Notice2021-11407
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Add the Sponsored GC Service and Make Other Changes
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 1, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 103 (Tuesday, June 1, 2021)</title>
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[Federal Register Volume 86, Number 103 (Tuesday, June 1, 2021)]
[Notices]
[Pages 29334-29348]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-11407]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92014; File No. SR-FICC-2021-003]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Add the Sponsored GC
Service and Make Other Changes
May 25, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 12, 2021, Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On May 12, 2021, FICC filed this proposed rule change as an
advance notice (SR-FICC-2021-801) with the Commission pursuant to
Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act entitled the Payment, Clearing, and
Settlement Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule
19b-4(n)(1)(i) under the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of
the advance notice is available at <a href="http://www.dtcc.com/legal/sec-rule-filings.aspx">http://www.dtcc.com/legal/sec-rule-filings.aspx</a>.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of modifications to the FICC
Government
[[Page 29335]]
Securities Division (``GSD'') Rulebook (``Rules'') \4\ in order to (i)
add a new service offering, which would allow a Sponsoring Member to
submit for clearing Repo Transactions with its Sponsored Members on
securities that are represented by Generic CUSIP Numbers and held under
a triparty custodial arrangement (the ``Sponsored GC Service''), (ii)
add language to Rule 3A to allow FICC to recognize, for Capped
Contingency Liquidity Facility[supreg] (``CCLF'') calculation purposes,
any offsetting settlement obligations as between a Sponsoring Member's
netting account and its Sponsoring Member Omnibus Account to ensure
that a Sponsoring Member's CCLF obligation is calculated in a manner
that more closely aligns with the liquidity risk associated with
Sponsored Member Trades, (iii) remove the requirement from Section 2 of
Rule 3A that a Sponsoring Member provide a quarterly representation to
FICC that each of its Sponsored Members is a ``qualified institutional
buyer'' as defined in Rule 144A of the Securities Act of 1933, as
amended (``Rule 144A''), or is a legal entity that, although not
organized as an entity specifically listed in paragraph (a)(1)(i) of
Rule 144A, satisfies the financial requirements necessary to be a
``qualified institutional buyer'' as specified in that paragraph, and
(iv) make a clarification, certain corrections, and certain technical
changes, as described in greater detail below.
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\4\ Capitalized terms not defined herein are defined in the
Rules, available at <a href="http://www.dtcc.com/legal/rules-and-procedures">http://www.dtcc.com/legal/rules-and-procedures</a>.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to amend the Rules to
(i) add a new service offering, the Sponsored GC Service, (ii) add
language to Rule 3A to allow FICC to recognize, for CCLF calculation
purposes, any offsetting settlement obligations as between a Sponsoring
Member's netting account and its Sponsoring Member Omnibus Account to
ensure that a Sponsoring Member's CCLF obligation is calculated in a
manner that more closely aligns with the liquidity risk associated with
Sponsored Member Trades, (iii) remove the requirement from Section 2 of
Rule 3A that a Sponsoring Member provide a quarterly representation to
FICC that each of its Sponsored Members is a ``qualified institutional
buyer'' as defined in Rule 144A, or is a legal entity that, although
not organized as an entity specifically listed in paragraph (a)(1)(i)
of Rule 144A, satisfies the financial requirements necessary to be a
``qualified institutional buyer'' as specified in that paragraph, and
(iv) make a clarification, certain corrections, and certain technical
changes, as described in greater detail below.
(i) Background
Under Rule 3A (Sponsoring Members and Sponsored Members), certain
Netting Members are permitted to sponsor, as Sponsoring Members,
``qualified institutional buyers'' as defined by Rule 144A, and certain
legal entities that, although not organized as entities specifically
listed in paragraph (a)(1)(i) of Rule 144A, satisfy the financial
requirements necessary to be ``qualified institutional buyers'' as
specified in that paragraph into FICC/GSD membership.\5\ Under Rule 3A,
a Sponsoring Member is permitted to submit to FICC for comparison,
Novation, and netting certain types of eligible delivery versus payment
(``DVP'') securities transactions (``Sponsored Member Trades'').\6\ A
Sponsoring Member is required to establish an omnibus account at FICC
for its Sponsored Members' positions arising from such Sponsored Member
Trades (``Sponsoring Member Omnibus Account''), which is separate from
the Sponsoring Member's regular netting accounts.\7\ For operational
and administrative purposes, FICC interacts solely with the relevant
Sponsoring Member as processing agent for purposes of the day-to-day
satisfaction of its Sponsored Members' obligations to or from FICC,
including their securities and funds-only settlement obligations.\8\
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\5\ Rule 3A, Section 3(a), supra note 4.
\6\ Rule 3A, Section 5, supra note 4. The term ``Sponsored
Member Trade'' means a transaction that satisfies the requirements
of Section 5 of Rule 3A and that is (a) between a Sponsored Member
and its Sponsoring Member or (b) between a Sponsored Member and a
Netting Member. Rule 1, supra note 4.
\7\ The term ``Sponsoring Member Omnibus Account'' means an
Account maintained by a Sponsoring Member that contains the activity
of its Sponsored Members that is submitted to FICC. A Sponsoring
Member may elect to establish one or more Sponsoring Member Omnibus
Accounts. Each Sponsoring Member Omnibus Account may contain
activity within the meaning of clause (a) of the Sponsored Member
Trade definition or activity within the meaning of clause (b) of
such definition. The Sponsoring Member Omnibus Account shall be
separate from the Accounts associated with the Sponsoring Member's
activity as a Netting Member except as contemplated by Sections 10,
11 and 12 of Rule 3A and under the Sponsoring Member Guaranty. Rule
1, supra note 4.
\8\ Rule 3A, Sections 5, 6(b), 7(a), 8(a), 8(c), 9(a), and 9(c),
supra note 4.
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The current Sponsoring Member/Sponsored Member Service (the
``Service''), which has been in existence since 2005, has seen a steady
increase in the number of Sponsoring Members, in the number of
Sponsored Members and in the volume of Sponsored Member Trades over the
past three years.\9\ One of the main benefits of the Service is that it
provides Sponsoring Members with the ability to offset on their balance
sheets their obligations to FICC on Sponsored Member Trades with their
Sponsored Members against their obligations to FICC on other eligible
FICC-cleared activity, including trades with other Netting Members.
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\9\ In March 2017, there was one Sponsoring Member and 1422
Sponsored Members. See Securities Exchange Act Release No. 80236
(March 14, 2017), 82 FR 14265 (March 17, 2017) (SR-FICC-2017-003).
The Service currently has approximately 27 Sponsoring Members and
approximately 1894 Sponsored Members. As of March 31, 2017, the
aggregate Purchase Price of outstanding Sponsored Member Trades was
approximately $32.2 billion. As of March 31, 2021, the aggregate
Purchase Price of outstanding Sponsored Member Trades was
approximately $286 billion.
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In addition, the Service allows Sponsoring Members to take lesser
capital charges for Repo Transactions with Sponsored Members than would
be required were such transactions uncleared.
By alleviating balance sheet and capital constraints on Sponsoring
Members, the Service allows eligible institutional firms to engage in
greater activity than may otherwise be feasible, which in turn
increases the liquidity available in the repo market. Such greater
liquidity provides stability in the market and additionally increases
potential returns for investors in both cash provider institutions and
collateral provider institutions. For example, the increased liquidity
the Service provides allows investors in institutional firms that act
as cash provider Sponsored Members to invest more of their cash than
may otherwise be possible outside of clearing, which in turn allows
such investors the ability to earn a greater return as a result of
their institutional
[[Page 29336]]
firms' participation in the Service. Likewise, for investors in
institutional firms that act as collateral provider Sponsored Members,
the increased liquidity ensures more consistent financing opportunities
than may otherwise be available outside of clearing. Such consistent
access to financing may increase the amount of cash the collateral
provider institutional firms have to deploy into other investment
strategies, which in turn allows their investors the opportunity to
earn a greater return as a result of the institutional firms'
participation in the Service.
FICC believes that enabling more repo transactions to clear through
FICC mitigates the risk of a large-scale exit by institutional firms
from the U.S. financial market in a stress scenario.\10\ To that point,
during the recent market volatility in the first quarter of 2020, the
Service in fact saw its peak volume of approximately $564 billion,
rather than a decline, and no discernable impact to volumes
notwithstanding the default of a Netting Member. In addition, no
Sponsored Members defaulted during that volatile period.
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\10\ The U.S. financial market experienced such a liquidity
drain from the repo market in the 2007-2008 financial crisis when
the bankruptcy of Lehman Brothers gave rise to concerns among cash
provider institutional firms about the creditworthiness of their
borrower counterparties. See Ben S. Bernanke, The Courage to Act: A
Memoir of a Crisis and its Aftermath 397 (2017) (discussing ``the
paralyzing uncertainty [on the part of repo lenders] about banks'
financial health'' in 2007 and 2008).
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In recent years, FICC has taken steps to enable Sponsoring Members
to submit term (rather than overnight) repo transactions for clearing.
Specifically, in 2019, the Commission approved rule changes that added
a new close-out mechanism and adjusted the calculation of certain
funds-only settlement amounts for Sponsored Member Trades that include
haircuts.\11\ FICC believes that having more centrally cleared term
repo transactions would promote the prompt and accurate clearance and
settlement of securities transactions because more securities
transactions would benefit from FICC's risk management and guaranty of
settlement.
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\11\ See Securities Exchange Act Release No. 88262 (February 21,
2020), 85 FR 11401 (February 27, 2020) (SR-FICC-2019-007).
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FICC also believes that enabling more term (rather than overnight)
repo activity in the Service can serve to help reduce repo rate
volatility in the market and, in turn, help to avoid events like those
that occurred in September 2019, when a temporary reduction in
overnight reverse repo activity by money market funds, including
through the Service, contributed in part to the repo rate volatility on
those days.\12\
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\12\ Gara Afonso et al., Federal Reserve Bank of New York, Staff
Report No. 918: The Market Events of Mid-September 2019 (March
2020), available at <a href="https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr918.pdf">https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr918.pdf</a>.
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Although the aforementioned rule changes have resulted in some
Sponsoring Members transacting term Repo Transactions with certain of
their Sponsored Member clients, FICC has received additional feedback
from several market participants that the Service's current requirement
that all Sponsored Member Trades be margined exclusively in cash
through FICC's funds-only settlement process is not conducive to
certain cash provider Sponsored Member clients, particularly money
market funds and other mutual funds, being able to transact term Repo
Transactions with their Sponsoring Members in central clearing.
Specifically, money market funds and other mutual funds are not
generally operationally equipped to provide or receive cash margin in
connection with their term repo activity (either bilaterally or in
central clearing). These funds depend on transfers of securities to
maintain required margin, and typically rely on a tri-party repo
clearing bank to administer the collateral management on such trades.
In particular, the tri-party repo clearing bank calculates the mark-to-
market change in value of the securities underlying each repo
transaction and facilitates the transfer of securities necessary to
ensure the value of the securities equals a specified percentage of the
outstanding principal amount of the repo transaction.
