[Federal Register Volume 79, Number 239 (Friday, December 12, 2014)]
[Notices]
[Pages 73927-73930]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-29179]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73787; File No. SR-FICC-2014-06]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Amend the Rules of the
Government Securities Division and the Mortgage-Backed Securities
Division on Insolvency and Ceasing To Act
December 8, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\, and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 25, 2014, 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 amendments to the rules of the
Government Securities Division (``GSD Rules'') of FICC and the rules of
the Mortgage-Backed Securities Division (``MBSD Rules'') of FICC (each
of GSD and MBSD, a ``Division'' of FICC) on insolvency and ceasing to
act that simplify in certain respects FICC's process in a cease to act
situation and provide greater legal certainty for FICC and its members,
particularly in an intra-day cease to act situation.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, FICC 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. FICC has prepared summaries, set forth in sections A, B
and C below, of the most significant aspects of such statements.
A. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The purpose of this filing is to amend the GSD Rules and the MBSD
Rules on insolvency and ceasing to act in order to simplify in certain
respects FICC's process in a cease to act situation and provide greater
legal certainty for FICC and its members, particularly in an intra-day
cease to act situation.
Background
In connection with lessons learned from a recent close-out
simulation exercise conducted by The Depository Trust & Clearing
Corporation, FICC's parent company, in which FICC participated, and
related review of the GSD Rules and the MBSD Rules, certain potential
challenges with administering certain aspects of the GSD Rules and the
MBSD Rules on insolvency and ceasing to act described below,
particularly in an intra-day cease to act situation, were identified.
``Time of Insolvency'' and ``Cut-Off Time''
Currently, GSD and MBSD include in their insolvency rules (GSD Rule
22, MBSD Rule 16) and cease to act rules (GSD Rule 22A, MBSD Rule 17)
the
[[Page 73928]]
concept of a ``Time of Insolvency'', which is defined to mean the time
at which FICC determines to its reasonable satisfaction that a member
is ``insolvent'' within the meaning of GSD Rule 22 or MBSD Rule 16,
respectively.
This ``Time of Insolvency'' concept is separate from the time at
which FICC ceases to act for a member, and such ``Time of Insolvency''
is currently used in the GSD Rules and the MBSD Rules as a line of
demarcation when determining FICC's obligations with respect to pending
transactions involving the insolvent member. Specifically, transactions
with the insolvent member that are not compared or deemed compared in
accordance with the GSD Rules or the MBSD Rules, respectively, prior to
the ``Time of Insolvency'' are not eligible to be part of the close-out
process, unless otherwise determined by the Board of Directors of FICC
in order to promote orderly settlement.
For a non-insolvency cease to act situation, the GSD Rules and the
MBSD Rules on ceasing to act (GSD Rule 22A, MBSD Rule 17) currently
include the concept of a ``Cut-Off Time'', which is defined to mean a
time specified in advance by FICC in a notice to its membership at
which it will cease to act for a member. Like the ``Time of
Insolvency'' concept, ``Cut-Off Time'' is currently used in the GSD
Rules and the MBSD Rules when determining FICC's obligations with
respect to pending transactions involving the defaulted member.
Identifying an exact time at which a member has become
``insolvent'' for purposes of establishing a ``Time of Insolvency'' may
pose potential challenges for FICC in circumstances where the member is
deemed ``insolvent'' based upon the determination or action of a third
party, such as the member's regulator, supervisory authority or a court
of competent jurisdiction. In an intra-day cease to act situation where
transaction data is being submitted to FICC in real-time, these
potential challenges with identifying an exact ``Time of Insolvency''
may create a lack of legal certainty for FICC and its members regarding
FICC's obligations with respect to pending transactions involving the
insolvent member. In light of the foregoing, FICC proposes to remove
the ``Time of Insolvency'' concept from the GSD Rules and the MBSD
Rules and instead simply rely on the single time it ceases to act for
an insolvent member for purposes of determining its obligations with
respect to pending transactions involving such insolvent member.
In order to also simplify its process in non-insolvency cease to
act situations, FICC proposes to remove the separate ``Cut-Off Time''
concept from the GSD Rules and the MBSD Rules and instead rely on the
single time it ceases to act for a defaulted member for purposes of
determining its obligations with respect to pending transactions
involving such defaulted member.\3\
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\3\ It should be noted that this proposed change will more
closely align the GSD Rules and the MBSD Rules with the rules of
FICC's affiliate, National Securities Clearing Corporation
(``NSCC''). Under its Rule 18 (Procedures for When the Corporation
Declines or Ceases to Act), NSCC relies on the time it declines or
ceases to act for a member when determining which transactions
involving such member will be excluded from its operations, rather
than on a separate ``Time of Insolvency'' or ``Cut-Off Time'', as
applicable.
