Notice2024-14067
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change To Modify the GSD Rules and MBSD Rules To Update Certain Member Requirements Under CCLF
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Published
June 27, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 124 (Thursday, June 27, 2024)</title>
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[Federal Register Volume 89, Number 124 (Thursday, June 27, 2024)]
[Notices]
[Pages 53670-53672]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-14067]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100402; File No. SR-FICC-2024-008]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change To Modify the GSD Rules and MBSD
Rules To Update Certain Member Requirements Under CCLF
June 21, 2024.
I. Introduction
On May 8, 2024, 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\ the proposed rule change SR-FICC-
2024-008 (``Proposed Rule Change'') to amend FICC's Government
Securities Division (``GSD'') Rulebook (``GSD Rules'') and Mortgage-
Backed Securities Division (``MBSD'') Clearing Rules (``MBSD Rules,''
and collectively with the GSD Rules, the ``Rules'') \3\ to update
certain member requirements concerning FICC's Capped Contingency
Liquidity Facility (``CCLF''). The proposed rule change was published
for comment in the Federal Register on May 20, 2024.\4\ The Commission
has received no comments on the proposed rule change. For the reasons
discussed below, the Commission is approving the Proposed Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Terms not defined herein are defined in the GSD Rules and
MBSD Rules, as applicable, available at <a href="http://www.dtcc.com/legal/rules-and-procedures">www.dtcc.com/legal/rules-and-procedures</a>.
\4\ See Securities Exchange Act Release No. 100137 (May 14,
2024), 89 FR 43938 (May 20, 2024) (File No. SR-FICC-2024-008)
(``Notice of Filing'').
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II. Background
FICC is a central counterparty (``CCP''), which means it interposes
itself as the buyer to every seller and seller to every buyer for the
financial transactions it clears. FICC's GSD provides CCP services for
the U.S. Government securities market, and FICC's MBSD provides CCP
services for the U.S. mortgage-backed securities markets.\5\ As such,
FICC is exposed to the risk that one or more of its members may fail to
make a payment or to deliver securities.
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\5\ GSD and MBSD maintain separate sets of rules, margin models,
and clearing funds.
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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.\6\ FICC would declare a Capped Contingency
Liquidity Facility Event (``CCLF Event'') to 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.\7\ During a CCLF Event,
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.\8\ 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.
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\6\ 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. See Securities Exchange Act Release No. 82090
(Nov. 15, 2017), 82 FR 55427, 55430 (Nov. 21, 2017) (SR-FICC-2017-
002); see 17 CFR 240.17Ad-22(e)(7)(i); GSD Rule 22A, Section 2a, and
MBSD Rule 17, Section 2a, supra note 3.
\7\ GSD Rule 22A, Section 2a, supra note 3; MBSD Rule 17,
Section 2a, supra note 3.
\8\ GSD Rule 22A, Section 2a, supra note 3; MBSD Rule 17,
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
[[Page 53671]]
additional liquidity buffer.\9\ FICC uses a tiered approach to allocate
the total size of the CCLF among its members to arrive at the maximum
amount of each member's CCLF obligation (referred to at MBSD as the
``Defined Capped Liquidity Amount'', and at GSD as the ``Individual
Total Amount'').\10\
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\9\ GSD Rule 22A, Section 2a, supra note 3; MBSD Rule 17,
Section 2a, supra note 3.
\10\ GSD Rule 22A, Section 2a, supra note 3; MBSD Rule 17,
Section 2a, supra note 3.
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FICC calculates a dollar amount for the CCLF obligation applicable
to each supplemental liquidity tier.\11\ 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 needs within each supplemental liquidity tier.\12\ However,
FICC also has the authority to reset a member's CCLF obligation amount
as FICC determines from time to time, referred to as an ad hoc
resizing.\13\
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\11\ GSD Rule 22A, Section 2a, supra note 3; MBSD Rule 17,
Section 2a, supra note 3.
\12\ 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 (Mar. 14, 2017), 82 FR
14401, 14404-05 (Mar. 20, 2017) (SR-FICC-2017-002); MBSD Rule 17,
Section 2a, supra note 3; GSD Rule 22A, Section 2a, supra note 3.
\13\ GSD Rule 22A, Section 2a, supra note 3; MBSD Rule 17,
Section 2a, supra note 3.
