[Federal Register Volume 82, Number 58 (Tuesday, March 28, 2017)]
[Notices]
[Pages 15400-15404]
[FR Doc No: 2017-06053]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80296; File No. SR-NYSEArca-2017-07]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a
Proposed Rule Change, as Modified by Amendment Nos. 1, 3, and 4
Thereto, To List and Trade Shares of the ProShares UltraPro 3x Crude
Oil ETF and ProShares UltraPro 3x Short Crude Oil ETF Under NYSE Arca
Equities Rule 8.200

March 22, 2017.

I. Introduction

    On January 26, 2017, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \2\ and Rule 19b-4
thereunder,\3\ a proposed rule change to list and trade shares
(``Shares'') of the ProShares UltraPro 3x Crude Oil ETF and ProShares
UltraPro 3x Short Crude Oil ETF (each a ``Fund,'' and collectively the
``Funds'') under NYSE Arca Equities Rule 8.200. The proposed rule
change was published for comment in the Federal Register on February 7,
2017.\4\ On March 9, 2017, the Exchange filed Amendment No. 1 to the
proposed rule change.\5\ On March 10, 2017, the Exchange filed and
withdrew Amendment No. 2 to the proposed rule change,\6\ and filed
Amendment No. 3 to the proposed rule change.\7\ On March 20, 2017, the
Exchange filed Amendment No. 4 to the proposed rule change.\8\ The
Commission received no comments on the proposed rule change. This order
approves the proposed rule change, as modified by Amendment Nos. 1, 3,
and 4 thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 79917 (February 1,
2017), 82 FR 9620.
    \5\ In Amendment No. 1, which amended and replaced the proposed
rule change in its entirety, the Exchange: (1) Supplemented its
description of the Funds' investments in over-the-counter (``OTC'')
transactions; (2) provided clarification and additional specificity
regarding the holding and settlement of futures contracts and
options on such futures; (3) provided additional details regarding
the calculation of the Bloomberg WTI Crude Oil Subindex\SM\; (4)
provided information regarding the calculation and dissemination of
the Indicative Fund Value of the Funds; (5) provided additional
clarification regarding the difference between the net asset value
calculation time and the creation and redemption cut-off time for
the Funds; (6) clarified the information that will be made available
on the Funds' Web site regarding the Funds and their portfolio
holdings; (7) supplemented its description of the Exchange's
surveillance procedures; (8) represented that the applicability of
Exchange listing rules specified in the proposed rule change shall
constitute continued listing requirements for listing the Shares on
the Exchange; (9) clarified the type of information that will be
available in the Information Bulletin regarding the Funds' portfolio
holdings; and (10) made other technical amendments. Amendment No. 1
to the proposed rule change is available at: https://www.sec.gov/comments/sr-nysearca-2017-07/nysearca201707-1630210-137426.pdf.
Amendment No. 1 is not subject to notice and comment because it is a
technical amendment that does not materially alter the substance of
the proposed rule change or raise any novel regulatory issues.
    \6\ Notice of the Exchange's withdrawal of Amendment No. 2 is
available at: https://www.sec.gov/comments/sr-nysearca-2017-07/nysearca201707-1644096-147899.pdf.
    \7\ In Amendment No. 3, which partially amended the proposed
rule change, as modified by Amendment No. 1 thereto, the Exchange
added a representation regarding the dissemination of the value of
the Bloomberg WTI Crude Oil Subindex\SM\. Amendment No. 3 to the
proposed rule change is available at: https://www.sec.gov/comments/sr-nysearca-2017-07/nysearca201707-1644096-147899.pdf. Amendment No.
3 is not subject to notice and comment because it is a technical
amendment that does not materially alter the substance of the
proposed rule change or raise any novel regulatory issues.
    \8\ In Amendment No. 4, which partially amended the proposed
rule change, as modified by Amendment Nos. 1 and 3 thereto, the
Exchange: (1) Clarified its use of the term ``Futures Contracts''
and (2) provided additional clarification regarding the calculation
of the Indicative Fund Value. Amendment No. 4 to the proposed rule
change is available at: https://www.sec.gov/comments/sr-nysearca-2017-07/nysearca201707-1657390-148729.pdf. Amendment No. 4 is not
subject to notice and comment because it is a technical amendment
that does not materially alter the substance of the proposed rule
change or raise any novel regulatory issues.
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II. Exchange's Description of the Proposal \9\
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    \9\ A more detailed description of the Funds, the Shares, and
the Benchmark, as well as investment risks, creation and redemption
procedures, net asset value (``NAV'') calculation, availability of
values and other information regarding the Funds' portfolio
holdings, and fees, among other things, is included in the
Registration Statement, as well as Amendment Nos. 1, 3, and 4, as
applicable. See infra note 11, and supra notes 5, 7, and 8,
respectively.
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    The Exchange proposes to list and trade the Shares under NYSE Arca
Equities Rule 8.200, Commentary .02, which governs the listing and
trading of Trust Issued Receipts.\10\ Each Fund is a

series of the ProShares Trust II (``Trust''), a Delaware statutory
trust.\11\ The Trust and the Funds are managed and controlled by
ProShare Capital Management LLC (``ProShare Capital''). ProShare
Capital is registered as a commodity pool operator with the Commodity
Futures Trading Commission and is a member of the National Futures
Association. Brown Brothers Harriman & Co. will be the custodian,
registrar, and transfer agent, and administrator for the Funds. SEI
Investments Distribution Co. serves as distributor for the Funds.
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    \10\ Commentary .02 to NYSE Arca Equities Rule 8.200 applies to
Trust Issued Receipts that invest in ``Financial Instruments.'' The
term ``Financial Instruments,'' as defined in Commentary .02(b)(4)
to NYSE Arca Equities Rule 8.200, means any combination of
investments, including cash; securities; options on securities and
indices; futures contracts; options on futures contracts; forward
contracts; equity caps, collars, and floors; and swap agreements.
    \11\ The Trust is registered under the Securities Act of 1933
(15 U.S.C. 77a) (``Securities Act''). On December 9, 2016, the Trust
filed with the Commission a registration statement on Form S-1 under
the Securities Act relating to the Funds (File No. 333-214904)
(``Registration Statement''). The description of the operation of
the Trust and the Funds herein is based, in part, on the
Registration Statement.
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Overview of the Funds

    The investment objective of the ProShares UltraPro 3x Crude Oil ETF
is to seek, on a daily basis,\12\ investment results that correspond
(before fees and expenses) to three times (3x) the performance of the
Bloomberg WTI Crude Oil Subindex\SM\ (``Benchmark'').\13\ The
investment objective of the ProShares UltraPro 3x Short Crude Oil ETF
is to seek, on a daily basis, investment results that correspond
(before fees and expenses) to three times (3x) the inverse of the
performance of the Benchmark. The Benchmark is intended to reflect the
performance of crude oil as measured by the price of futures contracts
of West Texas Intermediate sweet, light crude oil listed on the New
York Mercantile Exchange (``NYMEX''), including the impact of rolling,
without regard to income earned on cash positions.
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    \12\ The Fund does not seek to achieve its investment objective
over a period greater than a single trading day. The Exchange states
that the return of a Fund for a period longer than a single trading
day is the result of its return for each day compounded over the
period and thus will usually differ from a Fund's multiple times the
return of the Benchmark for the same period. See Amendment No. 1,
supra note 5, at 5.
    \13\ According to the Exchange, the Bloomberg WTI Crude Oil
Subindex\SM\ is a ``rolling index,'' which means that the Index
performance includes the impact of closing out futures contracts
that are nearing expiration and replacing them with futures
contracts with later expirations. The Exchange states that this
process is commonly referred to as ``rolling.'' See id. at 5 n.6.
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    In seeking to achieve the Funds' investment objectives, ProShare
Capital will utilize a mathematical approach to determine the type,
quantity and mix of investment positions that ProShare Capital
believes, in combination, should produce daily returns consistent with
the Funds' respective objectives. ProShare Capital will rely on a pre-
determined model to generate orders that result in repositioning the
Funds' investments in accordance with their respective investment
objectives.

