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- The proposed rule change amends the Clearing Agency Investment Policy (“Investment Policy”, or “Policy”) of FICC and its affiliates, The Depository Trust Company (“DTC”) and National Securities Clearing Corporation (“NSCC,” and together with DTC, the “Clearing Agencies”).
- Specifically, the proposed rule change would amend the Investment Policy to
- Clarify obligations regarding the separation and segregation of funds deposited to a Clearing Agency’s Participants Fund or Clearing Fund;
- Clarify roles and responsibilities related to credit reviews and setting investment limits;
- Update allowable investments for the respective Clearing Funds of NSCC and FICC and other investable funds;
- Include approvals required for longer term bank deposits and reverse repurchase investments;
- Remove descriptions of hedge transactions;
- Make technical corrections and revisions to clarify and simplify statements in the Investment Policy, as described in greater detail below
- The Investment Policy governs the management, custody and investment of cash deposited to the respective Clearing Funds of NSCC and FICC, the DTC Participants Fund, the proprietary liquid net assets (cash and cash equivalents) of the Clearing Agencies, and other funds held by the Clearing Agencies pursuant to their respective rules.
The Investment Policy identifies the guiding principles for investments and defines the roles and responsibilities of DTCC staff in administering the Investment Policy pursuant to those principles.
- The Investment Policy is co-owned by DTCC’s Treasury group (“Treasury”) and the Counterparty Credit Risk team (“CCR”) within DTCC’s Group Chief Risk Office (“GCRO”).
- Treasury is responsible for identifying potential counterparties to investment transactions, establishing, and managing investment relationships with approved investment counterparties, and making and monitoring all investment transactions with respect to the Clearing Agencies.
- CCR is responsible for conducting a credit review of any potential counterparty, updating those reviews on a quarterly basis, and establishing an investment limit for each counterparty.
- CCR is also responsible for ongoing monitoring of counterparties and recommending changes to investment limits when appropriate.
The Investment Policy also identifies sources of funds that may be invested, and the permitted investments of those funds, including the authority required to make such investments and the parameters of, and limitations on, each type of investment.
- Finally, the Investment Policy defines the approval authority required to exceed established investment limits.
- As stated above, the activities and processes carried out pursuant to the Investment Policy, and the governance set forth therein, support the Clearing Agencies’ compliance with the requirements of Rule 17Ad-22(e)(16).
Revisions to the Investment PolicyProposed Change Regarding the Separation and Segregation of Funds:
- Section 3.2 of the Policy addresses the Clearing Agencies’ approach to segregation of deposits to their respective Participants or Clearing Funds.
- The Policy currently states that deposits to the Participants Fund and Clearing Funds must not be commingled with each other or with general corporate funds of the Clearing Agencies.
- The Clearing Agencies’ intention in using this approach is to ensure these funds are not commingled on the Clearing Agencies’ books and records but is not intended to restrict the Clearing Agencies from depositing those amounts in the same deposit accounts, for example at their cash deposit accounts at the Federal Reserve Bank of New York (“FRBNY”).
In short, the Clearing Agencies have subaccounts on their books and records to reflect the segregation of various funds, but each Clearing Agency only has one account at the FRBNY where Clearing Funds and Participant Fund are held with Clearing Agency general corporate funds.
- For example, deposits to NSCC’s Clearing Fund currently can be deposited into the same bank deposit account as NSCC’s general corporate funds, so long as these amounts are separated on NSCC’s books and records and are not deposited into the same bank account as the DTC Participant Fund or either of the FICC Clearing Funds.
- Additionally, because GSD and MBSD are divisions of FICC, and FICC, like NSCC and DTC, has only one cash deposit account at the FRBNY, the proposed change also makes clear that the GSD Clearing Fund and MBSD Clearing Fund may be commingled in the same bank deposit account so long as they are segregated on FICC’s books and records.
- Lastly, the proposed change clarifies that the Clearing Agencies’ approach to segregation of funds applies not only to the relationship between a Clearing Agency’s general corporate funds and its Participants Fund or Clearing Fund but to all investable funds of a Clearing Agency.
