Notice2021-19046
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, 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
September 3, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 169 (Friday, September 3, 2021)</title>
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[Federal Register Volume 86, Number 169 (Friday, September 3, 2021)]
[Notices]
[Pages 49580-49587]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-19046]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92808; File No. SR-FICC-2021-003]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Amendment No. 1 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To
Add the Sponsored GC Service and Make Other Changes
August 30, 2021.
On May 12, 2021, Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'')
\1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-FICC-2021-003
to amend FICC's Government Securities Division Rulebook \3\ to add a
new service that expands FICC's existing Sponsored Service.\4\ The
proposed rule change was
[[Page 49581]]
published for public comment in the Federal Register on June 1,
2021.\5\ On June 8, 2021, FICC filed Amendment No. 1 to the proposed
rule change, to correct an erroneous cross reference in the original
filing.\6\ The proposed rule change, as modified by Amendment No. 1, is
hereinafter referred to as the ``Proposed Rule Change.'' On June 24,
2021, the Commission published a notice designating a longer period of
time for Commission action and a longer period for public comment on
the Proposed Rule Change.\7\ The Commission received one comment letter
in support of the Proposed Rule Change.\8\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ FICC's Government Securities Division (``GSD'') Rulebook
(``Rules'') is available at <a href="http://www.dtcc.com/legal/rules-and-procedures">http://www.dtcc.com/legal/rules-and-procedures</a>.
\4\ FICC also filed the proposals contained in the proposed rule
change as advance notice SR-FICC-2021-801 with the Commission
pursuant to Section 806(e)(1) of the Dodd-Frank Wall Street Reform
and Consumer Protection Act entitled the Payment, Clearing, and
Settlement Supervision Act of 2010 (``Clearing Supervision Act''),
12 U.S.C. 5465(e)(1), and Rule 19b-4(n)(1)(i) of the Act, 17 CFR
240.19b-4(n)(1)(i). Notice of filing of the Advance Notice was
published for comment in the Federal Register on June 3, 2021.
Securities Exchange Act Release No. 92019 (May 27, 2021), 86 FR
29834 (June 3, 2021) (SR-FICC-2021-801).
\5\ Securities Exchange Act Release No. 92014 (May 25, 2021), 86
FR 29334 (June 1, 2021) (SR-FICC-2020-003) (``Notice'').
\6\ Amendment No. 1 made a correction to Exhibit 5 of the
filing. On June 8, 2021, FICC filed Amendment No. 1 to the advance
notice to make the same correction as regarding the proposed rule
change. The advance notice, as modified by Amendment No. 1, is
hereinafter referred to as the ``Advance Notice.'' On June 11, 2021,
the Commission, by the Division of Trading and Markets, pursuant to
delegated authority, requested additional information from FICC
pursuant to Section 806(e)(1)(D) of the Clearing Supervision Act. 17
CFR 200.30-3(a)(93); 12 U.S.C. 5465(e)(1)(D). The request for
information tolled the Commission's period of review of the Advance
Notice until 60 days from the date of the Commission's receipt of
the information requested from FICC. See 12 U.S.C. 5465(e)(1)(E)(ii)
and (G)(ii); see Memorandum from the Office of Clearance and
Settlement, Division of Trading and Markets, titled ``Commission's
Request for Additional Information,'' available at <a href="https://www.sec.gov/rules/sro/ficc-an/2021/34-92019-memo-ficc.pdf">https://www.sec.gov/rules/sro/ficc-an/2021/34-92019-memo-ficc.pdf</a>. The
Commission received the information requested from FICC on July 2,
2021.
\7\ Securities Exchange Act Release No. 92185 (June 15, 2021),
86 FR 33420 (June 24, 2021) (SR-FICC-2021-003).
\8\ The comment is available at <a href="https://www.sec.gov/comments/sr-ficc-2021-003/srficc2021003.htm">https://www.sec.gov/comments/sr-ficc-2021-003/srficc2021003.htm</a>. Because the proposals contained in
the Advance Notice and the Proposed Rule Change are the same, the
Commission considers any public comments received on the proposal as
applicable to both filings, regardless of whether comments are
submitted with respect to the Advance Notice or the Proposed Rule
Change.
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The Commission is publishing this notice to solicit comments on
Amendment No. 1 from interested persons and, for the reasons discussed
below, to approve the Proposed Rule Change on an accelerated basis.
I. Description of the Proposed Rule Change
A. Background
1. FICC Services for Repurchase Agreement (``Repo'') Transactions
Repos involve a pair of securities transactions between two
parties. The parties agree to the terms of the trade, including the
securities, principal amount, interest rate, haircut, and tenor (i.e.,
date of maturity). The first transaction (the ``Start Leg'') consists
of the sale of securities, in which one party (the ``cash borrower'')
delivers securities, and in exchange, the other party (the ``cash
lender'') delivers cash. At the Start Leg, the cash borrower typically
delivers an amount of securities equal in value to the amount of cash
received from the cash lender, plus a haircut. Repo durations range
from one day (``overnight'') to a year or more, but are usually less
than three months (``term''). The second transaction (the ``End Leg'')
occurs on a date after that of the Start Leg and consists of the
repurchase of securities, in which the obligations to deliver cash and
securities are the reverse of the Start Leg. At the End Leg, the cash
borrower typically delivers the amount of cash borrowed, plus interest,
and the cash lender returns the securities.
