Rule Change
The Clearing Agencies propose to revise the Framework to improve
the accuracy and clarity of the descriptions of the Clearing Agencies'
practices concerning securities valuation. Specifically, the Clearing
Agencies propose to revise the Framework to: (i) clarify certain
aspects of the Pricing Vendor selection process; (ii) clarify the
description of the Clearing Agencies' practices for monitoring and
reviewing Pricing Vendor data; (iii) clarify the description of the
Clearing Agencies' processes concerning the use of end-of day and
intraday CUSIP pricing data; and (iv) make other non-substantive
clarifying and clean-up changes to the Framework. Each of these
categories of changes are discussed in further detail below.
Selection of Pricing Vendors
Pursuant to the Framework, the Clearing Agencies select Pricing
Vendors based on a review of their services, which includes a review of
their securities coverage, price quality checks, and other due
diligence prior to engagement. Once a Pricing Vendor is engaged, the
Securities Valuation team assesses the reliability of each Pricing
Vendor at least annually.
The Clearing Agencies propose minor modifications to the Framework
concerning the Pricing Vendor selection process. The Clearing Agencies
propose to revise the Framework to state that Pricing Vendors are
selected based on a ``service review'' as opposed to a ``review of
their service.'' The proposed rule change is not intended to reflect a
material change to the Pricing Vendor selection process, but rather,
would more accurately reflect the scope of any potential review
performed for Pricing Vendors, which may include factors beyond just
the specific service provided (e.g., it may include a review of certain
attributes of the Pricing Vendor itself).
The Clearing Agencies also propose to revise the Framework to
clarify that when reviewing the reliability of a Pricing Vendor, the
Clearing Agencies would consider whether the Pricing Vendor actually
provides accurate and timely pricing data as opposed to whether the
Pricing Vendor is ``able to provide'' accurate and timely data. The
Clearing Agencies believe the proposed rule change would more clearly
and accurately reflect the expectation that the Pricing Vendor has
actually provided accurate and timely pricing data and thereby further
ensure that the Clearing Agencies' policies and procedures are
reasonably designed to use reliable sources of timely price data.
Monitoring and Review of Pricing Vendor Data
Pursuant to the Framework, the Securities Valuation team monitors
and reviews each Pricing Vendor's pricing at least once each business
day. This includes a review of whether any CUSIP's price has remained
unchanged for an extended period of time, whether a CUSIP has been
dropped from the Pricing Vendor's file and whether other circumstances
exist that may call into question the reliability of any CUSIP's price.
The Clearing Agencies propose to make certain non-substantive
clarifying and grammatical corrections to the Framework concerning the
monitoring of Pricing Vendors. The proposed changes would clarify that
the scope of daily monitoring and review includes a determination of
whether (i) an ``eligible'' CUSIP's price has remained unchanged for an
extended period (as opposed to inferring ``all CUSIPS'' for which a
vendor may provide pricing in a given file) and (ii) other ``relevant''
circumstances exist that ``could'' call into question the reliability
of a CUSIP's price. These proposed changes are intended to enhance the
clarity and drafting of the Framework and are not intended to result in
a material change to the monitoring and review processes.
Processing and Use of Pricing Vendor Data
The Framework currently provides that the Securities Valuation team
assigns each CUSIP a primary source Pricing Vendor and a secondary
source Pricing Vendor and that, in the event that the primary Pricing
Vendor becomes unavailable, unreliable, or otherwise unusable with
respect to a CUSIP, the secondary Pricing Vendor will be designated as
the replacement for the primary Pricing Vendor with respect to such
CUSIP. The Framework also describes the processing of end-of-day and
intraday pricing from Pricing Vendors. Specifically, the Framework
provides that each CUSIP's price is date stamped (and in the case of
intraday pricing, time-stamped) and identified with its Pricing Vendor
source, and in the event that both primary Pricing Vendor and secondary
Pricing Vendor become unavailable, unreliable, or otherwise unusable
with respect to a CUSIP, the Securities Valuation team
[[Page 23480]]
assigns such CUSIP its last available price.
Pricing Vendor Assignments
The Clearing Agencies propose to revise the Framework to remove the
statement that the Securities Valuation team assigns each CUSIP a
primary and secondary source Pricing Vendor and remove corresponding
references to ``Primary Pricing Vendor'' and ``Secondary Pricing
Vendor'' throughout the Framework. The Clearing Agencies maintain
relationships with more than one Pricing Vendor for the majority of
their products; however, this may not be the case in all circumstances.