Therefore, the Clearing Agencies are proposing to clarify that, although deposits to a Clearing Agencies’ Participant Fund or Clearing Fund must be segregated on each respective Clearing Agency’s books and records from each other and from their respective general corporate funds, these amounts may be deposited in the same bank deposit account as other investable funds of that Clearing Agency.
- The proposed clarification is consistent with the Clearing Agencies’ existing practices and would not significantly affect the rights or obligations of the Clearing Agencies or their participants.
- This proposed change would clarify the Investment Policy and reflect the Clearing Agencies current practices regarding Clearing Agencies’ separation and segregation of funds
The proposed change addresses the segregation of funds deposited by Participants or into Clearing Funds within the Clearing Agencies. Currently, such deposits are not to be mixed with each other or with the Clearing Agencies' general corporate funds. This ensures funds are not mixed in the agencies' records, but it doesn't prevent them from being deposited into the same bank accounts, like their cash accounts at the Federal Reserve Bank of New York (FRBNY).
While there are subaccounts on the agencies' records reflecting segregated funds, each Clearing Agency only maintains one account at the FRBNY, where different funds (Clearing Funds, Participant Fund, and corporate funds) are held together. For instance, deposits to NSCC's Clearing Fund can be deposited into the same bank account as NSCC's general corporate funds, as long as they are separated in NSCC's records and not mixed with DTC Participant Fund or any FICC Clearing Funds. Similarly, GSD and MBSD Clearing Funds (divisions of FICC) can be held together in the same bank account as long as they're separated in FICC's records.
The proposed change clarifies that this segregation principle applies to all investable funds of a Clearing Agency. Hence, while these funds must be segregated in the Clearing Agency's records, they can be deposited into the same bank account.
The primary goal appears to be to ensure that there's no confusion or misinterpretation about the practices of segregation of funds within the Clearing Agencies' records.
However, these changes could potentially address certain risks or ambiguities:
- Avoid misinterpretation of "segregation": The key clarification here is that while different funds (Participant Fund, Clearing Fund, and corporate funds) must be segregated on the Clearing Agencies' books and records, they may still be deposited into the same bank account. This should prevent any misunderstanding about what "segregation" means in this context and assures participants that the current practice complies with the Policy.
- Prevent confusion about multiple Clearing Funds: The clarification that different Clearing Funds, such as GSD and MBSD Clearing Funds (divisions of FICC), can be commingled in the same bank account as long as they're segregated on FICC's books and records eliminates any confusion about managing multiple Clearing Funds.
- Reaffirm the principle of segregation to all investable funds: By extending the principle of segregation to all investable funds of a Clearing Agency, this prevents any potential loopholes where other types of funds might have been treated differently.
Proposed Change to Clarify Roles and Responsibilities of CCR and Treasury:
- Section 4 of the Policy outlines the roles and responsibilities of Treasury and CCR in conducting credit reviews and setting investment limits of counterparties.
- The proposed changes include clarification of these roles and responsibilities to improve the transparency of the Investment Policy to the DTCC staff who adhere to its provisions.
- The proposed changes to Section 4.2would add the requirement that Treasury state the intended type of investment relationship with a counterparty when it requests that CCR perform a credit review of an investment counterparty.
The proposed changes would also clarify that the governance of an investment counterparty credit review depends on whether the proposed counterparty is a participant of a Clearing Agency.
- Counterparties that are not participants must be approved by a Managing Director of CCR and counterparties that are participants are reviewed using a risk-based criteria based on the participants’ membership level.
An additional proposed change to Section 4.2 would remove the requirement that a Managing Director of GCRO approve counterparty investment limits.
- This proposed change would clarify that CCR is responsible for setting the aggregate investment limits assigned to a counterparty in connection with the credit reviews for that counterparty.
In addition, the Clearing Agencies are proposing changes to Section 4.2 to specify the management of the quarterly credit reviews and changes to counterparty investment limits.
- The Policy currently states that CCR will notify Treasury if an investment counterparty’s external credit rating is downgraded, if CCR believes an investment counterparty’s investment limit should change, or if an investment transaction should be terminated.
- The purpose of this procedure is to quickly capture any changes to an investment counterparty’s credit rating that may affect the Clearing Agencies’ exposure to such counterparty and, therefore, require change to the allowable investment limit applicable to that counterparty under the Policy.