FICC serves as CCP and provides clearance and settlement services
to facilitate both bilateral and tri-party repo transactions. FICC
facilitates bilateral repos \9\ in which all securities delivery
obligations are made against full payment (``delivery-versus-payment''
or ``DVP'') (the ``DVP Service''). FICC generally novates and
guarantees settlement of a trade upon validation of the trade details,
which results in the legally binding and enforceable contract between
FICC and the parties to the trade.\10\ On a daily basis, FICC
aggregates and matches a member's offsetting obligations resulting from
the member's trades, thereby netting the member's total daily
settlement obligations.\11\
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\9\ A bilateral repo is one in which the cash lender and cash
borrower directly exchange cash and securities. In the bilateral
repo market, the parties specify the securities used as collateral.
Therefore, a cash lender seeking to obtain a particular security
would utilize the bilateral repo market.
\10\ See Rule 5, supra note 3.
\11\ See Rule 11, supra note 3.
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FICC facilitates tri-party repos \12\ through its General
Collateral Finance (``GCF'') Repo[supreg] Service, which enables
members to trade general collateral finance repos based on rate, term,
and underlying product throughout the day on a blind basis.\13\ The
Bank of New York Mellon operates the tri-party platform that
facilitates trades conducted through the GCF Repo Service. FICC has
established standardized, generic CUSIP Numbers exclusively for GCF
Repo processing and to specify the acceptable types of underlying
Fedwire book-entry eligible collateral, which include U.S. Treasuries,
U.S. government agency securities, and certain mortgage-backed
securities.\14\
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\12\ A tri-party repo is one in which a clearing bank, acting as
tri-party agent, provides to both the cash lender and the cash
borrower certain operational, custodial, collateral management, and
other services. In tri-party repo trading, both parties maintain
accounts at a clearing bank, which facilitates the payment and
delivery of cash and securities between the parties' accounts. In
contrast to the bilateral repo market and its use of specific
collateral, the tri-party repo market is exclusively for general
collateral repos, meaning that the parties agree to use any
securities from a pre-approved basket of acceptable securities as
collateral. In a general collateral repo, the cash lender is
indifferent to the particular securities it receives as collateral,
provided that the securities come from the pre-approved basket of
acceptable securities.
\13\ See Rule 20, supra note 3.
\14\ See Rule 3 (definitions of ``GCF Repo Transaction'' and
``Generic CUSIP Number'') and Rule 20, Section 2, supra note 3;
Notice, supra note 5 at 29336.
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2. Sponsored Membership
In 2005, FICC established the Sponsored Service, allowing eligible
members to sponsor their clients into a limited form of membership.\15\
A Sponsoring Member is permitted to submit to FICC, for comparison,
novation, and netting, certain eligible securities transactions of its
Sponsored Members. FICC requires each Sponsoring Member to establish an
omnibus account at FICC (separate from its regular netting account) for
Sponsored Member trading activity. Sponsored Members generally have to
meet the definition of a qualified institutional buyer (``QIB''), as
defined in Rule 144A \16\ under the Securities Act of 1933.\17\
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\15\ Securities Exchange Act Release No. 51896 (June 21, 2005),
70 FR 36981 (June 27, 2005) (SR-FICC-2004-22). See Rule 3A, supra
note 3.
\16\ 17 CFR 230.144A.
\17\ 15 U.S.C. 77a et seq.
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For operational and administrative purposes, FICC interacts solely
with the Sponsoring Member as agent for purposes of the day-to-day
satisfaction of its Sponsored Members' obligations to and from FICC,
including their securities and funds-only settlement obligations.\18\
Sponsoring Members are also responsible for providing FICC with a
Sponsoring Member Guaranty, whereby the Sponsoring Member guarantees to
FICC the payment and performance by its Sponsored Members of their
obligations under the Rules.\19\ Although Sponsored Members are
principally liable to FICC for their own settlement obligations under
the Rules, the Sponsoring Member Guaranty requires the Sponsoring
Member to satisfy those settlement obligations on behalf of a Sponsored
Member if the
[[Page 49582]]
Sponsored Member defaults and fails to perform its settlement
obligations.\20\
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\18\ See Rule 3A, Section 8, supra note 3.
\19\ See Rule 1 (definition of ``Sponsoring Member Guaranty'')
and Rule 3A, Section 2(c), supra note 3.
\20\ Id.
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B. Proposed Sponsored GC Service
Currently, the Sponsored Service only facilitates trading in
bilateral DVP repos, not tri-party repos. In the Proposed Rule Change,
FICC proposes to expand the Sponsored Service to accommodate tri-party
repo trading, which FICC believes would increase term repo activity
within the Sponsored Service. FICC states that several market
participants have indicated that they currently transact tri-party term
repos outside of central clearing because they are not operationally
equipped to perform the collateral management and other functions
associated with term DVP repos.\21\ In particular, money market funds
and other mutual funds generally prefer to use the tri-party repo
market because a clearing bank administers collateral management and
other functions, as described above.\22\
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\21\ See Notice, supra note 5 at 29336. A key difference between
the bilateral and tri-party repo markets deals with the operational
aspects of managing term repos. In the tri-party repo market, a
clearing bank typically automatically selects securities from the
cash borrower's account to serve as collateral that satisfies the
credit and liquidity criteria agreed between the parties. The
clearing bank delivers securities against the simultaneous delivery
of cash between the parties' accounts at the clearing bank. The
clearing bank manages the regular revaluation of collateral,
variation margining, income payments on the collateral, and
collateral substitutions. In the bilateral repo market, the parties
themselves perform such collateral management and other
administrative functions.
