Notice2024-14378
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Modify the GSD Rules Relating to the Adoption of a Trade Submission Requirement
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
July 1, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 126 (Monday, July 1, 2024)</title>
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[Federal Register Volume 89, Number 126 (Monday, July 1, 2024)]
[Notices]
[Pages 54602-54616]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-14378]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100417; File No. SR-FICC-2024-009]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Modify the GSD Rules
Relating to the Adoption of a Trade Submission Requirement
June 25, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 12, 2024, Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of modifications to FICC's
Government Securities Division (``GSD'') Rulebook (``Rules'') \3\ to
(1) adopt a requirement that each Netting Member submits all eligible
secondary market transactions, both for repurchase agreements and
certain categories of cash transactions, to which it is a counterparty
to FICC for clearance and settlement and define the scope of such trade
submission requirement; (2) adopt ongoing membership requirements and
other measures that would facilitate FICC's ability to identify and
monitor Netting Members' compliance with the trade submission
requirement, and adopt fines and other disciplinary actions to address
a Netting Member's failure to submit transactions in compliance with
that requirement; (3) enhance the Rules relating to the initial
qualifications and ongoing standards for membership to improve FICC's
ability to manage the credit risks presented by Netting Members; and
(4) make other revisions to the Rules to clarify, conform and enhance
the disclosures of the Rules, as described below.
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\3\ Terms not defined herein are defined in the Rules, available
at www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_gov_rules.pdf.
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These proposed rule changes are primarily designed to comply with
the requirements of Rule 17ad-22(e)(18)(iv)(A) and (B) under the Act,
as described below.\4\
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\4\ 17 CFR 240.17ad-22(e)(18)(iv)(A) and (B). See Securities
Exchange Act Release No. 99149 (Dec. 13, 2023), 89 FR 2714 (Jan. 16,
2024) (``Adopting Release'', and the rules adopted therein referred
to herein as ``Treasury Clearing Rules'').
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
Executive Summary
On December 13, 2023, the Commission adopted amendments to the
covered clearing agency standards that apply to covered clearing
agencies that clear transactions in U.S. Treasury securities, including
FICC.\5\ These amendments require, among other things, that FICC
establish objective, risk-based, and publicly disclosed criteria for
participation that (i) require FICC's Netting Members submit for
clearance and settlement all of the
[[Page 54603]]
eligible secondary market transactions to which they are a
counterparty; and (ii) identify and monitor Netting Members' submission
of eligible secondary market transactions to which they are a
counterparty, including how FICC would address a failure to submit
transactions in accordance with this requirement.\6\
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\5\ Supra note 4.
\6\ Id. 17 CFR 240.17ad-22(e)(18)(iv)(A), (B).
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Therefore, under the Treasury Clearing Rules, FICC must require its
Netting Members, as direct participants, to submit all eligible
secondary market transactions to which they are a counterparty to it
for central clearing. FICC is also obligated to adopt provisions that
would facilitate its monitoring of Netting Members' compliance with the
trade submission requirement and how it would address a Member's
failure to comply. As described below, the proposed rules are designed
to comply with those requirements.
First, the proposed changes would adopt an ongoing membership
requirement that all Netting Members submit to FICC for clearance and
settlement eligible secondary market transactions to which they are a
party in a new GSD Rule 5 and would specify the scope of this
requirement by defining ``Eligible Secondary Market Transactions''. The
proposed rules would adopt the definition of Eligible Secondary Market
Transactions and related definitions from the Treasury Clearing
Rules,\7\ and would conform certain aspects of those defined terms to
the GSD Rules to provide Netting Members with clarity on the scope of
this trade submission requirement. FICC would also incorporate language
into the defined terms that provides further clarification of the scope
of this requirement, as described in greater detail below.
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\7\ Supra note 4. See also 17 CFR 240.17ad-22(a).
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Second, the proposed changes would adopt provisions to enable FICC
to identify and monitor Netting Members' ongoing compliance with the
proposed trade submission requirement. These provisions would include
affirmative obligations of Netting Members to notify FICC of non-
compliance and confirm their ongoing compliance with this requirement.
These provisions would also provide FICC with the authority to request
information or review a Netting Member's books and records to monitor
and verify, as needed, such compliance. Therefore, FICC's proposal
would require Netting Members to utilize their existing frameworks for
monitoring adherence to applicable regulatory obligations--
specifically, their compliance and independent audit functions--to
monitor and affirm their ongoing compliance with the trade submission
requirement. FICC's authority to request information and examine a
Netting Member's books and records would allow FICC to take affirmative
action when it deems such action necessary to fulfill its requirement
to identify and monitor Netting Members' compliance with the
requirement.
The proposed rule changes would also adopt disciplinary measures
FICC would take if a Netting Member fails to meet its obligations under
the new rules, which would include continuing fines until the failure
has been remediated and notifications to applicable regulatory
authorities. This fine would be incorporated into the GSD Fine
Schedule.
In adopting the Treasury Clearing Rules, the Commission recognized
the benefits central clearing brings to the markets served by a central
counterparty, like FICC, and, consequently, the importance of the risk
management measures employed by central counterparties.\8\ Therefore,
in connection with adopting the trade submission requirement, these
proposed rule changes would also include enhancements to the initial
qualifications for direct membership with GSD and the ongoing
membership obligations of Netting Members. The proposed enhancements
would improve the clarity and transparency of the GSD Rules regarding
the standards for membership and would provide FICC with additional
measures to strengthen its ability to manage the counterparty credit
risks that are presented by its Netting Members.
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\8\ Supra note 4.
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Finally, the proposed rule changes would include non-substantive
revisions to re-organize, clarify and conform the GSD Rules, as
described below.
Background
FICC, through GSD, serves as a central counterparty and provider of
clearance and settlement services for the U.S. government securities
markets. GSD's central counterparty services are available directly to
entities that are approved to be Netting Members and indirectly to
other market participants through its indirect access models--the
Sponsored Service or correspondent clearing/prime broker services.\9\
FICC's direct participants include brokers, dealers, inter-dealer
brokers and both U.S. and non-U.S. banks. Currently, other market
participants, including investment funds, pension plans and other buy-
side institutions, generally access GSD's central counterparty services
through one of its indirect access models.
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\9\ See Rule 2 (Members) (providing that FICC shall make its
services available to entities that are approved to be Members of
GSD); Rule 3A (Sponsoring Members and Sponsored Members) (describing
the Sponsored Service) and Rule 8 (Executing Firm Trades) (currently
describing the correspondent clearing/prime broker services), supra
note 3. FICC has separately proposed enhancements to its access
models, including revisions to rename the correspondent clearing/
prime broker service as the Agent Clearing Service, designed to
facilitate greater access to its services. See Securities Exchange
Act Release No. 99817 (Mar. 21, 2024), 89 FR 21362 (Mar. 27, 2024)
(SR-FICC-2024-005).
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Through GSD, FICC provides real-time trade matching, clearing, risk
management and netting for cash purchases and sales of eligible
securities, as well as repurchase and reverse repurchase transactions
involving eligible securities (``Repo Transactions''). Eligible
securities include securities issued by the U.S. Treasury Department
(``U.S. Treasury Securities'') and securities issued or guaranteed by
U.S. government agencies and government sponsored enterprises.\10\
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\10\ See definition of ``Eligible Securities'' in Rule 1, supra
note 3.
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In its role as central counterparty, FICC novates eligible
transactions that are submitted to it for clearance and settlement.
Novation is defined in the Rules as the termination of deliver,
receive, and related payment obligations between Netting Members and
the replacement of such obligations with identical obligations to and
from FICC, pursuant to the provisions of the Rules, and occurs at the
time a submitted transaction is compared by FICC.\11\ As recognized by
the Commission in the Adopting Release, by ``novating transactions
(that is, becoming the counterparty to both sides of a transaction),
[FICC] addresses concerns about counterparty risk by substituting its
own creditworthiness and liquidity for the creditworthiness and
liquidity of the counterparties.'' \12\
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\11\ See definition of ``Novation'' in Rule 1, supra note 3.
\12\ Supra note 4, at 8-9.
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The Adopting Release identifies the important operational, risk
management and other benefits of central clearing, which include the
reduction in counterparty credit risk through novation of trades by the
central counterparty, centralized default management, and efficiencies
provided by multilateral netting.\13\ The efficacy of FICC's own risk
management framework
[[Page 54604]]
is critical to its ability to provide these benefits to the market it
serves. This framework includes initial and ongoing participation
criteria and requirements relating to financial resources,
creditworthiness and operational capability.
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\13\ Supra note 4, at 14-17.
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These membership standards are designed to limit the risks a
Netting Member may present to FICC and the other Netting Members by
ensuring, among other things, that applicants to be Netting Members
have the financial and operational capabilities to meet the obligations
of membership on an ongoing basis. The Rules also provide FICC with the
ability to monitor Netting Members' adherence to continued suitability
for membership. These requirements are designed to balance appropriate
risk management with providing fair and open access by market
participants; they are objective, risk-based, and are set forth in
Rules 2A and 3.
Description of Proposed Rule Changes
1. Adopt Trade Submission Requirement and Define Scope of Requirement
The proposed rule changes would adopt an ongoing membership
obligation that each Netting Member submit to FICC for clearance and
settlement all ``Eligible Secondary Market Transactions'' to which it
is a counterparty. This requirement would be added to a new Rule 5 \14\
and would be adopted to comply with the amendments to Rule 17ad-
22(e)(18)(iv)(A) under the Act.\15\
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\14\ The rules currently in Rule 5, describing the Comparison
System, would be moved to a new Rule 6. References to Rule 5 would
be updated throughout the Rules to reflect this change. See
definitions of ``Novate'' and ``Yield Comparison Trade'' in Rule 1;
Sections 6 and 7 of Rule 3A; and Section 9 of Rule 3B. Supra note 3.
\15\ 17 CFR 240.17ad-22(e)(18)(iv)(A).
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Rule 5 would also provide that Netting Members are permitted, but
not required, to submit to FICC transactions that are outside the scope
of the new trade submission requirement.
a. Scope of Trade Submission Requirement
The proposed rule changes would specify the scope of the trade
submission requirement by adopting the definition of ``Eligible
Secondary Market Transactions'' and other related definitions from the
Treasury Clearing Rules.