In light of this feedback and in order to support more repo
activity (particularly term repo activity) to be able to be transacted
in central clearing, FICC is proposing to add the Sponsored GC Service,
which would allow Sponsoring Members and their Sponsored Member clients
to execute Repo Transactions with each other on a general collateral
basis in the same asset classes as are currently eligible for Netting
Members to transact in through FICC/GSD's existing GCF Repo[supreg]
Service. Such Repo Transactions would be allowed to settle on the tri-
party repo platform of a Sponsored GC Clearing Agent Bank (as defined
below) in a similar manner to the way Sponsoring Members and Sponsored
Members settle tri-party repo transactions with each other outside of
central clearing, thereby making it more operationally efficient for
them to transact Repo Transactions (particularly term Repo
Transactions) with each other through FICC.
(ii) Add a New Service Offering, the Sponsored GC Service
(A) Key Parameters of the Proposed Sponsored GC Service
As described above, a Sponsoring Member would be permitted to
submit to FICC for Novation the End Leg of Repo Transactions with its
Sponsored Member client that would be executed in one of a series of
new Generic CUSIP Numbers that would be registered with CUSIP Global
Services by FICC in connection with the proposed Sponsored GC Service
(each a ``Sponsored GC Trade''). The proposed schedule of securities
that would be eligible under each of the new Generic CUSIP Numbers that
would be established for the proposed Sponsored GC Service would be
identical to the current schedule of securities that are eligible under
each of the existing Generic CUSIP Numbers that is currently
established for the GCF Repo Service, including (i) U.S. Treasury
Securities maturing in ten (10) years or less, (ii) U.S. Treasury
Securities maturing in thirty (30) years or less, (iii) Non-Mortgage-
Backed U.S. Agency Securities, (iv) Federal National Mortgage
Association (``Fannie Mae'') and Federal Home Loan Mortgage Corporation
(``Freddie Mac'') Fixed Rate Mortgage-Backed Securities, (v) Fannie Mae
and Freddie Mac Adjustable Rate Mortgage-Backed Securities, (vi)
Government National Mortgage Association (``Ginnie Mae'') Fixed Rate
Mortgage-Backed Securities, (vii) Ginnie Mae Adjustable Rate Mortgage-
Backed Securities, (viii) U.S. Treasury Inflation-Protected Securities
(``TIPS'') and (ix) U.S. Treasury Separate Trading of Registered
Interest and Principal of Securities (``STRIPS'').\13\
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\13\ FICC has decided to use a new series of Generic CUSIP
Numbers in connection with the proposed Sponsored GC Service rather
than utilizing the existing Generic CUSIP Numbers employed for GCF
Repo Transactions in order to avoid any operational processing
errors that could otherwise result if a trade intended for the
proposed Sponsored GC Service was inadvertently processed as a GCF
Repo Transaction or vice versa. To that end, a trade submitted for
the proposed Sponsored GC Service would be automatically rejected by
FICC if not submitted in one of the nine new Generic CUSIP Numbers
earmarked for the proposed Sponsored GC Service, and a GCF Repo
Transaction would be rejected by FICC if not submitted in one of the
nine Generic CUSIP Numbers dedicated to the GCF Repo Service.
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Consistent with FICC's processing of Repo Transactions in its
existing GCF Repo Service, each Sponsored GC Trade would be required to
be fully collateralized with securities eligible under the applicable
Generic CUSIP Number and/or cash. However, consistent with the existing
Service,
[[Page 29337]]
Sponsoring Members and Sponsored Members would be permitted to transfer
a haircut on a Sponsored GC Trade so that the value of the securities
at the Start Leg (the ``GC Start Leg Market Value'') exceeds 100% of
the initial principal balance of the Sponsored GC Trade.
Consistent with the manner in which tri-party repo transactions are
settled today outside of central clearing, the Start Leg of a Sponsored
GC Trade would settle on a trade for trade basis on a Sponsored GC
Clearing Agent Bank's tri-party repo platform between the Sponsoring
Member and the Sponsored Member. Novation to FICC of the End Leg of a
Sponsored GC Trade would occur at the time when all of the following
requirements have been satisfied on a given Business Day: (i) The trade
data on the Sponsored GC Trade has been submitted to FICC by the
Sponsoring Member pursuant to Rule 6A by the deadline set forth in the
proposed new Schedule of Sponsored GC Trade Timeframes, (ii) the data
on the Sponsored GC Trade has been compared in the Comparison System
pursuant to Rule 6A, (iii) the Start Leg of the Sponsored GC Trade has
fully settled at the Sponsored GC Clearing Agent Bank by the deadline
set forth in the proposed new Schedule of Sponsored GC Trade
Timeframes, (iv) the Sponsored GC Clearing Agent Bank has, pursuant to
communication links, formats, timeframes, and deadlines established by
FICC for such purpose, provided to FICC a report containing such data
as FICC may require from time to time, including information regarding
the specific Eligible Securities that were delivered in the settlement
of the Start Leg of the Sponsored GC Trade (the ``Purchased GC Repo
Securities''), and (v) FICC determines that the data contained in such
report matches the data on the Sponsored GC Trade submitted by the
Sponsoring Member to the Comparison System.
Accrued repo interest on Sponsored GC Trades would be paid and
collected by FICC on a daily basis. If on any Business Day, the market
value of the Purchased GC Repo Securities is less than the GC Start Leg
Market Value, then the Sponsoring Member or Sponsored Member that
transferred the securities in the Start Leg (the ``GC Funds Borrower'')
would be required deliver to FICC (and FICC would be required to
deliver to the GC Funds Borrower's pre-Novation counterparty)
additional Eligible Securities that are represented by the same Generic
CUSIP Number as the Purchased GC Repo Securities (``GC Comparable
Securities'') and/or cash, such that the market value of the Purchased
GC Repo Securities (inclusive of the newly transferred securities and
cash) is at least equal to the GC Start Leg Market Value. If on any
Business Day, the market value of the Purchased GC Repo Securities is
greater than the GC Start Leg Market Value, the Sponsoring Member or
Sponsored Member that received the securities in the start leg (the
``GC Funds Lender'') would be required to return to FICC (and FICC
would be required to return to the relevant GC Funds Borrower)
Purchased GC Repo Securities such that the market value of the
remaining Purchased GC Repo Securities remains at least equal to the GC
Start Leg Market Value.
Such additional securities and/or cash must be delivered within the
timeframe set forth in the proposed new Schedule of Sponsored GC Trade
Timeframes. Any securities or cash transferred by the GC Funds Borrower
pursuant to these requirements would constitute Purchased GC Repo
Securities, and any Purchased GC Repo Securities transferred by the GC
Funds Lender pursuant to these requirements would, following such
transfer, no longer constitute Purchased GC Repo Securities.
In addition, consistent with the processing of Repo Transactions in
FICC's existing GCF Repo Service, a GC Funds Borrower would be
permitted to substitute for Purchased GC Repo Securities, GC Comparable
Securities and/or cash within the timeframe set forth in the proposed
new Schedule of Sponsored GC Trade Timeframes.
In order to facilitate settlement, FICC would direct each GC Funds
Borrower and GC Funds Lender to make any payment or delivery due to
FICC in respect of a Sponsored GC Trade (except for certain funds-only
settlement obligations, as discussed below) directly to the relevant
Member's pre-Novation counterparty. As a result, each transfer of
Purchased GC Repo Securities and daily repo interest would be made
directly between the relevant GC Funds Borrower and GC Funds Lender
through the tri-party repo platform of a Sponsored GC Clearing Agent
Bank.\14\
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\14\ FICC does not believe it is appropriate to require that
each payment and delivery under a Sponsored GC Trade be made from
(or to) the Sponsoring Member to (or from) FICC and separately from
(or to) FICC to (or from) the Sponsored Member because inserting
FICC in the middle of the payments and deliveries in this fashion
would require substantial changes in operational processes for both
Sponsored Members and Sponsoring Members. FICC does not believe such
operational changes to be necessary in light of the fact that there
can only be two pre-Novation counterparties involved in the
settlement of a Sponsored GC Trade (i.e., the Sponsoring Member and
its Sponsored Member client), as opposed to the multitude of Netting
Members that may be involved in the settlement of GCF Repo
Transactions the payment and delivery obligations under which are
aggregated and netted in FICC's Netting System. For such GCF Repo
Transactions, insertion of FICC in the middle of the payments and
deliveries can streamline the settlement process and create
significant operational efficiencies for Netting Members.
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To that end, each GC Funds Borrower and GC Funds Lender would agree
that any such direct payment or delivery discharges FICC's obligation
to make the same payment or delivery. Otherwise, all legal rights and
obligations as between FICC and Sponsoring Members, and as between FICC
and Sponsored Members, would be the same with respect to Sponsored GC
Trades as with respect to Sponsored Member Trades in the existing
Service, which is governed by Rule 3A.\15\
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\15\ Rule 3A, supra note 4.
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(B) Risk Management of Sponsored GC Trades
Sponsored GC Trades would be risk managed in a similar fashion to
Sponsored Member Trades in the existing Service.
To mitigate market risk, the VaR Charge would be calculated for
each Sponsored Member client individually based on such Sponsored
Member client's activity in the existing Service, as well as such
Sponsored Member client's activity in the proposed Sponsored GC
Service. The VaR Charge for the Sponsoring Member Omnibus Account would
continue to be the sum of the individual VaR Charges for each Sponsored
Member client, i.e., the Sponsoring Member Omnibus Account would
continue to be gross margined.\16\ To facilitate FICC's ability to
surveil a given Sponsored Member's FICC-cleared activity across its
Sponsored GC Trades as well as its other Sponsored Member Trades within
the existing Service, both with the same Sponsoring Member and across
Sponsoring Members (if applicable), the same symbol would be used to
identify the Sponsored Member for purposes of trade submission and risk
management under the proposal.
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\16\ See Rule 3A, Section 10, supra note 4.
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In addition, FICC would risk manage the mark-to-market risk
associated with unaccrued repo interest on a Sponsored GC Trade in the
same way it manages such risk in the GCF Repo Service, namely through a
proposed new GC Interest Rate Mark component of funds-only settlement.