For example, the Clearing Agencies may not maintain multiple Pricing
Vendors for products that are cleared based on the pricing of another
similar product for which they also maintain Pricing Vendor
relationships. The Clearing Agencies also may not perform intra-day
pricing for certain asset classes that are not subject to clearance and
netting services. The Clearing Agencies therefore believe the proposed
change would more accurately reflect the Clearing Agencies' practices
for maintaining Pricing Vendors. The proposed changes would further
clarify that the Clearing Agencies may not maintain ``primary'' and
``secondary'' vendors for all CUSIPs, and that the Clearing Agencies
may use whichever Pricing Vendor proves to be available and reliable
for a CUSIP at a given time without relying on such ``primary'' and
``secondary'' designations. The proposed changes would also provide
additional clarity and flexibility for the Clearing Agencies to
maintain more than two Pricing Vendors for a product area/CUSIP or,
where appropriate, reduce the number of Pricing Vendor relationships it
may maintain for any given product area or CUSIP, as governed by
applicable Securities Valuation policies and procedures.
The Clearing Agencies would also revise the Framework to specify
that in the event a Pricing Vendor becomes unavailable, unreliable, or
otherwise unusable with respect to a CUSIP, back-up pricing would be
utilized to provide accurate and timely pricing data with respect to
such CUSIP. The proposed change would more accurately reflect that
backup pricing may be sourced from an alternative Pricing Vendor, where
applicable, or may also be determined, in the absence of an alternative
Pricing Vendor, pursuant to the Clearing Agencies' applicable policies
and procedures to ensure that timely pricing data is applied.
End-of-Day and Intraday Price Processing
The Clearing Agencies also propose to clarify their processes for
recording end-of-day and intraday pricing. The Clearing Agencies would
revise the Framework to clarify that, with respect to end-of-day and
intraday pricing, if Pricing Vendor data is unavailable, unreliable, or
otherwise unusable for a CUSIP, the Securities Valuation team does not
``assign'' the last available price to the CUSIP, but rather, the last
available price is recorded in the Clearing Agencies' pricing database,
which is consumable for applicable stakeholders. The proposed rule
change would also further clarify that this process would apply if
pricing data were unavailable, unreliable, or otherwise unusable from
``all'' Pricing Vendors, and not just the primary or secondary Pricing
Vendors, for the reasons discussed above. The Clearing Agencies believe
the proposed changes concerning end-of-day and intraday price
processing would improve the accuracy and clarity of the Framework.
Other Non-Substantive Clean-Up Changes
Finally, the Clearing Agencies propose to make several non-
substantive changes to the Framework. For example, the Clearing
Agencies would revise a statement that the Securities Valuation team
values each ``applicable'' CUSIP to say each ``eligible'' CUSIP to
align this statement more clearly with the scope of the policy (i.e.,
those securities eligible for clearance and settlement or for each
CCPs' clearing fund). The Clearing Agencies would also revise the
definition of ``Pricing Vendors'' to define them as third-party pricing
``suppliers'' as opposed to ``vendors'' to eliminate redundancy in the
definition and align with other language used in the Framework
concerning their role in supplying prices. Additionally, the Clearing
Agencies would make several non-substantive, grammatical, and
punctuation-related clean-up changes throughout the Framework
(including revisions to a footnote in the policy regarding the
possibility that certain CUSIPs might not be priced as expected). The
proposed changes are not intended to change the meaning or purpose of
the Framework but rather improve the drafting and clarity of the
Framework.
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 \9\ and Rules 17Ad-
22(e)(4)(i) \10\ and (e)(6)(iv) \11\ under the Act, for the reasons set
forth below.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78q-1(b)(3)(F).
\10\ 17 CFR 240.17Ad-22(e)(4)(i).