The Commission's definition of Eligible Secondary Market
Transactions includes secondary market transactions in U.S. Treasury
Securities where the transaction is of a type that is accepted by FICC
for clearance and settlement and is one of three specified types of
transactions. FICC would adopt this language as codified in the
definition of ``Eligible secondary market transaction'' in Rule 17ad-
22(a) under the Act,\16\ with revisions to conform the language of the
definition to defined terms in the Rules. Specifically, FICC would
adopt a new defined term for ``U.S. Treasury Securities'' in Rule 1 and
would use this term in the definition. FICC would also replace
reference to ``clearance and settlement'' in the definition with its
defined term for ``Novation'', which, as described above, encompasses
its central counterparty role in the clearance and settlement process.
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\16\ 17 CFR 240.17ad-22(a).
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Rule 5 would further provide, as required by the Treasury Clearing
Rules, that Eligible Secondary Market Transactions that meet the
initial criteria must also be one of three types of transactions: (1)
any Repo Transaction collateralized by U.S. Treasury Securities in
which at least one counterparty is a Netting Member; or (2) purchase or
sale cash transactions in U.S. Treasury Securities between a Netting
Member and (a) any counterparty if the Netting Member brings together
multiple buyers and sellers using a trading facility (such as a limit
order book) and is a counterparty to both the buyer and seller in two
separate transactions; or (b) a Broker or Dealer. Again, FICC would
adopt this language from the statutory definition of Eligible Secondary
Market Transactions, with revisions only to incorporate defined terms
from the Rules. For example, FICC would replace references to ``direct
participant'' in the statutory definition of Eligible Secondary Market
Transactions with ``Netting Member'' and would use the defined terms
for ``Broker'' and ``Dealer'' from Rule 1.
FICC would also adopt new defined terms to improve the clarity of
the scope of the trade submission requirement. Such revisions would not
change the scope or applicability of the statutory definition of
Eligible Secondary Market Transactions and would be intended only to
provide clarity regarding the applicability of this term within the
Rules.
First, FICC would define ``Treasury Repo Transaction'' in Rule 1 to
mean a Repo Transaction collateralized by Eligible Treasury Securities.
FICC would use this new defined term in the definition of Eligible
Secondary Market Transactions. Second, FICC would define ``Buy/Sell
Transactions'' in Rule 1 to mean a Transaction that is either the
purchase or sale of an Eligible Netting Security in exchange for cash
for which the trade data is submitted to FICC for Novation. FICC would
use this term in the definition of Eligible Secondary Market
Transactions.\17\
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\17\ The term ``Buy/Sell Transaction'' would also be used in the
definition of ``Bilateral Transaction'' and ``Brokered Transaction''
in Rule 1 to clarify the meaning of those terms and would replace
lowercase uses of this term in other places in the Rules with the
proposed defined term. Supra note 3.
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The statutory definition of Eligible Secondary Market Transactions
also specifically excludes four types of Repo Transactions. FICC would
similarly adopt these exclusions, updating the language only to
incorporate defined terms to improve the clarity of the requirement.
For example, FICC would use the proposed definition of ``Treasury Repo
Transaction'' in each of the four exclusions from the definition of
Eligible Secondary Market Transactions.
The statutory exclusions to the trade submission requirement that
FICC would include in Rule 5 are (1) Treasury Repo Transactions and
Buy/Sell Transactions in which one of the counterparties is a central
bank, a sovereign entity, an international financial institution, or a
natural person; (2) Treasury Repo Transactions in which one of the
counterparties is either a U.S. covered clearing agency, a derivatives
clearing organization or a foreign central counterparty; (3) Treasury
Repo Transactions in which one of the counterparties is a state or
local government; and (4) Treasury Repo Transactions in which one of
the counterparties is an ``Affiliated Counterparty'' of the Netting
Member, provided that the affiliate submits to FICC for Novation all
other Treasury Repo Transactions to which it is a counterparty.
For the first exclusion, FICC would adopt the statutory definitions
of ``Central Bank'', ``Sovereign Entity'', ``International Financial
Institution'' and ``Local Government'' into Rule 1 from Rule 17ad-22(a)
under the Act, without any alteration to these definitions.\18\
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\18\ 17 CFR 240.17ad-22(a).
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For the fourth exclusion from the trade submission requirement,
FICC would adopt the statutory definition of ``Affiliated
Counterparty'' but would include in this definition additional language
to allow the definition to interoperate with the Commission's
application and interpretation of this particular exclusion.
Specifically, FICC would provide that an ``Affiliated Counterparty''
means a counterparty that meets the specified criteria ``or as
[[Page 54605]]
otherwise may be provided for by the SEC pursuant to the Exchange
Act''. FICC is proposing to include this language to make clear that
this defined term is intended to incorporate the Commission's own
application and interpretation of this exclusion from the scope of the
trade submission requirement.\19\ The additional language proposed to
the defined term would allow FICC to continue to apply the Commission's
interpretation of this definition, including any further interpretation
that the Commission may provide through future rulemaking.
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\19\ Additionally, the Adopting Release discusses how the
exclusion for Affiliated Counterparties is conditioned on the
affiliate submitting all Treasury Repo Transactions to which it is a
counterparty for central clearing. However, the Adopting Release
also specifies that ``[b]y referring to all other repos or reverse
repos, the exemption clarifies that the requirement does not
encompass transactions between the [Netting Member] and the
[Affiliated Counterparty], i.e., the transactions that are excluded,
and also does not encompass the [Affiliated Counterparty's]
transactions that would otherwise be excluded'' from the trade
submission requirement under other exclusions described above. Supra
note 4, at 86.
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FICC is also proposing to clarify language in the Rules to make
clear that a bank and its branches must all apply under the same
membership, as one Bank Netting Member. This proposed revision would
clarify that a branch and its parent bank are considered the same legal
entity under the GSD Rules and not separate affiliates. The proposed
changes would remove reference to a bank applying for membership
through its branch or agency from various places in Rules 2A and 3,
including (1) updating eligibility to be a Bank Netting Member to
remove the limitation that non-U.S. banks participate through a U.S.
branch in Section 3(a)(i) of Rule 2A; (2) updating the description of
financial requirements applicable to Foreign Persons that are banks to
remove reference to an application for membership through a U.S. branch
in Section 3(b)(ii)(E)(2) of Rule 2A; and (3) removing reference to a
bank's branch in the description of the annual attestation that must be
provided by non-U.S. bank Netting Members in Section 2(iii)(a) of Rule
3.
b. Remove Existing Trade Submission Requirements
In connection with adopting this trade submission requirement, FICC
would remove the existing trade submission requirements from the GSD
Rules. These requirements are currently set forth in Section 3 of Rule
11, Section 2 of Rule 15, and Section 2 of Rule 18.
Section 3 of Rule 11 requires Netting Members to submit data on all
of that Netting Member's trades other than Repo Transactions (i) with
other Netting Members that are eligible for netting and (ii) executed
by a Covered Affiliate (as defined in Rule 1) that meet certain
criteria. Section 2 of Rule 18 includes an identical trade submission
obligation with respect to trade data on Netting Members' Repo
Transactions. Both Rules exclude certain trades from the submission
requirement, including trades executed between Netting Members and
their Affiliates (defined in these Rules as ``Affiliate Trades'').
Section 2 of Rule 15 requires that certain broker Netting Members
submit to FICC trade data regarding their brokered activity upon FICC's
request.
FICC is proposing to remove these provisions from the Rules.\20\
The activity that would be required to be submitted to FICC pursuant to
the trade submission requirement proposed to be added to Rule 5
pursuant to the Treasury Clearing Rules would include activity that is
covered by these existing requirements. Therefore, FICC believes it is
unnecessary to retain these trade submission requirements in the Rules
with the adoption of the new requirements to Rule 5.
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\20\ FICC has separately proposed to remove Section 1 of Rule
15, see Securities Exchange Act Release No. 99817 (Mar. 21, 2024),
89 FR 21362 (Mar. 27, 2024) (SR-FICC-2024-005). Therefore, with the
proposed removal of Section 2 of Rule 15, Rule 15 will be revised to
be reserved for future use.
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In connection with this change FICC would delete the defined term
``Covered Affiliate'' from Rule 1.
c. Retain Prohibition Against Pre-Netting Trade Data
FICC is proposing to move and consolidate the existing restriction
against pre-netting practices from Section 3 of Rule 11 and Section 2
of Rule 18 into Section 4 of the new Rule 5. These provisions provide
that any trade data that is required to be submitted to FICC must be
submitted on a trade-by-trade basis with the original terms of the
trade unaltered, and specifically prohibits pre-netting practices. The
receipt of unaltered trade data permits FICC's market risk management
processes to monitor trades closer to the time of execution and manage
the risk exposures of those trades earlier in the day. Maintaining the
prohibition against pre-netting practices for trades that are required
to be submitted to FICC will, therefore, support the application of the
risk management benefits of central clearing to this trading activity
and support the goals of the Treasury Clearing Rules.
In moving and consolidating these provisions into Rule 5, FICC
would also update the disciplinary action it may take if a Netting
Member fails to comply with these requirements. Currently, Rules 11 and
18 provide that a Netting Member that violates this requirement ``may
be reported to the appropriate regulatory body, placed on the Watch
List and/or subject to an additional fee'' and that FICC may further
discipline the Netting Member pursuant to Rule 48.\21\ FICC is
proposing to remove these disciplinary measures and instead provide
that a Netting Member that has violated the prohibition against pre-
netting practices pursuant to the new Section 4 of Rule 5 may be
subject to an existing provision in the Rules that requires, in certain
circumstances, an additional charge to a Netting Member's Required Fund
Deposit, which would, as part of this proposed rule change, be defined
as a ``Credit Compliance Charge''.
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\21\ Section 3 of Rule 11, Section 2 of Rule 18, supra note 3.
See also Rule 48 (addressing FICC's general authority to discipline
any Member for violation of the Rules), id.
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FICC currently has the authority to collect an additional charge as
part of a Netting Member's Required Fund Deposit if the Member fails to
comply with applicable continuing membership standards, pursuant to
Section 8 of Rule 3.\22\ This additional amount is currently calculated
as equal to the greater of either: (i) $1,000,000, or (ii) 25 percent
of the normal calculation of the Netting Member's Required Fund
Deposit. FICC proposes to define this existing additional charge as the
``Credit Compliance Charge'' and replace the description of this charge
in Rule 3 with a defined term in Rule 1 and in the Margin Component
Schedule.\23\ Because the prohibition against pre-netting practices is
designed to support FICC's risk management of trades submitted for
clearance and settlement, FICC believes this charge is an appropriate
disciplinary measure for a violation of the requirement. This proposed
change would apply a disciplinary measure that is consistent with the
disciplinary measure applicable when a Netting Member fails to comply
with other membership obligations that are also designed to mitigate
risk presented to FICC and its other Netting Members.