Investments of the Funds

    Each Fund will seek to achieve its respective investment objective
by investing, under normal market conditions,\14\ substantially all of
its assets in futures contracts for West Texas Intermediate sweet,
light crude oil listed on the NYMEX, ICE Futures U.S. or other U.S.
exchanges (``Futures'') and listed options on such contracts
(``Options'' and, together with Futures, ``Futures Contracts''). The
Funds will not invest directly in oil. A Fund's investments in Futures
Contracts will be used to produce economically ``leveraged'' or
``inverse leveraged'' investment in a manner consistent with the
respective Fund's investment objective.
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    \14\ The term ``normal market conditions'' includes, but is not
limited to, the absence of trading halts in the applicable financial
markets generally; operational issues (e.g., systems failure)
causing dissemination of inaccurate market information; or force
majeure type events such as natural or manmade disaster, act of God,
armed conflict, act of terrorism, riot or labor disruption or any
similar intervening circumstance. See id. at 6 n.9.
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    In the event position, price or accountability limits are reached
with respect to Futures Contracts,\15\ each Fund may obtain exposure to
the Benchmark through investments in swap agreements and forward
contracts referencing such Benchmark (``Financial Instruments''). To
the extent that a Fund invests in Financial Instruments, it would first
make use of exchange-traded Financial Instruments, if available. If an
investment in exchange-traded Financial Instruments is unavailable,
then a Fund would invest in Financial Instruments that clear through
derivatives clearing organizations that satisfy the Trust's criteria,
if available. If an investment in cleared Financial Instruments is
unavailable, then a Fund would invest in other Financial Instruments,
including uncleared Financial Instruments in the OTC market. The Funds
may also invest in Financial Instruments if the market for a specific
Futures Contract experiences emergencies (e.g., natural disaster,
terrorist attack or an act of God) or disruptions (e.g., a trading
halt) that prevent or make it impractical for a Fund to obtain the
appropriate amount of investment exposure using Futures Contracts.
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    \15\ Designated contract markets, such as the NYMEX and ICE
Futures U.S., have established accountability levels and position
limits on the maximum net long or net short Futures Contracts in
commodity interests that any person or group of persons under common
trading control (other than as a hedge, which an investment by a
Fund is not) may hold, own or control. These levels and position
limits apply to the Futures Contracts that each Fund would invest in
to meet its investment objective. In addition to accountability
levels and position limits, NYMEX and ICE Futures U.S. also set
price fluctuation limits on Futures Contracts. The price fluctuation
limit establishes the amount that the price of Futures may vary
either up or down from the previous day's settlement price. Options
do not have individual price limits but rather are linked to the
price limit of Futures. See id. at 6 n.10.
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    Although each Fund, under normal market conditions, will invest
substantially all of its assets in Futures Contracts, each Fund will
also hold cash or cash equivalents, such as U.S. Treasury securities or
other high credit quality, short-term fixed-income or similar
securities (such as shares of money market funds and collateralized
repurchase agreements) pending investment in Futures Contracts or
Financial Instruments or as collateral for the Funds' investments.
    The Exchange represents that, to the extent a Fund enters into swap
agreements and other OTC transactions, it will do so only with large,
established and well capitalized financial institutions that meet the
Sponsor's credit quality standards and monitoring policies. The
Exchange states that each Fund will use various techniques to minimize
credit risk including early termination or reset and payment, using
different counterparties and limiting the net amount due from any
individual counterparty.\16\
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    \16\ See id. at 7.
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    The Funds do not intend to hold Futures \17\ through expiration,
but instead intend to ``roll'' or close their respective positions
before expiration. When the market for these contracts is such that the
prices are higher in the more distant delivery months than in the
nearer delivery months, the sale during the course of the ``rolling
process'' of the more nearby contract would take place at a price that
is lower