\22\ See Notice, supra note 5 at 29336.
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Therefore, FICC proposes to add the Sponsored GC Service, which
would allow (but not require) Sponsoring Members and their Sponsored
Members to trade general collateral repos with each other on the tri-
party platform of a Sponsored GC Clearing Agent Bank \23\ (each, a
``Sponsored GC Trade''). Such general collateral repos would involve
the same asset classes that are currently available for members using
the GCF Repo Service.\24\ Consistent with the GCF Repo Service, the
Sponsored GC Service would also permit cash borrowers to make
collateral substitutions. Sponsored GC Trades would settle in a manner
similar to the way Sponsoring Members and Sponsored Members currently
settle tri-party repos with each other outside of central clearing.
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\23\ The Bank of New York Mellon operates the tri-party platform
that would facilitate trades conducted through the Sponsored GC
Service.
\24\ FICC would register a new series of Generic CUSIP Numbers
for the Sponsored GC Service as follows: (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''). The purpose of registering a new series of Generic
CUSIP Numbers specific to the Sponsored GC Service is to avoid any
operational processing errors that could otherwise result if a trade
intended for the Sponsored GC Service was inadvertently processed as
a GCF Repo transaction or vice versa. Notice, supra note 5 at 29336.
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Sponsored GC Service Structure
Sponsored GC Trades would only be between a Sponsored Member and
its Sponsoring Member. FICC would novate only the End Legs of Sponsored
GC Trades. Consistent with the current settlement process of such tri-
party repos outside of central clearing, the Start Legs of Sponsored GC
Trades would continue to settle on a trade-for-trade basis on the tri-
party platform of a Sponsored GC Clearing Agent Bank.\25\
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\25\ FICC does not believe it would be efficient or appropriate
to novate the Start Legs of Sponsored GC Trades, as that novation
would unnecessarily complicate an already efficient process by
requiring the parties to make significant operational and business
changes to include FICC in the transaction chain. Since Sponsored GC
Trades would only be between a Sponsored Member and its Sponsoring
Member on a known (i.e., not blind) basis, all Start Leg obligations
would settle between a single set of counterparties, negating any
efficiency or reduced settlement risk that FICC's novation would
provide. See Notice, supra note 5 at 29337.
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Accrued repo interest on Sponsored GC Trades would be paid and
collected by FICC on a daily basis. Additionally, if the market value
of the securities collateral decreases from its market value at the
Start Leg, the cash borrower would be required deliver to FICC
additional securities (and/or cash) such that the market value of the
total securities collateral remains at least equal to its market value
at the Start Leg. Conversely, if the market value of the securities
collateral increases from its market value at the Start Leg, the cash
lender would be required to deliver to FICC securities (and/or cash)
such that the market value of the remaining securities collateral
remains at least equal to its market value at the Start Leg. Such
additional securities (and/or cash) must be delivered within the
timeframe set forth in a proposed new schedule of Sponsored GC Trade
timeframes set forth in the Rules.
In order to facilitate settlement of securities and cash
obligations, FICC would direct each party to a Sponsored GC Trade 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 pre-novation counterparty. As
a result, each transfer of securities and daily repo interest would be
made directly between the Sponsored Member and its Sponsoring Member
via the tri-party repo platform of a Sponsored GC Clearing Agent
Bank.\26\
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\26\ FICC similarly does not believe it would be appropriate for
FICC to be in the transaction chain for each payment and delivery
under a Sponsored GC Trade because inserting FICC in the middle of
the payments and deliveries would require substantial changes in
operational processes for both Sponsored Members and Sponsoring
Members. FICC does not believe such operational changes are
necessary since 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). See Notice,
supra note 5 at 29337-38.
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Market Risk Management
FICC would manage its market risk with respect to Sponsored GC
Trades similar to the manner in which FICC manages existing trades
within the Sponsored Service. To mitigate market risk, FICC would
calculate the Value at Risk (``VaR'') margin component (``VaR Charge'')
\27\ for each Sponsored Member based on its activity in the Sponsored
Service, including its activity in the proposed Sponsored GC Service.
The VaR Charge for the Sponsoring Member's omnibus account for
Sponsored Member trading activity would continue to be gross-margined
as the sum of the individual VaR Charges for each Sponsored Member
client.\28\
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\27\ Each member's margin consists of a number of applicable
components. The VaR Charge is typically the largest component of a
member's margin requirement. The VaR Charge is designed to capture
the potential market price risk associated with the securities in a
member's portfolio. The VaR Charge is designed to provide an
estimate of FICC's projected liquidation losses with respect to a
defaulted member's portfolio at a 99 percent confidence level. See
Rule 1 (definition of ``VaR Charge''), supra note 3; Securities
Exchange Act Release No. 83362 (June 1, 2018), 83 FR 26514 (June 7,
2018) (SR-FICC-2018-001).