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\22\ Supra note 3.
\23\ FICC recently proposed changes to the Rules that would move
the margin calculation methodology, including the relevant defined
terms currently located in Rules 1 and 4, into a new Margin
Component Schedule. See Securities Exchange Act Release No. 99844
(Mar. 22, 2024), 89 FR 21603 (Mar. 28, 2024) (SR-FICC-2024-007).
Therefore, FICC is proposing to also describe the calculation of the
Credit Compliance Charge in the proposed Margin Component Schedule.
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In connection with this proposed change, FICC would also delete the
[[Page 54606]]
defined term for ``Pre-Netting of Trades'' from Rule 1 as that term
would be incorporated into the new Section 4 of Rule 5.
2. Adopt Provisions To Monitor and Enforce the Trade Submission
Requirement
The proposed changes would adopt provisions to facilitate FICC's
ability to identify and monitor the trade submission requirement. These
proposed changes would specify FICC's ability to request information
from both the Netting Member and from its applicable regulatory
authority, and to review Netting Members' books and records, as and
when FICC deems it necessary to monitor Members' compliance with the
requirement. The proposed changes would also adopt affirmative, ongoing
membership obligations of Netting Members to monitor their own
continuous compliance with the requirement, proactively report any
instances of non-compliance with the requirement, and periodically
affirm ongoing compliance to FICC, as described below.
While FICC would adopt provisions that would allow it to request
information from Netting Members and their applicable regulatory
authority, and to inspect Netting Members' books and records when it
deems such review necessary, given that Netting Members' internal
operations, organizational structures and trading practices vary
greatly, FICC believes it is also appropriate to apply an approach that
entails some degree of Netting Member self-monitoring and self-
reporting under the general obligation to comply with FICC's ongoing
membership requirements. Therefore, and as recommended in the Adopting
Release,\24\ FICC is proposing to require that Netting Members monitor
their own compliance with the requirement and affirm such compliance to
FICC through a written attestation and report, as described in detail
below.
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\24\ Supra note 4, at 129 (``. . . U.S. Treasury securities CCA
could require direct participants to submit to the CCA information
regarding their U.S. Treasury securities transactions or to require
attestations from senior officials of the CCA's direct participants
as to their submission of the required transactions and compliance
with their obligations to submit such transactions.'')
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a. FICC's Authority To Request Information and Inspect Books and
Records
FICC would describe in Section 2 of Rule 5 its authority to take
certain actions, and Netting Members' agreement to comply with such
actions, in connection with its monitoring of Netting Members' ongoing
compliance with the trade submission requirement. FICC currently has
the authority to take each of these actions under Rules 2A and 3 in
connection with its monitoring of Members' compliance with the
requirements of membership generally. Therefore, FICC is not proposing
to expand its authority to request information, or review the books and
records of its Members, but would clarify that it may exercise these
existing rights in connection with its monitoring of the trade
submission requirement.
First, Netting Members would be required to submit to FICC any
reports or other information that FICC may reasonably request, as also
set forth in Section 2 of Rule 3, which requires that Netting Members
submit to FICC ``the reports, financial or other information set forth
below and such other reports, financial and other information as the
Corporation from time to time may reasonably require.'' The proposed
rule change would specify that this information could include, for
example, reports of trading activity, trade data, and the Netting
Member's policies, procedures or other controls related to its
compliance with the trade submission requirement. Second, Netting
Members would agree that FICC may inspect their books and records, as
also set forth in Section 10 of Rule 3. Finally, Netting Members would
authorize FICC to request information regarding a Netting Member from
that firm's Designated Examining Authority or Appropriate Regulatory
Agency, which FICC may also do under Rule 2A, Section 6 in evaluating
an applicant to be a Netting Member. This provision would incorporate a
suggestion in the Adopting Release that reviewing information from
regulatory organizations would be an appropriate method for FICC to
assess its Netting Members' compliance with the requirement.\25\ The
proposed rule would specify that the information that FICC may request
from such authority or agency could include, for example, information
related to such authority or agency's examination of the Netting
Member's trading practices, trading reports and other records.
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\25\ See id., (``The Commission further agrees that a U.S.
Treasury securities CCA also could review publicly available
information and information made available to it by regulatory and
self-regulatory organizations as part of its assessment of its
direct participants' compliance.'').
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As noted above and described below, FICC would primarily rely on
Netting Members to monitor their own compliance with the trade
submission requirement. However, these proposed changes to clarify
FICC's existing rights to request information and examine Netting
Members' books and records would allow FICC to verify such compliance,
for example, before it takes action to enforce the requirement.
b. Requirement To Notify FICC of Non-Compliance
Second, the proposed rule changes would require each Netting Member
to notify FICC in writing within 2 Business Days from the date on which
it learns that it is no longer in compliance with the trade submission
requirement. Currently, under Section 7 of Rule 3, Members are required
to notify FICC if they are no longer in compliance with the
qualifications, standards or other requirements of membership.\26\ This
proposed rule change would clarify for Members the application of this
existing requirement to a failure to comply with the trade submission
requirement.
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\26\ Section 7 of Rule 3, supra note 3.
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The proposed rule change would also specify that notification of
non-compliance shall include all relevant facts that are known to the
Netting Member at the time of the notification and would identify
examples of such information. Examples of such relevant facts would
include (i) the approximate duration of the non-compliance with the
trade submission requirement; (ii) either the time when non-compliance
with the trade submission requirement was remediated or the anticipated
steps to be taken to remediate such non-compliance and the approximate
time when non-compliance is expected to remediated; and (iii)
identification and contact information of the member of the Netting
Member's Controlling Management (as such term is defined in the Rules)
\27\ that is overseeing the matter.
---------------------------------------------------------------------------
\27\ See Rule 1 (``The term ``Controlling Management'' shall
mean the Chief Executive Officer, the Chief Financial Officer, and
the Chief Operations Officer, or their equivalents, of an applicant
or Member or such other individuals or entities with direct or
indirect control over the applicant or Member; provided that with
respect to a Registered Investment Company Netting Member or an
applicant to become a Registered Investment Company Netting Member,
the term ``Controlling Management'' shall include the investment
manager.''), supra note 3. See discussion below regarding a proposed
change to include a Netting Member's Chief Risk Officer to this
definition.
---------------------------------------------------------------------------
FICC believes this information would assist it in assessing the
status and extent of the Netting Member's non-compliance with this
requirement and the appropriate, applicable disciplinary measures. As
discussed below, FICC would provide Netting Members that self-report
non-compliance with the trade submission requirement with a cure period
before applying disciplinary
[[Page 54607]]
measures. Finally, by requiring that a Netting Member identify a member
of its Controlling Management that is overseeing the matter, the
proposed rule change would ensure that the Netting Member has
appropriately escalated the non-compliance internally and that the
matter is being addressed by its senior management.
c. Annual Trade Submission Attestation
Third, the proposed changes would require each Netting Member to
provide FICC with an annual attestation regarding its ongoing
compliance with the trade submission requirement. The requirement to
provide this attestation would be included in Section 2 of Rule 5, and
the attestation would be described in Section 2(iii)(c)(1) of Rule 3,
as an ongoing requirement of membership. FICC would also adopt a
definition of the ``Annual Trade Submission Attestation'' in Rule 1.
The Annual Trade Submission Attestation would be required to be
submitted to FICC by each Netting Member no less than annually, and
FICC would set the date such attestations are due on an annual basis.
Such an attestation would be signed by the Netting Member's Chief
Compliance Officer or most senior authorized officer of the Netting
Member who performs a similar function. FICC believes that a Netting
Member's Chief Compliance Officer, or similar senior officer, is the
appropriate level of authority to sign and deliver this attestation as
such officers are typically responsible for monitoring a firm's
compliance with applicable laws, regulations, and other ongoing
requirements.
Each Annual Trade Submission Attestation would be required to be on
a form that is provided by FICC and would include the following
attestations, as would be set forth in Rule 3: (i) the attesting
officer has read and understands the trade submission requirement set
forth in Rule 5; (ii) the Netting Member has established, maintains and
enforces policies, procedures or other controls that are reasonably
designed to ensure ongoing and continued compliance with the trade
submission requirement; (iii) such controls are reasonably designed to
promptly identify and remediate any occurrences of non-compliance with
the trade submission requirement; and (iv) the Netting Member has, at
all times during the 12 months prior to the date of the attestation,
complied with the trade submission requirement set forth in Rule 5.
Netting Members have an existing similar requirement to submit an
annual attestation with respect to their obligations to the Capped
Contingency Liquidity Facility under Rule 22A. Therefore, while this
attestation covers a different area of ongoing membership requirements,
the requirement will not be unfamiliar to existing Netting Members.
FICC would adopt a fine in the Fine Schedule that would apply when
a Netting Member fails to submit the Annual Trade Submission
Attestation on time and in the form required. The fine would be
$10,000, would apply on the Business Day following the day on which the
attestation was required to be provided to FICC and would continue to
be applied every 10 Business Days until the completed and correct
attestation is provided to FICC. By setting this fine at a relatively
higher value than other existing fines and by structuring the fine to
be applied periodically until this requirement has been fulfilled, FICC
believes this continuing fine would be an appropriate and effective
measure to deter non-compliance and signal to Netting Members that the
delivery of the attestation is an important obligation of membership.
d. Triennial Independent Trade Submission Review and Report
FICC is proposing to require that each Netting Member conduct an
independent review of its ongoing compliance with the trade submission
requirement on a triennial basis and provide a report of that review to
both FICC and the Netting Member's most senior governing body. FICC
believes that a more comprehensive review of a Netting Member's
compliance, performed by an independent body on a less frequent basis
would be an important mitigant to any contravention of the trade
submission requirement. The requirement to conduct a review and provide
a report of the review to FICC would be included in Section 2 of Rule
5, and the review and report would be described in Section 2(iii)(c)(2)
of Rule 3, as an ongoing requirement of membership. FICC would also
adopt definitions of the ``Triennial Independent Trade Submission
Review'' and the ``Triennial Independent Trade Submission Report'' in
Rule 1.