than the price of the more distant contract.\18\
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    \17\ The Exchange states that out-of-the-money Options will be
held to expiration and will expire worthless. According to the
Exchange, Funds intend to hold in-the-money options to expiration,
which would occur before the expiration of Futures. In-the-money
Options are settled through receipt or delivery of Futures. With
respect to Futures positions established through the Options
settlement procedure, the Funds intend to close such positions by
entering into simultaneous offsetting Futures positions. The effects
of contango and backwardation on the price of Futures will impact
the price of Options to the same degree of any change in the price
of the underlying Futures. See id. at 7 n.11.
    \18\ The Exchange states that this pattern of higher futures
prices for longer expiration Futures is referred to as ``contango.''
Alternatively, when the market for these contracts is such that the
prices are higher in the nearer months than in the more distant
months, the sale during the course of the ``rolling process'' of the
more nearby contract would take place at a price that is higher than
the price of the more distant contract. This pattern of higher
futures prices for shorter expiration Futures is referred to as
``backwardation.'' According to the Exchange, the presence of
contango in certain Futures at the time of rolling could adversely
affect a Fund with long positions, and positively affect a Fund with
short positions. Similarly, the presence of backwardation in certain
Futures at the time of rolling such contracts could adversely affect
a Fund with short positions and positively affect a Fund with long
positions. See id. at 7.
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    The Exchange states that the Funds do not expect to have exposure
to Futures Contracts and Financial Instruments greater than three times
(3x) the Funds' net assets. Thus, the maximum margin held at a future
commission merchant would not exceed three times the margin requirement
for either Fund.\19\ The Exchange represents that not more than 10% of
the net assets of a Fund in the aggregate invested in Futures Contracts
shall consist of Futures Contracts whose principal market is not a
member of the Intermarket Surveillance Group (``ISG'') or is a market
with which the Exchange does not have a comprehensive surveillance
sharing agreement (``CSSA'').\20\
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    \19\ See id.
    \20\ See id. at 14.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's
proposal to list and trade the Shares is consistent with the Exchange
Act and the rules and regulations thereunder applicable to a national
securities exchange.\21\ In particular, the Commission finds that the
proposed rule change, as modified by Amendment Nos. 1, 3, and 4
thereto, is consistent with Section 6(b)(5) of the Exchange Act,\22\
which requires, among other things, that the Exchange's rules be
designed to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest.
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    \21\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Exchange Act,\23\ which sets forth Congress' finding that it is in the
public interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers and investors of information with respect to
quotations for and transactions in securities. According to the
Exchange, quotation and last-sale information regarding the Shares will
be disseminated through the facilities of the Consolidated Tape
Association (``CTA''). Quotation information for cash equivalents, OTC
swaps and forward contracts may be obtained from brokers and dealers
who make markets in such instruments. Quotation information for
exchange-traded swaps will be available from the applicable exchange
and major market vendors. The intraday, closing prices, and settlement
prices of the Futures Contracts will be readily available from the
applicable futures exchange Web sites, automated quotation systems,
published or other public sources, or major market data vendors.
Complete real-time data for the Futures Contracts is available by
subscription through on-line information services. ICE Futures U.S. and
NYMEX also provide delayed futures and options on futures information
on current and past trading sessions and market news free of charge on
their respective Web sites. The specific contract specifications for
Futures Contracts are also available on such Web sites, as well as
other financial informational sources. Intra-day price and closing
price level information for the Benchmark will be available from major
market data vendors.
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    \23\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    The Funds' Web site, www.ProShares.com, will display the applicable
end of day closing NAV. Each Fund's total portfolio composition will be
disclosed each business day that the NYSE Arca is open for trading, on
the Funds' Web site. The Funds' Web site will also include a form of
the prospectus for the Funds that may be downloaded. The Web site will
include the Shares' ticker and CUSIP information, along with additional
quantitative information updated on a daily basis for each Fund.\24\
The Web site disclosure of portfolio holdings will be made daily and
will include, as applicable, (i) the name, quantity, value, expiration
and strike price of Futures and Options, (ii) the counterparty to and
value of swap agreements and forward contracts, and (ii) the aggregate
net value of other assets (i.e., Treasury securities, cash equivalents
and cash) held in each Fund's portfolio, if applicable.
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    \24\ The Funds' Web site will include (1) daily trading volume,
the prior business day's reported NAV and closing price, and a
calculation of the premium and discount of the closing price or mid-
point of the bid/ask spread at the time of NAV calculation (``Bid/
Ask Price'') against the NAV; and (2) data in chart format
displaying the frequency distribution of discounts and premiums of
the daily closing price or Bid/Ask Price against the NAV, within
appropriate ranges, for at least each of the four previous calendar
quarters.
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    The Benchmark will be disseminated by one or more major market data
vendors every 15 seconds during the NYSE Arca Core Trading Session of
9:30 a.m. to 4:00 p.m. Eastern Time (``E.T.''). The Indicative Fund
Value (``IFV'') \25\ per Share will be widely disseminated by one or
more major market data vendors every 15 seconds during the Exchange's
Core Trading Session.\26\ The Funds will compute their NAVs at 2:30
p.m. E.T., which is the designated closing time of the crude oil
futures listed on NYMEX,\27\ or an earlier time as set forth on
www.ProShares.com, if necessitated by the New York Stock Exchange LLC,
the Exchange, or other exchange material to the valuation or operation
of such Fund closing early. The NAV for the Shares will be disseminated
daily to all market participants at the same time.
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    \25\ The IFV will be calculated by using the prior day's closing
NAV per Share of a Fund as a base and will be updating throughout
the Exchange's Core Trading Session to reflect changes in the
approximate aggregate per Share value of the investments held by a
Fund based on the most recently available prices for the Fund's
investments. According to the Exchange, there may be times when
trading in the Shares is occurring during the NYSE Arca Core Trading
Session, but trading in Futures is not occurring. This may occur
when, for example, a futures exchange and NYSE Arca have different
holiday schedules, a futures exchange closes prior to the close of
the NYSE Arca Core Trading Session, price fluctuation limits are
reached in Futures, or a futures exchange imposes any other
suspension or limitation on trading in Futures. In such instances,
the IFV would be static or priced at the applicable early cut-off
time of the exchange trading the applicable Futures. See Amendment
No. 1, supra note 5, at 9; Amendment No. 4, supra note 8.
    \26\ The Exchange notes that several major market data vendors
display and/or make widely available IFVs taken from the CTA or
other data feeds. See Amendment No. 1, supra note 5, at 9 n.13.
    \27\ The Exchange states that the daily value of the Benchmark
is calculated as of 2:30 p.m. E.T. to coincide with the designated
closing time. Futures Contracts, however, continue to trade past
2:30 p.m. E.T. and through the end of the NYSE Arca Core Trading
Session at 4:00 p.m. E.T. See id. at 8 n.12.
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    The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. If the Exchange becomes aware that the NAV with respect to the
Shares is not