\28\ See Rule 3A, Section 10, supra note 3.
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Additionally, FICC would assign a symbol to each Sponsored Member
to facilitate FICC's ability to surveil the Sponsored Member's activity
across its Sponsored GC Trades as well as its other Sponsored Member
Trades within the existing Sponsored Service (both with the same
Sponsoring Member and across Sponsoring Members, if applicable). In
addition, FICC would apply certain heightened requirements that apply
to certain Sponsoring Members within the Sponsored GC Service as
well.\29\ For example, FICC
[[Page 49583]]
may impose heightened financial requirements on these Sponsoring
Members based on their anticipated activity and other factors,\30\ and
FICC may limit such a Sponsoring Member's activity if the sum of the
VaR Charges of its omnibus and netting accounts exceeds its net
capital.\31\
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\29\ Specifically, these restrictions apply to Category 2
Sponsoring Members, which are other members that meet certain
financial requirements as compared to Category 1 Sponsoring Members,
which are bank netting members that are well-capitalized with $5
billion in equity capital. See Rule 3A, Section 2(a), supra note 3.
\30\ See Rule 3A, Section 2(b), supra note 3.
\31\ See Rule 3A, Section 2(h), supra note 3.
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In addition, FICC would manage the mark-to-market risk associated
with unaccrued repo interest on a Sponsored GC Trade through a proposed
new interest rate mark component of funds-only settlement.\32\ FICC
would also apply an Interest Adjustment Payment to Sponsored GC Trades
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.\33\
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\32\ This GC Interest Rate Mark would be calculated in the same
manner as the GCF Interest Rate Mark is for GCF Repo transactions.
For a detailed description of the calculation, see Notice, supra
note 5 at 29337-38.
\33\ 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 currently
processed), and (iii) the accrued repo interest on Sponsored GC
Trades would be passed on a daily basis, as described above.
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Liquidity Risk Management
Currently, trades between a Sponsoring Member and its Sponsored
Member do not independently create liquidity risk for FICC. Under its
Rules, if a Sponsoring Member defaults, FICC may close out (that is,
cash settle) the Sponsored Member trades of the defaulting Sponsoring
Member.\34\ Similarly, if a Sponsored Member defaults, 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 defaulting Sponsored Member.\35\ Thus, in both
default scenarios, FICC bears no liquidity risk.
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\34\ See Rule 3A, Section 14(c), supra note 3. See also Rule
22A, Section 2, supra note 3.
\35\ See Rule 3A, Section 11, supra note 3.
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As a result, to the extent a Sponsoring Member either (1) runs a
matched book of Sponsored Member trades (i.e., enters into offsetting
trades with its own Sponsored Members), or (2) simply enters into
trades with its Sponsored Member (i.e., without entering into
offsetting trades), such activities do not increase FICC's liquidity
risk. FICC bears liquidity risk only when a Sponsoring Member enters
into an offsetting trade in which a third-party member is the pre-
novation counterparty. In that scenario, FICC is required to settle the
obligations of a defaulting Sponsoring Member.
Since Sponsored GC Trades would not involve third-party members,
such trades would impact FICC's liquidity risk in a similar manner to
trades between a Sponsoring Member and its Sponsored Member in the
current Sponsored Service. As a result, FICC proposes to manage the
liquidity risk associated with Sponsored GC Trades in the same manner
that it currently manages such risk for other trades between a
Sponsoring Member and its Sponsored Member.
C. Proposed Changes to Allocations Within the Capped Contingency
Liquidity Facility (``CCLF'')
1. CCLF Background
On April 25, 2017, the Commission approved FICC's adoption of the
Clearing Agency Liquidity Risk Management Framework (``Framework''),
which broadly describes FICC's liquidity risk management strategy and
objective to maintain sufficient liquid resources in order to meet the
potential amount of funding required to settle outstanding transactions
of a defaulting member (including affiliates) in a timely manner.\36\
The Framework identifies, among other things, each of the qualifying
liquid resources available to FICC, including the CCLF.\37\ The CCLF is
a rules-based, committed liquidity resource, designed to enable FICC to
meet its cash settlement obligations in the event of a default of the
member (including the member's family of affiliated members) to which
FICC has the largest exposure in extreme but plausible market
conditions.\38\ FICC would activate the CCLF if, upon a member default,
FICC determines that its non-CCLF liquidity resources would not
generate sufficient cash to satisfy FICC's payment obligations to its
non-defaulting members. In simple terms, a CCLF repo is equivalent to a
non-defaulting member financing FICC's payment obligation under the
original trade, thereby providing FICC with time to liquidate the
securities underlying the original trade. More specifically, upon
activating the CCLF, members would be called upon to enter into repo
transactions (as cash lenders) with FICC (as cash borrower) up to a
pre-determined capped dollar amount, thereby providing FICC with
sufficient liquidity to meet its payment obligations. For a non-
defaulting member to whom FICC has a payment obligation disrupted by a
member default, a CCLF repo would extinguish and replace the original
trade that gave rise to FICC's payment obligation.
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\36\ See Securities Exchange Act Release No. 80489 (April 19,
2017), 82 FR 19120 (April 25, 2017) (SR-FICC-2017-008).
\37\ See id.