This proposed new mark would be calculated in the same manner as the
GCF Interest Rate Mark
[[Page 29338]]
is for GCF Repo Transactions.\17\ In light of the application of the
proposed new GC Interest Rate Mark to Sponsored GC Trades, an Interest
Adjustment Payment would also be applied to account for overnight use
of funds by the Sponsoring Member or Sponsored Member, as applicable,
based on such party's receipt from FICC of a Forward Mark Adjustment
Payment (reflecting a GC Interest Rate Mark) on the previous Business
Day.\18\
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\17\ The term ``GCF Interest Rate Mark'' means, on a particular
Business Day as regards any GCF Repo Transaction that is not
scheduled to settle on that day, the product of the principal value
of the GCF Repo Transaction on the Scheduled Settlement Date for its
End Leg multiplied by a factor equal to the absolute difference
between the Repo Rate established by FICC for such Repo Transaction
and its Contract Repo Rate, and then multiplied by a fraction, the
numerator of which is the number of calendar days from the current
day until the Scheduled Settlement Date for the End Leg of the Repo
Transaction and the denominator of which is 360. If the Repo
Transaction's Contract Repo Rate is greater than its System Repo
Rate, then the GCF Interest Rate Mark shall be a positive value for
the Reverse Repo Party, and a negative value for the Repo Party. If
the Repo Transaction's Contract Repo Rate is less than its System
Repo Rate, then the GCF Interest Rate Mark shall be a positive value
for the Repo Party, and a negative value for the Reverse Repo Party.
The term ``GCF Interest Rate Mark'' means, as regards a GCF Net
Settlement Position, the sum of all the GCF Interest Rate Mark
Payments on each of the GCF Repo Transactions that compose such
position. Rule 1, supra note 4.
\18\ No other components of funds-only settlement would be
necessary to apply to Sponsored GC Trades because, as described
above, (i) all Sponsored GC Trades would novate after the settlement
of the Start Legs of such trades (i.e., not during the Forward-
Starting Period), (ii) mark-to-market changes in the value of the
securities transferred under Sponsored GC Trades would be managed by
the Sponsored GC Clearing Agent Bank on FICC's behalf (consistent
with the manner in which GCF Repo Transactions are processed today),
and (iii) the accrued repo interest on Sponsored GC Trades would be
passed on a daily basis, as described above.
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For liquidity risk management, Sponsored Member Trades between a
Sponsoring Member and its Sponsored Member in the existing Service do
not independently create liquidity risk for FICC. This is because FICC
is not required to complete settlement of such Sponsored Member Trades
in the event that either the Sponsoring Member or Sponsored Member
defaults. In the event that the Sponsoring Member defaults, Section
14(c) of Rule 3A permits FICC to close out (rather than settle) the
Sponsored Member Trades of the defaulter's Sponsored Members.\19\
Likewise, if the Sponsored Member defaults, FICC is also not required
to complete settlement. Rather, under Section 11 of Rule 3A, FICC may
offset its settlement obligations to the Sponsoring Member against the
Sponsoring Member's obligations under the Sponsoring Member Guaranty to
perform on behalf of its defaulted Sponsored Member.\20\
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\19\ Rule 3A, Section 14(c), supra note 4.
\20\ Rule 3A, Section 11, supra note 4.
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As a result, to the extent a Sponsoring Member either (1) runs a
matched book of Sponsored Members (i.e., enters into offsetting
Sponsored Member Trades with its own Sponsored Members) or (2) simply
enters into Sponsored Member Trades without entering into offsetting
transactions, it does not increase FICC's liquidity risk. By contrast,
if a Sponsoring Member enters into an offsetting Repo Transaction with
a third-party Netting Member that is novated to FICC, then that will
increase FICC's liquidity risk. This is because, unlike in the context
of Sponsored Member Trades, in the event of the Sponsoring Member's
default, FICC is required to settle with such third-party Netting
Member.
Sponsored GC Trades would impact FICC's liquidity risk similarly to
Sponsored Member Trades in the existing Service in this regard, in that
liquidity risk to FICC would only be increased to the extent the
Sponsoring Member enters into a Repo Transaction with a third-party
Netting Member (which it may choose to do in order to offset the
Sponsored GC Trade that it executed with its Sponsored Member).
Accordingly, FICC proposes to manage the liquidity risk associated with
Sponsored GC Trades in the same manner that it manages such risk for
other Sponsored Member Trades. As discussed below in Item II(A)1(iii),
FICC is proposing to add language to Rule 3A to revise the manner in
which it calculates a Sponsoring Member's Individual Total Amount for
purposes of its CCLF obligation, with respect to all Sponsored Member
Trades, including Sponsored GC Trades, in order to reflect the fact
that Sponsored Member Trades do not create liquidity risk.
(C) Proposed Rule Changes
To effectuate the proposed changes described above, FICC would
revise Rule 1 to add the following new defined terms: (1) GC Collateral
Return Entitlement, (2) GC Collateral Return Obligation, (3) GC
Comparable Securities, (4) GC Daily Repo Interest, (5) GC Funds
Borrower, (6) GC Funds Lender, (7) GC Interest Rate Mark, (8) GC Repo
Security, (9) GC Start Leg Market Value, (10) Purchased GC Repo
Securities, (11) Sponsored GC Clearing Agent Bank, and (12) Sponsored
GC Trade.
GC Collateral Return Entitlement would mean the entitlement of a
Sponsoring Member or Sponsored Member, as applicable, to receive the
Purchased GC Repo Securities (as defined below) in exchange for cash at
the End Leg of a Sponsored GC Trade.
GC Collateral Return Obligation would mean the obligation of a
Sponsoring Member or Sponsored Member, as applicable, to deliver the
Purchased GC Repo Securities in exchange for cash at the End Leg of a
Sponsored GC Trade.
GC Comparable Securities would mean, in relation to a Sponsored GC
Trade, any GC Repo Securities that are represented by the same Generic
CUSIP Number as the GC Repo Securities that were transferred in the
Start Leg of the Sponsored GC Trade, as set forth in the proposed new
Schedule of GC Comparable Securities.
GC Daily Repo Interest would mean the daily interest amount that is
payable under a Sponsored GC Trade.
GC Funds Borrower would mean a Sponsoring Member or Sponsored
Member, as applicable, that has a GC Collateral Return Entitlement and
associated cash payment obligation.
GC Funds Lender would mean a Sponsoring Member or Sponsored Member,
as applicable, that has a GC Collateral Return Obligation and
associated cash payment entitlement.
GC Interest Rate Mark would mean, on a particular Business Day as
regards any Sponsored GC Trade where the End Leg is not scheduled to
settle on that day, the product of the principal value of the Sponsored
GC Trade on the Scheduled Settlement Date for its End Leg multiplied by
a factor equal to the absolute difference between the System Repo Rate
established by FICC for such Sponsored GC Trade and its Contract Repo
Rate, and then multiplied by a fraction, the numerator of which is the
number of calendar days from the current day until the Scheduled
Settlement Date for the End Leg of the Sponsored GC Trade and the
denominator of which is 360. If the Sponsored GC Trade's Contract Repo
Rate is greater than its System Repo Rate, then the GC Interest Rate
Mark would be a positive value for the GC Funds Lender, and a negative
value for the GC Funds Borrower. If the Sponsored GC Trade's Contract
Repo Rate is less than its System Repo Rate, then the GC Interest Rate
Mark would be a positive value for the GC Funds Borrower, and a
negative value for the GC Funds Lender.
GC Repo Security would mean an Eligible Security that is only
eligible for submission to FICC in connection with the comparison and
Novation of Sponsored GC Trades.
[[Page 29339]]
GC Start Leg Market Value would mean, in relation to a Sponsored GC
Trade, the market value of the GC Repo Securities transferred in the
Start Leg of the Sponsored GC Trade, measured as of the date of the
settlement of the Start Leg of such Sponsored GC Trade.
Purchased GC Repo Securities would mean the GC Repo Securities
transferred by the Sponsoring Member or Sponsored Member, as
applicable, in settlement of the Start Leg of a Sponsored GC Trade,
plus all cash and other GC Repo Securities transferred by such
Sponsoring Member or Sponsored Member pursuant to proposed Sections
8(b)(ii) and 8(b)(v) of Rule 3A, less any GC Repo Securities or cash
received by the Sponsoring Member or Sponsored Member pursuant to
proposed Sections 8(b)(iii) and 8(b)(v) of Rule 3A.
Sponsored GC Clearing Agent Bank would mean a Clearing Agent Bank
that has agreed to provide FICC, upon request, under mutually agreeable
terms, with clearing services for Sponsored GC Trades.
Sponsored GC Trade would mean, in connection with the Sponsored GC
Service, a Sponsored Member Trade that is a Repo Transaction between a
Sponsored Member and its Sponsoring Member involving securities
represented by a Generic CUSIP Number the data on which are submitted
to FICC by the Sponsoring Member pursuant to the provisions of Rule 6A,
for Novation to FICC pursuant to proposed Section 7(b)(ii) of Rule 3A.
FICC also proposes to revise the following defined terms in Rule 1:
(1) Eligible Security, (2) End Leg, (3) General Collateral Repo
Transaction, (4) Generic CUSIP Number, (5) Initial Haircut, (4)
Interest Adjustment Payment, (5) Sponsored Member Trade, (6) Start Leg,
(7) Forward Mark Adjustment Payment, and (8) Sponsoring Member Omnibus
Account, each as described in greater detail below.
FICC proposes to revise the definition of Eligible Security to
state that a GC Repo Security would be deemed to be an Eligible
Security only in connection with a Sponsored GC Trade.
FICC also proposes to revise the definition of End Leg to include a
definition applicable to Sponsored GC Trades. As regards a Sponsored GC
Trade, End Leg would mean the concluding settlement aspects of the
transaction, involving the retransfer of the Purchased GC Repo
Securities by the GC Funds Lender and the taking back of such Purchased
GC Repo Securities by the GC Funds Borrower. Because FICC is revising
the definition of End Leg to add a definition applicable to Sponsored
GC Trades, FICC would also revise the first sentence of the current
definition to state that it does not apply to Sponsored GC Trades by
adding the phrase ``or a Sponsored GC Trade'' after ``as regards a Repo
Transaction other than a GCF Repo Transaction (or CCIT Transaction as
applicable).''
FICC proposes to revise the definition of General Collateral Repo
Transaction to state that General Collateral Repo Transaction would
mean a Repo Transaction, other than a GCF Repo Transaction or Sponsored
GC Trade (unless the context indicates otherwise), with a Generic CUSIP
Number.
FICC also proposes to revise the definition of Generic CUSIP Number
to state that FICC would use separate Generic CUSIP Numbers for General
Collateral Repo Transactions, GCF Repo Transactions and Sponsored GC
Trades.
FICC also proposes to revise the definition of Initial Haircut to
include a definition applicable to Sponsored GC Trades. As regards any
Sponsored GC Trade, Initial Haircut would mean any difference between
(x) the Contract Value of the Start Leg of the Sponsored GC Trade and
(y) the GC Start Leg Market Value. Because FICC is revising the
definition of Initial Haircut to include a definition applicable to
Sponsored GC Trades, FICC would revise proposed section (i) in the
definition to state that proposed section (i) would apply to any
Sponsored Member Trade that is not a Sponsored GC Trade by adding the
phrase ``that is not a Sponsored GC Trade'' after ``as regards any
Sponsored Member Trade.''
FICC also proposes to revise the definition Interest Adjustment
Payment to include a definition applicable to Sponsored GC Trades. As
regards a Sponsored GC Trade, Interest Adjustment Payment would mean
the product of the GC Interest Rate Mark multiplied by the applicable
Overnight Investment Rate and then multiplied by a fraction, the
numerator of which is the number of calendar days between the previous
Business Day and the current Business Day and the denominator of which
is 360.