disseminated to all market participants at the same time, it will halt
trading in the Shares until such time as the NAV is available to all
market participants. Further, the Exchange may halt trading during the
day in which an interruption to the dissemination of the IFV or the
value of the Benchmark occurs. If the interruption to the dissemination
of the IFV or the value of the Benchmark persists past the trading day
in which it occurred, the Exchange will halt trading no later than the
beginning of the trading day following the interruption. Trading in
Shares of a Fund will be halted if the circuit breaker parameters in
NYSE Arca Equities Rule 7.12 have been reached. Trading also may be
halted because of market conditions or for reasons that, in the view of
the Exchange, make trading in the Shares inadvisable. The Exchange
states that it has a general policy prohibiting the distribution of
material, non-public information by its employees.\28\ Moreover,
trading of the Shares will be subject to NYSE Arca Equities Rule 8.200,
Commentary .02(e), which sets forth certain restrictions on Equity
Trading Permit (``ETP'') Holders acting as registered Market Makers in
Trust Issued Receipts to facilitate surveillance.
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    \28\ See id. at 14.
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    The Commission notes that the Exchange or the Financial Industry
Regulatory Authority (``FINRA''), on behalf of the Exchange, or both,
will communicate as needed regarding trading in the Shares and certain
Futures Contracts with other markets and other entities that are
members of the ISG, and the Exchange or FINRA, on behalf of the
Exchange, or both, may obtain trading information regarding trading in
the Shares and certain Futures Contracts from such markets and other
entities. In addition, the Exchange may obtain information regarding
trading in the Shares and certain Futures Contracts from markets and
other entities that are members of ISG or with which the Exchange has
in place a CSSA.\29\ The Exchange is also able to obtain information
regarding trading in the Shares, the physical commodities underlying
Futures Contracts through ETP Holders, in connection with such ETP
Holders' proprietary or customer trades which they effect through ETP
Holders on any relevant market. The Exchange can obtain market
surveillance information, including customer identity information, with
respect to transactions (including transactions in Futures Contracts)
occurring on US futures exchanges, which are members of the ISG.
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    \29\ For a list of the current members of ISG, see
www.isgportal.org. According to the Exchange, not all components of
a Fund may trade on markets that are members of ISG or with which
the Exchange has in place a CSSA. See id. at 13 n.18.
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    The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. In support of this
proposal, the Exchange represented that:
    (1) The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.200.
    (2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
    (3) Trading in the Shares will be subject to the existing trading
surveillances administered by the Exchange, as well as cross-market
surveillances administered by FINRA on behalf of the Exchange, which
are designed to detect violations of Exchange rules and applicable
federal securities laws, and these procedures are adequate to properly
monitor Exchange trading of the Shares in all trading sessions and to
deter and detect violations of Exchange rules and federal securities
laws applicable to trading on the Exchange.
    (4) Prior to the commencement of trading, the Exchange will inform
its ETP Holders in an Information Bulletin of the special
characteristics and risks associated with trading the Shares.
Specifically, the Information Bulletin will discuss the following: (a)
The risks involved in trading the Shares during the Early and Late
Trading Sessions when an updated IFV will not be calculated or publicly
disseminated; (b) the procedures for purchases and redemptions of
Shares in Creation Units (and that Shares are not individually
redeemable); (c) NYSE Arca Equities Rule 9.2(a), which imposes a duty
of due diligence on its ETP Holders to learn the essential facts
relating to every customer prior to trading the Shares; (d) how
information regarding the IFV is disseminated; (e) how information
regarding portfolio holdings is disseminated; (f) the requirement that
ETP Holders deliver a prospectus to investors purchasing newly issued
Shares prior to or concurrently with the confirmation of a transaction;
and (g) trading information.
    (5) For initial and continued listing, each Fund will be in
compliance with Rule 10A-3 under the Act,\30\ as provided by NYSE Arca
Equities Rule 5.3.
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    \30\ 17 CFR 240.10A-3.
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    (6) Each Fund will seek to achieve its respective investment
objective by investing, under normal market conditions, substantially
all of its assets in Futures Contracts.'' In the event position, price
or accountability limits are reached with respect to Futures Contracts,
each Fund may obtain exposure to the Benchmark through investments in
Financial Instruments. To the extent that a Fund invests in Financial
Instruments, it would first make use of exchange-traded Financial
Instruments, if available. If an investment in exchange-traded
Financial Instruments is unavailable, then a Fund would invest in
Financial Instruments that clear through derivatives clearing
organizations that satisfy the Trust's criteria, if available. If an
investment in cleared Financial Instruments is unavailable, then a Fund
would invest in other Financial Instruments, including uncleared
Financial Instruments in the OTC market.
    (7) Not more than 10% of the net assets of a Fund in the aggregate
invested in Futures Contracts shall consist of Futures Contracts whose
principal market is not a member of the ISG or is a market with which
the Exchange does not have a CSSA.
    (8) To the extent a Fund enters into swap agreements and other OTC
transactions, it will do so only with large, established and well
capitalized financial institutions that meet the Sponsor's credit
quality standards and monitoring policies. Each Fund will use various
techniques to minimize credit risk including early termination or reset
and payment, using different counterparties and limiting the net amount
due from any individual counterparty.
    (9) A minimum of 100,000 Shares of each Fund will be outstanding at
the commencement of trading on the Exchange.
    The Exchange represents that all statements and representations
made in this filing regarding (a) the description of the portfolios of
the Funds or Benchmark, (b) limitations on portfolio holdings or the
Benchmark, or (c) the applicability of Exchange listing rules specified
in this rule filing shall constitute continued listing requirements for
listing the Shares on the Exchange. The issuer has represented to the
Exchange that it will advise the Exchange of any failure by the Funds
to comply with the continued listing requirements, and, pursuant to its
obligations under Section 19(g)(1) of the Act, the Exchange will
monitor for compliance with the continued listing

requirements.\31\ If a Fund is not in compliance with the applicable
listing requirements, the Exchange will commence delisting procedures
under NYSE Arca Equities Rule 5.5(m).
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    \31\ The Commission notes that certain other proposals for the
listing and trading of Managed Fund Shares include a representation
that the exchange will ``surveil'' for compliance with the continued
listing requirements. See, e.g., Securities Exchange Act Release No.
77499 (April 1, 2016), 81 FR 20428 (April 7, 2016) (Notice of Filing
of Amendment No. 2, and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 2, to List and
Trade Shares of the SPDR DoubleLine Short Duration Total Return
Tactical ETF of the SSgA Active Trust), available at: http://www.sec.gov/rules/sro/bats/2016/34-77499.pdf. In the context of this
representation, it is the Commission's view that ``monitor'' and
``surveil'' both mean ongoing oversight of the Fund's compliance
with the continued listing requirements. Therefore, the Commission
does not view ``monitor'' as a more or less stringent obligation
than ``surveil'' with respect to the continued listing requirements.
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    This approval order is based on all of the Exchange's
representations and description of the Funds, including those set forth
above and in Amendment Nos. 1, 3, and 4. The Commission notes that the
Shares must comply with the requirements of NYSE Arca Equities Rule
8.200 and Commentary .02 thereto to be listed and traded on the
Exchange on an initial and continuing basis.
    For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment Nos. 1, 3, and 4 thereto, is
consistent with Section 6(b)(5) of the Act \32\ and the rules and
regulations thereunder applicable to a national securities exchange.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\33\ that the proposed rule change (SR-NYSEArca-2017-07),
as modified by Amendment Nos. 1, 3, and 4 thereto, be, and it hereby
is, approved.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
---------------------------------------------------------------------------

    \34\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-06053 Filed 3-27-17; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 84, Number 65 (Thursday, April 4, 2019)]
[Notices]
[Pages 13328-13332]
[FR Doc No: 2019-06527]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85470; File No. SR-FICC-2018-013]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving a Proposed Rule Change To Expand Sponsoring Member
Eligibility in the Government Securities Division Rulebook and Make
Other Changes

March 29, 2019.

I. Introduction

    On December 13, 2018, 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-2018-013 to expand sponsoring member eligibility and make other
changes.\3\ The proposed rule change was published for comment in the
Federal Register on December 31, 2018.\4\ On February 14, 2019, the
Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change and reopened the period for comment on the proposed rule
change.\5\ The Commission received five comment letters to the proposed
rule change,\6\ including a response letter from FICC. For the reasons
discussed below, the Commission is approving the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On December 13, 2018, FICC also filed the proposal contained
in the proposed rule change as advance notice SR-FICC-2018-802 with
the Commission pursuant to Section 806(e)(1) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010 (``Clearing
Supervision Act''), 12 U.S.C. 5465(e)(1), and Rule 19b-4(n)(1)(i) of
the Act, 17 CFR 240.19b-4(n)(1)(i). As of February 11, 2019,
pursuant to Section 806(e)(1) of the Clearing Supervision Act, the
advance notice was deemed to not have been objected to by the
Commission. 12 U.S.C. 5465(e)(1); see Memorandum, Division of
Trading and Markets, U.S. Securities and Exchange Commission, to
File No. SR-FICC-2018-802, available at https://www.sec.gov/rules/sro/ficc-an/2019/ficc-2018-802-memo-deemed-approved.pdf.
    \4\ Securities Exchange Act Release No. 84951 (December 21,
2018), 83 FR 67801 (December 31, 2018) (SR-FICC-2018-013)
(``Notice'').
    \5\ Securities Exchange Act Release No. 85137 (February 14,
2019), 84 FR 5523 (February 21, 2019) (SR-FICC-2018-013).
    \6\ See letter from Robert E. Pooler, Jr., Chief Financial
Officer, Ronin Capital, LLC, dated January 18, 2019, to Brent J.
Fields, Secretary, Commission (``Ronin Letter''); letter from James
Tabacchi, Chairman, Independent Dealer and Trade Association, dated
January 22, 2019, to Brent J. Fields, Secretary, Commission (``IDTA
Letter''); letter from Robert Toomey, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association, dated January 22, 2019, to Brent J. Fields, Secretary,
Commission (``SIFMA Letter''); letter from Stephen John Berger,
Managing Director, Government & Regulatory Policy, Citadel, dated
January 30, 2019, to Brent J. Fields, Secretary, Commission
(``Citadel Letter''); and letter from Murray Pozmanter, Managing
Director, DTCC, dated February 4, 2019, to Brent J. Fields,
Secretary, Commission (``FICC Response Letter''). See comments on
the proposed rule change (SR-FICC-2018-013), available at https://www.sec.gov/comments/sr-ficc-2018-013/srficc2018013.htm. Because the
proposal contained in the proposed rule change was also filed as an
advance notice, supra note 3, the Commission is considering all
public comments received on the proposal regardless of whether the
comments were submitted to the advance notice or the proposed rule
change.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    FICC proposes to amend the FICC Government Securities Division
(``GSD'') Rulebook (``Rules'') \7\ to (i) allow a broader group of GSD
Netting Members \8\ to participate in FICC as Sponsoring Members,\9\
(ii) allow Sponsored Members to transact with Netting Members that are
not the Sponsoring Member through a certain omnibus account maintained
by the Sponsoring Member, and (iii) make certain conforming and
technical changes.
---------------------------------------------------------------------------