\38\ FICC designed the CCLF to meet the regulatory requirement
for a covered clearing agency to measure, monitor, and manage its
liquidity risk by maintaining sufficient liquid resources to effect
same-day settlement of payment obligations in the event of a default
of the participant family that would generate the largest aggregate
payment obligation for the clearing agency in extreme but plausible
market conditions. 17 CFR 240.17Ad-22(e)(7)(i); see Securities
Exchange Act Release No. 82090 (November 15, 2017), 82 FR 55427,
55430 (November 21, 2017) (SR-FICC-2017-002); Rule 22A, Section 2a,
supra note 3.
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FICC determines the total size of the CCLF based on FICC's
potential cash settlement obligations that would result from the
default of the member (including affiliates) presenting the largest
liquidity need to FICC over a specified look-back period, plus an
additional liquidity buffer. In the Proposed Rule Change, FICC does not
propose to change the method by which it determines the total size of
the CCLF.
FICC uses a tiered approach to allocate the total size of the CCLF
among its members to arrive at the amount of each member's CCLF
obligation. FICC allocates $15 billion of the total size of the CCLF
among all members.\39\ FICC allocates the remainder of the total size
of the CCLF among members that generate liquidity needs above the $15
billion threshold based on the frequency that such members generate
daily liquidity needs over $15 billion across supplemental liquidity
tiers in $5 billion increments. Specifically, FICC calculates a dollar
amount for the CCLF obligation applicable to each supplemental
liquidity tier. FICC allocates the CCLF obligation for each
supplemental liquidity tier to members on a pro-rata basis
corresponding to the number of times each member generates liquidity
[[Page 49584]]
needs within each supplemental liquidity tier.\40\
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\39\ FICC has determined that $15 billion is an appropriate
amount for allocation to all members because the average member's
liquidity need from 2015-2016 was approximately $7 billion, with a
majority of members (approximately 85 percent) having liquidity
needs less than $15 billion. See Securities Exchange Act Release No.
82090 (November 15, 2017), 82 FR 55427, 55430 (November 21, 2017)
(SR-FICC-2017-002).
\40\ For example, a member that generates daily liquidity needs
in the $15-$20 billion supplemental liquidity tier would incur a
pro-rata share for the $15-$20 billion supplemental liquidity tier
only. Another member that generates daily liquidity needs in the
$20-$25 billion supplemental liquidity tier would incur a pro-rata
share for both the $15-$20 and $20-$25 billion supplemental
liquidity tiers. A third member that generates daily liquidity needs
in the $65-$70 billion supplemental liquidity tier would incur a
pro-rata share for every supplemental liquidity tier. Each member's
pro-rata share is based on the frequency with which the member
generates daily liquidity needs in each supplemental liquidity tier.
See Securities Exchange Act Release No. 80234 (March 14, 2017), 82
FR 14401, 14404-05 (March 20, 2017) (SR-FICC-2017-002).
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2. Current CCLF Allocation Methodology for the Sponsored Service
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 to determine a Sponsoring
Member's CCLF obligation, FICC nets all of the positions recorded in
the Sponsoring Member's omnibus account (regardless of whether they
relate to the same Sponsored Member) and separately nets all of the
positions in the Sponsoring Member's netting account.\41\ As a result,
to the extent a Sponsoring Member enters into perfectly offsetting
Sponsored Member trades (i.e., the matched book scenario), the
settlement obligations of those trades net out in the omnibus account
and the netting account, with no resulting CCLF obligation for the
Sponsoring Member.
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\41\ See Rule 3A, Section 8(b) and Rule 22A, Section 2a(b),
supra note 3.
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However, if a Sponsoring Member enters into a Sponsored Member
trade without entering into an offsetting transaction, the Sponsoring
Member is subject to CCLF obligations for the position of its Sponsored
Member recorded in its omnibus account as well as its own position
arising from the Sponsored Member trade recorded in its netting
account. Although the positions in the Sponsoring Member's omnibus
account and netting account offset each other, FICC does not currently
net such positions for CCLF purposes because CCLF allocations are
determined at the participant account level.\42\ FICC believes the
foregoing scenario should not contribute to the Sponsoring Member's
CCLF obligation because, as described above in Section I.B, such
offsetting obligations do not present liquidity risk to FICC.
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\42\ 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. However, FICC notes an important
difference between Sponsored Member trades and other FICC repo
activity. See Notice, supra note 5 at 29343. Specifically, as
mentioned above in Section I.A.2., the Sponsored Service requires a
Sponsoring Member to maintain an omnibus account that is separate
from its netting account. In contrast, for all other repo activity,
members have the option to collapse all of their 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. Therefore, 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. Id.
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3. Proposed CCLF Allocation Methodology for the Sponsored Service
As described above, trades between a Sponsoring Member and its
Sponsored Member do not independently create liquidity risk for FICC,
and therefore, FICC believes that such trades should not affect the
Sponsoring Member's CCLF obligation. To ensure that a Sponsoring
Member's CCLF obligation is calculated to reflect the lack of liquidity
risk to FICC associated with Sponsored Member trades, FICC proposes to
take into account, for CCLF calculation purposes, any offsetting
settlement obligations between a Sponsoring Member's netting account
and its omnibus account. This proposed change would ensure that all
Sponsored Member trades, whether perfectly offset by other Sponsored
Member trades (i.e., the matched book scenario) or not, would be
recognized for CCLF purposes as not affecting FICC's liquidity risk.