FICC proposes to revise the definition of Sponsored Member Trade to
include Sponsored GC Trades.
FICC also proposes to revise the definition of Start Leg to include
a definition applicable to Sponsored GC Trades. As regards a Sponsored
GC Trade, Start Leg would mean the initial settlement aspects of the
Transaction, involving the transfer of GC Repo Securities by the
Sponsoring Member or Sponsored Member, as applicable, that is the GC
Funds Borrower and the taking in of such GC Repo Securities by the
Sponsoring Member or Sponsored Member, as applicable, that is the GC
Funds Lender. Because FICC is proposing to revise the definition of
Start Leg to add a definition applicable to Sponsored GC Trades, FICC
would revise that the first sentence of the current definition to state
that it does not apply to Sponsored GC Trades by adding the phrase ``or
a Sponsored GC Trade'' after ``as regards a Repo Transaction other than
a GCF Repo Transaction.''
FICC also proposes to revise the definition of Forward Mark
Adjustment Payment in Rule 1 to state that it would refer to the GC
Interest Rate Mark with respect to Sponsored GC Trades.
FICC also proposes to make conforming changes to the definition of
Sponsoring Member Omnibus Account to state that it may contain all
types of Sponsored Member Trades. The current definition of Sponsoring
Member Omnibus Account states that each Sponsoring Member Omnibus
Account may contain activity within the meaning of clause (a) of the
Sponsored Member Trade definition or activity within the meaning of
clause (b) of such definition.
In addition, FICC proposes to revise the definition of Sponsored GC
Service in Rule 1 and to revise Section VII (Sponsoring Members) of the
Fee Structure, as described below.
FICC proposes to revise the definition of Sponsored GC Service in
Rule 1 to state that it would mean the service offered by FICC to clear
tri-party repurchase agreement transactions between Sponsoring Members
and Sponsored Members, as described in Rule 3A. Currently, the
definition of Sponsored GC Service states that it means a service to be
offered by FICC, which has not yet been proposed for and would be
subject to regulatory approval, to clear tri-party repurchase agreement
transactions between the Sponsoring Members and Sponsored Members, as
shall be described in Rule 3A. FICC also proposes to remove the
footnote in the definition of Sponsored GC Service, which states that
the Sponsored GC Service shall be the subject of a subsequent rule
filing with the Commission and that the definition of Sponsored GC
Service shall be revised upon approval of the subsequent rule filing,
and at that time the footnote shall sunset.
FICC also proposes to revise Section VII (Sponsoring Members) of
the Fee Structure to remove language that states that to the extent
FICC, in consultation with its Board of Directors, does not implement
the Sponsored GC Service, all previously collected Sponsored GC
[[Page 29340]]
Pre-Payment Assessments shall be returned to the contributing
Sponsoring Members in full. FICC also proposes to remove the footnote
in this section which states that the Sponsored GC Service shall be the
subject of a subsequent rule filing with the Commission and that
Section VII of the Fee Structure shall be revised to remove the
referenced sentence upon approval of the subsequent rule filing, and at
that time the footnote shall sunset.
In addition, FICC proposes to revise Rule 3A, Section 5 (Sponsored
Member Trades) to state that this section does not apply to Sponsored
GC Trades. Section 5 concerns the types of trades that may be submitted
as Sponsored Member Trades and discusses the application of Rule 14
(Forward Trades) and Rule 18 (Special Provisions for Repo Transactions)
to Sponsored Member Trades. The requirements that Sponsored GC Trades
must meet would be separately enumerated in Section 7, and the
provisions of Rules 14 and 18, which only apply to transactions
eligible for FICC's general netting system, would not apply to such
Sponsored GC Trades.
FICC also proposes to revise Rule 3A, Section 6 (Trade Submission
and the Comparison System) to state that the current Schedule of
Timeframes would apply to Sponsored Member Trades other than Sponsored
GC Trades. The proposed new Schedule of Sponsored GC Trade Timeframes
would apply to Sponsored GC Trades.
Section 7 (The Netting System, Novation and Guaranty of Settlement)
of Rule 3A would be revised to create a proposed new paragraph (a). The
proposed new paragraph (a) would provide that the current provisions of
Section 7, which would be reorganized as proposed new subparagraphs (i)
through (iv) of proposed new paragraph (a), apply to Sponsored Member
Trades other than Sponsored GC Trades. These provisions concern the
netting and Novation of Sponsored Member Trades. As discussed below,
different provisions would apply to Sponsored GC Trades.
Proposed new paragraph (b) of Section 7 would only apply to
Sponsored GC Trades. Proposed new subparagraph (i) of proposed new
paragraph (b) of Section 7 would provide that only the End Legs of a
Sponsored GC Trade may be novated to FICC and that a Sponsored GC Trade
is permitted (but not required) to have an Initial Haircut. Proposed
new subparagraph (ii) of proposed new paragraph (b) of Section 7 would
provide requirements that would have to be satisfied in order for a
Sponsored GC Trade to be novated on a given Business Day. The following
requirements would be included: (A) The trade data on the Sponsored GC
Trade must have been submitted to FICC by the Sponsoring Member
pursuant to Rule 6A by the deadline set forth in FICC's proposed new
Schedule of Sponsored GC Trade Timeframes, (B) the data on the
Sponsored GC Trade must have been compared in the Comparison System
pursuant to Rule 6A, (C) the Start Leg of the Sponsored GC Trade must
have fully settled at the Sponsored GC Clearing Agent Bank by the
deadline set forth in FICC's proposed new Schedule of Sponsored GC
Trade Timeframes, (D) the Sponsored GC Clearing Agent Bank must have,
pursuant to communication links, formats, timeframes, and deadlines
established by FICC for such purpose, provided to FICC a report
containing such data as FICC may require from time to time, including
information regarding the specific GC Repo Securities that were
delivered in settlement of the Start Leg of the Sponsored GC Trade, and
(E) FICC must determine that the data contained in such report matches
the data on the Sponsored GC Trade submitted by the Sponsoring Member
pursuant to Rule 6A. Proposed new subparagraph (iii) of proposed new
paragraph (b) of Section 7 would state that, on each Business Day, FICC
would provide each Sponsoring Member with one or more Reports setting
forth (A) each Sponsored GC Trade, the data on which has been compared
in the Comparison System and (B) each Sponsored GC Trade, the End Leg
of which has been novated to FICC. Proposed new subparagraph (iv) of
proposed new paragraph (b) of Section 7 would require that each
Sponsoring Member and Sponsored Member acknowledges and agrees that it
has authorized each relevant Sponsored GC Clearing Agent Bank to
provide FICC with all information and data as FICC may require or
request from time to time in order to novate and process Sponsored GC
Trades.
Section 8 (Securities Settlement) of Rule 3A would be revised to
create a new paragraph (a). The proposed new paragraph (a) would
provide that the bulk of the current provisions of Section 8, which
would be reorganized as subparagraphs (i) through (vii) of proposed new
paragraph (a), apply to Sponsored Member Trades other than Sponsored GC
Trades. Those provisions concern the process for settling Sponsored
Member Trades. As discussed below, different settlement requirements
would apply to Sponsored GC Trades.
Proposed new paragraph (b) of Section 8 would apply only to
Sponsored GC Trades. Proposed new subparagraph (i) of proposed new
paragraph (b) of Section 8 would state that GC Collateral Return
Obligations and cash payment obligations associated with GC Collateral
Return Entitlements must be satisfied by a GC Funds Lender and GC Funds
Borrower, respectively, within the timeframes established for such by
FICC in the proposed new Schedule of Sponsored GC Trade Timeframes. In
addition, any failure by the GC Funds Borrower to satisfy its cash
payment obligations associated with GC Collateral Return Entitlements
within the timeframe established for such by FICC in the proposed new
Schedule of Sponsored GC Trade Timeframes would subject the GC Funds
Borrower to a late fee as if such GC Funds Borrower were a Net Funds
Payor within the meaning of Section IX of the Fee Structure (Late Fee
Related to GCF Repo Transactions). Proposed new subparagraph (ii) of
proposed new paragraph (b) of Section 8 would state that if on any
Business Day, the market value of a GC Funds Borrower's GC Collateral
Return Entitlement from the previous Business Day (or the current
Business Day) is less than the GC Start Leg Market Value, then such GC
Funds Borrower would deliver to FICC (and FICC would deliver to the
relevant GC Funds Lender) additional GC Comparable Securities and/or
cash, such that the market value of the GC Funds Borrower's GC
Collateral Return Entitlement (and the market value of the relevant GC
Funds Lender's GC Collateral Return Obligation) is at least equal to
the GC Start Leg Market Value. Such additional securities and/or cash
must be delivered by the GC Funds Borrower within the timeframe set
forth in the proposed new Schedule of Sponsored GC Trade Timeframes.
Proposed new subparagraph (iii) of proposed new paragraph (b) of
Section 8 would state that if on any Business Day, the market value of
a GC Funds Lender's GC Collateral Return Obligation from the previous
Business Day (or the current Business Day) is greater than the GC Start
Leg Market Value, then such GC Funds Lender would deliver to FICC (and
FICC would deliver to the relevant GC Funds Borrower) some of the
Purchased GC Repo Securities, such that the market value of the GC
Funds Lender's GC Collateral Return Obligation (and the market value of
the relevant GC Funds Borrower's Collateral Return Entitlement) is at
least equal to the GC Start Leg Market Value. Such Purchased
[[Page 29341]]
GC Repo Securities must be delivered within the timeframe set forth in
the proposed new Schedule of Sponsored GC Trade Timeframes. Proposed
new subparagraph (iv) of proposed new paragraph (b) of Section 8 would
state that each GC Funds Borrower (or if the repo rate for the relevant
Sponsored GC Trade is negative, the GC Funds Lender) would, within the
timeframe set forth in the proposed new Schedule of Sponsored GC Trade
Timeframes, pay the daily accrued GC Daily Repo Interest to FICC (and
FICC would pay such GC Daily Repo Interest to the GC Funds Lender or GC
Funds Borrower, as applicable). Proposed new subparagraph (v) of
proposed new paragraph (b) of Section 8 would state that a GC Funds
Borrower may substitute cash and/or GC Comparable Securities for any
Purchased GC Repo Securities in accordance with the timeframe set forth
in the proposed new Schedule of Sponsored GC Trade Timeframes. Proposed
new subparagraph (vi) of proposed new paragraph (b) of Section 8 would
state that FICC directs each Sponsored Member and Sponsoring Member to
satisfy any payment or delivery obligation due to FICC, except for any
obligation to pay a Funds-Only Settlement Amount, by making the
relevant payment or delivery to an account at the relevant Sponsored GC
Clearing Agent Bank specified by the pre-Novation counterparty to the
Sponsored Member or Sponsoring Member, as applicable, in accordance
with such procedures as the Sponsored GC Clearing Agent Bank may
specify from time to time. Each Sponsored Member and Sponsoring Member
that is owed any such payment or delivery from FICC would acknowledge
and agree that, if the pre-Novation counterparty to such Sponsored GC
Trade makes the relevant payment or delivery as described in the prior
sentence, FICC's obligation to make such payment or delivery would be
discharged and satisfied in full. Proposed new subparagraph (vii) of
proposed new paragraph (b) of Section 8 would state that the market
value of all GC Repo Securities would be determined by the relevant
Sponsored GC Clearing Agent Bank each Business Day.