    \7\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_gov_rules.pdf.
    \8\ The term ``Netting Member'' is defined in FICC's GSD Rule 1
as a Member of FICC's Comparison System (i.e., the system of
reporting, validating, and matching the long and short sides of
securities trades to ensure that the details of such trades are in
agreement between the parties) and FICC's Netting System (i.e., the
system for aggregating and matching offsetting obligations resulting
from trades).
    \9\ ``Sponsoring Membership'' is an existing program that allows
well-capitalized bank members to sponsor their eligible clients into
GSD Membership. Sponsored membership at GSD offers eligible clients
the ability to lend cash or eligible collateral via FICC-cleared
deliver-versus payment repo throughout the day. Sponsoring Member
banks facilitate their sponsored clients' GSD trading activity and
act as processing agents on their behalf for all operational
functions, including trade submission and settlement with FICC.
---------------------------------------------------------------------------

A. The Proposed Expansion of Sponsored Member Eligibility

    FICC proposes to broaden the group of GSD Netting Members that may
participate in FICC as Sponsoring Members. Currently, GSD Bank Netting
Members that are well-capitalized with at least $5 billion in equity
capital are permitted to serve as Sponsoring Members (``Category 1
Sponsoring Members'') and sponsor certain institutional firms into GSD
membership as Sponsored Members.\10\ A Sponsoring Member is permitted
to submit to FICC for comparison, novation, and netting certain types
of eligible transactions between itself and its Sponsored Members
(``Sponsored Member Trades'').\11\ For operational and administrative
purposes, FICC interacts solely with the Sponsoring Member as agent for
purposes of the day-to-day satisfaction of its Sponsored Members'
obligations to FICC, including the Sponsored Members' securities and
funds-only settlement obligations.\12\
---------------------------------------------------------------------------

    \10\ Notice, 83 FR at 67802; Rule 3A, Section 2, supra note 7.
    \11\ Notice, 83 FR at 67802. FICC requires the Sponsoring Member
to establish an omnibus account at FICC for all of its Sponsored
Members' FICC-cleared activity (``Sponsoring Member Omnibus
Account''), which is separate from the Sponsoring Member's regular
netting account. Rule 1; Rule 3A, Section 10, supra note 7.
    \12\ Notice, 83 FR at 67802; see Rule 3A, Sections 5, 6, 7, 8
and 9, supra note 7.
---------------------------------------------------------------------------

    FICC proposes to add a second category of Netting Members eligible
to become Sponsoring Members. This second category would include
Netting Members that are Tier One Netting Members (``Category 2
Sponsoring Members''),\13\ except for Inter-Dealer Broker (``IDB'')
Netting Members and Non-IDB Repo Brokers with respect to activity in
their segregated repo accounts.\14\ Category 2 Sponsoring Members could
include, for example, dealer Netting Members, Futures Commission
Merchant Netting Members, and foreign Netting Members.\15\
---------------------------------------------------------------------------

    \13\ The term ``Tier One Netting Member'' is designated in
FICC's GSD Rule 2A, supra note 7, as a non-registered investment
company Netting Member.
    \14\ Notice, 83 FR at 67802.
    \15\ Id.

---------------------------------------------------------------------------

    FICC stated that it did not include IDB Netting Members and Non-IDB
Repo Brokers as a $5 million cap applies to their respective loss
allocation obligations to FICC under Rule 4, Section 7, which does not
apply to other types of Netting Members.\16\ As a Sponsoring Member's
loss allocation obligations could otherwise exceed $5 million, FICC
stated that it would not be appropriate to allow either IDB Netting
Members or Non-IDB Repo Brokers to be eligible to become Category 2
Sponsoring Members. However, FICC stated that to the extent an IDB
Netting Member or Non-IDB Repo Broker also has another type of Netting
Member status with respect to which it is not subject to the loss
allocation cap described above, such IDB Netting Member or Non-IDB Repo
Broker could apply to become a Category 2 Sponsoring Member under
another Netting Member status.\17\
---------------------------------------------------------------------------

    \16\ Id. Section 7 of Rule 4, supra note 7, provides that ``an
Inter-Dealer Broker Netting Member, or a Non-IDB Repo Broker with
respect to activity in its Segregated Repo Account, shall not be
subject to an aggregate loss allocation in an amount greater than $5
million pursuant to this Section 7 for losses and liabilities
resulting from an Event Period.'' The limit on loss allocation for
these Members reflects their risk profile.
    \17\ Notice, 83 FR at 67802-03.
---------------------------------------------------------------------------

    FICC stated that the minimum financial requirements applicable to
Category 2 Sponsoring Members would be the same as its otherwise
applicable financial requirements under Section 4(b) of Rule 2A.\18\
However, as compared to Category 1 Sponsoring Members, the proposed
rule change would provide that FICC could impose greater financial
requirements on an applicant to become a Category 2 Sponsoring
Member.\19\ FICC stated that it decided to provide the option to impose
greater financial requirements as a Category 2 Sponsoring Member may
have substantially less capital than a Category 1 Sponsoring
Member.\20\ FICC further stated that its determination as to whether to
impose such greater financial requirements on a Category 2 Sponsoring
Member applicant would be based upon the level of the anticipated
positions and obligations of such applicant, the anticipated risk
associated with the volume and types of transactions such applicant
proposes to process through FICC as a Category 2 Sponsoring Member, and
the overall financial condition of such applicant.\21\ Such a
determination by FICC to impose increased financial requirements on a
Category 2 Sponsoring Member applicant would be subject to the approval
of the FICC Board of Directors in connection with its approval of the
application of such Category 2 Sponsoring Member.\22\ Once approved,
FICC would thereafter regularly review a Category 2 Sponsoring Member
regarding its continued adherence to such increased financial
requirements.\23\
---------------------------------------------------------------------------

