[Federal Register Volume 85, Number 102 (Wednesday, May 27, 2020)]
[Notices]
[Pages 31837-31838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11284]
[[Page 31837]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88910; File No. SR-FICC-2020-002]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving a Proposed Rule Change To Amend the Government
Securities Division Rulebook Relating to the Legal Entity Identifier
Requirement
May 20, 2020.
I. Introduction
On March 25, 2020, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
FICC-2020-002. The proposed rule change was published for comment in
the Federal Register on April 9, 2020.\3\ The Commission did not
receive any comment letters on the proposed rule change. For the
reasons discussed below, the Commission is approving the proposed rule
change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 88557 (April 3, 2020),
85 FR 19979 (April 9, 2020) (SR-FICC-2020-002) (``Notice'').
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II. Description of the Proposed Rule Change
FICC proposes to modify its Government Securities Division
(``GSD'') \4\ Rulebook (``Rules'') \5\ to require: (1) Netting and CCIT
Member applicants to obtain and provide a Legal Entity Identifier
(``LEI'') \6\ to FICC as part of its membership application and Netting
and CCIT Members to have a current LEI on file with FICC at all times;
and (2) Sponsoring Member applicants to provide FICC with an LEI for
each Sponsored Member applicant as part of its Sponsoring Member
application and Sponsoring Members to have a current LEI on file with
FICC for each existing Sponsored Member and to provide an LEI for each
newly added Sponsored Member it would like to sponsor into membership.
Additionally, FICC proposes to require any Netting Member, CCIT Member,
or Sponsoring Member who fails to maintain current LEIs on file to
indemnify FICC for any losses and Legal Actions that arise due to that
failure.
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\4\ FICC operates two divisions, GSD and the Mortgage Backed
Securities Division (``MBSD''). GSD provides trade comparison,
netting, risk management, settlement, and central counterparty
services for the U.S. Government securities market. MBSD provides
the same services for the U.S. mortgage-backed securities market.
GSD and MBSD maintain separate sets of rules, margin models, and
clearing funds. The proposed rule change relates solely to GSD.
\5\ Capitalized terms not defined herein are defined in the
Rules, available at http://www.dtcc.com/legal/rules-and-procedures.
\6\ A ``Legal Entity Identifier'' is a 20-character reference
code used to uniquely identify legally distinct entities that engage
in financial transactions. The Legal Entity Identifier is based on
the ISO 17442 standard developed by the International Organization
for Standardization and satisfies the standards implemented by the
Global Legal Entity Identifier Foundation. See https://www.gleif.org/en/about-lei/introducing-the-legal-entity-identifier-lei.
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A. Background
The Office of Financial Research (``OFR'') of the U.S. Department
of the Treasury has adopted a rule (``OFR Regulation'') establishing a
data collection for centrally cleared transactions in the U.S.
repurchase agreement (``repo'') market.\7\ To facilitate this
collection, OFR requires ``covered reporters,'' defined as certain
central counterparties who clear repo transactions, to submit to OFR
daily reports including trade and collateral information on all repo
transactions cleared through any of its services. FICC meets the
definition of a covered reporter because it acts as the central
counterparty (``CCP'') \8\ in repo transactions cleared through its
services. FICC offers its repo transaction clearing services through
its Netting System services and CCIT Services. To comply with this
requirement, FICC must submit, as part of its daily reports, the LEI of
each clearing member involved in each reported repo transaction.\9\
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\7\ 84 FR 4975 (February 20, 2019) (hereinafter the
``Release''). The OFR Regulation is codified at 12 CFR part 1610.
\8\ As a CCP, FICC interposes itself between counterparties to a
repo transaction, acting functionally as the buyer to every seller
and the seller to every buyer to ensure the performance of each
contract. 17 CFR 240.17Ad-22(a)(2).
\9\ In the Release, OFR recognizes that certain rule changes may
be necessary for a covered reporter like FICC to comply with this
requirement and notes that it expects such covered reporters to
effectuate rulemaking, subject to any necessary regulatory approval,
to require that its participants obtain and provide LEIs to meet a
covered reporter's OFR reporting requirements. Release, supra note
7, at 4980-81.
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OFR states in the Release that the reporting requirement will
enhance the ability of the Financial Stability Oversight Council
(``Council''),\10\ Council member agencies,\11\ and OFR to identify and
monitor risks to financial stability because the repo market serves a
crucial role in providing short-term funding, among other critical
functions, for U.S. markets.\12\ Specifically, the Release explains
that the LEI requirement will facilitate an understanding of repo
market participants' exposures, concentrations, and network
structures.\13\
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\10\ The Council was established by the Dodd-Frank Wall Street
Reform and Consumer Protection Act. The Council is charged with
identifying risks to the financial stability of the United States,
among other things. See https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc.
\11\ The Council member agencies are the Board of Governors of
the Federal Reserve System, Commodity Futures Trading Commission,
Federal Deposit Insurance Corporation, Federal Housing Finance
Agency, National Credit Union Administration, Office of the
Comptroller of the Currency, Securities and Exchange Commission,
Treasury Department, and Consumer Financial Protection Bureau. See
https://www.treasury.gov/initiatives/fsoc/about/Pages/FSOC-Member-Agencies.aspx.