In addition, FICC proposes to move language from current Section
8(a) to proposed new Section 8(c). Proposed new Section 8(c) would
state that notwithstanding the foregoing and any other activities the
Sponsoring Member may perform in its capacity as agent for Sponsored
Members, each Sponsored Member would be principally obligated to FICC
with respect to all securities settlement obligations under the Rules,
and the Sponsoring Member would not be a principal under the Rules with
respect to the settlement obligations of its Sponsored Members. This
provision would apply to both Sponsored GC Trades as well as other
kinds of Sponsored Member Trades.
FICC also proposes to revise Section 9 of Rule 3A to state which
provisions would apply to Sponsored Member Trades other than Sponsored
GC Trades, which provisions would apply only to Sponsored GC Trades,
and which provisions would apply to all Sponsored Member Trades.
Specifically, FICC proposes to add language to state that Section 9(a)
applies to Sponsored Member Trades other than Sponsored GC Trades and
current Sections 9(b), (c), (d), and (e), which would be reorganized as
proposed new Sections 9(c)(i), (c)(ii), (c)(iii), and (c)(iv),
respectively, applies to all Sponsored Member Trades. In addition, FICC
proposes to add a new Section 9(b) to Rule 3A, which would only apply
to Sponsored GC Trades and would state that each Sponsoring Member and
Sponsored Member would be obligated to pay to FICC, and/or would be
entitled to receive from FICC, the following amounts: Forward Mark
Adjustment Payment and Interest Adjustment Payment. It would also state
that such amounts would be payable and receivable as though they were
amounts described in Rule 13.
FICC proposes to add Section 10(i) to Rule 3A that would state that
for purposes of applying Rule 4 to a Sponsoring Member Omnibus Account,
each Sponsored GC Trade would be treated as a GCF Repo Transaction,
each GC Funds Lender and GC Funds Borrower would be treated as a GCF
Counterparty, and each Sponsored GC Clearing Agent Bank would be
treated as a GCF Clearing Agent Bank.
FICC would also revise Section 4 of Rule 5 (Comparison System) to
add Sponsored GC Trades. Specifically, Section 4 of Rule 5 would be
revised to state that GCF Repo Transactions and Sponsored GC Trades
must be submitted exactly as executed.
FICC is also proposing to add a new Schedule of Sponsored GC Trade
Timeframes that would only be applicable to Sponsored GC Trades. The
proposed new Schedule of Sponsored GC Trade Timeframes would state that
the time during which reports would be made available with respect to
end of day Clearing Fund requirements and funds-only settlement
requirements would be from 10:30 p.m. to 2:00 a.m. In addition, it
would state that 2:00 p.m. would be the time during which reports would
be made available with respect to intraday Clearing Fund requirements,
and intraday funds-only settlement requirements. The proposed new
Schedule of Sponsored GC Trade Timeframes would also state that at
10:00 a.m., funds-only settlement debits and credits are executed via
the Federal Reserve's National Settlement Service and at 4:30 p.m., the
intraday funds-only settlement debits and credits are executed via the
Federal Reserve's National Settlement Service.
The proposed new Schedule of Sponsored GC Trade Timeframes would
also state that 9:00 a.m. would be the deadline for the GC Funds
Borrower to satisfy the obligation described in proposed Section
8(b)(ii) of Rule 3A in accordance with the provisions of proposed
Section 8(b)(vi) of Rule 3A. It would also state that FICC reserves the
right to also require a GC Funds Borrower to satisfy the obligation
described in proposed Section 8(b)(ii) on an intraday basis based on
the market value of the applicable GC Repo Securities as determined by
the GC Clearing Agent Bank in accordance with proposed Section
8(b)(vii) of Rule 3A. It would also state that 12:00 p.m. would be the
deadline for the GC Funds Borrower (or if the repo rate for the
relevant Sponsored GC Trade is negative, the GC Funds Lender) to pay to
FICC the accrued GC Daily Repo Interest as described in proposed
Section 8(b)(iv) in accordance with the provisions of proposed Section
8(b)(vi) of Rule 3A (unless the End Leg of the related Sponsored GC
Trade is due to settle on the same day). The proposed new Schedule of
Sponsored GC Timeframes would state that any accrued GC Daily Repo
Interest that is due on the settlement day of the End Leg of the
related Sponsored GC Trade would be paid in connection with the
settlement of the End Leg.
The proposed new Schedule of Sponsored GC Trade Timeframes would
also state that 5:00 p.m. would be the deadline for final input by the
Sponsoring Members to FICC of Sponsored GC Trade data. Furthermore,
5:30 p.m. would be the deadline for (i) full settlement of the Start
Leg of the Sponsored GC Trade in accordance with proposed Section
7(b)(ii)(C) of Rule 3A, (ii) substitutions of Purchased GC Repo
Securities in accordance with proposed Section 8(b)(v) of Rule 3A, and
(iii) satisfaction of GC Collateral Return Obligations and cash payment
obligations associated with GC Collateral Return Entitlements by GC
Funds Lenders and GC Funds Borrowers, respectively, in accordance
[[Page 29342]]
with proposed Section 8(b)(i) of Rule 3A.
The proposed new Schedule of Sponsored GC Trade Timeframes would
also state that the time by which a GC Funds Lender would be required
to deliver any securities to a GC Funds Borrower in connection with
proposed Section 8(b)(iii) of Rule 3A would be determined by the
relevant Sponsored GC Clearing Agent Bank. Furthermore, it would state
that all times may be extended as needed by FICC to (i) address
operational or other delays that would reasonably prevent members or
FICC from meeting the deadline or timeframe, as applicable, or (ii)
allow the FICC time to operationally exercise its existing rights under
the Rules. In addition, it would state that times applicable to FICC
are standards and not deadlines and that actual processing times may
vary slightly, as necessary.
FICC also proposes to revise the Schedule for the Deletion of Trade
Data to state which provisions would not apply to Sponsored GC Trades.
In addition, FICC would also add language to state that trade data on
Sponsored GC Trades that remain uncompared on a given Business Day
would pend in the Comparison System until FICC's deadline for final
input by Sponsoring Members of Sponsored GC Trade data (as provided in
the Schedule of Sponsored GC Trade Timeframes) on such Business Day.
FICC would also add language to state that trade data on Sponsored GC
Trades, which have been compared in the Comparison System pursuant to
Rule 6A but the Start Legs of which have not fully settled at a
Sponsored GC Clearing Agent Bank by the deadline set forth in FICC's
proposed new Schedule of Sponsored GC Trade Timeframes, would be
deleted from the Comparison System during the same processing cycle as
the Repo Start Date for such Sponsored GC Trades.
FICC also proposes to revise the Schedule of Required Data
Submission Items to state that items (1) and (2) in this schedule would
not be required for Sponsored Member Trades.
FICC also proposes to revise the following schedules to exclude
Sponsored GC Trades: (i) Schedule of Required and Accepted Data
Submission Items for a Substitution and (ii) Schedule of Required and
Accepted Data Submission Items for New Securities Collateral.
In addition, as described above, FICC would add a proposed new
Schedule of GC Comparable Securities.
(iii) Add Language to Rule 3A To Allow FICC To Recognize, for CCLF
Calculation Purposes, Any Offsetting Settlement Obligations as Between
a Sponsoring Member's Netting Account and Its Sponsoring Member Omnibus
Account To Ensure That a Sponsoring Member's CCLF Obligation Is
Calculated in a Manner That More Closely Aligns With the Liquidity Risk
Associated With Sponsored Member Trades
As described above, Sponsored Member Trades between a Sponsoring
Member and its Sponsored Member in the existing Service do not
independently create liquidity risk for FICC. This is because FICC is
not required to complete settlement of such Sponsored Member Trades in
the event that either the Sponsoring Member or Sponsored Member
defaults. In the event that the Sponsoring Member defaults, Section
14(c) of Rule 3A permits FICC to close out (rather than settle) the
Sponsored Member Trades of the defaulter's Sponsored Members.\21\
Likewise, if the Sponsored Member defaults, FICC is also not required
to complete settlement. Rather, under Section 11 of Rule 3A, FICC may
offset its settlement obligations to the Sponsoring Member against the
Sponsoring Member's obligations under the Sponsoring Member Guaranty to
perform on behalf of its defaulted Sponsored Member.\22\
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\21\ Rule 3A, Section 14(c), supra note 4.
\22\ Rule 3A, Section 11, supra note 4.
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Accordingly, liquidity risk to FICC is only increased to the extent
the Sponsoring Member enters into a Repo Transaction with a third-party
Netting Member that is novated to FICC. Such a Repo Transaction creates
liquidity risk to FICC because, in the event of the Sponsoring Member's
default, FICC is required to settle with such third-party Netting
Member.\23\
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\23\ As described above, a Sponsored GC Trade would impact
FICC's liquidity risk similarly to a Sponsored Member Trade in the
existing Service in this regard, in that liquidity risk to FICC
would only be increased to the extent the Sponsoring Member enters
into an offsetting Repo Transaction with a third-party Netting
Member that is novated to FICC.
---------------------------------------------------------------------------
In light of this, FICC believes that a Sponsored Member Trade
should only increase the obligation of a Sponsoring Member with respect
to FICC's CCLF to the extent the Sponsoring Member offsets that trade
with a Repo Transaction entered into with a third-party Netting Member
that is novated to FICC. To the extent a Sponsoring Member either (1)
enters into an offsetting Sponsored Member Trade with another Sponsored
Member (i.e., it runs a matched book of Sponsored Member Trades) or (2)
simply does not enter into an offsetting transaction at all, then the
Sponsored Member Trade has no effect on FICC's liquidity risk, and so
should not affect the Sponsoring Member's CCLF obligation.
Currently, FICC does not impose a CCLF obligation on a Sponsoring
Member to the extent the Sponsoring Member runs a matched book of
Sponsored Member Trades. This is because FICC calculates a Sponsoring
Member's CCLF obligation based on the net settlement obligations of its
Sponsoring Member Omnibus Account and the net settlement obligations of
the Sponsoring Member's netting account.\24\ In other words, FICC nets
all of the positions recorded in the Sponsoring Member's Sponsoring
Member Omnibus Account, regardless of whether they relate to the same
Sponsored Member, and separately nets all of the positions in
Sponsoring Member's netting account. As a result, to the extent a
Sponsoring Member enters into perfectly offsetting Sponsored Member
Trades, the settlement obligations of those trades will net out in the
Sponsoring Member Omnibus Account and in the netting account and
thereby create no CCLF obligation for the Sponsoring Member.