    \18\ Notice, 83 FR at 67803.
    \19\ Id.
    \20\ Id.
    \21\ Id.
    \22\ Id.
    \23\ Id.
---------------------------------------------------------------------------

    Further, the proposed rule change would also impose an activity
limit on a Category 2 Sponsoring Member's Sponsored Member activity so
that a Category 2 Sponsoring Member would only be permitted to novate
new Sponsored Member activity to FICC to the extent the sum of the
value at risk charges (``VaR Charges'') \24\ of its Sponsoring Member
Omnibus Account(s) and its Netting System accounts (``Aggregate VaR
Charges'') do not exceed its Netting Member Capital,\25\ unless
otherwise determined by the Corporation in order to promote orderly
settlement.\26\ FICC stated that it anticipates calculating the ratio
of a Category 2 Sponsoring Member's Aggregate VaR Charges to its
Netting Member Capital on at least an hourly basis.\27\ To the extent a
Category 2 Sponsoring Member's Aggregate VaR Charges exceed its Netting
Member Capital, the member would not be permitted to submit new
Sponsored Member activity to FICC until its Netting Member Capital
equals or exceeds its Aggregate VaR Charges.\28\ FICC stated that it
anticipates it would provide exceptions in order to promote orderly
settlement to include, but not be limited to, circumstances in which
the novation of such activity would have a risk-reducing impact on the
Category 2 Sponsoring Member's overall FICC-cleared portfolio.\29\
---------------------------------------------------------------------------

    \24\ Each Netting Member is required to make margin deposits
(each, a ``Required Fund Deposit'') to FICC's Clearing Fund. Rule 4,
supra note 7. A Netting Member's Required Fund Deposit amount is
comprised of several components, the largest of which is generally
the VaR Charge. Notice, 83 FR at 67803.
    \25\ The term ``Netting Member Capital'' means net capital, net
assets, or equity capital as applicable, to a Netting Member based
on its type of regulation. Rule 1, supra note 7.
    \26\ Notice, 83 FR at 67803.
    \27\ Id.
    \28\ Id.
    \29\ Id.
---------------------------------------------------------------------------

    Moreover, FICC stated that to be consistent with its authority
under Section 7 of Rule 3 (Ongoing Membership Requirements), FICC would
reserve the right to require each Sponsoring Member, or any Netting
Member applicant to become such, to furnish to FICC such adequate
assurances of its financial responsibility and operational capability
within the meaning of Section 7 of Rule 3 as FICC may at any time or
from time to time deem necessary or advisable in order to protect FICC
and its members, to safeguard securities and funds in the custody or
control of FICC and for which FICC is responsible, or to promote the
prompt and accurate clearance and settlement of securities
transactions.\30\ Such a determination by FICC to impose adequate
assurances on a Sponsoring Member applicant would be subject to the
approval of the FICC Board of Directors in connection with its approval
of the application of such Sponsoring Member, and, once approved, FICC
would thereafter regularly review such Sponsoring Member regarding its
compliance with such adequate assurances requirements, as
appropriate.\31\ Any adequate assurances imposed on a Sponsoring Member
by FICC after its approval would be communicated in writing to the
Sponsoring Member and FICC would thereafter regularly review such
Sponsoring Member regarding its compliance with such adequate
assurances, as appropriate.\32\
---------------------------------------------------------------------------

    \30\ Id.
    \31\ Id.
    \32\ Id.
---------------------------------------------------------------------------

B. Proposed Addition of an Omnibus Account

    FICC proposes to allow Sponsored Members to transact with Netting
Members that are not the Sponsoring Member through a certain omnibus
account maintained by the Sponsoring Member. Currently, Rule 1 defines
the term ``Sponsored Member Trade'' as ``a transaction between a
Sponsored Member and its Sponsoring Member . . . .'' \33\ FICC proposes
to allow a Sponsoring Member to establish one or more Sponsoring Member
Omnibus Accounts that may contain transactions between a Sponsored
Member and a Netting Member other than the Sponsoring Member.\34\ A
Sponsoring Member may use the Omnibus Account in addition to or in lieu
of an account in which only transactions between a Sponsored Member and
its Sponsoring Member would be permitted.\35\
---------------------------------------------------------------------------

    \33\ Id.; Rule 1, definition of ``Sponsored Member Trade,''
supra note 7.
    \34\ Notice, 83 FR at 67804.
    \35\ Id. To the extent a Sponsoring Member elects to establish a
Sponsoring Member Omnibus Account that may contain transactions
between a Sponsored Member and a Netting Member other than the
Sponsoring Member, FICC anticipates calculating the Required Fund
Deposit for such Sponsoring Member Omnibus Account to be inclusive
of all transactions submitted into such account, including any
transactions between a Sponsored Member and a Netting Member other
than the Sponsoring Member as well as any transactions between a
Sponsored Member and the Sponsoring Member.

---------------------------------------------------------------------------

C. Conforming and Technical Changes

    FICC proposes conforming and technical changes to its rules. In
order to conform to expanding the Sponsored Membership eligibility,
FICC proposes to amend Section 2(e) of Rule 3A by deleting the
reference to Bank Netting Members and adding language that provides
that each Sponsoring Member would submit to FICC the reports and
information required to be submitted for its respective type of Netting
Member.\36\ FICC also proposes to make a conforming change to the first
sentence in Section 2(h) of Rule 3A to reference to add the newly
defined term ``Category 1'' before the first reference to Sponsoring
Member.\37\
---------------------------------------------------------------------------

    \36\ Notice, 83 FR at 67804.
    \37\ Id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \38\ 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
change, the comments received, and FICC's response thereto, 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 Sections 17A(b)(3)(F) \39\ and
17A(b)(3)(I) \40\ of the Act and Rule 17Ad-22(e)(18) thereunder.\41\
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78s(b)(2)(C).
    \39\ 15 U.S.C. 78q-1(b)(3)(F).
    \40\ 15 U.S.C. 78q-1(b)(3)(I).
    \41\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to (i) remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions and (ii) protect investors and the public
interest.\42\
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    First, the Commission believes the proposed rule change is designed
to remove impediments to and perfect the mechanism of a national system
for the prompt and accurate clearance and settlement of securities
transactions. Specifically, the Commission believes that the expansion
of the Sponsored Membership program eligibility and addition of an
Omnibus Account(s) are consistent with Section 17A(b)(3)(F).\43\ As
described above, eligibility to be a Sponsored Member currently is
limited to Sponsored Members of Category 1 Sponsoring Members. Entities
that are not Sponsored Members of a Category 1 Sponsoring Member and
otherwise engage in the same type of eligible trading activity outside
of a central counterparty currently do not avail themselves of the
guaranteed settlement, novation, and independent risk management
offered by FICC through the Sponsored Membership program. To help
address this issue, the proposal would expand the Sponsored Membership
program to include Category 2 Sponsoring Members and allow Sponsored
Members to transact with Netting Members that are not the Sponsoring
Member through an Omnibus Account maintained by the Sponsoring Member.
---------------------------------------------------------------------------

    \43\ Id.
---------------------------------------------------------------------------