The Triennial Independent Trade Submission Review would be required
to be conducted following procedures and standards that each Netting
Member has established to ensure the review is comprehensive and
adequate to sufficiently assess and confirm the Netting Member's
ongoing compliance with the trade submission requirement for the three-
year period prior to the review. Because each Netting Member's review
would need to be appropriate for its own business practices and
organization, FICC would permit each Netting Member to establish its
own procedures and standards for conducting this review. FICC would
have the authority, as discussed above, to review such procedures and
standards when it deems necessary to confirm they are designed to
ensure an appropriate assessment of compliance pursuant to the Rules.
The proposed rule would permit Netting Members to engage either an
internal independent group or an external third party to conduct this
review. An independent external third party could include, for example,
an auditor, consultant, or other independent firm that has experience
providing independent attestations, certifications or opinions in the
securities market industry. Netting Members that choose to engage an
external independent third party to conduct the Triennial Independent
Trade Submission Review would need to receive FICC's prior approval of
that third party. In approving an independent third party, FICC would
verify that the third party has the requisite expertise, as set forth
in the Rules, to conduct the triennial review. If a Netting Member
chooses to use an internal independent group to conduct the triennial
review, such group must report directly to the Netting Member's board
of directors, a committee of that board or to the equivalent senior
most governing body. Such requirement would ensure the independence of
this group from the business areas that are subject to the review.
Allowing Netting Members to choose to use either an internal group or
an external third party to conduct the Triennial Independent Trade
Submission Review provides flexibility and acknowledges the different
internal capabilities and resources of different Netting Members.
Each Netting Member would be required to complete a report of the
Triennial Independent Trade Submission Review, in a form that would be
prescribed by FICC, that is signed by the individual who oversaw the
review and, similar to the annual attestation, by the firm's Chief
Compliance Officer or most senior officer who performs a substantially
similar function. FICC would require that Netting Members provide the
Triennial Independent Trade Submission Report to its board of directors
or equivalent senior most governing body, before delivering the report
to FICC. FICC believes that involving the senior leaders at a Netting
Member in the triennial review and report would allow for appropriate
[[Page 54608]]
oversight and would signal the criticality of compliance with this
trade submission requirement to senior levels of a Netting Member's
organization.
Proposed Section 2(iii)(c)(2) of Rule 3 would identify the
components of the Triennial Independent Trade Submission Report, which
would (i) describe the procedures, methodology and/or standards
employed in conducting the Triennial Independent Trade Submission
Review, (ii) identify the books, records, processes, operations and/or
controls of the Netting Member that were examined in conducting the
triennial review; and (iii) state the conclusions of the review,
including whether the Netting Member has complied with the trade
submission requirement on an ongoing basis during the period covered by
the review.
FICC would adopt a fine in the Fine Schedule that would apply when
a Netting Member fails to complete the triennial review and submit the
triennial report to FICC by the time and in the form prescribed by
FICC. The fine would be $15,000 and would apply on the Business Day
following the day on which the attestation was required to be provided
to FICC and would continue to be applied every 10 Business Days until
the completed and correct attestation is provided to FICC.
Section 2(iii)(c)(2) of Rule 3 would address what would occur if
FICC determines, in its sole discretion, that a Triennial Independent
Trade Submission Review conducted on behalf of a Netting Member is
incomplete, inadequate or otherwise does not meet the requirements of
the Rule. If this were to occur, the Rule would provide that FICC shall
require the Netting Member to complete a revised review that addresses
the deficiencies of the prior review and would impose a fine on the
Netting Member as if such firm had not submitted a Triennial
Independent Trade Submission Report. Such fine would continue to apply
until the revised report is provided to FICC.
e. Enforcement of Trade Submission Requirement
Finally, Section 3 of Rule 5 would provide that a Netting Member
that fails to comply with the trade submission requirement would be
subject to a fine under the Fine Schedule and that the Netting Member's
Designated Examining Authority or Appropriate Regulatory Agency, as
applicable, and the Commission would be notified of that failure. FICC
believes that notice of a Netting Member's failure to comply with the
trade submission requirement to other appropriate regulatory
organizations is an appropriate measure and would be an effective
deterrent to non-compliance.
Within the Fine Schedule, FICC would adopt a fine of $20,000 and,
similar to the fines that would be imposed for a failure to submit a
required attestation or triennial report, the fine would continue to be
assessed until FICC has determined, in its sole discretion, that the
failure to comply has been remediated. FICC would assess this fine on a
longer timeframe--every 30 Business Days--to provide Netting Members
with an appropriate period of time to remediate non-compliance.
Section 3 of Rule 5 would provide Netting Members who notify FICC
of their non-compliance with the trade submission requirement with a
cure period of 10 Business Days before the applicable disciplinary
measures are taken. FICC believes it is appropriate to adopt this cure
period to encourage Netting Members to effectively monitor their own
compliance with the requirement and notify FICC when non-compliance is
discovered.
3. Adopt Enhancements to the Initial Qualifications and Ongoing
Membership Standards Applicable to Netting Members
The proposed revisions to the Rules would also enhance the
membership standards for applicants and Netting Members subject to
GSD's initial and ongoing requirements under Rules 2A and 3. These
enhancements, described below, are designed to clarify and strengthen
GSD's membership standards to help mitigate the credit exposure that
Netting Members present and, thus, continue to promote the safety and
soundness of FICC, its Members, and the industry it serves.
These proposed changes are consistent with the authority provided
to FICC under Section 17A(b)(4)(B) of the Act, which provides that a
registered clearing agency such as FICC may, among other things, deny
participation to, or condition the participation of, any person if such
person does not meet such standards of financial responsibility,
operational capability, experience, and competence as prescribed by the
rules of the registered clearing agency.\28\ Furthermore, the
registered clearing agency may examine and verify the qualifications of
an applicant to be a participant in accordance with procedures
established by the rules of the clearing agency.\29\
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\28\ 15 U.S.C. 78q-1(b)(4)(B).
\29\ Id.
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First, FICC proposes to make several changes to Rule 2A, which
addresses initial membership requirements. In addition to various
technical, ministerial, supplemental, and other conforming and
clarifying changes, FICC proposes the following changes to Rule 2A:
<bullet> Require applicants to always maintain adequate liquidity
resources to meet their actual or projected funding obligations to
FICC, as determined by FICC. Although already implicit in the Rules,
explicitly stating this requirement would provide greater notice and
transparency to applicants.
<bullet> In assessing the adequacy of an applicant's liquidity
resources, authorize FICC to consider, for example, the source of
liquidity and clearly state that FICC may deny membership to an
applicant if the applicant is unable to satisfactorily demonstrate to
FICC, in FICC's judgement, that the applicant maintains adequate
liquidity resources. Given the importance liquidity serves in
supporting an applicant's resiliency, it is imperative that FICC be
able to fully assess the quality and quantity of liquidity of its
applicants.
<bullet> Update current language that addresses consideration of
the financial resources of the applicant's parent company to more
broadly address the financial resources of a Guarantor, as such term
would be defined in Rule 1 by the proposal, since a guaranty may come
from an entity other than the parent company, and allow such
consideration to be made by FICC instead of its Board, as such a
decision aligns better with FICC management than with the Board.
<bullet> When a guaranty is provided, (i) authorize FICC the option
to engage external legal counsel to review the validity and
enforceability of a Guarantor's guaranty, with the costs and expenses
of such review being borne by the applicant or Member; and (ii) require
a Guarantor to provide FICC the Guarantor's annual audited Financial
Statements and such other information as FICC believes necessary or
appropriate in order to assess the Guarantor's ability to guarantee the
obligations of the applicant or Member to FICC for the duration of the
guaranty. Given the importance that a Guarantor's guaranty plays in
supporting an applicant, it is imperative that FICC be able to fully
assess the validity of that guaranty and the Guarantor's financials.
<bullet> Clarify the concept of ``business history'' of an
applicant to the ``operating and management history and outlook'' of
the applicant, to more clearly encompass the scope of ``business
history'' that FICC considers.
<bullet> Extend the required operating history of an applicant from
six months
[[Page 54609]]
to one year or, in the alternative, permit FICC to determine whether
the applicant has not only personnel with sufficient operational
background and experience, as currently allowed, but also sufficient
financial background and experience as well, to conduct the business of
the applicant. FICC believes one full year of operating history would
be a better measure of the applicant's wherewithal than merely six
months, and that the financial background and experience of the
applicant's personnel are equally as important to consider as their
operational background and experience.
<bullet> Require applicants to provide FICC with a business plan,
supported by financial assumptions and projections that includes the
applicant's proposed use of GSD's services that demonstrates, to the
satisfaction of FICC, that the applicant has a viable plan to meet and
sustain the financial and operational responsibility standards and
financial obligations under the Rules. Absent a viable business plan,
FICC could be exposed to greater risk from the applicant, if it were to
become a Member.
<bullet> As part of an applicant's membership application, allow
FICC to require an assessment of the applicant's business plan by an
independent third-party consultant, at the expense of the applicant, to
evaluate the reasonableness and viability of the plan, including its
assumptions and projections, and explicitly state that failure to
provide such a plan, when requested, may result in denial of the
application. Again, given the importance that a viable business plan
can have in supporting an applicant's obligations to FICC, it is
imperative that FICC be able to fully assess that plan.
<bullet> Explicitly authorize FICC to deny an applicant's
application if FICC believes the applicant does not have individuals
with relevant industry experience and appropriate history of compliance
with laws and regulations staffed in the following senior management
roles, as applicable, prior to activation of the applicant's
membership: President and/or Chief Executive Officer, Chief Financial
Officer, Chief Risk Officer (who would also be added to the current
definition of ``Controlling Management'' in Rule 1), General Counsel,
OFAC Officer and Cybersecurity Officer. Similar to having a viable
business plan, it is important that Members are adequately staffed with
key personnel to help manage the Member's obligations to FICC.
<bullet> Clarify, with respect to financial or other reports,
opinions, or information (collectively, ``information'') that an
applicant may be required to provide FICC, that (i) FICC may request
such information as it deems not only appropriate but also necessary in
order to evaluate the applicant's financial responsibility,
operational, legal and regulatory capabilities, experience and
competence; and (ii) such information may include, without limitation,
documented risk management practices, liquidity stress tests, credit
agreements, risk assessments, opinions of counsel and other independent
professionals, audited financial statements (including, without
limitation, those of the applicant's Affiliates and/or Guarantor),
consolidated and consolidating financial statements, financial
projections, and organizational documents and charts (including, but
not limited to, certificates of incumbency and the corporate structure
of the applicant's Affiliates and/or Guarantor). Although already
implicit in the Rules, clarifying this requirement would provide
greater notice and transparency to applicants.