\12\ See Release, supra note 7, at 4975.
\13\ See id. at 4980.
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B. Proposed Rule Changes
Currently, FICC does not require that its Members obtain LEIs or
provide LEIs to FICC either as part of application materials or as a
Member.\14\ FICC proposes to add a new defined term to its Rules for a
Legal Entity Identifier. FICC uses the terminology of the Global Legal
Entity Identifier in defining LEI in its GSD Rules.\15\ Moreover, to
comply with the OFR Regulation, FICC proposes to modify the GSD Rules
to require certain Member applicants and Members to obtain, provide,
and maintain current LEIs on file with FICC in the two following areas.
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\14\ See Notice, supra note 3, at 19980.
\15\ See supra note 6. The Global Legal Entity Identifier
Foundation was established by the Financial Stability Board in June
2014 to support the implementation and use of Legal Entity
Identifiers. The Financial Stability Board is an international body
that monitors and makes recommendations about the global financial
system. www.fsb.org.
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(1) Netting and CCIT Member Applicants and Members
FICC proposes to amend the GSD Rules to include the following two
requirements for its Netting Members and CCIT Members and for
applicants to become such Members. First, FICC proposes to amend its
GSD Rules to require each Netting Member applicant and each CCIT Member
applicant to obtain and provide an LEI to FICC as part of its
membership application. This change will be implemented upon Commission
approval.
Second, FICC proposes to amend its GSD Rules to add language that
would require each Netting Member and each CCIT Member to have a
current LEI on file with FICC at all times. Existing Netting Members
and CCIT Members will have 60 calendar days from the date of the
Commission's approval to submit their LEIs to FICC.
Additionally, FICC proposes to provide that a Netting Member or
CCIT
[[Page 31838]]
Member must indemnify FICC, among others (collectively, the ``LEI
Indemnified Parties''), for any and all losses, liabilities, expenses,
and Legal Actions \16\ suffered or incurred by the LEI Indemnified
Parties arising from a Netting Member's or CCIT Member's failure to
have its current LEI on file with FICC. FICC states that the proposed
indemnity clause is appropriate because, in fulfilling its regulatory
obligations under the OFR Regulation, FICC would be relying upon
Netting Members and CCIT Members to keep their LEI on file with FICC
current.\17\
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\16\ The proposed rule change would define ``Legal Action,'' to
mean and include any claim, counterclaim, demand, action, suit,
countersuit, arbitration, inquiry, proceeding or investigation
before any federal, state or foreign court or other tribunal, or any
investigative or regulatory agency or self-regulatory organization.
Notice, supra note 3, at 19980.
\17\ See id.
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(2) Sponsoring Members Applicants and Members
FICC proposes to amend the GSD Rules to include the following three
requirements for its Sponsoring Member applicants and Sponsoring
Members. First, each Netting Member or CCIT Member who submits an
application to FICC in order to become a Sponsoring Member must submit
the LEIs of its Sponsored Member applicants as part of the Sponsoring
Member application. This change will be implemented upon Commission
approval.
Second, each Sponsoring Member must provide the LEI for each of its
existing Sponsored Members so that FICC has a current LEI for each such
Sponsored Member at all times. For existing Sponsored Members,
Sponsoring Members will have 60 calendar days from the date of the
Commission's approval to submit the LEIs to FICC. Third, each
Sponsoring Member must provide the LEI for any new Sponsored Member it
wishes to sponsor into membership as a Sponsored Member. This change
will be implemented upon Commission approval.
Additionally, FICC proposes to include an indemnity clause, as
described above, for Sponsoring Members because, like Netting Members
and CCIT Members, FICC would be relying on the Sponsoring Members to
keep Sponsored Member LEIs on file with FICC current.\18\
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\18\ See id. at 19981.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \19\ 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 careful consideration, the Commission finds
that the proposed rule change is consistent with the requirements of
the Act and the rules and regulations thereunder applicable to FICC. In
particular, the Commission finds that the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act,\20\ for the reasons
described below.
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\19\ 15 U.S.C. 78s(b)(2)(C).
\20\ 15 U.S.C. 78q-1(b)(3)(F).
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Section 17A(b)(3)(F) of the Act requires, in part, that clearing
agency rules be designed to protect investors and the public
interest.\21\ As stated in Section II.A above, the OFR Regulation will
enhance the ability of the Council to identify and monitor risks to
financial stability because the repo market serves a crucial role in
providing short-term funding, among other critical functions, for U.S.
markets. Specifically, the LEI requirement will facilitate an
understanding of repo market participants' exposures, concentrations,
and network structures. Therefore, the Commission believes the proposed
rule change could serve to protect investors and the public interest.
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\21\ Id.
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IV. 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
\22\ and the rules and regulations promulgated thereunder.
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\22\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\23\ that proposed rule change SR-FICC-2020-002, be, and hereby is,
APPROVED.\24\
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\23\ 15 U.S.C. 78s(b)(2).
\24\ In approving the proposed rule change, the Commission
considered the proposals' 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.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11284 Filed 5-26-20; 8:45 am]
BILLING CODE 8011-01-P