- The proposed changes to this Section would clarify that CCR only notifies Treasury if an investment counterparty’s external credit ratings fall below the minimum ratings in the Policy or requires a change to that counterparties’ investment limit.
- The proposed changes would also clarify that CCR may advise Treasury if it is appropriate to set a counterparty’s investment limit lower than the investment limits provided within the Policy or to terminate an investment transaction. These proposed changes would clarify that either of these investment limit changes require approval by a Managing Director of GCRO.
Aims to clarify the roles and responsibilities of the Treasury group and Counterparty Credit Risk team (CCR) within the DTCC in regard to credit reviews and investment limit setting:
- When Treasury requests a credit review of an investment counterparty from CCR, it must specify the intended type of investment relationship.
- The governance of a credit review depends on whether the proposed counterparty is a participant of a Clearing Agency. Non-participant counterparties require approval by a Managing Director of CCR, while participant counterparties are reviewed using a risk-based criteria based on their membership level.
- CCR is solely responsible for setting the aggregate investment limits assigned to a counterparty following the credit reviews, eliminating the need for approval from a Managing Director of the Group Chief Risk Office (GCRO).
- The procedure for CCR's management of quarterly credit reviews and changes to counterparty investment limits has been clarified. CCR only notifies Treasury if a counterparty's external credit ratings fall below the minimum ratings in the Policy or if a change to the counterparty's investment limit is required.
- If it's appropriate to set a counterparty’s investment limit lower than the established limits or to terminate an investment transaction, CCR can advise Treasury. Either of these investment limit changes require approval by a Managing Director of GCRO.
These changes aim to improve the transparency of the Investment Policy for the DTCC staff and remove any potential confusion regarding the different responsibilities between Treasury and CCR.
These changes could help prevent oversight issues, such as:
- Improved Counterparty Risk Assessment: By requiring the Treasury group to specify the type of investment relationship when requesting a credit review from the Counterparty Credit Risk (CCR) team, this change could potentially close a loophole where an inappropriate or sub-optimal risk assessment is conducted due to lack of context about the relationship.
- Defined Responsibility for Investment Limits: By making it clear that the CCR team is solely responsible for setting investment limits, this change eliminates any potential confusion or buck-passing between teams. This could close a loophole where a risky counterparty might get approved due to lack of clear responsibility.
- Better Management of Credit Ratings Downgrade: By specifying that CCR only notifies Treasury if a counterparty’s external credit ratings fall below the minimum ratings in the Policy or if a change to the counterparty's investment limit is required, this closes a potential loophole where Treasury may not be notified timely of a deteriorating credit quality of a counterparty.
- Control on Exceptional Decisions: If it's appropriate to set a counterparty’s investment limit lower than the established limits or to terminate an investment transaction, CCR can advise Treasury. But these exceptional decisions require approval by a Managing Director of GCRO, closing a potential loophole where drastic changes could be made without sufficient senior oversight.
Proposed Change to Update Allowable Investments and Investment Limits:
- The Clearing Agencies are proposing to amend the table of allowable investments in Section 6 of the Policy to reflect their current investment practice of only investing the Clearing Funds of NSCC and FICC; NSCC’s Fully Paid-For Account, DTC Short Position Cash, Corporate Actions Payments and Principal & Interest Payments; and GSD Forward Margin in bank deposits.
- The table identifies the sources of investable funds that are invested by the Clearing Agencies, and groups these sources of funds into separate categories.
- The Policy currently permits the Clearing Agencies to invest the investable funds listed above in multiple types of investment vehicles, for example reverse repurchase agreements.
- The Clearing Agencies believe that it is prudent investment practice to limit the investment of these funds to only bank deposits and have, in practice, already limited such investments accordingly.
- The proposed changes to this table would also delete footnotes that include information that is no longer necessary given this change in investment practice.
Two proposed changes to Section 6.2.1 of the Policy would conform the Investment Policy to current practice.
- First, this section currently states that the DTC Participant Fund may only be invested in demand deposit, savings or checking accounts that provide same day access to funds.
- The Clearing Agencies would update this section to make clear that these criteria also applies to investment of the NSCC and FICC Clearing Funds.