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Transactions Deemed Compared Based Solely on Non-Defaulting Member Data
Currently, the provisions of the GSD Rules and the MBSD Rules on
ceasing to act (GSD Rule 22A, MBSD Rule 17), and the related prongs of
the ``Compared Trade'' definition in Rule 1 of each of the Division's
Rules, provide that, in the context of FICC ceasing to act for a
member, a transaction involving such member that would not otherwise be
compared or deemed compared under the GSD Rules or the MBSD Rules,
respectively, may, in certain circumstances, be deemed a compared trade
based solely on data submitted by a non-defaulting member. The
determination of whether such a transaction should be deemed a compared
trade is currently based on a multi-pronged facts and circumstances-
based test, including determinations as to whether the transaction was
executed prior to FICC ceasing to act for the defaulted member, whether
the transaction was entered into in good faith and not primarily in
order to take advantage of the defaulted member's financial condition
and whether the transaction is an Off-the-Market Transaction as defined
in Rule 1 of each of the Division's Rules.
Administering such a multi-pronged facts and circumstances-based
test for individual transactions in a cease to act situation,
particularly an intra-day cease to act situation where transaction data
is being submitted to FICC in real-time, may pose potential challenges
to FICC and create a lack of legal certainty for FICC and its members
regarding FICC's obligations with respect to individual pending
transactions involving the insolvent or otherwise defaulted member. In
order to simplify FICC's process in a cease to act situation and
provide FICC and its members with greater ex ante legal certainty
regarding the rules applicable to pending transactions involving an
insolvent or otherwise defaulted member, FICC proposes to remove the
multi-pronged facts and circumstances-based test and the related
provisions of each of the Division's Rules and instead simply rely on
the compared trade definitions under each of the Division's Rules,
subject to the discretion of the Board of Directors of FICC to
determine otherwise in order to promote orderly settlement with respect
to transactions the data on which have been submitted only by non-
defaulting members.
Proposed GSD Rule Changes
FICC is proposing to amend the GSD Rules as follows:
In Rule 1--``Definitions'', the following definitions have been
revised:
The term ``Compared Trade'' is revised to remove the prong of the
definition which provides that, in the context of FICC ceasing to act
for a member under GSD Rule 22A, a transaction involving such member
that would not otherwise be a Compared Trade under the GSD Rules may,
in certain circumstances, be deemed a Compared Trade based solely on
data submitted by a non-defaulting member.
The term ``Off-the-Market Transaction'' is revised to conform the
text and the numbering of the definition with the text and numbering of
the parallel ``Off-the-Market Transaction'' definition in the MBSD
Rules.
In Rule 3A--``Sponsoring Members and Sponsored Members'', Sections
15(a) and 16(a) are revised to remove references to Rule 22, current
Section 3 (Notification of Insolvency) and related conforming changes
to the text of such sections are made. Section 15(b) is revised to
remove the reference to the ``Time of Insolvency'' concept and to align
the text regarding the actions taken by FICC in connection with the
insolvency of a Sponsored Member with the parallel text included in
Section 16 relating to the actions taken by FICC in connection with the
insolvency of a Sponsoring Member. Consistent with the numbering of
Section 15, Section 16(a) is revised to make the second paragraph a new
subsection (b). New Section 16(b) is also revised to align the text
regarding the actions taken by FICC in connection with the insolvency
of a Sponsoring Member with the parallel text included in Section 15(b)
relating to the actions taken by FICC in connection with the insolvency
of a Sponsored Member.
In Rule 22--``Insolvency of a Member'', current Section 3, which
provides for FICC to notice its membership and the Securities and
[[Page 73929]]
Exchange Commission (SEC) regarding the insolvency of a member, is
removed in order to clarify that the membership and the SEC will only
receive one notice from FICC at the time it ceases to act for a member
in accordance with the provisions of Section 1 of Rule 22A (Procedures
for When the Corporation Ceases to Act), whether FICC ceases to act for
the member for insolvency or non-insolvency related reasons. Section 4
(Ceasing to Act for the Member) is renumbered as new Section 3 and
revised to remove the reference to the ``Time of Insolvency'' concept.
In Rule 22A--``Procedures for When the Corporation Ceases to Act'',
Section 1 (Notification) is revised to clarify that FICC will notice
the SEC as well as its membership of every decision to cease to act for
a member. Section 1 is further revised to remove the requirement that
FICC establish a separate ``Time of Insolvency'', in the event it
ceases to act because of a member's insolvency, or ``Cut-Off Time'', in
the event it ceases to act for a member for non-insolvency related
reasons.
Sections 2, 2(a) and 2(b) are revised remove the ``Time of
Insolvency'' and ``Cut-Off Time'' concepts, and instead rely on the
time FICC ceases to act for a member for purposes of determining its
obligations with respect to pending transactions involving such member.
Section 2(a) is further revised to use the defined term ``Compared
Trade'' for purposes of clarifying which transactions are eligible to
be part of the close-out process as of the time FICC ceases to act for
a member, subject to the discretion of the Board of Directors of FICC
to determine otherwise in order to promote orderly settlement.