---------------------------------------------------------------------------
\24\ See Rule 3A, Section 8(b) and Rule 22A, Section 2a(b),
supra note 4.
---------------------------------------------------------------------------
However, currently, if a Sponsoring Member enters into a Sponsored
Member Trade without entering into an offsetting transaction, it is
subject to CCLF obligations for the position of its Sponsored Member
recorded in its Sponsoring Member Omnibus Account as well as its own
position arising from the Sponsored Member Trade recorded in its
netting account. This is because, although the positions in the
Sponsoring Member Omnibus Account and netting account arising from such
Sponsored Member Trade are perfectly offsetting, FICC does not
currently net them against each other for CCLF purposes due to the
current CCLF allocation being calculated at the participant account
level.\25\
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\25\ Consider the following example: A Sponsoring Member sells
100 shares of CUSIP 123 to a Sponsored Member in a Repo Transaction.
That transaction will result in the Sponsoring Member's netting
account being long 100 shares of CUSIP 123 and the Sponsoring
Member's Sponsoring Member Omnibus Account being short 100 shares of
CUSIP 123. Under the existing Rules, the Sponsoring Member will have
a CCLF obligation for both the long position in the netting account
as well as the short position in the Sponsoring Member Omnibus
Account even though, as described above, the Sponsored Member Trade
does not independently create liquidity risk for FICC.
Although this limitation on offset is consistent with FICC's
approach of not offsetting the positions of two accounts of the same
Member for CCLF purposes, there is an important difference between
Sponsored Member Trades and other FICC repo activity. As discussed
above, the Service requires that a Sponsoring Member have a
Sponsoring Member Omnibus Account that is separate from its netting
account. For all other repo activity, the Member has the option to
collapse all of its activity into a single participant account in
order to achieve a similar netting benefit. Sponsoring Members do
not have that option with respect to their Sponsored Member Trades,
so FICC believes this proposed change is necessary to ensure that a
Sponsoring Member's CCLF obligations are calculated in a manner that
more closely aligns with the liquidity risk associated with
Sponsored Member Trades.
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[[Page 29343]]
In order to ensure that a Sponsoring Member's CCLF obligation is
calculated in a manner that more closely aligns with the liquidity risk
associated with Sponsored Member Trades, FICC proposes to add language
to Rule 3A to allow it to recognize, for CCLF calculation purposes, any
offsetting settlement obligations as between a Sponsoring Member's
netting account and its Sponsoring Member Omnibus Account. This
proposed change would ensure that all Sponsored Member Trades, whether
perfectly offset by other Sponsored Member Trades or not, would be
recognized for CCLF purposes as not affecting FICC's liquidity risk.
With respect to Sponsored GC Trades in particular, this proposed change
would ensure that FICC applies an appropriate CCLF obligation to a
Sponsoring Member in the event a Sponsored GC Clearing Agent Bank
allocates to a Sponsored GC Trade a different security than the
security that underlies an offsetting Sponsored Member Trade.\26\
---------------------------------------------------------------------------
\26\ For example, a Sponsoring Member may enter into a Sponsored
GC Trade on a Generic CUSIP Number and an offsetting Sponsored
Member Trade in a specific CUSIP Number (e.g., CUSIP 123). Although
CUSIP 123 may be an eligible security under the Generic CUSIP Number
underlying the Sponsored GC Trade, the Sponsored GC Clearing Agent
Bank may allocate to the Sponsored GC Trade a different eligible
CUSIP Number (e.g., CUSIP 456) from the securities eligibility
schedule. In that situation, the CUSIP 123 and CUSIP 456 positions
in the Sponsoring Member's netting account and the Sponsoring Member
Omnibus Account would not offset within the respective account, but
the proposed change to Section 8(d) of Rule 3A would allow FICC to
offset the CUSIP 123 and CUSIP 456 positions across the Sponsoring
Member's netting account and Sponsoring Member Omnibus Account to
ensure that the CCLF obligation applicable to the Sponsoring Member
accurately reflects the liquidity risk that its positions create.
---------------------------------------------------------------------------
Specifically, FICC proposes to add new Section 8(d) to Rule 3A,
which would state that FICC, when calculating Individual Total Amounts
\27\ for a Sponsoring Member, may net any offsetting settlement
obligations across the Sponsoring Member's proprietary positions and
the positions of its Sponsored Members in its Sponsoring Member Omnibus
Account(s).
---------------------------------------------------------------------------
\27\ The Individual Total Amount dictates the maximum amount of
liquidity a Member must provide under FICC's CCLF. See Rule 22A,
Section 2a(b), supra note 4.
---------------------------------------------------------------------------
Expected Member Impact
FICC has conducted a study for the period from January 1, 2021 to
March 30, 2021 as to the impact on FICC/GSD Netting Members' CCLF
allocations as a result of recognizing offset between positions in a
Sponsoring Member's netting account and its Sponsoring Member Omnibus
Account. The impact of recognition of the offsetting positions as
between a Sponsoring Member's netting account and its Sponsoring Member
Omnibus Account relates strictly to the allocation of the total CCLF
facility amongst the FICC/GSD netting membership, with certain
Sponsoring Members receiving less allocation of CCLF once the offsets
between the Sponsoring Member's netting account and the Sponsoring
Member Omnibus Account are recognized.
(iv) Remove the Requirement from Section 2 of Rule 3A That a Sponsoring
Member Provide a Quarterly Representation to FICC That Each of Its
Sponsored Members Is a ``Qualified Institutional Buyer'' as Defined in
Rule 144A, or Is a Legal Entity That, Although Not Organized as an
Entity Specifically Listed in Paragraph (a)(1)(i) of Rule 144A,
Satisfies the Financial Requirements Necessary To Be a ``Qualified
Institutional Buyer'' as Specified in That Paragraph
FICC also proposes to remove the requirement from Section 2 of Rule
3A that a Sponsoring Member provide to FICC a quarterly representation
that each of its Sponsored Members is a ``qualified institutional
buyer'' as defined in Rule 144A, or is a legal entity that, although
not organized as an entity specifically listed in paragraph (a)(1)(i)
of Rule 144A, satisfies the financial requirements necessary to be a
``qualified institutional buyer'' as specified in that paragraph.\28\
FICC proposes to remove this requirement because Section 3(d) of Rule
3A separately requires a Sponsoring Member to notify FICC if its
Sponsored Member is no longer either a ``qualified institutional
buyer'' as defined in Rule 144A, or a legal entity that, although not
organized as an entity specifically listed in paragraph (a)(1)(i) of
Rule 144A, satisfies the financial requirements necessary to be a
``qualified institutional buyer'' as specified in that paragraph.\29\
As such, FICC views the quarterly representation requirement in Section
2 of Rule 3A to be an overlapping and redundant requirement that
creates administrative burdens for FICC and for its Sponsoring Members
that are, in FICC's view, unnecessary.
---------------------------------------------------------------------------
\28\ Rule 3A, Section 2(d), supra note 4.
\29\ Rule 3A, Section 3(d), supra note 4.
---------------------------------------------------------------------------
To effectuate the proposed changes described above, FICC would
revise Rule 3A to remove Section 2(d).
(v) A Clarification, Certain Corrections, and Certain Technical Changes
FICC proposes to make a clarification to the Rules. Specifically,
in the definition of Initial Haircut, FICC proposes to add the phrase
``, if any,'' after ``absolute value of the dollar difference.''
FICC also proposes to make certain corrections to the Rules.
First, FICC proposes to correct the definition of Initial Haircut
in Rule 1 so that it would be defined, with respect to Sponsored Member
Trades that are not Sponsored GC Trades, as the absolute dollar
difference between the Market Value of the Sponsored Member Trade, as
of the settlement date of the Start Leg, and the Contract Value of the
Start Leg of the Sponsored Member Trade, instead of the Contract Value
of the Close Leg (as is currently provided).
Second, FICC proposes to correct the reference in Rule 3A, Section
3(a)(ii)(B) to paragraph (a)(1)(i)(H) of Rule 144A instead of paragraph
(a)(1)(i) of Rule 144A (as is currently provided).
Third, FICC also proposes to correct a typographical error in
Section VII (Fee Structure) by revising from the reference to
Additional Sponsored GC Credit instead of Additional Sponsored GC
Assessment (as is currently provided).
FICC also proposes to make certain technical changes, such as
numbering and renumbering sections and making conforming grammatical
changes.
For example, because FICC is removing Section 2(d) of Rule 3A, FICC
proposes to renumber the subsequent subsections in Rule 3A, Section 2.
Specifically, FICC proposes to renumber current Sections 2(e), 2(f),
2(g), 2(h), 2(i), and 2(j) as Sections 2(d), 2(e), 2(f), 2(g), 2(h),
and 2(i), respectively.
In addition, Section 7 of Rule 3A, in connection with FICC's
creation of a proposed new paragraph (a) as described above, FICC
proposes to renumber current Sections 7(a), 7(b), 7(c) and 7(d) as new
Sections 7(a)(i), 7(a)(ii), 7(a)(iii) and 7(a)(iv), respectively. In
addition, in current Sections 8(b) and 8(c), FICC proposes to revise
the references from Section 7 to Section 7(a) to reflect the proposed
renumbering of Section 7 described above.
Likewise, in Section 8 of Rule 3A, in connection with FICC's
creation of a
[[Page 29344]]
proposed new paragraph (a) as described above, FICC proposes to
renumber current Sections 8(a), 8(b), 8(c), 8(d), 8(e), 8(f) and 8(g)
as new Sections 8(a)(i), 8(a)(ii), 8(a)(iii), 8(a)(iv), 8(a)(v),
8(a)(vi), and 8(a)(vii), respectively. In addition, in current Section
8(a), FICC proposes to revise the reference from Section 8(c) to
Section 8(a)(iii) to reflect the proposed renumbering of Section 8
described above. In current Section 8(f), FICC also proposes to revise
the reference from subsection (b) to subsection (a)(ii) to reflect the
proposed renumbering of Section 8 described above.
In addition, in current Section 9 of Rule 3A, in connection with
FICC's addition of proposed new paragraph (b) as described above, FICC
proposes to renumber current Sections 9(b), 9(c), 9(d) and 9(e) as new
Sections 9(c)(i), 9(c)(ii), 9(c)(iii) and 9(c)(iv), respectively.
Because FICC is adding Sponsored GC Trades to the definition of
Sponsored Member Trade as described above, FICC would create new
sections (a) and (b) and renumber current sections (a) and (b) as
subsections (i) and (ii) of new section (a). FICC would also revise the
definition of Same-Day Settling Trade and current Section 8(c) and
Section 18(a) of Rule 3A to reflect the proposed changes to the
Sponsored Member Trade definition.