- Finally, the proposed changes would include adding “unless an exception has been granted pursuant to Section 4.2 of this Policy” following the requirement for approved bank counterparty minimum external credit ratings, for clarification purposes in terms of the interplay of the various sections in the Policy.
The current policy allows Clearing Agencies to invest funds in various investment vehicles like reverse repurchase agreements. However, they have decided to limit these investments to only bank deposits for prudent investment practice.
Changes are proposed to Section 6.2.1 of the policy to align it with the current practice. First, a rule that the DTC Participant Fund can only be invested in bank accounts with same-day access to funds, which is currently in place, will be extended to apply to the NSCC and FICC Clearing Funds as well.
Lastly, they will add "unless an exception has been granted pursuant to Section 4.2 of this Policy" following the requirement for approved bank counterparty minimum external credit ratings. This is for clarity, showing how different sections of the policy interplay with one another.
These proposed changes appear to close the following loopholes:
- Overly Broad Investment Options: Currently, the Clearing Agencies are allowed to invest in a wide range of investment vehicles, including more risky or less liquid assets such as reverse repurchase agreements. Limiting investments to bank deposits restricts this, potentially reducing risk and ensuring greater liquidity.
- Inconsistent Investment Rules: By applying the same investment rules for the DTC Participant Fund to the NSCC and FICC Clearing Funds, it ensures consistent investment practices across all funds. This could close a loophole where certain funds might be treated differently, potentially leading to differing risk profiles.
- Unclear Credit Rating Requirements: The phrase "unless an exception has been granted pursuant to Section 4.2 of this Policy" brings more clarity to the approved bank counterparty minimum external credit ratings. This prevents any ambiguity about credit rating requirements that might be used to justify riskier investments.
In general, these changes appear to reinforce the focus on risk management, liquidity, and transparency, while reducing potential for discretionary or inconsistent practices.
Proposed Change to Include Approvals Required for Longer Term Transactions:
- The Clearing Agencies are proposing to amend the Policy to describe the approval requirements for investments in bank deposits and reverse repurchase agreements with a term maturity longer than overnight.
- The Policy is currently silent as to the approval process for these longer-term transactions. The proposed changes would describe the requirement that CCR approve such longer-term transactions and would align the parameters around establishing investment limits for such transactions to the guidelines provided in Section 6.2.1 of the Policy, for longer term bank deposit investments, and Section 6.2.2, for reverse repurchase agreements, unless an exception has been granted pursuant to Section 4.2 of the Policy.
The proposed changes would also describe the requirement that CCR assess the creditworthiness of a counterparty when determining term to maturity for such longer term transactions requested by Treasury.
- These proposed changes would improve the Investment Policy by clearly describing the approval process for these types of investments.
The Clearing Agencies plan to amend their Policy to detail the approval process for investments in bank deposits and reverse repurchase agreements that have a term maturity longer than overnight, which is currently unspecified. The proposed changes stipulate that the Counterparty Credit Risk team (CCR) must approve such longer-term transactions.
They must also establish investment limits for these transactions according to guidelines provided in Sections 6.2.1 (for longer term bank deposit investments) and 6.2.2 (for reverse repurchase agreements), unless an exception is granted under Section 4.2. Additionally, CCR must evaluate a counterparty's creditworthiness when determining the term to maturity for such longer-term transactions requested by the Treasury group. These changes aim to provide clarity on the approval process for such investments.
The proposed changes essentially aim to tighten the regulations around longer-term investments and might close potential loopholes related to them. These loopholes could include:
- Lack of Clear Approval Process: The existing Policy is silent on the approval process for longer-term transactions (bank deposits and reverse repurchase agreements with a term maturity longer than overnight). This could potentially allow for these transactions to be processed without the necessary scrutiny or oversight. The proposed changes will close this loophole by establishing a clear approval process that involves the Counterparty Credit Risk team (CCR).
- Absence of Defined Investment Limits: Without defined investment limits for longer-term transactions, there's a potential for misallocation of resources or excessive risk-taking. The proposed changes ensure investment limits are established following specific guidelines, unless an exception is granted.
- Inadequate Credit Risk Assessment: The proposed requirement for CCR to assess the creditworthiness of a counterparty for such transactions addresses the risk of engaging with less creditworthy counterparties, which could potentially increase the financial risk for the Clearing Agencies. This helps close the loophole where investments might be made without thorough analysis of the counterparty's creditworthiness.