    The Commission believes that the proposal's expansion of the
Sponsored Membership program would help make the risk-reducing benefits
of central clearing available to a wider range of entity types. In
turn, increased trading activity through the expanded Sponsored
Membership program could help (i) lower the risk of diminished
liquidity in the U.S. repo market caused by a large scale exit of
participants from the market in a stress scenario (through FICC's
guaranty of completion of settlement for a greater number of eligible
transactions); (ii) protect against fire sale risk (through FICC's
ability to centralize and control the liquidation of a greater portion
of a failed counterparty's portfolio); and (iii) decrease settlement
and operational risk (by making a greater number of transactions
eligible to be netted and subject to guaranteed settlement, novation,
and independent risk management through FICC).
    Commenters in support of the proposal argued that the proposal
would enhance the repo market. Specifically, commenters believe that by
replacing bilateral counterparty exposures with a model where all
market participants face a central counter party, parties are less
exposed to a counterparty default.\44\ Additionally, commenters believe
that increased central clearing could improve trading conditions for
market participants, as the associated netting benefits can help to
alleviate dealer balance sheet constraints that negatively impact
liquidity and lead to increases in volume over time, which should help
reduce costs.\45\
---------------------------------------------------------------------------

    \44\ See Ronin Letter at 5; SIFMA Letter at 2; Citadel Letter at
1.
    \45\ See Ronin Letter at 4-5; SIFMA Letter at 2; Citadel Letter
at 1.
---------------------------------------------------------------------------

    In addition, one commenter expressed concern that increased
participation in FICC might not increase liquidity in the inter-dealer
market as Sponsoring Members could simply match sponsored cash and
collateral providers internally to take advantage of balance sheet
relief.\46\ However, the commenter did not argue against the
Commission's approval of the proposal based on the proposal's potential
effects on liquidity, as the commenter also acknowledged that increased
participation in FICC might actually improve liquidity.\47\
Additionally, FICC designed, and the commenter acknowledged, the
proposal is an attempt to provide a potential solution for some of the
structural inefficiencies that exist in the U.S. Treasury repo
market.\48\ As such, the proposed rule change is consistent with
Section 17A(b)(3)(F).\49\
---------------------------------------------------------------------------

    \46\ See Ronin Letter at 6-7.
    \47\ See id. at 7.
    \48\ See id.
    \49\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Likewise, the Commission believes that the conforming and technical
changes are consistent with Section 17A(b)(3)(F) by promoting the
prompt and accurate clearance and settlement of securities
transactions. The proposed changes would help clarify the Sponsored
Membership rules.\50\ By proposing changes to the Rules to improve
clarity, the Commission believes that the proposed changes are designed
to help GSD members better understand and remain compliant with the
Rules; thus promoting the prompt and accurate clearance and settlement
of securities transactions.
---------------------------------------------------------------------------

    \50\ Id.
---------------------------------------------------------------------------

    Further, the Commission also believes that any flexibility in the
proposed rule change is consistent with Section 17A(b)(3)(F).\51\
Commenters argue that the proposed rule change should specify under
what qualitative standards Category 2 Sponsoring Members would be
evaluated and what additional financial requirements and assurances
FICC could impose on them.\52\ FICC stated that it believes it is
appropriate to evaluate all Category 2 Sponsoring Member applicants on
a case-by-case basis as applicants can vary widely in terms of their
organizational structures, capitalizations, and the nature and

volume of activity they are interested in centrally clearing through
FICC.\53\
---------------------------------------------------------------------------

    \51\ Id.
    \52\ See IDTA Letter at 2-5.
    \53\ See FICC Response Letter at 4-6.
---------------------------------------------------------------------------

    In expanding Sponsored Membership, FICC must account for the risk
of Category 2 Sponsoring Members and their Sponsored Members defaulting
to FICC. As the entities eligible for Category 2 Sponsoring Membership
are diverse, the Commission believes that flexibility in reviewing
applicants on a case-by-case basis would help FICC account for this
default risk.
    Similarly, a commenter thought that the proposed rule change, as
described in the Notice, should be clarified regarding how the types of
transactions that can be included in a Sponsoring Member's Omnibus
Account would work operationally.\54\ In explaining how operationally a
Sponsoring Member's Omnibus Account would work FICC stated that (i)
while each Sponsored Member's activity is assigned a separate VaR
Charge, the positions of a Sponsored Member's activity (x) between
itself and its Sponsoring Member and (y) between itself and another
Netting Member (in a Sponsoring Member Omnibus Account) would be
netted; and (ii) FICC would allow a Sponsoring Member to establish a
Sponsoring Member Omnibus Account that could contain activity between
Sponsored Members and Netting Members other than Sponsoring
Members.\55\ The Commission believes that the (i) rule text and (ii)
FICC's description of a Sponsoring Member's Omnibus Account are
consistent with providing the clarity required for GSD members to
understand the Rules, as amended by the proposed rule change.
---------------------------------------------------------------------------

    \54\ See IDTA Letter at 3-5.
    \55\ See FICC Response Letter at 6-7.
---------------------------------------------------------------------------

    Second, the Commission believes that the proposed rule change is
designed to protect investors and the public interest. Specifically,
the Commission believes that the expansion of the Sponsored Membership
program and addition of an Omnibus Account(s) are consistent with
protecting investors and the public interest. By expanding the types of
entities that are eligible to participate and thereby benefit from
FICC's guaranteed settlement, novation, and independent risk
management, the proposal would help mitigate the risk of a large scale
exit by such firms from the U.S. repo market in a stress scenario and,
thus, help lower the risk of a liquidity drain in such a scenario.
Specifically, the Office of Financial Research's U.S. Money Market Fund
Monitor shows that a previous expansion of the Sponsoring Member
Program lead to exponential growth in incremental cash investment from
money market funds in FICC.\56\ Likewise, by providing central clearing
to a greater number of Sponsored Member trades, the proposal would help
enable FICC to centralize and control the liquidation of a greater
number of such positions in the event of a Sponsored Member or
Sponsoring Member's default. Doing so would help protect against the
risk that an uncoordinated liquidation of the positions by multiple
counterparties to the defaulting member would cause a fire sale of
positions that negatively impacts the counterparties, FICC, and
potentially the broader financial system.
---------------------------------------------------------------------------

    \56\ See FICC Response Letter at 8.
---------------------------------------------------------------------------

    One commenter requested greater information than FICC provided in
the Notice regarding whether the proposed rule change would benefit the
market.\57\ Specifically, the commenter stated that the actual impact
of the proposed rule change is unknown and the proposed rule change
could increase concentration risk at FICC.\58\ The Commission believes
the proposed rule change is designed to protect investors and the
public interest as expanding the Sponsored Membership program would
include independent risk management designed to help account for any
increased concentration risk. While the actual impact of the proposed
rule change cannot be known, prior expansion of the Sponsored
Membership program provides insight into the likely effect of future
expansions of the program. Specifically, prior expansion has led to
exponential growth in incremental cash investment in FICC.\59\
Similarly, although the greater activity in a Sponsoring Member Account
would likely increase the exposure to FICC from a Netting Member
default, FICC would help account for this risk by individually
margining each Sponsored Member.
---------------------------------------------------------------------------

    \57\ See IDTA Letter at 3-5.
    \58\ See id.
    \59\ See FICC Response Letter at 8.
---------------------------------------------------------------------------

