Notice2024-27754
Self-Regulatory Organizations; The Depository Trust Company; Fixed Income Clearing Corporation; National Securities Clearing Corporation; Order Approving Proposed Rule Change To Amend the Clearing Agency Risk Management Framework
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Published
November 27, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 229 (Wednesday, November 27, 2024)</title>
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[Federal Register Volume 89, Number 229 (Wednesday, November 27, 2024)]
[Notices]
[Pages 93689-93691]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-27754]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101685; File Nos. SR-DTC-2024-003; SR-FICC-2024-006;
SR-NSCC-2024-003]
Self-Regulatory Organizations; The Depository Trust Company;
Fixed Income Clearing Corporation; National Securities Clearing
Corporation; Order Approving Proposed Rule Change To Amend the Clearing
Agency Risk Management Framework
November 21, 2024.
I. Introduction
On March 11, 2024, The Depository Trust Company (``DTC''), Fixed
Income Clearing Corporation (``FICC''), and National Securities
Clearing Corporation (``NSCC,'' each a ``Clearing Agency,'' and
collectively, the ``Clearing Agencies''), filed with the Securities and
Exchange Commission (``Commission'') proposed rule changes SR-DTC-2024-
003, SR-FICC-2024-006, and SR-NSCC-2024-003, respectively, pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder (the ``Proposed Rule Changes'').\2\ The
Proposed Rule Changes were published for comment in the Federal
Register on March 26, 2024.\3\ The Commission has received comments on
the changes proposed.\4\ For the reasons discussed below, the
Commission is approving the Proposed Rule Changes.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 99802 (Mar. 20,
2024), 89 FR 21118 (Mar. 26, 2024) (File No. SR-DTC-2024-003) (``DTC
Notice of Filing''); Securities Exchange Act Release No. 99805 (Mar.
20, 2024), 89 FR 21068 (Mar. 26, 2024) (File No. SR-FICC-2024-006)
(``FICC Notice of Filing''); Securities Exchange Act Release No.
99803 (Mar. 20, 2024), 89 FR 21091 (Mar. 26, 2024) (File No. SR-
NSCC-2024-003) (``NSCC Notice of Filing'').
\4\ Specifically, the Commission received comments on the FICC
Notice of Filing, and the comments are available at <a href="https://www.sec.gov/comments/sr-ficc-2024-006/srficc2024006.htm">https://www.sec.gov/comments/sr-ficc-2024-006/srficc2024006.htm</a>. The
comments generally relate to issues raised in other FICC proposed
rule changes that are not relevant to the Notices of Filing. See,
Securities Exchange Act Release Nos. 99817 (SR-FICC-2024-005) and
99844 (SR-FICC-2024-007). The Commission considers the relevant
comments related to the FICC Notice of Filing in its analysis at
Section IV infra.
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II. Background
On December 13, 2023, the Commission adopted rules under the Act to
amend the standards applicable to covered clearing agencies providing
central counterparty services for transactions in U.S. Treasury
securities to require policies and procedures be reasonably designed to
ensure that the covered clearing agency has appropriate means to
facilitate access to clearance and settlement services of all eligible
secondary market transactions in U.S. Treasury securities, including
those of indirect participants.\5\ The adopted rules also require that
these policies and procedures be reviewed annually by the board of
directors of such covered clearing agencies for U.S. Treasury
securities.\6\ Currently, FICC is the only Clearing Agency providing
clearance and settlement services to the U.S. Treasury securities
market.
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\5\ See Standards for Covered Clearing Agencies for U.S.
Treasury Securities and Application of the Broker-Dealer Customer
Protection Rule with Respect to U.S. Treasury Securities, Exchange
Act Release No. 99149 (Feb. 15, 2023), 88 FR 13872 (Jan. 16, 2024)
(S7-23-22) (``Treasury Clearing Adopting Release'').
\6\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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To address the new requirements, the Clearing Agencies propose to
amend their Clearing Agency Risk Management Framework (``Framework).\7\
Specifically, the Proposed Rule Changes would add a new section to the
Framework regarding ``Solicitation of Participant and Stakeholder
Views''. This subsection would: (i) describe generally Clearing Agency
participant and industry stakeholder outreach in the development and
evaluation of new programs or risk management practices, and (ii)
provide for the annual review of FICC's Government Securities Division
(``GSD'') access models by FICC's Board of Directors. The proposal
would also make other conforming and clean up changes to the text of
the Framework, as described below.