<bullet> Clarify that if FICC determines to apply a limitation or
restriction on an applicant in lieu of applying a membership standard,
as FICC is currently authorized to do, that such limitations and
restrictions also include conditions and, in addition to the examples
already provided in the Rules, such limitations, restrictions, and
conditions also may include increased or adjusted ongoing membership
financial requirements or an ongoing requirement to provide additional
information or reports to FICC. Although already implicit in the Rules,
clarifying this requirement would provide greater notice and
transparency to applicants.
<bullet> Clearly authorize FICC to deny membership to an applicant
if FICC becomes aware of any factor or circumstance about the applicant
or its Controlling Management that may impact the suitability of the
applicant as a Member, such as, without limitation, (i) if the
applicant would be placed on the Watch List upon admission; (ii)
concerns relating to compliance with anti-money laundering or sanctions
laws, rules, and regulations; (iii) concerns relating to the amount or
degree of leverage maintained or proposed to be maintained by the
applicant; and/or (iv) pending, adjudicated or settled regulatory or
other legal actions involving the applicant or its management,
including the applicant being subject to a Statutory Disqualification,
as such term is defined in Rule 1. Although already implicit in the
Rules, explicitly stating this authority would provide greater notice
and transparency to applicants.
<bullet> If an applicant is denied membership, restrict the
applicant from reapplying for membership until the applicant has
demonstrated to the satisfaction of FICC that the applicant has
adequately addressed the specific grounds upon which the application
was denied. This change would help stop an applicant from immediately
reapplying for membership and tying up FICC resources without first
taking the time to address the underlying issue for the denial.
Second, FICC proposes to make several changes to Rule 3, which
addresses ongoing membership requirements. In addition to various
technical, ministerial, and other conforming and clarifying changes,
FICC proposes the following changes to Rule 3:
<bullet> Expand the requirement that information provided to FICC
under the Rules must be in English and move the requirement into
Section 1 of Rule 3. Currently the requirement that information
provided to FICC must be in English is at the end of Section 2 of Rule
3 and only applies to information that is provided to FICC under Rule
3. The proposed change would move this statement into Section 1, which
addresses ongoing membership requirements generally, and would expand
the requirement to apply to all information provided under the Rules.
<bullet> Update the type of financial information that FICC may, in
its discretion, request from a Member's Affiliate and not just the
Member's parent, including Affiliates of Members that are a Broker or
Dealer, U.S. bank or trust company, Futures Commission Merchant, or
non-U.S. organized entity, to include the annual audited Financial
Statements for the applicable fiscal year, certified by an independent
certified public accountant and prepared in accordance with generally
accepted accounting principles, of the Affiliate, and if annual audited
Financial Statements are not available, allow FICC, in its discretion,
to accept unaudited Financial Statements, audited consolidated
Financial Statements, or other financial information of the entity, as
applicable.
<bullet> Require Members to provide accurate, complete and timely
responses to FICC's annual and periodic due diligence information
requests, which could include, for example, the delivery of additional
reports and other information. Although already implicit in the Rules,
explicitly stating this requirement would provide greater notice and
transparency to Members.
[[Page 54610]]
<bullet> Subject Members to (i) a fine, pursuant to the Fine
Schedule; (ii) require adequate assurances of their financial
responsibility and operational capability as provided for in Section 7
of Rule 3; and/or (iii) if the requested information is outstanding for
more than 60 calendar days and until such time that the information is
received by FICC to FICC's satisfaction, a Credit Compliance Charge,
calculated pursuant to the Margin Component Schedule, added to the
Required Fund Deposit of such Member, if the Member fails to provide
accurate, complete and timely information, including responses to due
diligence requests, in the manner requested. Although already subject
to fines for failing to timely provide financial and related
information, expanding such fines to explicitly include failing to
respond to other information requests, particularly due diligence
requests, and adding the ability to assess adequate assurances or a
Credit Compliance Charge, would further support the importance of
Members providing timely responses to requests for key information.
<bullet> Clarify the timing and manner in which Members must notify
FICC if a Member is no longer in compliance with applicable membership
standards or is the subject of an investigation or proceeding,
including the Member's Controlling Management, that would cause it to
no longer meet an applicable membership standard, and that failure to
provide such notification shall subject the Member to a fine. Although
already implicit in the Rules, clarifying this requirement would
provide greater notice and transparency to Members.
<bullet> Authorize FICC to require Funds-Only Settling Bank Members
to provide adequate assurances that could limit the number of Netting
Members for which the Funds-Only Settling Bank Member provides
settlement services. Given the significant risk that Funds-Only
Settling Bank Members present to FICC and Netting Members in settling
for Netting Members, it is imperative that FICC be able to adequately
mitigate that risk exposure, when needed, by limiting the number of
Netting Members for which such a bank can settle, when FICC deems such
measure necessary to mitigate risk presented by the Funds-Only Settling
Bank Member.
<bullet> Clarify that the ongoing monitoring of Members includes,
without limitation, monitoring through annual and periodic due
diligence requests. Although already implicit in the Rules, clarifying
this requirement would provide greater notice and transparency to
Members.
Third, FICC proposes to make several changes to the Fine Schedule.
In addition to various technical, ministerial, and other conforming and
clarifying changes to the Fine Schedule, FICC proposes the following
changes:
<bullet> Replace the ``Financial Reports'' fine category and
associated fines with a new category titled ``Reports, Information and
Due Diligence Requests,'' where the first, second, third, and fourth
occasions for failing to timely provide such information would result
in $5,000, $10,000, $15,000, and $20,000 fines, respectively, and
provide that for more than four occasions, fines will be determined by
FICC with the concurrence of the Board of Directors. FICC believes that
providing a broader fine category, with higher fines, would help
improve Member's compliance with the obligation.
<bullet> Provide notice that (i) the fine for failure to deliver
timely and accurate responses to due diligence requests, in the form
required by FICC, would be assessed on the 31st Business Day following
the day on which such responses are due; (ii) the fine for failure to
deliver all other information would be assessed on the Business Day
following the day on which such information is due; and (iii) in all
cases, the applicable fine shall be assessed every 10 Business Days and
shall increase by $5,000 each time it is assessed, as shown in the Fine
Schedule, until such responses have been delivered to FICC. Providing
better notice of when the fines will be assessed, and applying a
continuing, meaningful fine for a Member's ongoing failure to comply,
would help improve compliance with the obligation.
4. Other Revisions and Clarifications to the Rules
Finally, the proposed rule changes would make other revisions to
clarify and conform provisions of the Rules to improve their accuracy
and transparency.
First, the proposed rule changes would revise and clarify certain
defined terms in Rule 1. The revisions would update the definition of
``Affiliate'' to replace a citation to a particular regulatory
definition of this term set forth in rules promulgated under the Act,
with the text of the particular regulatory definition of this term.\30\
This revision would not change the meaning of this term as it is used
in the Rules, but would provide further clarity by including the actual
definition and not requiring a reader to find that definition in the
cited regulation.
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\30\ 17 CFR 230.405.
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The proposed rule changes would also update the definition of
``Designated Examining Authority'' to include the appropriate
regulatory bodies that may apply to other legal entity types and to
permit FICC to choose the applicable regulatory body when a Member has
multiple overseeing regulators. The additional regulatory authorities
that would be included in this defined term are already listed along
with the term Designated Examining Authority in Section 6 of Rule 3.
Expanding the defined term to include these additional regulatory
agencies in the defined term would allow FICC to remove that additional
language from Rule 3 and simplify the uses of this term in other places
in the Rules, including in Sections 2 and 3 of proposed Rule 5
regarding the monitoring and enforcement of the trade submission
requirement.
The proposed rule changes would also update the defined term for
``Eligible Treasury Security'' to clarify the meaning of this term by
using the new proposed defined term for ``U.S. Treasury Security'' and
the existing defined term for ``Eligible Security''.
Second, the proposed rule changes would reorganize the sections
within Rules 2A and 3, regarding the initial and ongoing requirements
of membership, to identify similar requirements together in the same
sections and ensure members have a clear understanding of these
obligations. In Rule 2A, these proposed changes would include adding
subheadings to Section 5, which describes the various documents and
other application requirements, to improve the transparency of this
section and better identify these requirements to the reader.
These proposed changes would also rename Section 1 of Rule 3
``General'' and move general statements that are applicable to the
provisions of both Rule 3 and the Rules generally into this section.
For example, Section 1 of Rule 3 would now include a statement that
clarifies for Members which requirements apply when a firm qualifies
for multiple types of Netting Member and would include and expand the
requirement that information provided to FICC under the Rules generally
must be in English, as discussed above.
The proposed changes to Rule 3 would also rename Section 2
``Financial Statements, Regulatory Reports and Other Reporting
Requirements'', create subheadings to more clearly describe the types
of information and reports that Netting Members must provide on an
[[Page 54611]]
ongoing basis, and move other ongoing reporting requirements into new
Section 2(i). For example, Section 2(i) would include an existing
ongoing requirement to provide regulatory reports that are submitted to
a Member's regulatory supervisors and other authorities. The proposed
changes would move all statements in Rule 3 regarding the timing of
ongoing membership reporting requirements into a new Section 2(ii). The
definition of ``Financial Statements'' would be moved out of Section 3
of Rule 3 and into Rule 1, with the other defined terms. The ongoing
requirement that Members maintain a current Legal Entity Identifier
would be moved into Section 3 of Rule 3.
The proposed changes to Rule 3 would also move the existing
requirement that Members maintain or upgrade their systems into Section
6 of Rule 3, where other operational requirements are currently
described. The proposed changes would add new subheadings to Section 7
of Rule 3, which describes the general continuance standards for
membership, to make these standards easier to identify. The proposed
changes would simplify the description of the requirement to notify
FICC of events that impact a Member's compliance with applicable
ongoing membership requirements in new Section 7(a) of Rule 3, and to
specify that failure to provide this notification will result in a fine
pursuant to the Fine Schedule. These proposed changes would not change
Members' notification obligations or impose new disciplinary measures
but would improve the clarity of these requirements in the Rules.
The proposed changes would move the description of the requirement
that Netting Members that are Foreign Persons notify FICC if they
become subject to disciplinary action by their home regulator to
Section 9 of Rule 3, which already addresses the ongoing requirement
that Members comply with applicable laws. Finally, the proposed changes
would move the statement that a Netting Member may be required to
provide FICC with a legal opinion if FICC determines that the Member
could be subject to ``Legal Risk'' (as such term is defined in the
Rules) to Section 11 of Rule 3, which already addresses FICC's ongoing
monitoring of Members.