Section 2(c), which provides that, in the context of FICC ceasing
to act for a member, a transaction involving such member that would not
otherwise be compared or deemed compared under the GSD Rules may, in
certain circumstances, be deemed compared based solely on data
submitted by a non-defaulting member, based on a multi-pronged facts
and circumstances-based test, is removed. FICC would instead rely on
the ``Compared Trade'' definition in GSD Rule 1 when determining its
obligations with respect to pending transactions involving an insolvent
or otherwise defaulted member, subject to the discretion of the Board
of Directors of FICC to determine otherwise in order to promote orderly
settlement with respect to transactions the data on which have been
submitted only by non-defaulting members.
Proposed MBSD Rule Changes
FICC is proposing to amend the MBSD Rules as follows:
In Rule 1--``Definitions'', the following definitions have been
revised:
The term ``Compared Trade'' is revised to remove the prong of the
definition which provides that, in the context of FICC ceasing to act
for a member under MBSD Rule 17, a transaction involving such member
that would not otherwise be compared or deemed compared under the MBSD
Rules may, in certain circumstances, be deemed a Compared Trade based
solely on data submitted by a non-defaulting member. The ``Compared
Trade'' definition is further clarified to reference the specific MBSD
Rules (Rule 5 and Rule 7) pursuant to which a transaction would be
compared or deemed compared by MBSD.
In Rule 16--``Insolvency of a Member'', current Section 3, which
provides for FICC to notice its membership and the Securities and
Exchange Commission (SEC) regarding the insolvency of a member, is
removed in order to clarify that the membership and the SEC will only
receive one notice from FICC at the time it ceases to act for a member
in accordance with the provisions of Section 1 of Rule 17 (Procedures
for When the Corporation Ceases to Act), whether FICC ceases to act for
the member for insolvency or non-insolvency related reasons. Section 4
(Ceasing to Act for the Member) is renumbered as new Section 3 and
revised to remove the reference to the ``Time of Insolvency'' concept.
In Rule 17--``Procedures for When the Corporation Ceases to Act'',
Section 1 (Notification) is revised to clarify that FICC will notice
the SEC as well as its membership of every decision to cease to act for
a member. Section 1 is further revised to remove the requirement that
FICC establish a separate ``Time of Insolvency'', in the event it
ceases to act because of a member's insolvency, or ``Cut-Off Time'', in
the event it ceases to act for a member for non-insolvency related
reasons.
Sections 2, 2(a), 2(d) and 2(e) are revised to remove the ``Time of
Insolvency'' and ``Cut-Off Time'' concepts, and instead rely on the
time FICC ceases to act for a member for purposes of determining its
obligations with respect to pending transactions involving such member.
Section 2(g), which provides that, in the context of FICC ceasing
to act for a member, a transaction involving such member that would not
otherwise be compared or deemed compared under the MBSD Rules may, in
certain circumstances, be deemed compared based solely on data
submitted by a non-defaulting member, based on a multi-pronged facts
and circumstances-based test, is removed. FICC would instead rely on
the compared trade definitions in the MBSD Rules when determining its
obligations with respect to pending transactions involving an insolvent
or otherwise defaulted member, subject to the discretion of the Board
of Directors of FICC to determine otherwise in order to promote orderly
settlement with respect to transactions the data on which have been
submitted only by non-defaulting members.
2. Statutory Basis
The proposed rule is consistent with Section 17A(b)(3)(F) \4\ of
the Securities and Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder because it will promote the prompt
and accurate clearance and settlement of securities transactions and
remove impediments to and perfect the mechanism of a national system
for the prompt and accurate clearance and settlement of securities
transactions in that it will simplify in certain respects FICC's
process in a cease to act situation and provide greater legal certainty
for FICC and its members as to FICC's obligations with respect to
pending transactions involving an insolvent or otherwise defaulted
member, particularly in an intra-day cease to act situation.
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\4\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Clearing Agency's Statement on Burden on Competition
FICC does not believe that the proposed rule change will have any
impact, or impose any burden, on competition because it relates to
changes to FICC's insolvency and cease to act rules that would apply
equally to all members of each Division of FICC.
C. Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
Written comments relating to the proposed rule change have not yet
been solicited or received. FICC will notify the Commission of any
written comments received by FICC.
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
[[Page 73930]]
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.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or
Send an email to [email protected]. Please include File
No. SR-FICC-2014-06 on the subject line.
Paper Comments
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-2014-06. 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 Web site (http://www.sec.gov/rules/sro.shtml). 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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of FICC and on its
Web site at http://www.dtcc.com/~/media/Files/Downloads/legal/rule-
filings/2014/ficc/SR-FICC-2014-06.pdf. All comments received will be
posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FICC-2014-06 and should be submitted on
or before January 2, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-29179 Filed 12-11-14; 8:45 am]
BILLING CODE 8011-01-P