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\7\ The Framework provides an outline for, among other things,
how each of the Clearing Agencies comprehensively manages the risks,
including the legal, credit, liquidity, operational, general
business, investment, custody, and other risks, that arise in or are
borne by it.
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III. Description of the Proposed Rule Changes
A. Subsection 3.4.1 General Solicitation of Views
The Clearing Agencies state that they routinely solicit their
participants' and other industry stakeholders' views when developing
and evaluating products, services, or risk management practices so they
may best meet the industry's needs.\8\ To codify this practice, the
proposal would add a new subsection to the Framework (entitled
``General Solicitation of Views''), which identifies several ways that
the Clearing Agencies may seek the views of participants and
stakeholders. Such methods would include targeted outreach to firms
expected to be impacted by a proposal, widely distributed surveys, ad
hoc forums, and standing advisory councils assembled to consider issues
relevant to a proposal. This list of outreach methods is illustrative,
not exhaustive.
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\8\ See DTC Notice of Filing, supra note 3, 89 FR at 21119; FICC
Notice of Filing, supra note 3, 89 FR at 21069; and NSCC Notice of
Filing, supra note 3, 89 FR at 21091.
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The subsection would also identify the industry stakeholders that
may participate in such advisory councils, including for example,
representatives from transfer agents, liquidity providers, market
infrastructures, institutional and retail investors, customers of the
Clearing Agencies' participants, securities issuers, and securities
holders. The Clearing Agencies state that the proposed changes in
subsection 3.4.1 do not create any obligation for the Clearing Agencies
to conduct such outreach in any particular circumstances.\9\
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\9\ See DTC Notice of Filing, supra note 3, 89 FR at 21119; FICC
Notice of Filing, supra note 3, 89 FR at 21069; and NSCC Notice of
Filing, supra note 3, 89 FR at 21092.
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B. Subsection 3.4.2 Required Solicitation of Views--Annual Review of
GSD Access Models
The Clearing Agencies propose adding a new subsection to the
Framework (entitled ``Required Solicitation of Views--Annual Review of
GSD Access Models'') in connection with the recently adopted
requirement in Rule 17ad-22(e)(18)(iv)(C) that the board of directors
of a covered clearing agency annually review the policies and
procedures that the covered clearing agency uses to ensure that they
have appropriate means to facilitate access to clearance and settlement
services of all eligible secondary market transactions in U.S. Treasury
securities, including those of indirect participants.\10\ To assist the
board in their review of GSD access models, the Proposed Rule Changes
would establish an advisory council comprised of participants, their
customers, and other industry stakeholders. This advisory council
review of GSD's access models would be escalated to the FICC Board of
Directors, or a committee thereof, with its annual review of GSD's
access models, which
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would also be required by this new subsection.
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\10\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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FICC's goal in the annual review of FICC/GSD's access models is to
determine whether the GSD Clearing Rules and any other written policies
and procedures are reasonably designed to ensure appropriate and
flexible means to facilitate access to clearance and settlement of all
eligible secondary market transactions in U.S. Treasury securities,
including those of indirect participants.\11\ In furtherance of this
goal, the new subsection would require that the annual review include
the following: (1) document any instance in which FICC treats
transactions differently based on either the identity of the submitting
participant, the fact that an indirect participant is a party to the
transaction, the method of execution, or any other way, and confirm
that any variation in treatment is both necessary and appropriate to
meet the minimum standards regarding, among other things, operations,
governance, and risk management identified in the Standards for Covered
Clearing Agencies; (2) consider whether to enable GSD's Netting
Members, as defined in the GSD Rules,\12\ to submit eligible
transactions for clearance and settlement that have been executed by
two indirect participants of FICC/GSD (``done-away''); (3) consider the
volumes and proportion of the markets that are being centrally cleared
through different access models in determining whether FICC/GSD's
access models are meeting the needs of the market; and (4) consider
whether it is appropriate to develop and propose an additional category
or categories of Netting Members to the GSD Rules to reflect the types
of legal entities that applied to be a Netting Member over the prior 12
months and did not fit into one of the existing Netting Member
categories.\13\
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\11\ See DTC Notice of Filing, supra note 3, 89 FR at 21119;
FICC Notice of Filing, supra note 3, 89 FR at 21069; and NSCC Notice
of Filing, supra note 3, 89 FR at 21092.