In addition, in the definition of Initial Haircut, FICC is
proposing to add section numbers (i) and (ii) to make it clear that
proposed section (i) of the definition would apply to any Sponsored
Member Trade that is not a Sponsored GC Trade and proposed section (ii)
would apply to any Sponsored Member Trade.
In addition, FICC would also make certain conforming grammatical
changes. For example, FICC would add a comma and move the word ``and''
in the definition of Generic CUSIP Number to reflect the addition of
Sponsored GC Trades. Similarly, in each of the (i) Schedule of Required
and Accepted Data Submission Items for a Substitution and (ii) Schedule
of Required and Accepted Data Submission Items for New Securities
Collateral, FICC would also add a comma and move the word ``and'' as
conforming grammatical changes. As another example, FICC would also add
the word ``or'' in the definition of Sponsored Member Trade to reflect
the addition of Sponsored GC Trades. In the definition of Initial
Haircut, FICC would also add the word ``and'' to reflect the addition
of proposed section (ii). As another example, in Section 18(a) of Rule
3A, FICC would revise the reference from subsection to subsections to
reflect the proposed changes to the definition of Sponsored Member
Trades described above.
2. Statutory Basis
FICC believes these proposed changes are consistent with the
requirements of the Act, and the rules and regulations applicable to a
registered clearing agency. Specifically, FICC believes that the
proposed changes are consistent with Section 17A(b)(3)(F) of the
Act,\30\ and Rule 17Ad-22(e)(7),\31\ Rule 17Ad-22(e)(18),\32\ and Rule
17Ad-22(e)(21)(i),\33\ as promulgated under the Act, for the reasons
stated below.
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78q-1(b)(3)(F).
\31\ 17 CFR 240.17Ad-22(e)(7).
\32\ 17 CFR 240.17Ad-22(e)(18).
\33\ 17 CFR 240.17Ad-22(e)(21)(i).
---------------------------------------------------------------------------
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, (ii) promote the prompt and accurate clearance
and settlement of securities transactions, and (iii) in general, to
protect investors and the public interest.\34\
---------------------------------------------------------------------------
\34\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
FICC believes that the proposed changes described in Item
II(A)1(ii) above, i.e., to add the Sponsored GC Service, are designed
to remove certain impediments to and perfect the mechanism of a
national settlement system for the prompt and accurate clearance and
settlement of securities transactions. This is because the Sponsored GC
Service would allow Sponsoring Members and their Sponsored Member
clients to submit for clearing Repo Transactions that settle on a tri-
party repo platform of a Sponsored GC Clearing Agent Bank in a manner
consistent with the way Sponsoring Members and their Sponsored Member
clients settle tri-party repo transactions outside of central clearing.
In particular, as described above, the existing Service's requirement
that Sponsored Member Trades be margined exclusively in cash through
FICC's funds-only settlement process is currently an impediment that
discourages term repo activity through the Service because money market
funds and other mutual funds are not generally operationally equipped
to provide or receive cash margin in connection with their term repo
activity (either bilaterally or in central clearing). As such, FICC
believes that adding the Sponsored GC Service would make it more
operationally efficient for Sponsoring Members and their Sponsored
Members that are money market funds and other mutual funds to transact
Repo Transactions (particularly term Repo Transactions) with each other
through FICC, and thereby, remove the impediment, consistent with
Section 17A(b)(3)(F) of the Act.\35\
---------------------------------------------------------------------------
\35\ Id.
---------------------------------------------------------------------------
FICC also believes the proposed changes described in Item
II(A)1(ii) above, i.e., to add the Sponsored GC Service, are designed
to promote the prompt and accurate clearance and settlement of
securities transactions, consistent with Section 17A(b)(3)(F) of the
Act.\36\ By allowing Sponsoring Members and Sponsored Member clients to
submit for clearing Repo Transactions that settle on the tri-party repo
platform of a Sponsored GC Clearing Agent Bank in a manner consistent
with the way Sponsoring Members and their Sponsored Member clients
settle tri-party repo transactions outside of central clearing today,
FICC believes the proposed changes would enable Sponsoring Members to
submit a greater number of securities transactions to be cleared and
settled by FICC. In particular, FICC believes Sponsoring Members would
be able to submit to FICC more term Repo Transactions. FICC's clearance
and settlement of such term Repo Transactions would promote the prompt
and accurate clearance and settlement of securities transactions by
increasing the number of transactions subject to FICC's risk management
and guaranty of settlement. Therefore, FICC believes that the proposed
changes described in Item II(A)1(ii) above are designed to promote the
prompt and accurate clearance and settlement of securities
transactions, consistent with Section 17A(b)(3)(F) of the Act.\37\
---------------------------------------------------------------------------
\36\ Id.
\37\ Id.
---------------------------------------------------------------------------
FICC also believes that the proposed changes described in Item
II(A)1(iii) above, i.e., to add language to Rule 3A to enable FICC to
recognize, for CCLF calculation purposes, any offsetting settlement
obligations as between a Sponsoring Member's netting account and its
Sponsoring Member Omnibus Account, are designed to remove certain
impediments to and perfect the mechanism of a national settlement
system for the prompt and accurate clearance and settlement of
securities transactions, consistent with Section 17A(b)(3)(F) of the
Act.\38\ Currently, as described above, if a Sponsoring Member enters
into a Sponsored Member Trade that is not perfectly offset by another
Sponsored Member
[[Page 29345]]
Trade, it is subject to a CCLF obligation for its positions that is in
excess of the liquidity risk its positions generate. FICC believes that
this approach to CCLF calculations unnecessarily increases the costs
for Sponsoring Members and therefore, may be an impediment that
discourages the submission of Sponsored Member Trades to FICC. With
this proposed change, FICC would be able to calculate a Sponsoring
Member's CCLF obligation in a manner that more closely aligns with the
liquidity risk associated with Sponsored Member Trades and thereby
removes the aforementioned impediment. As such, FICC believes the
proposed changes described in Item II(A)1(iii) above are designed to
remove certain impediments to and perfect the mechanism of a national
settlement system for the prompt and accurate clearance and settlement
of securities transactions, consistent with Section 17A(b)(3)(F) of the
Act.\39\
---------------------------------------------------------------------------
\38\ Id.
\39\ Id.
---------------------------------------------------------------------------
FICC also believes that the proposed changes described in Item
II(A)1(iii) above, i.e., to add language to Rule 3A to enable FICC to
recognize, for CCLF calculation purposes, any offsetting settlement
obligations as between a Sponsoring Member's netting account and its
Sponsoring Member Omnibus Account, are designed to promote the prompt
and accurate clearance and settlement of securities transactions,
consistent with Section 17A(b)(3)(F) of the Act.\40\ As described
above, if a Sponsoring Member enters into a Sponsored Member Trade
without another offsetting Sponsored Member Trade, it is subject to a
CCLF obligation for its positions that is in excess of the liquidity
risk that its positions generate. With this proposed change, FICC would
be able to calculate a Sponsoring Member's CCLF obligation in a manner
that more closely aligns with the liquidity risk associated with
Sponsored Member Trades and thereby reduce unnecessary costs. FICC
believes that reducing unnecessary costs could encourage Sponsoring
Members to submit a greater number of securities transactions to be
cleared and settled by FICC. FICC's clearance and settlement of a
greater number of securities transactions would promote the prompt and
accurate clearance and settlement of securities transactions by
increasing the number of transactions subject to FICC's risk management
and guaranty of settlement. Therefore, FICC believes that the proposed
changes described in Item II(A)1(iii) above are designed to promote the
prompt and accurate clearance and settlement of securities
transactions, consistent with Section 17A(b)(3)(F) of the Act.\41\
---------------------------------------------------------------------------
\40\ Id.
\41\ Id.
---------------------------------------------------------------------------
FICC believes the proposed changes described in Item II(A)1(iv)
above, i.e., to remove the requirement from Section 2 of Rule 3A that a
Sponsoring Member provide a quarterly representation to FICC that each
of its Sponsored Members is a ``qualified institutional buyer'' as
defined in Rule 144A, or is a legal entity that, although not organized
as an entity specifically listed in paragraph (a)(1)(i) of Rule 144A,
satisfies the financial requirements necessary to be a ``qualified
institutional buyer'' as specified in that paragraph, are designed, in
general, to protect investors and the public interest, consistent with
Section 17A(b)(3)(F) of the Act.\42\ FICC believes the administrative
burdens created for FICC and the Sponsoring Members by the quarterly
representation requirement in Section 2 of Rule 3A is unnecessary
because it is an overlapping and redundant requirement and does not add
any substantive benefit. As described above, Section 3(d) of Rule 3A
separately requires a Sponsoring Member to notify FICC if its Sponsored
Member is no longer either a ``qualified institutional buyer'' as
defined in Rule 144A, or a legal entity that, although not organized as
an entity specifically listed in paragraph (a)(1)(i) of Rule 144A,
satisfies the financial requirements necessary to be a ``qualified
institutional buyer'' as specified in that paragraph.\43\ As such, FICC
believes that removing this overlapping and redundant quarterly
representation requirement would facilitate the effective and efficient
operation of FICC and the Service and therefore, would enable FICC to
better serve its Sponsoring Members. Furthermore, with these proposed
changes, there would be a clear and singular mechanism for Sponsoring
Members to notify FICC of a Sponsored Member's failure to satisfy the
above-described requirement (as opposed to having overlapping and
redundant requirements that could cause confusion). FICC believes this
proposed change would enhance clarity and therefore, may enhance
compliance by the Sponsoring Members with the requirement to notify
FICC if a Sponsored Member is no longer either a ``qualified
institutional buyer'' as defined in Rule 144A, or a legal entity that,
although not organized as an entity specifically listed in paragraph
(a)(1)(i) of Rule 144A, satisfies the financial requirements necessary
to be a ``qualified institutional buyer'' as specified in that
paragraph. Therefore, FICC believes that the proposed changes described
in Item II(A)1(iv) above, are designed, in general, to protect
investors and the public interest, consistent with Section 17A(b)(3)(F)
of the Act.\44\
---------------------------------------------------------------------------
\42\ Id.
\43\ Rule 3A, Section 3(d), supra note 4.
\44\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
FICC believes the proposed clarification, corrections, and
technical changes described in Item II(A)1(v) above are also designed
to promote the prompt and accurate clearance and settlement of
securities transactions, consistent with Section 17A(b)(3)(F) of the
Act, by enhancing clarity and transparency regarding the Service.\45\
Having transparent and clear provisions regarding the Service would
enable Members to better understand the operation of the Service and
would provide Members with increased predictability and certainty
regarding their rights and obligations. FICC believes that this
predictability and certainty regarding their rights and obligations may
encourage Sponsoring Members to submit a greater number of securities
transactions to be cleared and settled by FICC. FICC's clearance and
settlement of such securities transactions would promote the prompt and
accurate clearance and settlement of securities transactions by
increasing the number of transactions subject to FICC's risk management
and guaranty of settlement. Therefore, FICC believes the proposed
clarification, corrections, and technical changes described in Item
II(A)1(v) above are designed to promote the prompt and accurate
clearance and settlement of securities transactions, consistent with
Section 17A(b)(3)(F) of the Act.\46\
---------------------------------------------------------------------------
\45\ Id.