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III. Description of the Proposed Rule Change
First, FICC proposes to modify the MBSD Rules concerning CCLF to
require a Clearing Member to provide regular attestations that it has
incorporated the maximum amount that it could be required to fund
during a CCLF event into its liquidity plans. FICC also proposes to
modify the GSD Rules to provide further clarity around GSD's existing
attestation requirement. Second, FICC proposes to modify both the MBSD
and GSD Rules to require that a Clearing Member provide certain
acknowledgements to FICC regarding its understanding of and ability to
meet its CCLF obligations. Third, FICC proposes to modify MBSD Rules to
provide Clearing Members with additional clarity and transparency
regarding the liquidity funding reports provided by FICC to Clearing
Members concerning their CCLF obligations.
A. Required Attestations
FICC proposes to modify MBSD Rules to require Clearing Members to
provide FICC with regular attestations that the Clearing Member has
incorporated their Defined Capped Liquidity Amount into their liquidity
plans. Clearing Members must provide these attestations to FICC on at
least an annual basis or upon demand by FICC. The Required Attestation
would need to be signed by two of the Clearing Member's officers and
include certifications that (1) the officers have read and understand
the MBSD Rules; (2) the Defined Capped Liquidity Amount has been
incorporated into the Clearing Member's liquidity planning; (3) the
officers understand the Defined Capped Liquidity Amount may be changed
by FICC with appropriate notice; (4) such changes to the Defined Capped
Liquidity Amount will be incorporated by the Clearing Member into its
liquidity planning; and (5) the Clearing Member shall continuously
reassess its liquidity plans to ensure the ability to meet the Defined
Capped Liquidity Amount in the event of a CCLF Event. FICC states that
the new requirement for MBSD Clearing Members to provide Required
Attestations will strengthen the CCLF program and is consistent with an
existing requirement in the GSD Rules for GSD Netting Members.\14\
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\14\ See Notice of Filing, supra note 4, at 43939.
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Additionally, FICC would modify the GSD Rules concerning required
attestations for GSD Netting Members to clarify that the regular
interval for attestations is on at least an annual basis. FICC states
that this clarification would align the required regular interval for
attestations at GSD with the proposed MBSD Rules concerning Required
Attestations, and that it is consistent with current practice, in which
GSD Netting Members are required to provide their Required Attestations
on at least an annual basis.\15\
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\15\ Id.
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B. CCLF Acknowledgements
FICC proposes to modify the MBSD Rules and GSD Rules to require
MBSD Clearing Members and GSD Netting Members to provide written
acknowledgments to FICC concerning their understanding of and ability
to meet their CCLF obligations, from time to time, as determined by
FICC.\16\ FICC states that the proposed modifications would strengthen
the CCLF program by ensuring MBSD Clearing Members and GSD Members
understand their CCLF obligations as required by FICC.\17\
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\16\ One example when such written acknowledgements would be
required to be provided by MBSD Clearing Members and GSD Netting
Members to FICC is when a CCLF obligation increased by an amount
that exceeded certain thresholds established by FICC following an ad
hoc resizing of the CCLF, as discussed in note 13 supra. In this
situation, FICC would require a written acknowledgement from MBSD
Clearing Members and GSD Netting Members confirming their ability to
meet the increased CCLF obligation. FICC would inform MBSD Clearing
Members and GSD Netting Members of any such requirements, including
specific thresholds, by Important Notice. See Notice of Filing,
supra note 4, at 43939.
\17\ Id.
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C. Liquidity Funding Report
FICC proposes to modify the MBSD Rules to provide clarity and
transparency about the liquidity funding reports FICC currently
provides each day to MBSD Clearing Members and the information
contained in those reports. Specifically, FICC proposes to amend the
MBSD Rules to explicitly state that FICC will provide Clearing Members
with liquidity funding reports each Business Day that include
information concerning the Clearing Member's Defined Capped Liquidity
Amount and other historical CCLF information. As amended, the MBSD
Rules would state that the information provided in the liquidity
funding reports by FICC to MBSD Clearing Members is for informational
purposes only. FICC states that the clarity and transparency provided
by these proposed modifications to MBSD Rules is consistent with the
information concerning liquidity funding reports already provided to
GSD Netting Members under GSD Rules.\18\
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\18\ Id.
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IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \19\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After 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
Section 17A(b)(3)(F) \20\ of the Act and Rule 17Ad-22(e)(7) each
promulgated under the Act.\21\
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\19\ 15 U.S.C. 78s(b)(2)(C).
\20\ 15 U.S.C. 78q-1(b)(3)(F).
\21\ 17 CFR 240.17Ad-22(e)(7).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency, such as FICC, be designed to, among other things,
promote the prompt and accurate clearance and settlement of securities
transactions.\22\
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\22\ 15 U.S.C. 78q-1(b)(3)(F).