\12\ See Fixed Income Clearing Corporation Government Securities
Division Rulebook, Rule 1 (defining Netting Member and associated
terms), available at https://www.dtcc.com/~/media/files/downloads/
legal/rules/ficc_gov_rules.pdf.
\13\ In a separate proposed rule change, FICC proposed to add a
framework to consider an applicant who does not meet the eligibility
requirements of any existing categories. See Securities Exchange Act
Release No. 99817 (Mar. 21, 2024), 89 FR 21362, 21373 (Mar. 27,
2024) (File No. SR-FICC-2024-005).
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C. Other Conforming and Clean Up Changes
The proposal would make other conforming and clean up changes to
the Framework. The Clearing Agencies would amend Section 1 of the
Framework to: (1) include the annual review of GSD's access models in
the list of regulatory requirements that are addressed in the
Framework, and (2) update the description of the contents of Section 3
of the Framework to include the solicitation of participant and
stakeholder views and annual review of GSD's access models as part of
the Clearing Agencies' management of risks.
The Clearing Agencies would also remove the defined term
``Management Committee'' wherever referenced and replace it with
``senior management committee'' while maintaining the current makeup
and responsibilities of the current Management Committee, as described
in the Framework. The Clearing Agencies state that the proposed change
would allow the Framework to continue to be accurate notwithstanding
any future name changes to the committee.\14\
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\14\ See DTC Notice of Filing, supra note 3, 89 FR at 21120;
FICC Notice of Filing, supra note 3, 89 FR at 21070; and NSCC Notice
of Filing, supra note 3, at 3.
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Other minor grammatical and clean up changes would also be made to
the Framework.
IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \15\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After carefully considering the Proposed Rule
Changes, the Commission finds that the Proposed Rule Changes are
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to the Clearing Agencies. In
particular, the Commission finds that the Proposed Rule Changes are
consistent with Section 17A(b)(3)(F) \16\ of the Act and Rule 17Ad-
22(e)(18)(iv)(C),\17\ each promulgated under the Act.
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\15\ 15 U.S.C. 78s(b)(2)(C).
\16\ 15 U.S.C. 78q-1(b)(3)(F).
\17\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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A. Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a registered clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions and assure
the safeguarding of securities and funds which are in their custody or
control or for which they are responsible.\18\
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\18\ See supra note 13.
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As described above in Section III.A, the Clearing Agencies
routinely solicit their participants' and other industry stakeholders'
views. The Proposed Rule Changes would codify that the Clearing
Agencies use this practice, which should help ensure that the Clearing
Agencies have mechanisms in place to be informed of the views of their
participants and other industry stakeholders. By allowing specifically
for formal engagement and transparency on their risk management
practices, the Proposed Rule Changes should continue to encourage
communication and provide a formal mechanism to help the Clearing
Agencies identify and evaluate any unintended consequences a proposal
or practice may have on its direct and indirect participants and obtain
recommendations on how to meet its goals through alternative
approaches. In addition, as described in Section III.B, the Proposed
Rule Changes would establish an annual advisory council for FICC's GSD
to assist the FICC Board of Directors, or a committee thereof, in its
required annual review of GSD access models, and the Proposed Rule
Changes would also identify several things that the advisory council
would have to do as part of its review. Adopting this advisory council
and a plan for its work, as well as requiring annual review by the FICC
Board of Directors, should help FICC work to meet its regulatory
obligations to establish, implement, maintain and enforce written
policies and procedures reasonably designed to ensure that it has
appropriate means to facilitate access, including for indirect
participants, to its clearance and settlement services by providing a
method by which FICC can be informed by its participants and other
industry stakeholders as to access issues. This change should help
ensure that FICC solicits and considers such views when making
decisions about how to structure its access models, which should, in
turn, help further continued prompt and accurate clearance and
settlement in the U.S. Treasury market, consistent with Section
17A(b)(3)(F) of the Act.\19\
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\19\ 15 U.S.C. 78q-1(b)(3)(F).
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Finally, the proposed conforming and clean-up changes should help
to ensure that the Framework is clear and accurate. The risk management
functions described in the Framework allow the Clearing Agencies to
continue their critical operations and services, and better
understanding of the Framework should help promote the prompt and
accurate clearance and settlement of securities transactions,
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consistent with Section 17A(b)(3)(F) of the Act.\20\
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\20\ 15 U.S.C. 78q-1(b)(3)(F).