This proposed change would also apply to trades in the new Sponsored GC
Service.\43\
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\43\ For Sponsored GC Trades, 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. For example, a
Sponsoring Member may enter into a Sponsored GC Trade on a Generic
CUSIP Number and a separate offsetting Sponsored Member trade in a
specific CUSIP Number. Although the specific CUSIP Number might also
be an eligible security under the Generic CUSIP Number underlying
the Sponsored GC Trade, the Sponsored GC Clearing Agent Bank could
allocate to the Sponsored GC Trade a different eligible CUSIP Number
from the list of eligible securities. FICC's proposed change would
offset these positions across the Sponsoring Member's netting
account and omnibus account to ensure that the CCLF obligation
applicable to the Sponsoring Member accurately reflects the
liquidity risk associated with those positions.
---------------------------------------------------------------------------
Although, as noted above, the Proposed Rule Change would not affect
the method by which FICC determines the total CCLF amount, FICC's
proposal to net offsetting trades between a Sponsoring Member and its
Sponsored Member for CCLF calculation purposes would affect the
allocation of CCLF obligations over $15 billion to other members.
Specifically, as described above, under the current Rules, if a
Sponsoring Member enters into a Sponsored Member trade without entering
into an offsetting transaction, the Sponsoring Member is subject to
CCLF obligations for the position of its Sponsored Member recorded in
its omnibus account as well as its own position arising from the
Sponsored Member trade recorded in its netting account. Under the
Proposed Rule Change, the Sponsoring Member would not incur CCLF
obligations for such transactions. Therefore, a Sponsoring Member's
peak daily liquidity is currently higher than it would be under the
Proposed Rule Change. This, in turn, may decrease the frequency with
which a Sponsoring Member's daily peak liquidity reaches into higher
supplemental liquidity tiers. As a result, the pro-rata allocation of
CCLF obligations among members with daily peak liquidity in those
supplemental liquidity tiers would increase.\44\ When fewer members
generate peak liquidity needs in a supplemental liquidity tier, the
remaining members that generate peak liquidity in that tier bear a
larger pro-rata share of the CCLF allocations for that tier.
---------------------------------------------------------------------------
\44\ However, as stated above, the proposals in the Proposed
Rule Change would not change FICC's current methodology for
calculating the total amount of the CCLF.
---------------------------------------------------------------------------
D. Other Proposed Changes
FICC proposes to remove a provision from the Rules requiring a
Sponsoring Member to provide FICC with a quarterly representation that
each of its Sponsored Members is a either a QIB or satisfies the
financial requirements necessary to be a QIB.\45\ FICC proposes to
remove this requirement because an existing Rule provision requires a
Sponsoring Member to attest that a Sponsored Member satisfies the QIB
requirement at the time of the Sponsored Member's initial
application,\46\ and another existing Rule provision requires a
Sponsoring Member to notify FICC if its Sponsored Member no longer
satisfies the QIB requirement.\47\ Therefore, FICC believes the
quarterly representation to be an overlapping and redundant requirement
that creates unnecessary administrative burdens for FICC and for its
Sponsoring Members.\48\
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\45\ See Rule 3A, Section 2(d), supra note 3.
\46\ See Rule 3A, Section 3(b), supra note 3.
\47\ See Rule 3A, Section 3(d), supra note 3.
\48\ See Notice, supra note 5 at 29343.
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FICC also proposes to make certain corrections to the Rules
regarding the Sponsored Service. First, FICC proposes to change an
erroneous reference to the
[[Page 49585]]
``Close Leg'' in the Rule 1 definition of Initial Haircut to ``Start
Leg.'' Second, FICC proposes to clarify the citation to paragraph
(a)(1)(i)(H) of Rule 144A in Rule 3A, Section 3(a)(ii)(B).
Additionally, FICC proposes to make several technical and grammatical
changes to section numbers and cross-references throughout the Rules to
conform with the new proposed Rule provisions regarding Sponsored GC
Service.
E. Description of Amendment No. 1
In Amendment No. 1, FICC updated Exhibit 5 to the Proposed Rule
Change to correct an erroneous cross reference in the original filing.
Specifically, Exhibit 5 to the original filing erroneously showed the
proposed change to Rule 3A, Section 18, subsection (a) to include a
cross reference to subsections (a)(i) and (a)(ii) of the Sponsored
Trade definition. Amendment No. 1 corrected Exhibit 5 so that the cross
reference is to subsections (a)(i) and (b) of the Sponsored Trade
definition.
II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \49\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After carefully considering the Proposed Rule
Change, the Commission finds that the Proposed Rule Change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to FICC. In particular, the
Commission finds that the Proposed Rule Change is consistent with
Sections 17A(b)(3)(F) \50\ of the Act and Rules 17Ad-22(e)(7), (e)(18),
and (e)(23) thereunder.\51\
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\49\ 15 U.S.C. 78s(b)(2)(C).
\50\ 15 U.S.C. 78q-1(b)(3)(F).
\51\ 17 CFR 240.17Ad-22(e)(7), (e)(18), and (e)(23).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act \52\ requires the rules of a
clearing agency to, among other things, (i) promote the prompt and
accurate clearance and settlement of securities transactions, (ii)
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible, and (iii) protect investors and the public interest.