Proposed Change to Remove Reference to Hedge Transactions:
- The proposed changes would remove references to the Clearing Agencies’ process involving hedge transactions from the Policy. Section 6.2.6 of the Policy currently describes allowable hedge transactions, limitations on hedge transaction maturity dates and value amounts, and the approval process for hedge transactions.
- The proposed changes would remove this section from the Policy because hedging activity is different from investment activity. Additionally, hedging activity is conducted using only general corporate funds of the Clearing Agencies, thereby posing very little risk to the Clearing Agencies’ Clearing Fund or Participant Fund.
- Therefore, the Clearing Agencies believe it is appropriate to establish a stand-alone internal hedging policy reflecting the processes, procedures and philosophy regarding hedge transactions that is currently captured in this Investment Policy.
- Such internal hedging policy would provide greater detail and clarity related to the current hedging practices of the Clearing Agency. Further, the proposed removal of references to hedging activity would improve the Investment Policy in clarifying and focusing its purpose.
The proposed change would remove all references to hedge transactions from the Investment Policy of the Clearing Agencies. This is because hedging is a different type of activity than investment, and it only involves the general corporate funds of the Clearing Agencies, meaning it poses minimal risk to their Clearing Fund or Participant Fund.
The Clearing Agencies plan to establish a separate internal policy specifically for hedge transactions, providing more detailed information and clarity about their current practices.
This could potentially close a loophole where hedging activities, which carry different risks and objectives from regular investment activities, are treated the same under the Investment Policy.
By establishing a separate, dedicated policy for hedge transactions, the Clearing Agencies can apply more specific, relevant, and rigorous controls and measures tailored to the unique nature of hedging.
This can help to better manage potential risks and ensure that hedging activities do not inadvertently impact the Clearing Fund or Participant Fund. Thus, this change enhances clarity, focus, and risk management in the agencies' financial operations.
Proposed Change to Make Technical Corrections and Revisions:
- Finally, the proposed changes would make technical corrections to statements in the Investment Policy, delete irrelevant processes, and add clarifying words or sentences throughout the Policy.
- These changes are
- change the word “Subject” to “Pursuant” in the footnote to the table in Section 5 and delete the second footnote,
- change the heading of subparagraph 6.2.4 from Reverse Repurchase Agreements (Reverse Repos) to Money Market Mutual Funds (MMMFs) as the content of the subparagraph discusses MMMFs instead of Reverse Repos,
- change the word “percent” as it relates to a counterparty’s shareholders’ equity capital in Section 6.2.1 to “multiple” for consistency with the use of the word multiple in the corresponding table
- remove reference to Hold-in custody Reverse Repos in Section 6.2.2 as the Clearing Agencies do not engage in such transactions
- change numeric representations in the table in 6.2.1 for consistency throughout the Policy
- delete any footnotes made inaccurate or unnecessary by the other proposed changes to the Policy
- add the word “amount” in front of the words “by 30%” in Section 7.1 for clarification purposes.
The Clearing Agencies believe the proposed change to reflect the Clearing Agencies’ current investment practice to only invest NSCC and FICC Clearing Funds, Fully Paid-For Account, Short Position Cash, Corporate Actions Payments, Principal & Interest Payments, and GSD Forward Margin in bank deposits would allow it to adhere to these guidelines by maximizing liquidity and minimizing the risk posed by other, potentially longer term, investments. Therefore, the Clearing Agencies believe the proposed change would allow the Clearing Agencies to continue to invest pursuant to the Investment Policy in a prudent and conservative manner that assures the safeguarding of securities and funds that are in their custody and control, or for which they are responsible.
The Investment Policy:
How to comment:
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.
- Use the Commission’s Internet comment form (http://www.sec.gov/rules/sro.shtml);
- Send an e-mail to
[email protected]. Please include File Number SR-FICC-2023-006, SR-NSCC-2023-005, and SR-DTC-2023-005
- Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly.
- Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend the Clearing Agency Investment Policy.
- Revisions to the Investment Policy that can be viewed as closing loopholes.
The Investment Policy itself is COMPLETELY [REDACTED].
- How is the public supposed to comment on that?!?