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Accordingly, and for the reasons stated above, the Commission finds
that the Proposed Rule Changes are consistent with Section 17A(b)(3)(F)
of the Act.
B. Section 17Ad-22(e)(18)(iv)(C) of the Act
Section 17Ad-22(e)(18)(iv)(C) under the Act requires, among other
things, that a covered clearing agency serving the U.S. Treasury
market, like FICC, establish, implement, maintain, and enforce written
policies and procedures reasonably designed to ensure that the covered
clearing agency has appropriate means to facilitate access to clearance
and settlement services of all eligible secondary market transactions
in U.S. Treasury securities, including those of indirect participants,
and that the board of directors for the covered clearing agency, like
FICC, annually review such policies and procedures.\21\ The Proposed
Rule Changes, as described in Section III.B above, would establish an
advisory council and framework for that council's work and would
provide for annual review by the FICC Board of Directors as to FICC's
policies and procedures regarding access to its clearance and
settlement services.
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\21\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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One commenter addressed certain aspects of this proposal.
Specifically, the commenter states that FICC's rules ``should provide
that indirect participants will be allotted at least 50% of the
representation on the council.'' \22\ The Commission agrees that
indirect participant representation on the proposed council is
important. Under the Proposed Rule Changes, the advisory council would
include representatives not only from FICC participants, but also their
customers, that is, indirect participants who rely on FICC's services
to access FICC's clearance and settlement services. Though not
required, the use of an advisory council is consistent with Rule 17ad-
22(e)(18)(iv)(C), and that rule does not mandate the particular
composition of the advisory council that FICC has chosen to establish.
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\22\ Letter from Jiri Krol, Deputy CEO, Global Head of
Government Affairs, Alternative Investment Management Association,
at 8 (Apr. 23, 2024), available at <a href="https://www.sec.gov/comments/sr-ficc-2024-006/srficc2024006.htm">https://www.sec.gov/comments/sr-ficc-2024-006/srficc2024006.htm</a> (``AIMA Letter'').
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The Commission recently adopted Rule 17ad-25(j) \23\ which requires
each registered clearing agency to establish, implement, maintain, and
enforce written policies and procedures reasonably designed to solicit,
consider, and document its consideration of the views of participants
and other relevant stakeholders. The Commission therefore has given
clearing agencies discretion in the design and structure of stakeholder
outreach.\24\ The Commission also stated in the Rule 17ad-25(j) final
rule release that such ``other relevant stakeholders'' generally would
include investors, customers of clearing agency participants, and
securities issuers.\25\
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\23\ 17 CFR 240.17ad-25(j).
\24\ Clearing Agency Governance and Conflicts of Interest,
Securities Exchange Act Release No. 98959 (Nov. 16, 2023), 88 FR
84454, 84483 (Dec. 5, 2023).
\25\ See id.
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Pursuant to the Proposed Rule Changes, FICC would include indirect
participants on its advisory council. The Commission supports the
inclusion of indirect participants and encourages FICC to solicit views
from a variety of indirect participants who may have differing needs.
The commenter further stated that FICC should, ``explicitly
describe how and to what extent the feedback and recommendations made
by the indirect participant members on the council (or indirect
participants at large) will be considered and/or incorporated into the
review process and potential changes to the access models.'' \26\
Within the Proposed Rule Changes, FICC has outlined specific points of
consideration, and specific data to document and analyze in furtherance
of the annual review by the Board of Directors, or a committee thereof,
of GSD access models as noted in Section III.B above. In addition,
pursuant to the Proposed Rule Changes, the advisory council's review
would be escalated to the FICC Board of Directors, or a committee
thereof, to assist in their annual review. Rule 17ad-22(e)(18)(iv)(C)
does not require the use of an advisory council.
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\26\ AIMA Letter, supra note 22, at 8.
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Accordingly, the Commission finds that the Proposed Rule Changes
are consistent with the requirements of Rule 17ad-22(e)(18)(iv)(C).\27\
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\27\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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V. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act and
in particular with the requirements of Section 17A of the Act \28\ and
the rules and regulations promulgated thereunder.
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\28\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\29\ that proposed rule changes SR-DTC-2024-003, SR-FICC-2024-006, and
SR-NSCC-2024-003 be, and hereby are, approved.\30\
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\29\ 15 U.S.C. 78s(b)(2).
\30\ In approving the Proposed Rule Changes, the Commission
considered their impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-27754 Filed 11-26-24; 8:45 am]
BILLING CODE 8011-01-P
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