As noted above, these proposed changes are not intended to alter
the requirements of Members or rights of FICC with respect to ongoing
membership standards, but would re-arrange, clarify and simplify the
descriptions in Rule 3 to improve the transparency of those provisions.
Third, the proposed rule changes would move descriptions of the
ongoing and regular attestation, acknowledgement and certification
requirements into new Section 2(iii) of Rule 3 and would amend the Fine
Schedule to adopt fines that would be assessed for a failure to deliver
such attestations when required. The attestations that would be
included in this new subsection are (1) an existing requirement that
Bank Netting Members that are Foreign Persons provide an attestation on
at least an annual basis regarding their capital requirements and
capital ratios, which is currently described in Rule 3; (2) the
existing requirement that Netting Members, Sponsoring Members and CCIT
Members deliver a ``Cybersecurity Confirmation'' (as such term is
defined in Rule 1) at least every two years, as currently described in
Section 2 of Rule 3; (3) the proposed Annual Trade Submission
Attestation and the proposed Triennial Independent Trade Submission
Review and Report requirements that are proposed to be added to new
Rule 5, as described above; and (4) the existing requirement that
Netting Members provide an annual attestation and periodic
acknowledgements regarding their obligations under the Capped
Contingency Liquidity Facility (``CCLF'', as such term is defined in
the Rules) pursuant to Rule 22A, which is currently described in Rule
22A.\31\
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\31\ FICC recently proposed changes to the Rules to require that
each Netting Member provide certain acknowledgements to FICC
concerning their understanding of and ability to meet their CCLF
obligations. See Securities Exchange Act Release No. 100137 (May 14,
2024), 89 FR 43938 (May 20, 2024) (SR-FICC-2024-008). The changes
proposed herein would move the separately proposed disclosures of
those acknowledgements from Rule 22A to Rule 3.
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In connection with these proposed changes, FICC would delete the
definition of ``Required Attestation'', which currently refers to the
attestation regarding a Netting Member's CCLF obligations and replace
that definition with a defined term for ``CCLF Attestation'' in Rule 1,
to better reflect the nature of this required attestation. FICC would
also amend Rule 22A to remove the descriptions of the CCLF attestation
and acknowledgement requirements and replace those descriptions with a
reference to Rule 3.
FICC would also specify in the Fine Schedule the applicable fines
for a failure to provide the attestations that would be identified in
Section 2(iii) of Rule 3. While FICC has the authority under Rule 48 to
take disciplinary action, including imposing a fine, if a Netting
Member violates any provision of the Rules, the proposed change to
specify the applicable fines for failure to deliver the Cybersecurity
Confirmation and the CCLF attestation and acknowledgements would
improve the transparency of the Rules and permit Members to better
anticipate the consequences of failing to comply with these
requirements.
Finally, the proposed rule changes would amend Sections 4(b)(iii)
and 6 of Rule 2A and Section 5 of Rule 3 to remove references to FICC's
Board of Directors as being responsible for approving or authorizing
certain actions and replacing such references with references to FICC.
As provided in Rule 44, action by FICC may include action by the Board
or by another authorized person as may be designated by the Board from
time to time. This proposed change would permit the Board to either
retain the authority to take the actions specified in these sections of
the Rules or to authorize management of FICC to do so, consistent with
Rule 44 and the Board's authority under the FICC By-laws. Specifically,
the Board's authority to empower management with certain
responsibilities originates in the FICC By-laws, which have been filed
as a Rule of FICC.\32\ The By-laws document the responsibilities of the
Board in electing and appointing officers of FICC, and prescribing and
assigning to those officers their respective powers, authority and
duties.\33\ This revision would simplify these statements in the Rules,
consistent with Rule 44.
---------------------------------------------------------------------------
\32\ See Securities Exchange Act Release Nos. 54173 (July 19,
2006), 71 FR 42890 (July 28, 2006) (SR-DTC-2006-10, SR-FICC-2006-09,
and SR-NSCC-2006-08); 82917 (Mar. 20, 2018) 83 FR 12982 (Mar. 26,
2018) (SR-FICC-2018-002).
\33\ See Sections 3.2 through 3.9, id.
---------------------------------------------------------------------------
Implementation Timeframe
Subject to approval by the Commission, FICC expects to implement
the proposal by no later than March 31, 2025, and would announce the
effective date of the proposed rule change by an Important Notice
posted to FICC's website.
As provided for in the Treasury Clearing Rules, while the Rules
would be updated to reflect the changes proposed by this filing by no
later than March 31, 2025, Netting Members would not be obligated to
comply with the trade submission requirement proposed by this filing
until December 31, 2025, with respect to Buy/Sell Transactions that are
considered Eligible Secondary Market Transactions, and June 30, 2026,
with respect to Treasury Repo Transactions that are considered Eligible
Secondary Market Transactions.
[[Page 54612]]
2. Statutory Basis
FICC believes the proposed changes are consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a registered clearing agency. In particular, FICC
believes the proposed rule changes are consistent with Section
17A(b)(3)(F) and (G) of the Act,\34\ and Rules 17ad-22(e)(18)(ii),
(iii), (iv)(A) and (B), and (e)(23)(ii), each promulgated under the
Act,\35\ for the reasons described below.
---------------------------------------------------------------------------
\34\ 15 U.S.C. 78q-1(b)(3)(F) and (G).
\35\ 17 CFR 240.17ad-22(e)(18)(ii), (iii), (e)(18)(iv)(A) and
(B), and (e)(23)(ii).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act requires that the rules of FICC be
designed to, among other things, promote the prompt and accurate
clearance and settlement of securities transactions and assure the
safeguarding of securities and funds which are in its custody or
control or for which it is responsible.\36\
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The proposed rule changes to require that each Netting Member
submit to FICC for Novation all Eligible Secondary Market Transactions
to which it is a counterparty would promote the prompt and accurate
clearance and settlement of securities transactions, consistent with
Section 17A(b)(3)(F) of the Act, by ensuring that such transactions are
subject to the risk mitigation benefits of central clearing at FICC.
Such benefits are described by the Commission in the Adopting Release
and include, for example, (1) reduction in overall counterparty credit
risk when FICC Novates such transactions, becoming a counterparty to
each transaction, as the buyer to every seller and the seller to every
buyer; (2) enhancing the efficiency of, and market confidence in,
centralized default management at FICC if a Netting Member defaults;
and (3) increasing multilateral netting of these transactions, thereby
reducing operational and other risks associated with such
transactions.\37\ By implementing the trade submission requirement and
adopting provisions to monitor and enforce Members' compliance with
that requirement, as required by the Treasury Clearing Rules, the
proposal would extend the benefits of central clearing to all Eligible
Secondary Market Transactions and, thereby, promote the prompt and
accurate clearance and settlement of securities transactions, as
recognized by the Adopting Release. In this way, the proposal is
consistent with the requirements of Section 17A(b)(3)(F) of the
Act.\38\
---------------------------------------------------------------------------
\37\ See supra note 4, at 14-18.
\38\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described above, FICC proposes changes that would enhance GSD's
initial and ongoing membership standards provided under Rules 2A and 3,
respectively. In particular, for Rule 2A, FICC proposes to, in summary,
(i) explicitly require adequate liquidity through adequate resources;
(ii) when an applicant or Member relies on a Guarantor, permit FICC to
engage external counsel, at the applicant or Member's expense, to
review the guaranty provided, and require the Guarantor to provide FICC
with information FICC deems necessary or appropriate in assessing the
guaranty; (iii) clarify that FICC considers ``business history'' to
encompass more broadly the ``operating and management history and
outlook'' of the applicant, and require that an applicant have at least
one year of such history and outlook, or, absent one year, permit FICC
instead of its Board, to determine whether the applicant has personnel
with sufficient operational and financial background and experience;
(iv) require applicants to provide FICC with a business plan, which
FICC may require to be assessed by a third-party at the participant's
expense, that, in FICC's judgement, demonstrates the applicant's
ability to meet its requirements to FICC; (v) explicitly state that
FICC can deny an application if the applicant does not have adequate
personnel in key senior management roles; (vi) clarify what information
FICC may require an applicant, or the applicant's Affiliates or
Guarantor, to provide FICC; (vii) clarify that in addition to
limitations and restrictions, conditions may also be placed on an
applicant, and provide further examples of such; (viii) clearly
authorize FICC to deny an applicant's membership under certain
additional circumstances, and if membership is denied under any
circumstance, not permit reapplication until the applicant has
adequately addressed the reason for the denial, to FICC's satisfaction.
Also as described above, for Rule 3, FICC proposes to, in summary,
(i) require Affiliates of a Member to provide FICC, at FICC's
discretion, certain financial statements; (ii) explicitly state that
Members are required to provide accurate, complete and timely responses
to FICC's annual and periodic due diligence information requests, which
are used for ongoing monitoring of a Member, and that failure to do so
could subject the Member to fines, adequate assurances, or a Credit
Compliance Charge; (iii) clarify the time and manner in which a Member
must notify FICC if the Member breaches its GSD membership standards,
or whether it or its Controlling Management are the subject of an
investigation or proceeding that may cause the Member to breach its
membership standards; and (iv) include an adequate assurances condition
on Funds-Only Settling Bank Members that could limit the number of
Netting Members for which the bank provides settlement services.
Finally, as described above, FICC also proposes to update the Fine
Schedule by replacing the current ``Financial Reports'' category and
associated fines with a new ``Reports, Information and Due Diligence
Requests'' category, which would include more meaningful fine amounts,
as well as notices regarding when fines would be charged and what
continuing fines would be levied if the Member does not provide the
outstanding information.