---------------------------------------------------------------------------
\52\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described above in Section I.B., FICC's current Sponsored
Service only facilitates trading in DVP repos, not tri-party repos.
Certain market participants (e.g., money market funds and other mutual
funds) have stated that their participation in the Sponsored Service is
inhibited because they are not operationally equipped to perform the
collateral management and other functions associated with term DVP
repos.\53\ FICC proposes to expand the Sponsored Service via the
Sponsored GC Service to accommodate tri-party repo trading, in which a
clearing bank administers such collateral management and other
functions. As a result, FICC expects the proposed Sponsored GC Service
to increase term repo activity within the Sponsored Service.\54\ By
enabling Sponsoring Members and their Sponsored Members to engage in
tri-party term repo transactions with each other, the proposed
Sponsored GC Service would encourage more term repo trades centrally
cleared by FICC within the Sponsored Service. Increasing the number of
trades centrally cleared by FICC would promote the prompt and accurate
clearance and settlement of securities transactions because securities
transactions that might otherwise be conducted outside of central
clearing would benefit from FICC's risk management and guarantee of
settlement.\55\ Accordingly, FICC's proposal to add the Sponsored GC
Service is consistent with promoting the prompt and accurate clearance
and settlement of securities transactions.
---------------------------------------------------------------------------
\53\ See Notice, supra note 5 at 29336.
\54\ See id. FICC conducted two surveys of its Sponsoring
Members, the data from which supports FICC's expectation that the
proposed Sponsored GC Service would increase term repo activity
within the Sponsored Service. FICC provided the survey data to the
Commission as part of FICC's response to the Commission's request
for additional information in connection with the Advance Notice.
See supra note 6. Pursuant to 17 CFR 240.24b-2, FICC requested
confidential treatment of its response to the Commission's request
for additional information.
\55\ See Letter from Robert Toomey, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association (June 18, 2021) at 2 (commenting on the benefits to
market participants resulting from the expected increase in greater
central clearing of tri-party repos via the Sponsored GC Service).
---------------------------------------------------------------------------
Additionally, as described above in Section I.C., the CCLF is
designed to provide FICC with sufficient qualifying liquid resources to
cover the default of the family of affiliated members that would
generate the largest liquidity need for FICC. The Proposed Rule Change
would change the allocation of CCLF obligations among FICC's members.
Specifically, with respect to trades between a Sponsoring Member and
Sponsored Member, FICC proposes to take into account, for CCLF
calculation purposes, any offsetting settlement obligations between a
Sponsoring Member's netting account and its omnibus account. Such
trades do not independently create liquidity risk for FICC, and
therefore, should not affect the Sponsoring Member's CCLF obligation.
Therefore, the Proposed Rule Change would result in the allocation of
CCLF obligations to FICC's members that more accurately reflect the
liquidity needs presented to FICC by each member. However, the proposed
change in CCLF allocation methodology would not change the current
total overall size of the CCLF. By maintaining the total size of the
CCLF, FICC should be able to continue to perform its clearance and
settlement functions with sufficient qualifying liquidity resources for
FICC to mitigate the losses that the default of the largest affiliated
family of members could cause, not only to FICC and its non-defaulting
members, but also to the financial markets more broadly. As such, the
Proposed Rule Change is consistent with promoting the safeguarding of
securities and funds in FICC's custody and control, and thereby
protecting investors and the public interest.
Finally, as described above in Section I.D., FICC also proposes to
make certain corrections to the Rules regarding the Sponsored Service,
as well as several technical and grammatical changes throughout the
Rules to conform with the new provisions regarding Sponsored GC
Service. Making corrections and other improvements to clarify the Rules
helps to ensure that the Rules are accurate and clear to members.
Members that better understand their rights and obligations regarding
the Rules are more likely to act in accordance with the Rules, which
generally promotes the prompt and accurate clearance and settlement of
securities transactions.
For the foregoing reasons, the Commission believes that the
Proposed Rule Change is designed to promote the prompt and accurate
clearance and settlement of securities transactions, safeguard
securities and funds that are in the custody or control of FICC, and
protect investors and the public interest, consistent with Section
17A(b)(3)(F) of the Exchange Act.\56\
---------------------------------------------------------------------------
\56\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(7)
Rule 17Ad-22(e)(7) under the Act requires a covered clearing agency
to establish, implement, maintain, and
[[Page 49586]]
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.\57\ As described above
in Section I.C., FICC proposes to change the Rules to allow netting,
for CCLF allocation purposes, of offsetting positions in a Sponsoring
Member's omnibus account and netting account.
---------------------------------------------------------------------------
\57\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------
FICC's proposal would not impact FICC's current methodology for
determining the total amount of the CCLF as a liquidity resource. As
discussed above in Section II.A., FICC proposes to change the Rules
regarding CCLF allocation to ensure that a Sponsoring Member's CCLF
obligation aligns more closely with the actual liquidity risk its
trading activity presents to FICC. As a result, FICC's proposed CCLF
allocation methodology represents more efficient liquidity risk
management than the current methodology. Accordingly, the Commission
believes that FICC's proposed CCLF allocation methodology is consistent
with Rule 17Ad-22(e)(7).\58\
---------------------------------------------------------------------------
\58\ Id.