\46\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(7) under the Act requires FICC to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to effectively measure, monitor, and manage the
liquidity risk that arises in or is borne by the covered clearing
agency, including measuring, monitoring, and managing its settlement
and funding flows on an ongoing and timely basis, and its use of
intraday liquidity.\47\ FICC believes that the proposed changes
described in Item II(A)1(iii) above are consistent with Rule 17Ad-
22(e)(7) because, as described above, all Sponsored Member Trades
(including Sponsored Member Trades in the existing Service and
Sponsored GC Trades in the proposed Sponsored GC Service) do not
independently create a
[[Page 29346]]
liquidity risk. FICC believes the proposed changes described in Item
II(A)1(iii) above would allow FICC to calculate a Sponsoring Member's
CCLF obligation in a manner that more closely aligns with the liquidity
risk associated with Sponsored Member Trades. As such, FICC believes
that the proposed changes described in Item II(A)1(iii) above are
reasonably designed to effectively measure, monitor, and manage the
liquidity risk that arises in or is borne by the covered clearing
agency, including measuring, monitoring, and managing its settlement
and funding flows on an ongoing and timely basis, and its use of
intraday liquidity, consistent with Rule 17Ad-22(e)(7).\48\
---------------------------------------------------------------------------
\47\ 17 CFR 240.17Ad-22(e)(7).
\48\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(18) under the Act requires FICC to 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.\49\ FICC believes that the proposed changes described in Item
II(A)1(iv) above would enhance clarity and therefore, may enhance
compliance by the Sponsoring Members with the requirement to notify
FICC if a Sponsored Member is no longer either a ``qualified
institutional buyer'' as defined in Rule 144A, or a legal entity that,
although not organized as an entity specifically listed in paragraph
(a)(1)(i) of Rule 144A, satisfies the financial requirements necessary
to be a ``qualified institutional buyer'' as specified in that
paragraph. As described above, this requirement is set forth in Section
3(d) of Rule 3A.\50\ With these proposed changes, there would be a
clear and singular mechanism for Sponsoring Members to notify FICC of a
Sponsored Member's failure to satisfy the above-described requirement
(as opposed to having overlapping and redundant requirements that could
cause confusion). Therefore, FICC believes the proposed changes
described in Item II(A)1(iv) above are consistent with Rule 17Ad-
22(e)(18).\51\
---------------------------------------------------------------------------
\49\ 17 CFR 240.17Ad-22(e)(18).
\50\ Rule 3A, Section 3(d), supra note 4.
\51\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(21)(i) under the Act requires FICC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to be efficient and effective in meeting the
requirements of its participants and the markets it serves, and have
the covered clearing agency's management regularly review the
efficiency and effectiveness of its clearing and settlement
arrangements.\52\ FICC believes that the proposed changes described in
Item II(A)1(ii) above would improve the efficiency and effectiveness of
FICC's clearing and settlement arrangements by making it more
operationally efficient for Sponsoring Members and their Sponsored
Members that are money market funds and other mutual funds to transact
Repo Transactions (particularly term Repo Transactions) through FICC by
allowing them to settle such Repo Transactions on the tri-party repo
platform of a Sponsored GC Clearing Agent Bank in a similar manner to
the way such Sponsoring Members and Sponsored Members settle tri-party
repo transactions with each other outside of central clearing. FICC
also believes that the proposed rule changes described in Item
II(A)1(iv) above would improve the efficiency and effectiveness of
FICC's clearing and settlement arrangements by removing the quarterly
representation requirement of Sponsoring Members under Section 2 of
Rule 3A, which, as described above, overlaps and is redundant with the
separate requirement under Section 3(d) of Rule 3A that requires a
Sponsoring Member to notify FICC if its Sponsored Member is no longer
either a ``qualified institutional buyer'' as defined in Rule 144A, or
a legal entity that, although not organized as an entity specifically
listed in paragraph (a)(1)(i) of Rule 144A.\53\ Therefore, FICC
believes that the proposed changes described in Items II(A)1(ii) and
II(A)1(iv) above are consistent with Rule 17Ad-22(e)(21)(i).\54\
---------------------------------------------------------------------------
\52\ 17 CFR 240.17Ad-22(e)(21)(i).
\53\ Rule 3A, Section 3(d), supra note 4.
\54\ 17 CFR 240.17Ad-22(e)(21)(i).
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
FICC believes that the proposed changes described in Item
II(A)1(ii) above, i.e., to add the Sponsored GC Service, could promote
competition by allowing a greater variety of institutions to become
Sponsoring Members and Sponsored Members and could encourage Sponsoring
Members and Sponsored Members to submit to FICC a greater number and
variety of transactions, including, in particular, term Repo
Transactions.
The proposed changes described in Item II(A)1(ii) above, i.e., to
add the Sponsored GC Service, which would allow Sponsoring Members and
their Sponsored Member clients to submit for clearing Repo Transactions
that settle on a tri-party repo platform of a Sponsored GC Clearing
Agent Bank in a manner consistent with the way Sponsoring Members and
their Sponsored Member clients settle tri-party repo transactions
outside of central clearing today, could promote competition. FICC
believes this new Sponsored GC Service could encourage more
institutions to become Sponsoring Members and Sponsored Members. As
described above, the existing Service's requirement that all Sponsored
Member Trades be margined exclusively in cash through FICC's funds-only
settlement process is not conducive to certain cash provider Sponsored
Members, particularly money market funds and other mutual funds, being
able to transact Repo Transactions with their Sponsoring Members in
central clearing. Therefore, FICC believes the proposed changes
described in Item II(A)1(ii) above could promote competition because
they could cause Sponsoring Members to accept a greater number of
Sponsored Members, including those institutions who may not be
generally operationally equipped to provide or receive cash margin in
connection with their term repo activity (either bilaterally or in
central clearing). FICC also believes that the ability to submit for
clearing Repo Transactions that settle on a tri-party repo platform of
a Sponsored GC Clearing Agent Bank in a manner consistent with the way
Sponsoring Members and their Sponsored Member clients settle tri-party
repo transactions outside of central clearing today may also attract
more institutions to become Sponsoring Members.
Furthermore, FICC believes that these proposed changes described in
Item II(A)1(ii) above may also encourage Sponsoring Members and
Sponsored Members to submit to FICC a greater number and variety of
securities transactions, including, in particular, term Repo
Transactions. As described above, in order to engage in term repo
activity, money market funds and other mutual funds typically require
the support of a tri-party repo clearing bank to administer the
collateral management on such trades. The new Sponsored GC Service
would allow Sponsoring Members and their Sponsored Member clients to
submit for clearing Repo Transactions that settle on the tri-party repo
platform of a Sponsored GC
[[Page 29347]]
Clearing Agent Bank in a manner consistent with the way Sponsoring
Members and Sponsored Members settle tri-party repo transactions
outside of central clearing, thereby making it more operationally
efficient for them to transact Repo Transactions (particularly term
Repo Transactions) with each other through FICC. Therefore, FICC
believes these proposed changes described in Item II(A)1(ii) above
could promote competition because they could encourage Sponsoring
Members and Sponsored Members to submit to FICC a greater number and
variety of securities transactions, including term Repo Transactions.
FICC believes that the proposed changes described in Item
II(A)1(iii) above could promote competition. FICC believes that the
proposed changes described in Item II(A)1(iii) above may encourage
Sponsoring Members and Sponsored Members to submit to FICC a greater
number of securities transactions. As described above, the proposed
changes would allow FICC to recognize, for CCLF calculation purposes,
any offsetting settlement obligations as between a Sponsoring Member's
netting account and its Sponsoring Member Omnibus Account to ensure
that a Sponsoring Member's CCLF obligation is calculated in a manner
that more closely aligns with the liquidity risk associated with
Sponsored Member Trades. Specifically, as described above, if a
Sponsoring Member enters into a Sponsored Member Trade without another
perfectly offsetting Sponsored Member Trade, it is subject to a CCLF
obligation for its positions that is in excess of the liquidity risk
that its positions generate. With this proposed change, FICC would be
able to calculate a Sponsoring Member's CCLF obligation in a manner
that more closely aligns with the liquidity risk associated with
Sponsored Member Trades and thereby reduce unnecessary costs. In
addition, as described above, unlike other Netting Members, Sponsoring
Members do not have the option to collapse all of their FICC/GSD
activity into one participant account in order to reap the commensurate
benefits of offsetting positions for the purposes of reducing their
CCLF obligations. With the proposed changes described in Item
II(A)1(iii) above, FICC would be able, for CCLF calculation purposes,
to recognize the offsetting settlement obligations across the
Sponsoring Member's netting account and its Sponsoring Member Omnibus
Account, and therefore, FICC believes these proposed changes may
encourage more repo activity through the Service. As such, FICC
believes the proposed changes described in Item II(A)1(iii) above could
promote competition because they could encourage Sponsoring Members and
Sponsored Members to submit a greater number of securities transactions
to be cleared and settled by FICC.
FICC believes that the proposed changes described in Item
II(A)1(iv) above could promote competition. FICC believes the proposed
changes described in Item II(A)1(iv) above could encourage Sponsoring
Members to sponsor more Sponsored Members and thereby encourage the
submission of more securities transactions to FICC because it would
eliminate the administrative burdens on FICC and the Sponsoring Members
of the overlapping and redundant quarterly representation requirement
in Section 2 of Rule 3A described above.\55\
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\55\ Rule 3A, Section 2, supra note 4.
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FICC does not believe that the proposed changes described in Item
II(A)1(v) above to make a clarification, certain corrections, and
certain technical changes would have an impact on competition. The
proposed changes described in Item II(A)1(v) above would simply provide
additional clarity, transparency and consistency to the Rules and not
affect Members' rights and obligations. As such, FICC believes that the
proposed changes described in Item II(A)1(v) above would not have any
impact on competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
FICC reviewed the proposed rule change with Sponsoring Members and
Sponsored Members in order to benefit from their expertise. Written
comments relating to this proposed rule change have not been received
from the Sponsoring Members, Sponsored Members or any other person.
FICC will notify the Commission of any written comments received by
FICC.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#6614130a034b05090b0b030812152615030548010910"><span class="__cf_email__" data-cfemail="c4b6b1a8a1e9a7aba9a9a1aab0b784b7a1a7eaa3abb2">[email protected]</span></a>. Please include
File Number SR-FICC-2021-003 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-FICC-2021-003. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of FICC and on DTCC's website
(<a href="http://dtcc.com/legal/sec-rule-filings.aspx">http://dtcc.com/legal/sec-rule-filings.aspx</a>). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
[[Page 29348]]
should refer to File Number SR-FICC-2021-003 and should be submitted on
or before June 22, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\56\
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\56\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-11407 Filed 5-28-21; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on June 1, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.