FICC believes these proposed enhancements to GSD's membership
standards would clarify, streamline, and improve FICC's ability to
assess and manage applicants and Members, as applicable. FICC also
believes the level of detail and clarity offered by the proposed
changes provides greater transparency and notice to all applicants and
Members that are or would be subject to Rules 2A and 3. By enhancing
the authority and tools available to FICC to assess and manage
applicants and Members, FICC would better position itself to identify
and mitigate the credit risk presented to it and, thus, promote the
safety and soundness of FICC, its Members, and the industry it serves,
all of which helps assure the safeguarding of securities and funds in
the custody or control of FICC, consistent with Section 17A(b)(3)(F) of
the Act.\39\
---------------------------------------------------------------------------
\39\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Section 17A(b)(3)(G) of the Act requires that the rules of FICC
provide that its participants shall be appropriately disciplined for
violation of any provision of the rules of the clearing agency by
expulsion, suspension, limitation of activities, functions, and
operations, fine, censure, or any other fitting sanction.\40\ The
proposed rule changes would adopt measures in Rule 5 and in the Fine
Schedule to address a failure to comply with the trade submission
requirement. Under these provisions, FICC would impose a continuing
fine and notification to the applicable Netting Members' Designated
Examining Authority or Appropriate Regulatory Agency and to the
Commission. The disciplinary action would be clearly described in Rule
5 and the proposed
[[Page 54613]]
fine amounts would be set forth in the Fine Schedule. FICC is also
proposing to adopt a cure period of 10 Business Days before it takes
disciplinary measures if a Netting Member self-reports a failure to
comply with the requirement. FICC believes these measures, including
the cure period that would be available to Members who self-report a
failure to comply with the trades submission requirements, are
appropriate deterrents to non-compliance and are consistent with the
requirements of Section 17A(b)(3)(G).\41\
---------------------------------------------------------------------------
\40\ 15 U.S.C. 78q-1(b)(3)(G).
\41\ Id.
---------------------------------------------------------------------------
Additionally, the proposed rule changes would define a broader
category for fines applicable when a Netting Member fails to timely
submit required reports, information and responses to due diligence
requests, and would increase the applicable fines. The proposed fine
amounts were determined in consideration of, and in alignment with, the
other existing fines applicable. The proposed rule changes are designed
to apply meaningful and appropriate disciplinary action that would
signal to Netting Members the criticality of these risk management
requirements. As such, the proposed rule changes are also consistent
with the requirements of Section 17A(b)(3)(G).\42\
---------------------------------------------------------------------------
\42\ Id.
---------------------------------------------------------------------------
Rule 17ad-22(e)(18)(ii) and (iii) under the Act requires that FICC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to establish objective, risk-based, and
publicly disclosed criteria for participation, which . . . (ii) require
participants to have sufficient financial resources and robust
operational capacity to meet obligations arising from participation in
the clearing agency, and (iii) monitor compliance with such
participation requirements on an ongoing basis.\43\
---------------------------------------------------------------------------
\43\ 17 CFR 240.17ad-22(e)(18)(ii) and (iii).
---------------------------------------------------------------------------
As described above, FICC proposes several changes to GSD's initial
and ongoing membership requirements under Rules 2A and 3. FICC believes
each of those proposed changes is objective, risk-based, and, of
course, would be publicly disclosed as part of the Rules. FICC also
believes the proposed changes support fair and open access to GSD
services, as the proposed changes are agnostic to any individual or
group of applicants or Members but, instead, are simply designed to
clarify and strengthen GSD's current membership standards.
Additionally, with respect to the specific proposed changes to (i)
enhance FICC's ability to consider, assess, and require adequate
liquidity of an applicant or Member; (ii) require applicants to have
personnel with adequate experience and background; and (iii) explicitly
require responses to due diligence requests, which are a key tool to
assessing a Member's credit risk, FICC believes that those changes
would help ensure that applicants and Members have sufficient financial
resources and robust operational capacity to meet their obligations to
FICC. For those reasons, FICC believes the proposed changes are
consistent with Rule 17ad-22(e)(18)(ii) and (iii) under the Act.\44\
---------------------------------------------------------------------------
\44\ Id.
---------------------------------------------------------------------------
Rule 17ad-22(e)(18)(iv)(A) under the Act requires, among other
things, that FICC, as a covered clearing agency that provides central
counterparty services for transactions in U.S. Treasury securities,
require that any direct participant of such covered clearing agency
submit for clearance and settlement all of the eligible secondary
market transactions to which such direct participant is a
counterparty.\45\ The proposed rule changes would adopt a requirement
that all Netting Members submit to FICC for clearing and settlement all
Eligible Secondary Market Transactions to which they are a party, and
would adopt the definition of Eligible Secondary Market Transactions
and other related terms from the Treasury Clearing Rules in defining
the scope of this requirement. The proposed changes to adopt this
requirement, and related defined terms, into Rules 1 and 5 would
directly comply, and, therefore, be consistent, with the requirements
of Rule 17ad-22(e)(18)(iv)(A).\46\
---------------------------------------------------------------------------
\45\ 17 CFR 240.17ad-22(e)(18)(iv)(A).
\46\ Id.
---------------------------------------------------------------------------
Rule 17ad-22(e)(18)(iv)(B) under the Act requires, among other
things, that FICC, as a covered clearing agency that provides central
counterparty services for transactions in U.S. Treasury securities,
identify and monitor its direct participants' submission of
transactions for clearing as required by Rule 17ad-22(e)(18)(iv)(A),
including how FICC would address a failure to submit transactions in
accordance with Rule 17ad-22(e)(18)(iv)(A).\47\ FICC is proposing to
adopt provisions that would specify its authority to request
information and inspect its Netting Members' books and records in
connection with monitoring their compliance with the trade submission
requirement. FICC is also proposing to adopt ongoing membership
requirements that would require each Netting Member to (1) report to
FICC if the Netting Member is not in compliance with the trade
submission requirement; (2) deliver an annual attestation regarding its
ongoing compliance with the trade submission requirement; (3) conduct
an independent review of its ongoing compliance with the trade
submission requirements on a triennial basis; and (4) submit a report
of that review to its senior most governing body and FICC. As discussed
above, FICC believes it is appropriate to identify and monitor Netting
Members' submission of transactions for clearing by adopting both
provisions that Netting Members take specific affirmative actions to
review their compliance and affirm such compliance to FICC, and
provisions that specify FICC's own authority to inspect and verify such
compliance. Collectively, these provisions provide a comprehensive
framework for identifying and monitoring compliance with the trade
submission requirements and are consistent with the requirements of
Rule 17ad-22(e)(18)(iv)(B).\48\
---------------------------------------------------------------------------
\47\ 17 CFR 240.17ad-22(e)(18)(iv)(B).
\48\ Id.
---------------------------------------------------------------------------
FICC is also proposing to adopt measures in Rule 5 to specify how
FICC would address a failure to comply with the trade submission
requirement. Under these provisions, FICC would impose a continuing
fine and notification to the applicable Netting Members' Designated
Examining Authority or Appropriate Regulatory Agency and to the
Commission. FICC is also proposing to adopt a cure period of 10
Business Days before it takes disciplinary measures if a Netting Member
self-reports a failure to comply with the requirement. FICC believes
these measures, including the cure period, are appropriate deterrents
to non-compliance and are consistent with the requirements of Rule
17ad-22(e)(18)(iv)(B).\49\
---------------------------------------------------------------------------
\49\ Id.
---------------------------------------------------------------------------
Rule 17ad-22(e)(23)(ii) under the Act requires that FICC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for providing sufficient information to
enable participants to identify and evaluate the risks, fees, and other
material costs they incur by participating in FICC.\50\ As described
above, FICC is proposing a number of clarifications and revisions to
the Rules that do not create new rights or obligations, but are
designed instead to improve the clarity and transparency of the Rules.
For example, by reorganizing the sections of Rule 3, which addresses
the ongoing membership requirements, these proposed changes create
clearer disclosures and improve Netting
[[Page 54614]]
Members' ability to identify and evaluate the material costs they incur
by participating in membership. Similarly, by moving all of the
required attestations, certifications and acknowledgments that are
required of Members on regular and ongoing basis into one section
within Rule 3, these proposed changes make the Rules easier to read and
understand. In this way, the proposed changes that are designed to
clarify and conform provisions of the Rules are consistent with the
requirements of Rule 17ad-22(e)(23)(ii).\51\
---------------------------------------------------------------------------
\50\ 17 CFR 240.17ad-22(e)(23)(ii).
\51\ Id.
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
The proposed rule changes to adopt a trade submission requirement
and define the scope of that requirement by adopting definitions from
the Treasury Clearing Rules could impose a burden on competition.
Specifically, Netting Members that are subject to the trade submission
requirement may incur additional costs related to submitting those
transactions to FICC for central clearing, such as applicable clearing
fees and risk management charges. These costs could burden Netting
Members that have lower operating margins or higher costs of capital
than other Netting Members or market participants. However, FICC
believes that any burden on competition would be necessary and
appropriate in furtherance of the purposes of the Act, as permitted by
Section 17A(b)(3)(I) of the Act.\52\
---------------------------------------------------------------------------
\52\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
First, as described above, the proposed rule changes to adopt a
trade submission requirement would be necessary in furtherance of the
Act. By subjecting Eligible Secondary Market Transactions to the risk
mitigation benefits of central clearing at FICC, including reducing
overall counterparty credit risk, enhancing the efficiency of, and
market confidence in, centralized default management at FICC if a
Netting Member defaults, and increasing multilateral netting of these
transactions, the proposed trade submission requirement would promote
the prompt and accurate clearance and settlement of securities
transactions, consistent with Section 17A(b)(3)(F) of the Act.\53\
---------------------------------------------------------------------------
\53\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described above, the proposed trade submission requirement that
would be adopted in Rule 5 and the proposed scope of transactions that
are subject to that requirement that would be adopted through the
definition of ``Eligible Secondary Securities Transactions'' as such
term is defined in the Exchange Act are necessary in furtherance of
Rule 17ad-22(e)(18)(iv)(A) under the Act.\54\ The proposed measures
that address how FICC would identify and monitor Netting Members'
compliance with the trade submission requirement and how FICC would
address a failure to submit transactions in compliance with the trade
submission requirement are also necessary in furtherance of Rule 17ad-
22(e)(18)(iv)(B) under the Act.\55\
---------------------------------------------------------------------------
\54\ 17 CFR 240.17ad-22(e)(18)(iv)(A).
\55\ 17 CFR 240.17ad-22(e)(18)(iv)(B).
---------------------------------------------------------------------------
Second, FICC believes the proposed changes are appropriate in
furtherance of the Act. Specifically, the proposed trade submission
requirement would apply equally to all Netting Members, without any
distinction between Members that are different legal entities or have
different locations of incorporation, organizational structure or
sizes. Under the proposed rules, which are being adopted to comply with
the requirements of Rule 17ad-22(e)(18)(iv)(A), all Netting Members
would be subject to the same obligation to submit Eligible Secondary
Market Transactions to which they are a counterparty to FICC for
clearing and settlement.\56\
---------------------------------------------------------------------------
\56\ 17 CFR 240.17ad-22(e)(18)(iv)(A).