    By better enabling FICC to remove impediments to and perfect the
mechanism of a national system for the prompt and accurate clearance
and settlement of securities transactions and protect investors and the
public interest, as described above, the Commission finds that the
proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act.\60\
---------------------------------------------------------------------------

    \60\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Section 17A(b)(3)(I) of the Exchange Act

    Section 17A(b)(3)(I) of the Exchange Act requires that the rules of
a clearing agency do not impose any burden on competition not necessary
or appropriate in furtherance of the purposes of the Exchange Act.\61\
As discussed above, FICC is proposing a number of changes to expand the
Sponsored Membership program. The proposed changes are designed to (i)
remove impediments to and perfect the mechanism of a national system
for the prompt and accurate clearance and settlement of securities
transactions and (ii) protect investors and the public interest,
consistent with Section 17A(b)(3)(F) of the Exchange Act.\62\
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78q-1(b)(3)(I).
    \62\ See 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    A commenter expressed concerns about the ability of Netting Members
that are not affiliated with a bank to participate as Sponsoring
Members due to VaR margin requirements.\63\ Specifically, separate VaR
charges for each Sponsored Member will likely limit wide adoption of
Sponsored Membership to those Netting Members that have a low cost of
capital.\64\ Likewise, the commenter expressed concern that expanding
Sponsored Membership might increase the Capped Contingency Liquidity
Facility (``CCLF'') \65\ responsibilities of other Netting Members if
the liquidity needs of the largest Netting Members grow
substantially.\66\ Conversely, one Commenter supported the proposed
framework of risk management outlined in the proposal as appropriate to
ensure proper risk controls and integrity with the FICC
environment.\67\
---------------------------------------------------------------------------

    \63\ See Ronin Letter at 6.
    \64\ Id.
    \65\ CCLF is a rules-based, member-funded, committed repo
facility designed to ensure that FICC has sufficient liquid
resources to satisfy its cash settlement obligations in the event of
the default of the participant family that would generate FICC's
largest aggregate payment obligation. Rule 22A, Section 2a, supra
note 7. FICC designed the CCLF funding obligations to be generally
proportionate to the liquidity needs that members present to FICC.
See Securities Exchange Act Release No. 82090 (November 15, 2017),
82 FR 55427 (November 21, 2017) (SR-FICC-2017-002) (``CCLF Approval
Order'').
    \66\ See Ronin Letter at 6.
    \67\ See SIFMA Letter at 1.
---------------------------------------------------------------------------

    The Commission understands that the impact of the cost of meeting a
margin or CCLF requirement would depend, in part, on each Netting
Member's specific business model and that some Netting Members could
satisfy the increase at a lower cost than others. For example, when the
Commission originally approved the CCLF, the Commission's approval was
based in part on the Commission's belief that FICC appropriately sought
to mitigate the relative burdens on Netting Members that present
relatively less liquidity risk

to FICC by only requiring them to contribute their allotted share of
the Aggregate Regular Amount, which is allocated among all Netting
Members, but Netting Members with larger obligations are required to
contribute a larger amount.\68\
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    \68\ See CCLF Approval Order, 82 FR at 55430.
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    As a result, the Commission believes that any competitive burden
imposed by the proposed changes would not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\69\
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    \69\ 15 U.S.C. 78q-1(b)(3)(I).
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    FICC proposes that while it would provide a netting benefit to a
Sponsoring Member's offsetting positions at FICC, FICC would
individually margin each Sponsored Member as FICC novates and
guarantees the settlement of each Sponsored Member's position.
Likewise, to the extent the CCLF were to potentially increase as a
result of Sponsored Member activity, the CCLF is designed so that
requirements are in proportion to the liquidity exposure that each
Netting Member presents to GSD. It is necessary for FICC to collect
margin requirements and impose liquidity requirements to help ensure
FICC can complete settlement in the event of a Netting Member default.
Similarly, it is appropriate to assess individual members VaR Charges
and CCLF requirement based upon the guarantee and liquidity risks that
FICC assumes based upon the member's position.
    Therefore, the Commission believes that the proposed rule change is
consistent with Section 17A(b)(3)(I) of the Exchange Act, as the
proposal would not impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.\70\
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    \70\ 15 U.S.C. 78q-1(b)(3)(I).
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A. Consistency With Rule 17Ad-22(e)(18) of the Exchange Act

    Rule 17Ad-22(e)(18) 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 permit fair and open access
by direct and, where relevant, indirect participants and other
financial market utilities, require participants to have sufficient
financial resources and robust operational capacity to meet obligations
arising from participation in the clearing agency, and monitor
compliance with such participation requirements on an ongoing
basis.\71\
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    \71\ 17 CFR 240.17Ad-22(e)(18).
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    As described above, the proposed rule change would expand the
Sponsored Membership program eligibility. The proposed rule change to
expand Sponsoring Member eligibility would establish objective, risk-
based, and publicly disclosed criteria for additional types of Netting
Members to participate in FICC as Sponsoring Members. As described
above, FICC could impose greater financial requirements on an applicant
to become a Category 2 Sponsoring Member as they may have substantially
less capital than a Category 1 Sponsoring Member. Likewise, the
proposed rule change would also impose an activity limit on a Category
2 Sponsoring Member's Sponsored Member activity. Moreover, FICC would
reserve the right to require each Sponsoring Member, or any Netting
Member applicant to become such, to furnish to FICC such adequate
assurances of its financial responsibility and operational capability.
Each of these proposed changes would assist FICC in requiring Netting
Members to have sufficient financial resources and robust operational
capacity to meet obligations arising from participation in the clearing
agency.
    As described above, commenters argued that the proposed rule change
should specify under what qualitative standards Category 2 Sponsoring
Members would be evaluated and what additional financial requirements
and assurances FICC could impose on them.\72\ FICC stated that it
believes it is appropriate to evaluate all Category 2 Sponsoring Member
applicants on a case-by-case basis as applicants can vary widely in
terms of their organization structures, capitalizations, and the nature
and volume of activity they are interested in centrally clearing
through FICC.\73\
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    \72\ See Ronin Letter at 5; SIFMA Letter at 2-3.
    \73\ See FICC Response Letter at 4-6.
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    The Commission believes that the limited discretion in the publicly
disclosed criteria for participation is consistent with Rule 17Ad-
22(e)(18) as it is design to help ensure sufficient financial resources
and robust operational capacity by Netting Members. In expanding
Sponsored Membership, FICC must account for the risk of Category 2
Sponsoring Members and their Sponsored Members defaulting to FICC. As
the entities eligible for Category 2 Sponsoring Membership are diverse,
the Commission believes that flexibility in reviewing applicants on a
case-by-case basis would help FICC account for this default risk.
Therefore, the Commission finds that the proposal is consistent Rule
17Ad-22(e)(18) under the Act

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 \74\ and
the rules and regulations promulgated thereunder.
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    \74\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\75\ that proposed rule change SR-FICC-2018-013, be, and hereby is,
approved.\76\
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    \75\ 15 U.S.C. 78s(b)(2).
    \76\ 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.\77\
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    \77\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-06527 Filed 4-3-19; 8:45 am]
 BILLING CODE 8011-01-P