\11\ 17 CFR 240.17Ad-22(e)(6)(iv).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act \12\ 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 improve descriptions of the
Clearing Agencies' processes for selecting Pricing Vendors, reviewing
the reliability of Pricing Vendors, monitoring and reviewing each
Pricing Vendor's pricing data, and the processing and use of Pricing
Vendor data for securities valuation purposes. The proposed rule change
is designed to improve the accuracy and clarity of the Framework
document. 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 for collateral valuation, risk management
and settlement purposes. Since margin and collateral play key roles in
the applicable Clearing Agency's risk management process, having
accurate margin system and collateral valuation facilitates 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. The Clearing Agencies
therefore believe that enhancing the quality and accuracy of the
Framework is consistent with the requirements of Section 17A(b)(3)(F)
of the Act.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(4)(i) \13\ under the Act requires that each 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 by
maintaining sufficient financial resources to cover its credit exposure
to each participant fully with a high degree of confidence. The
[[Page 23481]]
Framework describes how the Clearing Agencies identify, measure,
monitor, and manage the risks related to the pricing of securities
processed or otherwise held by the Clearing Agencies. The processes,
systems, and controls used by the Clearing Agencies to identify,
measure, monitor, and manage such risks, as described in the Framework,
and the policies and procedures that support these activities, help
assure that each Clearing Agency is using (i) reliable sources of
timely price data when pricing securities processed or otherwise held
by the applicable Clearing Agency and (ii) procedures and sound
valuation models when pricing data are not readily available or
reliable. The proposed rule change would enhance the Framework by
providing additional clarity and accuracy concerning the Clearing
Agencies' securities valuation practices, and specifically, its
processes for selecting Pricing Vendors, reviewing the reliability of
Pricing Vendors, monitoring and reviewing each Pricing Vendor's pricing
data, and the processing and use of Pricing Vendor data. By
appropriately pricing securities, the Clearing Agencies can more
accurately calculate the value of the securities that the Clearing
Agencies monitor or hold for risk management purposes. The proposed
changes are therefore intended to facilitate the maintenance of
policies and procedures that are reasonably designed to effectively
identify, measure, monitor and manage the Clearing Agencies' credit
exposures to participants and those arising from its payment, clearing,
and settlement processes and determine the amount of financial
resources required to cover its credit exposure to each participant
with a high degree of confidence in accordance with the requirements of
Rule 17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
\13\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(6)(iv) \14\ under the Act requires each covered
clearing agency 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 uses procedures and sound valuation models for addressing
circumstances in which pricing data are not readily available or
reliable. The Framework describes how the CCPs identify, measure,
monitor, and manage the risks related to the pricing of securities
processed or otherwise held by the CCPs. As noted above, the proposed
rule change would enhance the Framework by providing additional clarity
and accuracy concerning the Clearing Agencies' securities valuation
practices, and specifically, its processes for selecting Pricing
Vendors, reviewing the reliability of Pricing Vendors, monitoring and
reviewing each Pricing Vendor's pricing data, and the processing and
use of Pricing Vendor data. The processes, systems, and controls used
by the CCPs to identify, measure, monitor, and manage such risks, as
described in the Framework, and the policies and procedures that
support these activities, help assure that each CCP is using reliable
sources of timely price data as well as procedures and sound valuation
models when pricing data are not readily available or reliable. The
Clearing Agencies therefore believe the proposed changes to the
Framework are consistent with the requirements of Rule 17Ad-
22(e)(6)(iv).
---------------------------------------------------------------------------
\14\ 17 CFR 240.17Ad-22(e)(6)(iv).
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
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 providing additional
clarity and accuracy concerning the Clearing Agencies' securities
valuation processes. The Framework itself, and the proposed rule
changes described herein, 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.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
The Clearing Agencies have not received or solicited any written
comments relating to this proposal. If any written comments are
received, they will be publicly filed as an Exhibit 2 to this filing,
as required by Form 19b-4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at <a href="https://www.sec.gov/regulatory-actions/how-to-submit-comments">https://www.sec.gov/regulatory-actions/how-to-submit-comments</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#196d6b787d70777e78777d74786b727c6d6a596a7c7a377e766f"><span class="__cf_email__" data-cfemail="3f4b4d5e5b5651585e515b525e4d545a4b4c7f4c5a5c11585049">[email protected]</span></a> or 202-551-5777.
The Clearing Agencies reserve the right not to respond to any
comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Because the foregoing proposed rule change does not:
(i) significantly affect the protection of investors or the public
interest;
(ii) impose any significant burden on competition; and
(iii) become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \15\ and
Rule 19b-4(f)(6) thereunder.\16\
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
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, or
otherwise in furtherance of the purposes of the Act.
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#047671686129676b6969616a7077447761672a636b72"><span class="__cf_email__" data-cfemail="ddafa8b1b8f0beb2b0b0b8b3a9ae9daeb8bef3bab2ab">[email protected]</span></a>. Please include
File Number SR-FICC-2023-004 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.
[[Page 23482]]
All submissions should refer to File Number SR-FICC-2023-004. 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 FICC 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-FICC-2023-004 and should be submitted on
or before May 8, 2023].
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
---------------------------------------------------------------------------
\17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-07962 Filed 4-14-23; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on April 17, 2023.
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.