---------------------------------------------------------------------------
Similarly, the ongoing reporting requirement, Annual Trade
Submission Attestation, Triennial Independent Trade Submission Review
and Triennial Independent Trade Submission Report, proposed to comply
with the requirements of Rule 17ad-22(e)(18)(iv)(B), would apply to all
Netting Members equally, without distinction.\57\ FICC is proposing to
provide Netting Members with some flexibility in how they conduct the
Triennial Independent Trade Submission Review by permitting them to
either engage an internal independent group or an external independent
third party to conduct the review. By providing this flexibility, the
proposed rules acknowledge that Netting Members may have different
organizational structures and internal capabilities, but would continue
to apply the same ongoing monitoring and attestation obligations on all
Members. Similarly, the fines and regulatory reporting measures that
FICC is proposing to adopt to address non-compliance with the trade
submission requirement, would apply equally to all Netting Members.
Finally, FICC is also proposing to adopt a cure period to incentivize
Netting Members to self-report any non-compliance with the requirement.
In these ways, FICC believes the proposed rule changes are appropriate
and designed in a way to minimize the impact the proposal could have on
competition.
---------------------------------------------------------------------------
\57\ 17 CFR 240.17ad-22(e)(18)(iv)(B).
---------------------------------------------------------------------------
Therefore, while the proposed rule changes may cause some burden on
competition, FICC believes that the proposed rule changes are necessary
and appropriate in furtherance of the purposes of the Act.
FICC believes that some of the proposed enhancements to GSD's
initial and ongoing membership standards under Rules 2A and 3 could
impact competition and that impact could be a burden: (i) authorizing
FICC, at its discretion, the option to engage external legal counsel to
review the validity and enforceability of a Guarantor's guaranty, with
the costs and expenses of such review being borne by the GSD applicant
or Member; (ii) requiring an assessment of an applicant's business
plan, by an independent third-party consultant, at the expense of the
applicant, to assess the reasonableness and viability of the
applicant's business plan, including its assumptions and projections;
(iii) extending the required operating history of a GSD applicant from
six months to one year; (iv) subjecting Members to increased fines,
adequate assurances, or a risk management charge for failing to provide
FICC requested information; and (v) authorizing FICC the option to
apply an adequate assurances condition on Funds-Only Settling Bank
Members that could limit the number of Netting Members for which the
bank provides settlement services.
FICC believes that requiring GSD applicants and Members to bear the
cost of external legal counsel that FICC would have the option to
engage to review the validity and enforceability of a Guarantor's
guaranty could impose a burden on competition on such applicants and
Members because they could now be required to expend financial
resources on something that they currently may not be required to do.
Similarly, requiring an applicant to bear the cost of an independent
third-party consultant to assess the reasonableness and viability of
the applicant's business plan could impose a burden on competition for
the same reason. However, in both circumstances, FICC does not believe
the burden would be significant because FICC does not anticipate that
these new authorities would be exercised often, nor does FICC believe
the costs would be ongoing or extensive in consideration of the amount
of funds it takes to engage in the securities industry as a FICC
participant. Moreover, FICC believes
[[Page 54615]]
that these costs are likely avoidable where the guaranty or business
plan is sound, clear, complete, and leaves little open to question.
FICC believes that extending the required operating history of a
GSD applicant from six months to one year could cause a burden on
competition because the applicant's competitive position may rest on
its FICC membership. The significance of this potential burden would
likely depend on the facts and circumstances of each individual
applicant. However, FICC notes that it offers access to GSD services
through its Sponsored Members service,\58\ that one year of operating
history is still not a long period, and that FICC maintains the option
to alternatively consider, at FICC's discretion, whether the applicant
has personnel with sufficient operational and financial background and
experience if the one-year operating history is not yet met.
---------------------------------------------------------------------------
\58\ See Rule 3A, supra note 3.
---------------------------------------------------------------------------
FICC believes that subjecting Members to increased fines, adequate
assurances, or a risk management charge for failing to provide FICC
requested information may cause a burden on competition because funds
paid to or held by FICC means fewer financial resources available to
the Member for, possibly, competitive engagement. However, FICC does
not believe the burden would be significant because whether a Member is
subject to such charges would be within the control of the Member and
avoidable if the Member simply provides the information requested by
FICC in a timely and complete manner.
Finally, FICC believes that providing it the option to subject a
Funds-Only Settling Bank Member to an adequate assurances condition
that limits the number of Netting Members for which the bank provides
settlement services could cause a burden on competition for that Member
because it could limit the bank's business. However, FICC does not
believe such burden would be significant because FICC does not
anticipate exercising this authority often, and the circumstance in
which such a bank would be subject to such a condition is likely within
the control of the bank (i.e., FICC would not be exercising this
authority but for addressing a risk presented by the bank that the bank
could likely control).
Regardless of their significance, FICC believes that the potential
competitive burdens of these proposed changes are necessary and
appropriate in furtherance of the purposes of the Act, as permitted by
Section 17A(b)(3)(I) thereof.\59\ More specifically, FICC believes
these proposed changes are necessary and appropriate in furtherance of
Section 17A(b)(3)(F) of the Act \60\ and Rule 17ad-22(e)(18)(ii) and
(iii) promulgated thereunder.\61\
---------------------------------------------------------------------------
\59\ 15 U.S.C. 78q-1(b)(3)(I).
\60\ 15 U.S.C. 78q-1(b)(3)(F).
\61\ 17 CFR 240.17ad-22(e)(18)(ii) and (iii).
---------------------------------------------------------------------------
First, FICC believes the proposed changes that could cause a burden
on competition discussed above (i.e., independent review of a guaranty
at the applicant or Member's cost; independent assessment of an
applicant's business plan at the applicant's cost; extending the
operating history requirement to one year; increasing and adding
charges for failure to provide complete and timely information; and
providing the option for an adequate assurance condition that could
limit the number of Netting Member clients at a Funds-Only Settling
Bank) are necessary in furtherance of Section 17A(b)(3)(F) of the Act
\62\ because they would improve FICC's ability to assess and manage
applicants and Members, as applicable, to help ensure they can or will
be able to meet their obligations to FICC and, to the extent Members
are not providing FICC with needed information or certain settling bank
Members are presenting a unique risk, the proposed changes would
provide enhanced charges and assurances to help incentivize Members and
protect FICC. By furthering FICC's ability to assess, manage,
incentivize, and seek assurances of its applicants and Members, as
applicable, the proposed changes are necessary to improve FICC's
ability to assure the safeguarding of safeguarding of securities and
funds which are in its custody or control or for which it is
responsible, as required under Section 17A(b)(3)(F) of the Act, as
cited above.
---------------------------------------------------------------------------
\62\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
FICC also believes those proposed changes are necessary in
furtherance of Rule 17ad-22(e)(18)(ii) and (iii) under the Act.\63\ As
required by Rule 17ad-22(e)(18)(ii) and (iii), those proposed changes
are reasonably designed to help ensure that (A) applicants and Members,
as applicable, have sufficient financial resources and robust
operational capacity to meet the obligations arising from participation
in FICC, and (B) FICC has more meaningful tools to help ensure
compliance with its Rules, all of which is in furtherance of and
consistent with Rule 17ad-22(e)(18)(ii) and (iii) under the Act, as
cited above.
---------------------------------------------------------------------------
\63\ 17 CFR 240.17ad-22(e)(18)(ii) and (iii).
---------------------------------------------------------------------------
Second, FICC believes those proposed changes are appropriate in
furtherance of both Section 17A(b)(3)(F) of the Act \64\ and Rule 17ad-
22(e)(18)(ii) and (iii) \65\ promulgated thereunder because the changes
are reasonably tailored, objective, risk-based, and agnostic in their
application to applicants and Members, as applicable. In fact, FICC
believes the potential burdens discussed above are, essentially, within
the control of the applicant or Member, as applicable. For example, if
the subject guaranty or business plan is sound, clear, complete, and
leaves little open to question, then it is highly unlikely that the
applicant or Member would incur the additional cost of an independent
assessment. Similarly, if the applicant has personnel with sufficient
operational and financial background and experience, then it may not
need a year's worth of operating history. Finally, if the subject
Member simply provides the information requested by FICC in a timely
and complete manner, or the Funds-Only Settling Bank Member mitigates
the risk at issue from its side, then the corresponding charges and
assurances proposed would not likely be imposed. For these reasons,
FICC believes those proposed changes are appropriate in furtherance of
and consistent with Section 17A(b)(3)(F) of the Act and Rule 17ad-
22(e)(18)(ii) and (iii) under the Act, as each are cited above.
---------------------------------------------------------------------------
\64\ 15 U.S.C. 78q-1(b)(3)(F).
\65\ 17 CFR 240.17ad-22(e)(18)(ii) and (iii).
---------------------------------------------------------------------------
FICC does not believe the proposal to make technical corrections
and other clarification changes to the Rules would impact competition.
These changes are being proposed to ensure the clarity and accuracy of
the Rules. They would not change FICC's current practices or affect
Members' rights and obligations. As such, FICC believes those changes
would not have any impact on competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
FICC 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
[[Page 54616]]
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="http://www.sec.gov/regulatory-actions/how-to-submit-comments">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 SEC's Division of Trading
and Markets at <a href="/cdn-cgi/l/email-protection#86f2f4e7e2efe8e1e7e8e2ebe7f4ede3f2f5c6f5e3e5a8e1e9f0"><span class="__cf_email__" data-cfemail="dbafa9babfb2b5bcbab5bfb6baa9b0beafa89ba8beb8f5bcb4ad">[email protected]</span></a> or 202-551-5777.
FICC reserves the right not to respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#b5c7c0d9d098d6dad8d8d0dbc1c6f5c6d0d69bd2dac3"><span class="__cf_email__" data-cfemail="f785829b92da94989a9a92998384b7849294d9909881">[email protected]</span></a>. Please include
file number SR-FICC-2024-009 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-FICC-2024-009. 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="https://www.sec.gov/rules/sro.shtml">https://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
a.m. and 3 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">dtcc.com/legal/sec-rule-filings</a>). Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection. All submissions should
refer to File Number SR-FICC-2024-009 and should be submitted on or
before July 22, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\66\
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\66\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-14378 Filed 6-28-24; 8:45 am]
BILLING CODE 8011-01-P
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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.