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(e)(18)
Rule 17Ad-22(e)(18) under the Act requires a covered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to establish objective, risk-based,
and publicly disclosed criteria for participation in the clearing
agency.\59\ As described above in Section I.D., FICC proposes to remove
a provision from the Rules requiring a Sponsoring Member to provide
FICC with a quarterly representation that each of its Sponsored Members
is a either a QIB or satisfies the financial requirements necessary to
be a QIB. FICC proposes to remove the quarterly representation
requirement because existing Rule provisions require Sponsoring Members
to attest to its Sponsored Member's QIB status \60\ and to notify FICC
if a Sponsored Member no longer satisfies the QIB requirement.\61\
Therefore, the quarterly representation requirement is redundant and
creates unnecessary administrative burdens for FICC and its Sponsoring
Members. A redundant requirement that creates unnecessary
administrative burdens is not an objective, risk-based criterion for
participation in FICC. Accordingly, the Division believes that FICC's
proposal to remove the requirement for Sponsoring Members to provide
FICC with a quarterly representation verifying the QIB status of its
Sponsored Members is consistent with Rule 17Ad-22(e)(18).\62\
---------------------------------------------------------------------------
\59\ 17 CFR 240.17Ad-22(e)(18).
\60\ See Rule 3A, Section 3(b), supra note 3.
\61\ See Rule 3A, Section 3(d), supra note 3.
\62\ Id.
---------------------------------------------------------------------------
D. Consistency With Rule 17Ad-22(e)(21)
Rule 17Ad-22(e)(21) under the Act requires a covered clearing
agency 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,
including the clearing agency's clearing and settlement arrangements
and the scope of products cleared or settled.\63\ As described above in
Section I.B., FICC's current Sponsored Service does not accommodate the
trading of tri-party repos. FICC proposes to expand the Sponsored
Service to allow tri-party repo trading to meet the needs of market
participants that currently transact tri-party term repos outside of
central clearing because they are not operationally equipped to perform
the collateral management and other functions associated with term DVP
repos. By expanding the Sponsored Service to facilitate tri-party repo
trading, FICC seeks to provide a viable option for its members to
transact term tri-party repos in central clearing. Sponsored GC Trades
would settle in a manner similar to the way Sponsoring Members and
Sponsored Members currently settle tri-party repos with each other
outside of central clearing, thereby making it more operationally
efficient for the parties to transact term repos with each other using
FICC as the CCP. The Commission believes that the proposed Sponsored GC
Service is consistent with Rule 17Ad-22(e)(21) \64\ because it is
responsive to the requests from FICC's members for the ability to trade
centrally cleared term tri-party repos in a manner that is efficient
and effective in meeting the operational requirements of FICC's
members.
---------------------------------------------------------------------------
\63\ 17 CFR 240.17Ad-22(e)(21).
\64\ Id.
---------------------------------------------------------------------------
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 is consistent with the
Act. Comments may be submitted by any of the following methods:
Electronic Comments
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
Send an email to <a href="/cdn-cgi/l/email-protection#5a282f363f77393537373f342e291a293f39743d352c"><span class="__cf_email__" data-cfemail="097b7c656c246a6664646c677d7a497a6c6a276e667f">[email protected]</span></a>. Please include File Number
SR-FICC-2021-003 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-FICC-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 such filings will also be available for inspection
and copying at the principal office of FICC and FICC's website at
<a href="https://www.dtcc.com/legal">https://www.dtcc.com/legal</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 should refer to File Number SR-FICC-2021-003 and should be
submitted on or before September 24, 2021.
IV. Accelerated Approval of the Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause, pursuant to Section
19(b)(2)(C)(iii) of the Act,\65\ to approve the Proposed Rule Change,
as modified by Amendment No. 1, prior to the thirtieth day after the
date of publication of Amendment No. 1 in the Federal Register. As
noted above, in
[[Page 49587]]
Amendment No. 1, FICC updated Exhibit 5 to the Proposed Rule Change to
correct an erroneous cross reference in the original filing. Amendment
No. 1 neither modifies the Proposed Rule Change as originally published
in any substantive manner, nor does Amendment No. 1 affect any rights
or obligations of FICC or its members. Instead, Amendment No. 1
corrects a typographical error in the original filing. Accordingly, the
Commission finds good cause, pursuant to Section 19(b)(2)(C)(iii) of
the Act,\66\ to approve the Proposed Rule Change, as modified by
Amendment No. 1, prior to the thirtieth day after the date of
publication of notice of Amendment No. 1 in the Federal Register.
---------------------------------------------------------------------------
\65\ 15 U.S.C. 78s(b)(2)(C)(iii).
\66\ Id.
---------------------------------------------------------------------------
V. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change, as modified by Amendment No. 1, is consistent
with the requirements of the Act and in particular with the
requirements of Section 17A of the Act \67\ and the rules and
regulations promulgated thereunder.
---------------------------------------------------------------------------
\67\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\68\ that proposed rule change SR-FICC-2021-003, be, and hereby is,
APPROVED.\69\
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\68\ 15 U.S.C. 78s(b)(2).
\69\ In approving the proposed rule change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\70\
---------------------------------------------------------------------------
\70\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-19046 Filed 9-2-21; 8:45 am]
BILLING CODE 8011-01-P
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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.