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As stated above in Section II, the CCLF is a key tool in FICC's
ability 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. The Proposed Rule Change would modify the
Rules by requiring MBSD Clearing Members and GSD Netting Members to
provide attestations and acknowledgements to FICC that they understand
their CCLF obligations, incorporate such obligations into their
liquidity planning, and continually reassess their understating of and
ability to meet their CCLF obligations.\23\ Requiring attestations on
at least an annual basis and written acknowledgements from MBSD
Clearing Members and GSD Netting Members to FICC should enhance the
overall design and efficacy of the CCLF, which is a key tool in FICC's
ability to meet its cash settlement obligations in the event of a
member default and a CCLF event is declared by FICC. The Proposed Rule
Change should further improve the ability of FICC to rely on the CCLF
and MBSD Clearing Members and GSD Netting Members as liquidity
providers during a CCLF event, and, in turn, enable FICC to use the
CCLF to meet its settlement obligations in the event of a member's
default.
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\23\ See Notice of Filing, supra note 4, at 43940.
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By doing so, the Proposed Rule Change should better ensure that, in
the event of a member default, FICC's operation of its critical
clearance and settlement services would not be disrupted because of
insufficient financial resources. Accordingly, the Commission finds
that the Proposed Rule Change should help FICC continue providing
prompt and accurate clearance and settlement of securities
transactions, consistent with Section 17A(b)(3)(F) of the Act.\24\
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\24\ 15 U.S.C. 78q-1(b)(3)(F).
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Further, the proposed clarifying changes should help to ensure that
the Rules are clear to MBSD Clearing Members and GSD Netting Members
concerning their understanding of and obligations during a CCLF Event.
When members better understand their rights and obligations, members
are more likely to act in accordance with the Rules, which should
promote the prompt and accurate clearance and settlement of securities
transactions, consistent with Section17A(b)(3)(F) of the Act.\25\
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\25\ 15 U.S.C. 78q-1(b)(3)(F).
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For these reasons, the Commission believes that the Proposed Rule
Change is designed to promote the prompt and accurate clearance and
settlement of securities transactions consistent with Section
17A(b)(3)(F) of the Act.\26\
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\26\ Id.
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B. Consistency With Rule 17Ad-22(e)(7)
Rule 17Ad-22(e)(7) under the Act requires a covered clearing
agency, such as 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.\27\ As described above in Section
II, FICC proposes to modify the Rules to require certain attestations
and acknowledgements from MBSD Clearing Members and GSD Netting Members
concerning their CCLF obligations.
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\27\ 17 CFR 240.17Ad-22(e)(7).
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The Commission believes that the Proposed Rule Change described
above is consistent with the requirements of Rule 17Ad-22(e)(7). By
requiring certain attestations and acknowledgements by MBSD Clearing
Members and GSD Netting Members, the Proposed Rule Change is designed
to improve the operation of the CCLF as a reliable form of liquid
resources upon the default of a member to which FICC has the largest
exposure in extreme but plausible conditions. Moreover, by requiring
attestations on at least an annual basis and certifications from two
officers that the MBSD Clearing Members and GSD Netting Members are
continually reassessing their CCLF obligations, the Proposed Rule
Change improves the reliability of the CCLF and enhances due diligence
of its liquidity providers. Further, requiring written acknowledgements
from MBSD Clearing Members and GSD Netting Members from time to time
and following an ad hoc resizing of the CCLF ensures that MBSD Clearing
Members and GSD Netting Members will continually assess their ability
to meet their CCLF obligations during a CCLF event, which also improves
the reliability of the CCLF. As a result, the required attestations and
written acknowledgements included in the Proposed Rule Change by FICC
should enhance FICC's ability to measure, monitor, and manage their
liquidity risk concerning their CCLF obligations.
For these reasons, the Commission believes that the Proposed Rule
Change is consistent with Rule 17Ad-22(e)(7) under the Act.\28\
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\28\ 17 CFR 240.17Ad-22(e)(7).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act and
in particular with the requirements of Section 17A of the Act \29\ and
the rules and regulations promulgated thereunder.
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\29\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\30\ that proposed rule change SR-FICC-2024-008, be, and hereby is,
approved.\31\
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\30\ 15 U.S.C. 78s(b)(2).
\31\ In approving the Proposed Rule Change, the Commission
considered its 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.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-14067 Filed 6-26-24; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on June 27, 2024.
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.